GFX Labs' Proposal To Become Contributors

A developer team investing meaningful labor/resources into a protocol like Compound deserves clear terms and a contract with a runway sufficient to engage in more than short-term planning. This proposal seems like a solid step in that direction. Of course it also helps that GFX Labs and its leadership have been such active long-term contributors!

Here are a couple of questions to consider:

(1) Is it in Compound’s best interests for GFX Labs, or any one organization, to tackle all 15 of the items on the suggested to-do list? I think it’s a solid list, and Getty and Eddy are clearly well-qualified to tackle most items on it. But I wouldn’t want the adoption of this proposal to preclude the protocol from hiring other teams to work on items that may be a bit more outside of GFX Labs’ usual wheelhouse. An example that comes to mind is the interest rate curve research: that work strikes me as benefitting from a very different skill/experience set than what’s needed for most of the other items and could be tackled without deep knowledge of the complete protocol codebase. Maybe some detail on how GFX Labs envisions prioritizing these items and/or how we would make space for others to come in and tackle a subset of these items would help address this question for me.

(2) Can the protocol afford the services as proposed? Over the past year interacting with governance, I’ve learned that my barometer for the market value of this work is way off, so to be clear, I’m not questioning whether the pay rate is reasonable. Rather, I’m asking whether the protocol can afford to pay GFX Labs its base fee and bonus in the most optimistic scenario, or even in the base case scenario:

  • I’m assuming the base fee and bonus would both come from protocol reserves, because that’s the protocol’s only source of the requested payment vehicle (USDC) unless it sells off COMP, which would go against the proposal’s intent to “not push more COMP into circulation”.
  • Using the numbers in the proposal, the protocol currently holds 29.4% of ~$41M, or a little more than $12M USDC in its reserves. Assuming constant protocol usage as in the proposal, the protocol accrues 29.4% of $17M, or $5M USDC annually to reserves.
  • Said another way, for their base fee, GFX Labs is requesting all new USDC reserves accrued over the one-year contract in a no-change-in-revenue scenario (= $5M).
  • Assuming GFX Labs is successful at increasing revenues by 50%, the protocol will retain this extra renevue (across all markets, which is the silver lining) at the expense of 100% of the USDC revenue it would have accrued without this proposal.
  • But then we have to consider where the funds for the performance bonus would come from. Let’s take the 75% revenue increase, $100 COMP price example (= $5M bonus). In this scenario, the protocol would take in an extra 0.75*$5M = $3.75M USDC to reserves, but would owe GFX labs $5M USDC in bonus payments. The extra USDC revenues aren’t sufficient to cover the performance fee, so we would need to tap into prior years’ accrued reserves and/or swap other stablecoin reserves for USDC just to pay the bonus.
  • Any improvements in the price of COMP would exacerbate this problem, as the price of COMP doesn’t directly affect available reserves (yes there is probably some correlation, but it is indirect and sublinear). The only way the protocol would be able to pay the bonus would be to sell COMP, again contradicting the positioning about not diluting token holders.
  • The situation just gets more untenable as we go up the KPI chart.

Regarding point (2), in short, unless my math is wrong here, I think the bonus incentive needs to be paid in COMP (or the size of the bonus significantly reduced) to make this proposal viable without risking a full drain of the protocol’s USDC reserves.

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