Reduce unrealistic FDV and give GEL healthier valuation so all stakeholders can benefit from it

Summary:
Reduce unrealistic FDV and give GEL healthier valuation so all stakeholders can benefit from it

Background & Motivation:
Gelato is an amazing project but its tokenomics has big valuation problem and can damage the future of the protocol and community.

I made this table using data from coingecko after @Dan told them to correct the numbers, the comparison is obvious.
123123

Compared to both the competitors chainlink and keep3r, and a project that launched token the same time as gelato, we have the lowest mc/fdv ratio, and the difference is very huge. Also if we compare the market caps, we are so much smaller than competitor keep3r but out fdv is almost 2x keep3r.

All this means there is a big valuation problem with gelato and it’s because of the total token supply. When more and more tokens are released for the team and investors, the token price will be pushed down even more because of the emission and smaller upside limited by the fdv.

If GEL price is too low, community, investors and team will all lose financial incentives and lose interest and patience for the project. Also it’s easy to be monopoly in the network after executors have to stake GEL, because whales can buy the token very cheap and stake, then take most transactions. Then the network is not decentralized anymore.

So I propose to burn 90% of the treasury GEL to reduce the fdv and give GEL a proper valuation for gelato to growth healthier.

Specification:
If we burn 90% of the treasury, the new mc/fdv will be about 23%. It’s still very small but at least better than before. And the treasury still has more token than any single party. With this burn, GEL price has more upside to grow, so even though the GEL holding in treasury is much smaller, but the GEL future price will be much higher, so the total value of the treasury can be saved, and all stakeholders can benefit and be incentivized by the price appreciation and continue to contribute and support gelato.

Participants/Team:
This should be discussed and voted by all GEL holders, and I really hope the team will not use their dominant voting power to single handedly scrap it. Thank you very much.

Hey @hidden_hands, thanks for your post and the research.

Firstly, let me correct your assumptions. The actual circulating supply of GEL is ~100,288,200 GEL, i.e ~23.8%, not 13.03% as your table suggests. This inaccuracy is not your fault, but Coingecko’s because they only treat vested GEL that has been claimed and is not located in certain budget / vesting contracts as circulating.

I created a public repository and deployed a smart contract that returns the true circulating GEL supply.

Repository:

Contract:

Secondly, I think using the current market sentiment to do something about the mc/fdv ratio does sound like an interesting concept, however we should carefully consider how this should be done.

Re: Burning treasury funds:

Right now we have a pretty big treasury of GEL. This of course has an impact on the mc/fdv ratio. Nevertheless this is also ensures the longevity of the project by having sufficient resources available to grow & fulfil the true potential of the project. It is important to understand that Gelato is a long-term project, we are building the backend of web3, meaning that Gelato will grow continuously as web3 as an industry grows.

Until web3 hits mass adoption with 1bn active users, 10 years might still have to pass. In order to make sure the project has sufficient capital at hand to raise additional investor funds to continue the development, incentivize Node operators and grow the community, having such a sizeable treasury is imo imperative if you look at competing projects such as Chainlink (having 65% allocated to the company and treasury).

Burning these resources would only constitute a temporary fix for the cosmetics of the mc/fdv ratio because Gelato requires these resources to become the defacto backend infrastructure that underpins all applications in web3. Thus, if we burn 90% now, we will have to continuously mint new tokens and dilute holders periodically in the future to still have access to the same resources. Having only 90% of the current treasury available will be insufficient to ensure the long term sustainability of the project.

However, there might be another way of how to improve the cosmetics of the mc/fdv ratio, accelerated vestings.

Idea: Accelerated Vestings:

An idea that some community members put forward to me is that in order to increase the circulating supply of GEL, the community could decide to accelerate the allocations of private investors today, which would change the actual circulating supply from 23.8% to 33.8%. Given that more and more capital of the treasury will also be deployed over the next months (for growth & liquidity programs), we could fairly quickly reach a 50% mc/fdv ratio within a couple of months which sounds very reasonable to me. This accelerated vestings would only count for private investors and not the team as they need long term incentive alignment with the project.

I think both points are definitely worth discussing and have their trade-offs. I would like to see more opinions in here and have others participate in the discussions about the pro’s and con’s.

EDIT: I changed the title of your post @hidden_hands to have the discussion be more about the FDV adjustment in general than about only specifically burning treasury funds.

2 Likes

thnk you hilmar for the good response.

I like the idea to release investor tokens now and the mc/fdv ratio can be improved that way. i’m for it.

burning the treasury token still is a good option imo, but maybe not 90% if we release investor token early. gelato is long term and it needs treasury to develop, but having many GEL tokens in the treasury is like a ticking bomb, the more token in treasury the more dilution in the future, each GEL will be worthless.

if we have less in the treasury, that’s less dilution, and each GEL will be worth more. so in the end, treasury still can have a lot of money for development, it’s only less GEL but GEL is worth more because of less dilution. and investors are more and more careful about fdv, because a super high fdv valuation it can limit the future potential growth. then we scare away investors because they don’t want to buy things that have unrealistic fdv.

i think we have 2 separate problems. the first one is mc/fdv is too small, and the second one is fdv is too big. release token early solve the first problem, but burning some token is the only way to solve the second problem imo

this is how the market works. if gel is always having bad price, no one wants to have gel even if you give it away as development reward. people will want to receive stable coins than gel.

1 Like

Hey @hidden_hands I had made similar observations and pointed them out to the team, so I generally agree with your sentiment.
Burning 90% of the treasury would be a pretty short sighted move though, as a healthy treasury is necessary to accelerate the growth of the protocol in better market conditions.
I like @hilmarx idea of unlocking the remaining investor tokens early, as Gelato has clearly found PMF and its MC is mostly a consequence of past tokenomic decisions.
I do think the idea of burning a moderate percentage (around 20% maybe) of the treasury in combination with the investor unlocks could lead to the desired outcome and make the token a much more desirable buy.
The unlocking tokens could be partially sold OTC to VCs that are long term aligned with the protocol, to make sure that there isn’t short term sell pressure.

3 Likes

thank you for the response

yes i agree, a combination of releasing early and burning can be great.

but i think it’s not correct to say we need this many tokens for future growth. the right way imo is to say we need this much dollars to fund our future growth. if GEL is worth so little, the treasury is still not having enough money for growth even if we have a lot of GEL. if GEL is worth a lot, less GEL can still be a lot of money. but we can’t have both ways. maybe 90% is too much, but 20% of the treasury is 10% of total supply, which imo is too little. maybe 50% of the treasury, so it’s 25% of the total supply.

i don’t think we should do otc with vc from the treasury, because gelato has funding, and it’s not fair for vc to just buy those tokens cheap, unless they provide other important values, but i don’t believe they will because most of them just want a cheap entry, they don’t care about the project.

Hi there! As I said in the telegram group, I think the following strategy could help in this case:

Every X months (maybe every 3 months) Gelato sells a small part of the GEL treasury tokens to loyal users (KYC’d, have a POAP, used the protocol before X snapshot…, could even vary each cicle). There could be even a small discount to attract investors at first (like VCs and seed rounds).

This could solve every problem exposed in this post:

  • MC/FDV would go up slowly but surely.
  • GEL treasury would have most of its tokens and sold assets would be liquid and future-proof.
  • There would be no burning or at least not a 90% burn which would pump the price crazily and could be manipulated by insiders.
  • Locked/vesting wouldn’t be rushed, which wasn’t addressed in the original vesting roadmap, which could also affect the price and general community sentiment around the project.

As @hilmarx said the actual numbers are already higher and with this amount of burn plus unlock the circulating supply would come out somewhere pretty close to 50%, which means only 1x dilution left.
This should be an acceptable amount of future dilution to make GEL a worthwhile investment.

I was referring to selling the unlocking investor shares OTC, so they don’t directly hit the market. The treasury wouldn’t be affected by this.

2 Likes

thank you for the reply

if it’s about unlocking investors, they can do OTC as they wish, and maybe some of them already did, they don’t need permission from gelato. and they can choose to sell to anyone, as long as the price is good for them, so there is no promise that the buyers are long term for gelato.

thanks for your ideas

i don’t think it’s good to sell token like this. it’s a lot of work to make rules and plans about how to sell, how much to sell and who can buy, and there will always be people complaining and fud if they cannot buy or something. the team should focus on building. gelato doesn’t need funding, so no reason to sell treasury token. it just creates complex work.

Hi there,

I am a bit concerned by things I am reading here:

  1. Assuming you are not in for a quick flip, the circulating supply is pretty much irrelevant: pre-sale investors will be fully unlocked in ~1yr and the team in ~3yr, we are not talking about a protocol with a multi-decade inflation schedule that will outlive us, so FDV is the metric that matter.

  2. As a GEL token holder, you indirectly own a pro-rate share of the tokens hold in the DAO treasury (let say you control 1% of the circulating supply, then you also indirectly control 1% of the token hold in the treasury). If you believe the DAO will be able to allocate this dry power efficiently to support long term growth, then there is no issue with having a large share of the total supply hold in treasury. The risk would be that a minority of large token holders (i.e. the team and pre-sale investors) that together control a large majority of the (circulating) voting power decide to misappropriate funds by, for example, voting to pay themselves a special dividend/bonus/grant that would benefit them to the cost of the minority token holders. This is highly unlikely and if you believe that’s a probable outcome, you should probably not be invested in this project.

  3. Burning treasury token should have (in theory) no impact on FDV, it’s just a value redistribution mechanism that would increase the share of the FDV directly controlled by current holders at the cost of sacrificing some long-term growth potential by reducing treasury funds. Actually, you could even argue that FDV could get lower as the market reflect this lower potential future growth.

  4. @hilmarx, I am really struggling to see how accelerating vesting of pre-sale investors would do any good. Can you please disclose the entry price of the various pre-sale rounds?
    Let’s assume pre-sale investors entered at the typical valuation we see across crypto, between $10m and $25m FDV. Even on the higher end of the range, that would imply an entry price at $0.059 per $GEL, which represents a significant money multiple of 3.4x. So, if anything, accelerating the vesting will likely generate additional sale pressure pro pre-sale investors, further depreciating $GEL price while benefiting their realised IRR.

You can find all of the private sale prices in our token sale announcement here:

The initial idea behind this was brought forward to me by @dom who commented underneath a recent tweet from the Solana CEO about this matter. You can check it out here:

I found this concept interesting to think about because we just saw what a major sudden unlock does in terms of price panic and token holder sentiment. There were many GEL holders which are bullish on the project but still sold their tokens because they expected major sell pressure due to the unlock. In reality, actually only very little GEL was sold from those that got unlocked, but liquid GEL holders frontran the news and panic sold which created a lot of volatility.

The past month with the unlock taught me that those sudden liquidity shocks are hard for communities to handle. The benefit I see for accelerated private investor vesting for those that participated in the private GEL rounds are that we can have all the possible negative impact on GEL happen before the end of the year. Thereafter, there will no longer be a major unlock of this size and it will be much easier for token holders to reason about the future supply. Based on my discussions with private investors I am actually quite confident that most of them are long term holders and believe in our vision and appreciate our traction, thus I would think there wont that much immediate price impact. Also, long-term GEL token holders should not care about 1-3 months price volatility that this might cause.

TLDR: Rather than waiting a year for another period of extreme GEL price volatility, we just get it over with right now and then have a much more straightforward future vesting schedule and change in supply to reason with.

This is just an idea that was brought forward to me btw and I find it interesting to hear how the community feels about it. Personally I see some merits here but also some potential downsides. Open to hear more opinions on this matter.

RE: Burning Treasury tokens, I personally agree with @3.1415r’s sentiment here.

1 Like

Thanks @hilmarx, appreciate your answer. I get the idea now, basically it’s about front-loading the unlock fear. Seeing it with this lens, I am totally neutral to slightly positive. I am personally in for the long run and would be happy to continue increasing my position in case of another round of downside volatility.

1 Like

My two cents here and kudos to @hilmarx and other community members for being proactive about this issue!

Goals of closing the FDV gap

  • Frontrunning the valuation overhang, hopefully in time for the next cycle

  • Most rational token investors would be hesitant to own anything with the unlock dynamics and gap between circ supply / fully diluted supply like $GEL, regardless of product strength and traction

  • If decentralization is truly a priority and on the near-term roadmap, then we need more liquid supply or potentially treasury supply of native $GEL tokens that Gelato node operators can then purchase and lock for staking & economic security via incentive alignment (through the token) as well as slashing. You can essentially backsolve to how much liquidity is “needed” to accomplish this under a certain set of assumptions around how many node operators we’re targeting, etc

Dynamics around accelerated vesting

  • I can’t think of great precedents or case studies of when this has been done within or outside of crypto (equities don’t really have this dynamic given lockups are far less drastic once venture-backed businesses IPO)

  • To that end, @hilmarx @Dan @freshaspect and others, I would suggest maybe tapping into the founder network or your existing VC investors to ask and see if they are aware of others who have done this

  • There are bad ways to do accelerated vesting and then less bad ways to do it. The bad way would be to unlock everyone’s tokens and just say “okay do whatever you want.” The less bad way would be to ask those who do want to exit to work with reputable market-makers to minimize the short-term price impact (not that it really matters in the long-run, but optics may be important for community morale and potentially for if/when staking is enabled for node operators). And ideally, no founder tokens ought to have any change in vesting schedule given it is extremely important for incentive-alignment purposes to have core contributor token ownership

  • And on the topic of treasury sales and/or burning I tend to agree with @hilmarx and @3.1415r. Ultimately what supports fair market value is revenue and what supports revenue is a great Gelato product built by a set of people who really care about delivering something awesome. Everything else is just financial engineering. If Gelato is in need of funding and needs to sell out of treasury, then well we can cross that bridge as a community later on. This is almost an entirely separate issue from fixing the FDV overhang.

Outstanding questions (fine if can’t disclose)

  • Can you disclose what valuation / token price the Series A deal was done at? Or was it the same as the token sale?

  • Have you discussed this with any of your existing unvested investors?

2 Likes

Thanks for the detailed response @randomishwalk!

Yes it was the same as the public token sale.

Have you discussed this with any of your existing unvested investors?

No, I wanted to get the community sentiment first. But I think you made a good point on asking our network if anyone has experience in accelerated investor vestings and could share the lessons learned. Will report back in here once I receive some more valuable data on this.

1 Like

many good discussion in this thread, thank you @hilmarx @3.1415r @randomishwalk @dom @Sed for your additional points.

i think the biggest issue still is the unreal valuation or fdv, and we don’t a good idea how to solve it. that’s why i proposed burning.

release investor token earlier is also a good idea imo, especially in a bear market, best time to do it.

i don’t think it’s good to sell GEL in treasury, except when gelato team really needs funding. uniswap proposed a similar thing, and the community was very unhappy about it, huge backlash.

1 Like

@hilmarx another way I see the tokens in the hands of the DAO be distributed and become technically circulating would be to offload a part of the supply into the hands of a foundation that has a mandate to distribute those to the benefit of the ecosystem over several years. This would probably also have some legal benefits.

It’s been quite a while since we had an engaging discussion on the forum. So thank you @hidden_hands for bringing up this topic that seems to have haunted the community from time to time.

I think the issues here are elaborated and understood very clearly:

  • Low market cap vs. FDV ratio, which translates to the lack of decentralization, the growing pressure from potential bursts of supply, etc.
  • High FDV, which translates to the overly high valuation that perhaps doesn’t reflect the reality given the current state of the protocol and the general market.

These are valid issues that are worth concerns. Numbers of projects that emerged during late 2020 till even recently, are all facing the similar challenge that becomes ever too obvious now that we are in the bear market. I believe now is the right moment to start thinking about how we can improve the situation with all means available, given that the lack of overall speculative activities in a bear market can somewhat mitigate any turbulence caused by large change in tokenomics, and also Gelato protocol has matured enough to a stage where restructuring the tokenomics as an essential part of the ecosystem’s economics, incentive mechanism, and business model, should be taken more seriously.

So far, I’ve seen basically 3 ideas on how to handle the said issues:

1. Accelerating the unlock schedule for investors
I’m generally in favor of this approach. Looking at the current price of $GEL, the only major risk in my opinion would be the selling pressure from seed investors due to their lucrative profit if exiting now. Having said that, I doubt the selling would be as aggressive because of the thin liquidity. In addition, it’s unclear how much $GEL the seed investors actually are entitled to, which makes the assessment of the potential impact somewhat pointless. Nevertheless, I do think it’s a sensible approach, and if we want to do it, the timing looks primed. We just have to come up with a proper new vesting schedule that can accelerate the token release while creating only a moderate amount of market turbulence, if any.

2. Burning part of the treasury holding
This is an interesting one and I believe a couple of projects have already done it, e.g. Sushi Swap, Step Finance, just off the top of my head. From a token valuation point of view, I think that permanently taking some token out of the total supply at least won’t have negative impacts. In the long term I do tend to agree that it creates a better outlook for investors to feel more comfortable investing and staying invested, simply because FDV is a typical metric many use to evaluate the potential upside / growth.

Several replies pointed out that a burn would impair the financial capacity of the treasury to fund the protocol’s long term development. Though I understand the argument, it’s really not enough to dismiss the point of the burn proponents. To me, @hidden_hands makes a good point, which is how we measure the financial capacity of the treasury, or put more simply, what should be the unit of count, $GEL vs. $USD. A token is only good for acting as incentives or funding protocol development if it has value, and the most tangible way to measure that value is in $USD. If by burning some treasury holding, a reduced total supply + a higher ratio of market cap vs. FDV can increase the value of $GEL, then the question is which factor outweighs, i.e. the appreciation of $GEL or the amount of $GEL burned. This is another impossible question to answer, since we cannot model the correlation between the amount of $GEL burned and the subsequent $GEL appreciation. But my thinking is, as long as a moderate burn can create an opportunity for $GEL to appreciate enough, either in the short or long term, to outweigh the value of the burned amount measured as if there were no burn, then it’s worth doing. Perhaps something like 20% is more reasonable. 90% is just too aggressive and likely defeats the purpose.

3. Selling tokens from the treasury
This in my perspective is the least beneficial way among all three ideas to distribute $GEL from the treasury. Gelato has already secured a rather healthy runway, therefore selling is certainly not needed financially. Besides, this would also entail a certain discount on the token compared with the market price. If we don’t even need the funding in the first place, then there is even less reason to sell our tokens at a discount.

So in summary, a combination of idea 1 and 2 seems to me most likely to create a healthy momentum to address the two issues mentioned at the beginning.

I also would like to respond to some of the very thoughtful comments brought up by @3.1415r

I agree with this view to a certain extent. Although, how the tokens are released should matter, regardless of the timeframe, and the current investor vesting schedule for $GEL does look odd and can create unnecessary panics among token holders and potential investors. Depending on where we are in the market, sometimes these panics can be detrimental. It’d be great if we improve it in the sense that $GEL can be released faster and more progressively.

I have to disagree with this, simply because the control over a DAO treasury is not pro rata but rather binary, e.g. holding 51% of the circulation supply gives the total control of 100% of the treasury. It is inaccurate to draw a linear correlation between an individual holding and the entitlement in a DAO treasury.

FDV should be reduced while the market cap most probably will be increased right after the burn, because the price may appreciate on the burning event, but likely not appreciate enough to reach / surpass the previous FDV before the burn, which is especially true in a bear market.

2 Likes

@btt RE: Selling tokens from the treausry

I think this is also something very important to consider for the discussion about burning treasury funds:

We will definitely soon have to sell more tokens from the treasury for additional runway. I think that many underestimate how much $ it takes to build a protocol like Gelato, especially in light of more and more well funded competitors entering the space (e.g. Chainlink). Building the decentralized backend of web3 is a massive opportunity and given its size, we have seen quite the increase in high quality competition in the past year. We are now roughly 30 people in the team, Chainlink Labs has over 400 employees (as listed on Linkedin). In order to compete, we will have to significantly scale up our team, there is no way around this.

If we slow down now, then Gelato might risk losing its pole position in the automation space, ending up being that one project who had the initial idea, but wasn’t sufficiently capitalized to execute on it. The treasury funds were always meant to grow the network, and the most efficient way of achieving this is to raise more money, hire more smart & dedicated people into the team and continue to build and market Gelato.

We have achieved quite a lot with actually little spending over the past year, however our plan over the coming months is to accelerate growth rather than slowing down, which will require additional resources that will have to come from the treasury. We will of course put forward a proposal detailing how much % of the treasury will be required. I am quite convinced that over the long run the entirety of the treasury will be necessary to be invested into the future development and growth of the protocol, maybe even newly issued GEL beyond that if the currently allocated budget turns out to be insufficient.

3 Likes

Hi @hilmarx, when you say “maybe even newly issued GEL”, are you actually considering increasing the total token supply?

Obviously, this would be a move in the opposite direction of a token burn, which, as mentioned earlier, I am not in favour of, but seems to be a popular option. This would completely change the terms for the current investors which assumed the total token supply was an absolute max that could never be breached, and this would render the calculation of FDV meaningless. It doesn’t feel like a door that should be opened.

I am 100% in favour of the project raising additional capital to keep up with Chainlink and finance future growth, but this should be achievable using the existing supply. If the ~16.6m GEL in the treasury are not sufficient, I think reallocating a share of the Community Development fund (~197.5m GEL) would be more acceptable.

Also, what mechanism do you have in mind for selling GEL tokens from the treasury?
This scenario remains me of what Aura Finance had to do a few month ago: they ended up selling AURA tokens from the treasury using limit orders at a premium to market price on CowSwap. Limit orders are a good way to overcome the low liquidity issue. The operation was successful, they raised ~$1.1m in 4 rounds of limit orders (increasing premium over time) over a 2-week period. Discussion here if you want to have a look: [AIP-3] Increasing AURA Float and Liquidity, while Building DAO Runway - Proposals - Aura Finance.

If you are considering selling tokens OTC at a discount to market value (which is obviously not optimal), then in fairness to current token holders, I hope you will offer us the right to participate at the same terms.

Hi @hilmarx, when you say “maybe even newly issued GEL”, are you actually considering increasing the total token supply?

I don’t think this will be immediately necessary as indeed we still have a good amount of resources in the treasury, but I think eventually this might be necessary. The token was also designed in such a way to allow the DAO to mint new tokens to the treasury. This process would go via the usual governance process and will be voted upon by all token holders. It all depends on how the market develops and how fast we want to grow at the end of the day. For now however, I don’t see the need for this in the next 12 - 18 months, though things might change.

Also, what mechanism do you have in mind for selling GEL tokens from the treasury?

There are multiple concerns here at play for what is the best way to sell tokens, most of them concerning the legal and operational situation of selling tokens that are liquid. The easiest option here is by far just regular OTC deals with institutional investors (one-to-one communication, KYCed, etc).

However, I am definitely open to hear what other projects have done in the past which complies with local regulations and is practically feasible that enables the community to participate more. I will have a look at the AURA sale, thanks for sharing.

1 Like