Wintermute DeFi Governance Digest: February 2025 | Week 4
25 FEBRUARY 2025 | RESEARCH | AUTHORED BY CALLEN
This week’s proposals include dYdX launching a buyback program, Frax Finance introducing changes to their ecosystem tokens and outlining a new emissions plan, and Sky announcing the Sky Capital Flow system which aims to minimize value leak and simplify revenue flow; along with votes from Aave to deploy V3 on Soneium and Arbitrum upgrading to ArbOS Callisto in preparation for Ethereum’s Pectra upgrade.
Proposals
dYdX (DYDX)
Proposal: [DRC] dYdX Treasury SubDAO DYDX Buyback Program
Author: Karpatkey
Summary: This proposal requests to establish a DYDX buyback program that uses 25% of dYdX’s net protocol revenue to buy back DYDX from the open market and stake it to earn additional staking rewards.
Key Points:
- The dYdX Treasury SubDAO proposes implementing a DYDX Buyback Program using 25% of Net Protocol Revenue.
- dYdX’s Net Protocol Revenue for 2024 was $46M and is currently allocated as follows:
–> Megavault (50%)
–> Treasury SubDAO (10%)
–> DYDX staking rewards (40%)
- If approved, two 12.5% reductions will be made to the share of net revenue sent to the Megavault.
–> Stage 1: Net revenue share for Megavault is reduced to 37.5%
–> Stage 2: (1 week later) Net revenue share for Megavault is reduced to 25%
- The Treasury SubDAO, on behalf of the dYdX community, will utilize these funds to begin buying back DYDX from the open market via centralized and decentralized exchanges using a TWAP.
- The Treasury SubDAO will stake the purchased DYDX with validators to improve the economic security of the chain and earn additional USDC rewards.
- Based on 2024 annual dYdX fees, re-directing 25% of net protocol revenue for the Buyback program would’ve resulted in the purchase of ~2.15% of the circulating supply.
- Based on the 2025 projected Net Protocol Revenue, it’s estimated that ~$9.05M DYDX will be purchased over the current year.
Our Take: This is a great proposal from the Treasury SubDAO. It imposes explicit buybacks using protocol revenue which ties protocol growth with the token, staking improves the economic security of the network which also increases the amount of USDC earned by the subDAO to fund expenses or further buybacks.
Frax Finance (FXS)
Proposal: [FIP – 4XX] Frax North Star Proposal
Author: Amirnade, Frax Core Team
Summary: This proposal highlights various changes within the Frax ecosystem including the renaming of FXS & FRAX, token emission changes, the Flox Capacitor Boost, and the Frax North Star Hardfork.
Key Points:
- Given Frax Finance’s continuous innovation, the protocol and ecosystem have changed significantly over time yet still rely on token incentives and structures from the past, causing a mismatch in incentives and utility.
- This proposal presents a myriad of changes, notably:
–> FRAX the original stablecoin will be renamed as “Legacy Frax Dollar”
–> FXS will be renamed to FRAX (veFXS -> veFRAX) and retain all current governance rights and incentives associated with FXS
–> FRAX (prev. FXS) will become the gas token for Fraxtal, replacing frxETH
–> wfrETH will become frxETH and will be changed to a normal ERC20
- Furthermore, there are notable changes to veFRAX (prev. veFXS) incentives and rewards:
–> veFRAX will now receive multi-token (additional) rewards starting with Frax Bonds (FXBs) which will be funded with excess revenue share
–> veFRAX will continue to receive FRAX but these rewards will be determined by the “tail emission plan” instead of the revenue share
–> The tail emission plan allocates 20% of yearly FRAX inflation rewards to veFRAX. Inflation will start at 10% per year, dropping 0.7% a year for 10 years to reach a terminal rate of 3%
–> veFRAX stakers are also expected to receive airdrops and additional incentives from Frax Finance’s strategic partners and investing protocols
Our Take: It’s great to see the Frax team & community continue to evolve alongside their product offerings and ensure there are systems in place to withhold alignment between token holders and the Frax ecosystem.
Sky (SKY)
Proposal: Sky Endgame: The permanent Sky Capital Flow System
Author: Rune
Summary: This proposal presents the “Sky Capital Flow System” which aims to streamline governance, reduce complexity, and align incentives permanently. It’s expected to be put into place once the transition to the Sky Endgame is complete.
Key Points:
- The Sky Capital Flow Systems aims to achieve simplicity and immutability while allowing for growth.
- It’ll clearly and reliably segment how revenue is allocated across several key functions: routine upkeep, buffer capitalization, reward distributions, and token supply management through a smart burn mechanism.
- It’s expected to maximally prevent: bureaucracy, hidden cash siphoning due to governance complexity, unintentional waste or negligence, and other major downsides of core governance complexity.
- The system begins with Sky’s net revenue every month which is derived from various expenses and income sources – e.g., Stability Fees and Sky Savings Rate.
- It then uses 20% of the net revenue every month to first ensure that all operational and governance-related costs are met:
–> 6% – Voter Incentives
–> 1% – Governance Accessibility Rewards (Frontends)
–> 1% – Governance Accessibility Rewards (Stars)
–> Up to 2% – Aligned Delegates
–> Up to 10% – Core Executors
- It’ll then use up to 50% of the remaining revenue to fund the Leverage Buffer Capital (LBC) which protects the system from volatility and ensures risk parameters are met. Funding ultimately depends on the total supply of USDS and how far the current buffer is from its target rate.
- In the last stage, the remaining revenue is split accordingly:
–> 37.5% to the Activation Reward Buffer (ARB) which rewards active participants in the ecosystem
–> 62.5% to the Smart Burn Buffer (BBB) which buys-back-and-burns SKY tokens and is done more aggressively when the price of SKY is cheap relative to the protocol’s profit and overall market cap.
- Lastly, excess revenue that is not required by the protocol can be lent to ‘Stars’ for a fee to ensure that any idle capital is put to use.
Our Take: Rune’s focus on governance minimization, predictability, and ensuring the protocol can protect its core functions is great to see. The overall system is designed nicely and we look forward to seeing Sky reach a state where the Capital Flow System can be employed.
Votes
Aave (AAVE)
Proposal: [TEMP CHECK] Deploy Aave on Soneium
Status: Live.
Created: Feb 21, 2025.
Ends: Feb 25, 2025.
Leading Consensus: YAE – 855.3k AAVE (100% of total votes).
Summary: This proposal requests the DAO consider the deployment of Aave V3 on Soneium. Soneium is an Ethereum L2 developed by Sony and the Startale Group. The proposal includes Aave being considered for a 100M ASTR liquidity incentive campaign.
Arbitrum (ARB)
Proposal: [CONSTITUTIONAL] AIP: ArbOS Version 40 Callisto
Status: Live.
Created: Feb 21, 2025.
Ends: Feb 28, 2025.
Leading Consensus: For – 46.9M ARB (99.95% of total votes).
Summary: This proposal requests to upgrade Arbitrum One and Arbitrum Nova to ArbOS 40 “Callisto”. Callisto adds support for relevant Execution Layer changes from Ethereum’s upcoming Pectra upgrade and a small Arbitrum Stylus fix.