Hey Empty Set Dollar Community! This week’s newsletter is going to be a little different. In the past we’ve done a week-in-review style and proposals to watch. This week, it will take the shape of a Q&A with the goal of answering some of the popular questions from Discord about the upcoming proposal to move to V1.5.
If you haven’t seen it already, go watch the Community Call #3, read the Medium article written by the ESS, and read the excellent write-up done by the Complement Capital.
If you have questions that are unanswered in this, please feel free to present them in the Discord. I’m hoping to continue to create a short FAQ at the end of the following newsletters for questions as they arise. This will eventually transition to a full FAQ upon launch of V1.5.
Additionally, there will be a fourth Community Call this Friday, February 26th, with time and details to follow. To stay up to date: Twitter, Discord, Telegram.
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These questions were answered by EQ Parenthesis and edited by yours truly. Some answers have been edited to make the material easier to approach.
What are ESD/ESDS, and how will they work?
Once the move to V1.5 happens, ESD will be split into two separately functioning coins (ESD and ESDS). ESD will function as a stable coin, the uses of which parallel the current uses of ESD in V1 (yield farming, storage, etc.). ESDS is a seigniorage coin, which can be purchased and sold similarly to countless other cryptocurrencies. In a simple analogy, it is akin to depositing your money into a bank account at, say, Wells Fargo (ESD), or buying ownership of Wells Fargo (ESDS).
ESD will be stabilized by a reserve system, while ESDS will be allowed to grow to the value determined by the market.
So, there's going to be a reserve created as the main lever for stability for ESD: What is that reserve going to be made of?
At launch USDC will be the only collateral accepted, this may change in the future if we enable more complex reserve management strategies. The Reserve Ratio (RR) will be at 100% on launch. To begin - it’ll be like wrapped USDC. That is set by the DAO, not algorithmically. There will be votes on the reserve ratio.
How are the two coins related/how will they interact with each other?
The primary goal of the reserve is to return the stablecoin (ESD) to peg. Once that is achieved, the excess yield in the reserve will be used to buy and burn the seigniorage coin (ESDS), increasing the value of ESDS in the process. As the project grows, so will the ability to generate yield from the reserve, meaning the rate at which ESDS will be positively impacted by ESD should increase. Now, there will be buying/selling/trading of ESDS in the process, meaning the impact on ESDS’ value will be positively correlated with the increased use of ESD. (Though not directly correlated.) This means we may not see constant green candles in the short term, but that does not imply the system is not working.
What happens to your original ESD that is in the DAO, LP, Couponed?
Original ESD won't go away. There will be a migration contract that will allow users to voluntarily burn their original ESD in exchange for Continuous ESDS at some fixed exchange rate. ESD that is currently LPd or locked in coupons will need to be withdrawn before it can be migrated. The rate of exchange of ESD V1 for ESDS will be determined at a later date, but will match percentage ownership of the protocol.
Will that exchange rate change, or will it be fixed indefinitely? What mechanism is being looked at to determine exchange rate?
The exchange rate will be fixed when we turn off regulation (see the EIP-23 section in the Gitbook). Tell the contract to stop accepting advances. There will be an active step to change your ESD, whether bonded, unbonded, burned but not redeemed, you will have to take an action to change your ESD into Continuous ESD. The exchange rate will then be whatever the ESD:ESDS exchange rate ends up being in the DAO when we turn off regulation but the percentage ownership rate will be the same. Proportion of the protocol is essential because that means you’ll have the same voting power.
This is also so that people who are bonded in the DAO currently can do a 1:1 ESDS migration which may be favorable for tax purposes based on your jurisdiction
V1 ESD is the original token, but will become ESDS after migration which is not pegged to the dollar anymore. What value does it hold?
V1.5 ESDS’ value upon migration will be established before the move. We currently already have ESDS (bonded ESD) and ESD, but ESDS isn't a trade-able asset. With Continuous ESD (V1.5), we're effectively forcing all ESD in existance to bond, migrate to ESDS (V1.5), and then making that ESDS trade-able, allowing ESD issuance to restart at 0. ESDS then represents the value of the network itself, (think buying ownership in a company) instead of being commingled with issuance.
In a two token model how does the token (ESDS) that isn’t pegged gain value?
ESD is going to be broken into two halves. ESD is pegged to the dollar through a reserve system. When below peg, the reserve system buys ESD and burns it. When above, arbitragers buy ESD for 1 dollar and sell it for the price above 1. The other side is tradable coin ESDS. So as ESD gains usage, adoption, etc, the value of ESDS will grow. Remember, from above, the USDC that is deposited as collateral will be used to yield farm, (much like a bank uses the money in our savings to invest) and the yield gained will be used to buy ESDS and burn it.
ESDS being purchased by the reserve and burned when RR is above target is a bit confusing. The protocol is making a decision based on what mechanism to buy or burn?
Once we’ve established the peg of ESD, excess reserve will be used to buy and burn. In the beginning, while 100% collateral is maintained, this will be slow. Over time, this can and will increase in rate and efficacy as Reserve Ratio (RR) can venture away from 100%. Say we've successfully figured out a secondary stability mechanism such that we've been able to lower the target RR to 70% (we only need to store 70% of the collateral of our issuance). Now every time a new ESD is minted, $0.70 goes to the reserve collateral, and $0.30 is excess which can be used to buy and burn ESDS. In contrast to Frax where this happens on individual mint, Continuous ESD would execute this buy and burn in aggregate, but from a high level it should have the same economic effect.
Is there any benefit to being a holder of V1/What’s the point of holding original ESD?
The only way to get Continuous ESDS is by burning your original ESD for it. This proposal will take the entire supply of original ESD and convert that supply to Continuous ESDS.
This change is basically a complete revamp - why is that okay?
Frankly, it's necessary. It's clear that uncollateralized models are unlikely to work, and other classes of novel algo stables are seeing more success. As a project we're not tied to any specific mechanism. We see this as progressing to the best model given the data we have on what has worked and what hasn't. (A full write up on this is coming soon.)
At the end of the day, the true core of what we’re trying to do is become a stable instrument that is censorship resistant. This progression is a step toward something that we believe will work better.
Just so we're clear, this experiment is still just beginning. The most successful projects in crypto didn't happen overnight. They take time, and tweaking. I definitely understand that the project doesn't look like what it set out to be, but that's a strength, not a weakness. That's our community learning from experience and being willing to change based on the evidence in front of them.
This has dramatically impacted my trust in the system and the developers--Why should I stay with the project?
Change can be scary, especially when money is involved. However, I implore you to see change not as a white flag, but as efforts to continue to be proactive, adaptive, and progressive. One of the best parts of this community is its ability to foresee problems, create proposals, and adjust. One of the best parts of the developers is how quickly, aggressively, and actively they work on these changes. The foundations for the project have not changed. The developers have not changed. The direction and mission of the project have not changed. What has changed is the form in which the project functions. This is an adjustment of course, not an abandonment of it.
Will there still be lockups for the ESS team moving forward?
This was addressed by EQ in the Discord, so I will paraphrase here. The lockup by the dev team was and is designed as a way to create and maintain trust in the project. With the move to a new system, locking up right now wont work, necessarily. The process of migrating locked-up funds would be extensive, so the idea is to lock-up dev funds after the move. The dev team is not leaving.
When!?
ESS has been developing V1.5 since the start of the new year. And as stated in the Medium post: Development will be wrapping up shortly with an audit kicking off late Q1. Pending governance approval, Continuous ESD will launch early Q2 once the audit process is complete. A series of proposals will be made to v1 in parallel to prepare for the migration — additionally these proposals passing will de facto approve the Continuous ESD upgrade.
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Alright folks, it’s now your turn to talk. Head to the Discord and let me know any other questions you may have. See you at the next Community Call, Friday, February 26th.