OpenZeppelin Security Partnership - 2022 Q3 Adjustment

Simple Summary

As we approach OpenZeppelin’s next compensation adjustment at the end of June, we’d like to propose a change to the payment structure of our original partnership agreement. We ask the community to consider approving our next two quarterly payments in USDC rather than our typical COMP stream, starting with Q3 in July. This would effectively change our $4M annual compensation structure from 100% COMP to 50% COMP / 50% USDC. Please see our motivations and details below.

Motivation

OpenZeppelin’s ongoing compensation, paid in COMP as a continuous stream, has been far lower in dollar value than originally expected over the first two quarters of this year. Due to the market conditions, of the $2M expected in dollar value, we have experienced an effective loss of nearly three-fourths or ~$1.5M. We have held onto the vast majority of this COMP throughout the duration as part of our commitment to align our long-term incentives with that of the DAO community. However, we find ourselves in a position where we need to cover FIAT based costs (e.g., auditor payroll) and other operations as part of this partnership.

If we move forward with the existing compensation structure for Q3, we would need to consider selling a large portion of COMP to cover our costs which would create additional downward pressure on the market. We do not like this approach as it would likely still incur losses for us, reduce our alignment with the community’s incentives and negatively impact other holders of COMP. Instead, it would be preferable for us to receive our remaining compensation in a stablecoin such as USDC. This would allow us to hold on to our remaining COMP long-term while still covering operating costs.

Proposal Structure

Our upcoming Q3 governance proposal would be to move 1M USDC tokens from the cUSDC market reserves and send it to OpenZeppelin’s Multisig address. Stablecoin reserves have been accessed in this way before in Proposal 56 to compensate users affected by DAI Liquidations. We have also seen recent service proposals such as Certora include a 50/50 split of USDC and COMP payments. If we are compensated in USDC for the final two quarters of this year, this would effectively replicate the same 50/50 split for OpenZeppelin’s total annual compensation.

In detail, this proposal would:

  • End the existing COMP stream to OpenZeppelin’s Multi-sig
  • Reduce reserves of cUSDC by 1,000,000 USDC
  • Approve 1,000,000 USDC for transfer to OpenZeppelin’s Multi-sig

It’s important to note that this would be a lump-sum payment rather than a continuous stream. Compound does not have a built-in feature to stream other ERC20 tokens. While we could make use of Sablier, we do not want to run into the same issues that we experienced in our Q2 proposal and would prefer to wait until their newer version is released with better governance support.

Request for Feedback

Given that this is a change to our existing proposed partnership agreement, we want to hear the community’s feedback before moving to submit a proposal. I’ve listed out the possible concerns and our response but please raise any other concerns that we might have missed. We’re also open to alternative suggestions on how to address our compensation concerns.

  1. Changing the partnership agreement - We recognize that this is a change to the original agreement and that we’re asking the community to approve a change to our compensation terms, although the original dollar value will remain the same. We think that preventing the need for us to sell COMP is mutually beneficial and we hope the community will agree. We would also expect that, if the DAO continues our original partnership into 2023, our Q1 2023 quarterly proposal would restart compensation to 50% USDC / 50% COMP each quarter going forward following these terms.
  2. Payment Incentives - We recognize that receiving a lump sum payment at the beginning of the quarter rather than a continuous stream may be an uncomfortable change. However, we believe that our past performance reflects our commitment to excellence and that our existing holdings of COMP will keep us aligned with the long-term interests of the community. We intend to use Sablier for streaming future stablecoin payments once their new version is released.
  3. Impact on USDC Reserves - We recognize that cToken market reserves are an important component of keeping Compound healthy in turbulent markets. We do not believe that the impact of removing $2M from reserves of $13M in a stable asset over the course of this year will put the protocol at risk but we welcome feedback and alternative suggestions for stablecoin payments.

Please post your feedback and signal your support below. We hope to collect enough feedback over the coming week to be ready to submit a governance proposal by next Friday, June 24th.

1 Like

I’d like to provide my individual perspective on the COMP distibution, and protocol reserves, before diving into this proposal.

COMP was originally intended to distribute control of the Compound protocol, from a single party (Compound Labs) to a broad array of users, developers, applications, community members, and stakeholders. A protocol is most reliable & dependable, when a single actor can’t change the system without the consent and support of a broad community. In that sense, COMP is meant to be distributed, and organizations like OpenZeppelin are the ideal recipients and holders of COMP; able to participate in governance and oversight of the protocol, with the unique skills that OpenZeppelin brings to the table.

Reserves are intended as a safety measure to protect users from losses, bad debt, and temporary illiquidity. The more reserves the better, and these should generally increase over time, increasing user safety. The largest and most prominent use of reserves was Proposal 59.


The motivation behind this proposal makes sense, and in general, we’re all in early unexplored territory as a community figuring out the best practices for B2DAO procurement. Making sure that the economic relationship between the Compound protocol and OpenZeppelin (and others!) is successful is an important priority.

That being said, this proposal’s approach to decrease USDC reserves by $2M/yr is unsustainable:

  • This sets a new precedent that reserves are meant to be spent as major expenditures, which will lead to others requesting USDC;
  • USDC reserves are not organically growing by more than $2M/yr
  • USDC reserves will be depleted, and unable to protect users

Here are several alternatives which could make more sense to explore, rather than decreasing reserves:

  1. OpenZeppelin could be given COMP up-front each quarter, not streamed COMP over time. This should completely decrease price risk
  2. And/or, OpenZeppelin could borrow USDC from the protocol using COMP as collateral
  3. The protocol could borrow USDC (using the COMP controlled by governance as collateral)
3 Likes

@rleshner Thanks for the prompt and thoughtful reply!

The perspective on protocol reserves you’ve shared is understandable. While this initial request would be relatively negligible, I can see how the precedent of using stablecoin reserves may be unsustainable if it becomes commonplace.

The alternatives you’ve listed are interesting. I’ll sync with our team and hear from other community members before sharing our thoughts by Tuesday next week.

1 Like

We think this is unfair. When you choose COMP as the settlement method, it is extra to promote the rise of COMP to gain additional income. Represents the result of your outstanding work and great growth to the protocol. The loss of COMP falling is something that should be taken into account from the start.

We can’t always blame the market for going down, Compound itself isn’t doing well, communities are falling apart, funds are fleeing the protocol, and contributors are leaving the protocol.

The criteria for asset listings you raised are good, but no assets have been added in recent months.

Compound III is still an obscure state, and its development progress is not at all transparent.

We think it would be better to get through this stage with a round of strategic fundraising, these have been raised and the community has not responded well.

https://www.comp.xyz/t/compound-need-to-increase-community-engagement-and-more

1 Like

While i don’t have objections against using part of the reserves for protocol expenses in principle, in that particular situation i believe it’s unfavorable for protocol. Here is my reasoning.

If we don’t count reserves, protocol treasury itself currently filled with COMP to the roof. And not in sense that it’s too much in comparison with total supply, but in sense that there is nothing else there. And that is very bad, as normally treasury should be primarily filled with reserve assets, which are usually assets external to entity, not those which it can’t issue itself. That makes is easier to fulfill external expenses, which are usually nominated in USD.

Ideally, in the best interest of protocol whould be to unload part of it’s COMP holdings in favor of stable coins and possibly to some extend eth/wbtc. Nothing else from Compound markets really qualify as reserve asset. On the other hand direct selling into the market own native tokens while in theory possible might look somewhat undesireble from regulatory perspective. So protocol is kind of in a position when from one hand it would benefit from more diversified treasury, but on the other hand kind of limited in it’s selling abilities. If we look from this perspective, giving away tokens to somebody, rather than stable coins (which potentially could be used for treasury in future) is preferrable for protocol.

We also should clearly understand, that situation in which OpenZeppelin found themselves in is completely created by OpenZeppelin itself. Decision to hold majority of an awarded tokens rather than selling at least part of them, knowing that they do have expenses which they would need to finance in USD is reckless and unacceptable. If you know that you would need to sell tokens to finance expenses anyway it’s very poor management to bet everything to speculate on price (which holding basically is.) It’s very expensive lesson to learn. But past is past, for today’s price of COMP, 3rd Quarter payment wouldn’t be more then 30k COMP tokens in total (most likely less given the average price is going to be higher than current) Which if we look at daily volumes at CEXes which is over 50M wouldn’t really be hard to liquidate without any significant impact on price, especially if it isn’t executed on one CEX as a single market-sell. So impact on price isn’t really a big concern in that situation.

As for some solutions suggested by @rleshner i strongly against idea of protocol using COMP to borrow anything. I believe that is absolutely unnesessary risk for otherwise pretty solidly positioned protocol and that might be only considered in some dire situation, which current proposal obviously isn’t. I believe that should be out of question. It’s up to Governance, but i firmly believe protocol should not be doing anything like that.

As for OpenZeppelin borrowing themselves probably wouldn’t be so great idea either. Not because it’s not possible in principle, but because of prior actions of what they did with recieved tokens indicates that they likely don’t have someone on their team who could evaluate their own financial risks properly, or they wouldn’t be in current position. In current global market situation using something as volatile as COMP for collateral could lead to financial ruin. And i would sincerely want them to do well and continie doing their job for mutual benefit.

But on paper that surely looks great: what can go wrong, borrow rates for usdc on Compound are practically zero, “market bounced from the bottom” etc, etc. A lot of things could go wrong. If you need to finance expenses in usd, do DCA sell. Even from current prices all can potentially go a lot lower.

As for other ideas like paying upfront, i see it as a possibility indeed, though just to make sure nobody dumps it instantly, i would suggest to stream it over a month, or at least a week just to be sure nobody would have ability to act irresponsibly.

To summarise, i suggest we hold on to original agreement and leave payments in COMP, potentially upfront. And as sort of advice for OpenZeppelin, don’t marry to your bags, sell when needed. I doubt anyone will blame you for cashing a bit of your earned money and it doesn’t mean that you have no faith in protocol. Besides if you really into long-term governance participance, your COMP payments just went up like a lot. Maybe their valuation went down, but you going to get much more of them, and they are fixed and quite limited supply. That might be a blessing in disguise in the long run.

1 Like

Thanks for the feedback, everyone. We’ll be following up with a proposed plan by tomorrow for what we plan to submit this Friday.

Thanks for the feedback, everyone. The first option of receiving our COMP payment in a lump-sum seems like the best path forward.

Since there are concerns about using stablecoin reserves and the community is understanding about our needs to cover costs by selling COMP, the lump-sum payment should address our concerns for the next two quarters. We’ll also be sure to sell any COMP in slow tranches to avoid any negative market impact and still plan to keep a portion of our total COMP long-term. Since COMP streams can only be continuous and must be manually ended by governance, this would need to be a lump-sum payment and couldn’t be streamed. Given that market downturns have been rapid in the latest weeks, we would also want to calculate this COMP amount on a weekly VWAP, as opposed to a monthly one that has been used in the past.

We really appreciate the community’s willingness to address our concerns and we plan to submit our proposal this Friday with the latest up-to-date pricing.

6 Likes

We’ve submitted our proposal: Compound

Based on the VWAP price, this would be $38 per COMP for a total quarterly payment of 26,316 COMP equaling $1M. This COMP would be transferred from the Timelock’s existing balance.

3 Likes

Voting is now live! Please vote in support of our proposal today and tomorrow to ensure we pass quorum.