[Temp Check] Burn surplus RetroPGF (+ monetary policy proposals)

[polynya]

Currently, there’s no monetary policy proposal type. So, this is not a proposal, but rather a conversation starter about some serious issues.

This has been completely centralized, as decided by Optimism Foundation. The projections offered at genesis have not been honoured, and current projections are also vague. Confidence in tokens or anything of economic value is derived from predictability and stability - which has been completely undermined in the name of experimentation. There’s billions of dollars at play here, we need to take things more seriously. The entire handling of $OP distribution has been haphazard. I believe $OP can do better with decentralized community checks and balances, and thus there should be monetary policy proposal types.

While there are many errors and problems with the policy, the most obvious issue is - the RetroPGF allocation. I’ve discussed burning it in the past, so let’s revisit that topic. As per initial projections announced at genesis, 100% of the RetroPGF (along with Ecosystem Fund) was intended to be allocated by the end of Year 4:

However, after nearly 2 years in, only 40 million, or ~4.7% would have been distributed. Current projections are radically different [please see Erratum below, the next figures are wrong], calling for only 140 million OP to be distributed by the end of year 5. This is only 16% of the initial projections, despite the 1 extra year. To be clear, this is a more reasonable projection than the ones initially offered, but that leaves a massive overhang of 700 million $OP tokens. At the end of 5 years, over ~75% of pending unlock (effectively inflation) will be RPGF alone.

It’s obvious that RPGF was severely overallocated at genesis, and >6x gap between initial projections and current projections reflects the magnitude of the error. My recommendation is to burn the ~700 million OP that was overallocated to RPGF, while honouring the current projections till year 5.

[Erratum: As @danftz points out below, it’s actually 340 million OP per the projections, with the overhang being ~500M OP, not ~700M OP. I’d prefer to see 140M OP be distributed, as that’s plenty for RPGF.]

To be clear, this does not mean the end of RPGF at the end of year 5. 5 years in for the OP Collective, and nearly a decade in for the Optimism Foundation and its predecessor Plasma Group at large, it’s about time to consolidate and become economically sustainable. Beyond that point, a ~75% overhang is unjustified. So, RPGF will continue, but in a different form, that’s sustainable:

• Share of protocol revenues (sequencer, MEV, OP stack chains etc.)
• Share of regular inflation (currently 0%, but we can bump it to 1% or 2% after year 5)

This will lead to:

• A more sustainable RPGF
• Clarity in the massive RPGF overhang, leading to increase confidence and long-term value in the $OP token, leading to higher economic security and sustainability
• Increase in net value of $OP tokens by ~16% due to the lower supply

These are just my thoughts, please voice your opinion below.

PS: I’ve changed the title to “Burn surplus RetroPGF” from “Burn RetroPGF”

[jengajojo]

This is an interesting proposition. While I agree with the fact that decision making around RPGF unlock was miscalculated, burning 700M tokens will be a massive blow to the ability of the collective to fund public goods. This is compounded by the fact that I have yet to see any reporting of the protocol revenues.

Maybe a healthy middle ground would be to burn part of the supply (eg 50%) and leave the remaining tokens to fund RPGF for the coming 5 years till we see sustainable protocol revenues being generated.

[polynya]

That is my opinion of the middle ground - ~140M OP allocated over 5 years, also aligning with the projections. That’s plenty of public goods funding, plus more to come through share of protocol revenues and regular inflation. RPGF recipients thus far have been very happy with the grants (myself included) and no one has complained of there being too little (indeed, I’ve seen more complaints to the contrary) - and this is based on just 10M OP allocated, there’s a lot more of that to come. It’s not 50% to account for the magnitude of overallocation.

Of course, if others feel burning ~430M instead of ~700M, which is the 50% mark is a better middle ground, then that’s worth considering too.

[0x666]

or just let retropgf distribute on ? years instead of 5
do you remember airdrop part also distributed just a less parts?

[danftz]

@polynya

However, after nearly 2 years in, only 40 million, or ~4.7% would have been distributed. Current projections are radically different, calling for only 140 million OP to be distributed by the end of year 5. This is only 16% of the initial projections, despite the 1 extra year. To be clear, this is a more reasonable projection than the ones initially offered, but that leaves a massive overhang of 700 million $OP tokens.

My understanding of the data in the OP Token Unlock spreadsheet is a bit different: The forecast for FY 2 is 38M OP distributed via RPGF, another 60M in FY 3, 100M in FY 4 and an additional 140M in FY 5. This adds up to a total amount of ≈ 340M OP, which will be distributed via RPGF by April 2027.

This still leaves an “overhang” of ≈ 520M OP, but this is significantly lower than the 700M OP mentioned.

That said, it might be worth burning some of that 520M OP overhang, but I haven’t really formed an opinion on it yet and may comment here again later when I have.

[polynya]

@danftz Thanks, you’re right, let me correct the post.

[sam.ng]

Hi @polynya,

I tend to agree that sequencer revenue can be used/split for various things e.g funding public goods/going to the treasury. That said, as Optimism plans to decentralize the sequencer, this is also something to consider in monetary policy proposals imo. For example, instead of burning the entire RPGF budget after five years, you could allocate a portion of it as inflationary rewards for operators. As Optimism appears to be adopting Proof of Governance for leader election, rather than distributing all fees and MEV to operators, it’s possible to burn all of them.

Note that a portion could also be sent to the treasury or dedicated to RPGF. If economic activity increases leading to a situation where the amount burned is greater than the inflationary rewards paid to operators, $OP could be net deflationary by the end of the year. Assuming a flat market cap, the token price would increase.

@polynya

$OP token, leading to higher economic security and sustainability

I’m not sure I understand your point here. Considering that Optimism is more likely to use Proof of Governance as leader election mechanism, what do you mean by “economic security”?

[polynya]

@sam.ng

I’m not sure I understand your point here. Considering that Optimism is more likely to use Proof of Governance as leader election mechanism, what do you mean by “economic security”?

AFAIK, sequencer decentralization is still TBD, and the focus is on multi-proofs and a security council right now. If by “proof of governance” you mean sequencers are selected by Token House, then the higher the value of $OP, the more difficult it is to attack. Same concept as proof-of-stake. However, I believe a PBS style mechanism is much more likely in the long term, where the auction proceeds can be directed to Treasury and distributed partially as RPGF. Also, there’s plenty of inflationary rewards possible - just don’t need so much.

[sam.ng]

@polynya

AFAIK, sequencer decentralization is still TBD

Found this pretty useful tbh.

@polynya

I believe a PBS style mechanism is much more likely in the long term, where the auction proceeds can be directed to Treasury and distributed partially as RPGF.

I guess in that case, you would extract only the MEV and not the fees, right? Also, this approach would imply an enshrined version of PBS, which introduces decent complexity. I believe it’s more probable that we’ll first see an out-of-protocol version of PBS. That being said, it seems likely and makes sense for the sequencers to outsource block production in the long run.

[polynya]

@sam.ng

I guess in that case, you would extract only the MEV and not the fees, right? Also, this approach would imply an enshrined version of PBS, which introduces decent complexity. I believe it’s more probable that we’ll first see an out-of-protocol version of PBS. That being said, it seems likely and makes sense for the sequencers to outsource block production in the long run.

PBS-style mechanism works a bit differently in L2s, think of Builder = sequencer; Proposer = Ethereum L1. But anyway, that is speculative. Irrespective of the exact method used for sequencer selection, I expect a significant portion of revenues from both fees and MEV to accrue to the treasury, which in turn can be in part redistributed as RPGF.

[Milo]

100% of the RetroPGF (along with Ecosystem Fund) was intended to be allocated by the end of Year 4

I can see that 100% of the RetroPGF + Ecosystem fund was intended to be unlocked by the end of year 4. But I can’t see any intention to distribute it simultaneously as per that schedule. I’d argue there’s an important difference.

The challenge with funding public goods retroactively is that investors and builders need confidence that their risk will be rewarded, if they succeed. Having a large supply locked doesn’t make sense; we need to see a huge chunk of unlocked supply ready to reward successful projects. In many ways, seeing a $1bn pot of money just sitting there waiting to be given out is a much better incentive than being promised sequencer revenue and inflation. It’s much more visible, tangible, and inspires more confidence that you’ll be rewarded.

Furthermore, distributing tokens along with a predetermined schedule, rather than distributing them when projects deserve it, is probably not a good idea. Therefore, I’m in favour of the overhang!

I also think that a 16% increase in token price is probably not as powerful as the narrative of investing 16% of tokens into growing the ecosystem; especially when it grows the ecosystem by encouraging risk, competition, and investment. That gives me far more confidence in the value of the OP token.

[polynya]

While I don’t think this is sustainable at all, I appreciate the perspective.

[max-andrew]

Could this also be taken as a signal that the market is willing to allow Optimism to do the game-changing level of investment that would allow it to take the top spot in the L2 race? One could make the argument that the two problems at play here are actually search problems and large numbers.

1. Optimism and others have a search problem identifying and recruiting the talent that can enable the Collective to more fully realize the Optimistic Vision

2. Individuals — particularly young developers — are not necessarily trained capital allocators who would instinctively feel comfortable signing off on the amounts that are both required and afforded to them by the markets

Related to the point @Milo made, burning OP is the equivalent of Amazon throwing their hands up and saying “we have no more ideas, we’re pivoting our company to stock buybacks and dividends rather than R&D investment.”

[polynya]

@max-andrew

Could this also be taken as a signal that the market is willing to allow Optimism to do the game-changing level of investment that would allow it to take the top spot in the L2 race? One could make the argument that the two problems at play here are actually search problems and large numbers.

1. Optimism and others have a search problem identifying and recruiting the talent that can enable the Collective to more fully realize the Optimistic Vision
2. Individuals — particularly young developers — are not necessarily trained capital allocators who would instinctively feel comfortable signing off on the amounts that are both required and afforded to them by the markets

Related to the point @Milo made, burning OP is the equivalent of Amazon throwing their hands up and saying “we have no more ideas, we’re pivoting our company to stock buybacks and dividends rather than R&D investment.”

RPGF will continue, just in a more sustainable manner.

[max-andrew]

To deliver the Optimistic Vision and influence the economy as a whole, the Superchain needs to be the leading L2 (likely by a wide margin). The Collective cannot control the rules and goals of non-OP chains.

The current level of investment hasn’t gotten Optimism where it needs to be yet. An argument for contractionary policy doesn’t make sense to me.

How are we measuring sustainability when the token is up 90% this year?

[NathanVDH]

The idea of burning the budgeted tokens that are not used by the Collective is excellent because it finally provides an avenue for those who believe that the Collective shouldn’t be spending as much a way to express themselves.

Governance should provide an option for people to vote less governance, less spending. Otherwise, governance is simply about how the Collective should spend its tokens. I’m very much in favor of this.

[jackanorak]

Although I’ve also been observing tokenomic developments with some conceern, I think the opposite - burning surplus is a self-defeating trashing of collective resources to make an ultimately empty statement.

There’s rarely if ever a good argument for burning tokens. Instead of focusing on the cost/dilution side, I think our attention is better directed toward the growth and revenue generation side of things and using the considerable resources that are budgeted to jumpstart the sustainable economic activity, protocol revenues, and so on.

We’re nowhere near the place where kneecapping ourselves as a forcing function is going to lead anywhere productive. I’m not sure where that place would even be, to be honest.

[NathanVDH]

Contracting temporarily the budget of the Collective in years send a strong message. OP tokens aren’t there to be picked up by low effort projects. This also makes the token a more interesting financial asset: you can be assured that money spent is spent on things that passed a certain quality threshold, not simply those that were there.

I’m all for spending money, but I think that the budget was clearly too optimistic. Revisions to the budget are necessary, even if we don’t end up deciding to burn excess tokens.

[jackanorak]

How about instead of having less to spend, you spend on better stuff?

[polynya]

Which is precisely the motivation of this post. By burning surplus RPGF you’re reallocating to the “better stuff”. If you don’t like burning philosophically, an alternative is to simply reallocate the surplus RPGF $OP to everything else, though this is more complicated. Either way, my main argument is RPGF was overallocated and the surplus can be reallocated for a more sustainable and productive OP Collective - I’m happy to see alternative ideas for said reallocation.

Also, to be very, very clear as many are misunderstanding, RPGF will continue for the foreseeable future, just in a more sustainable and efficient manner (IMO).