How to OTC Trade for a DAO? A Story from Tribe and Lido

People are doing this with Tribe after the stablecoin DAO announced their disbandment: bidding for their tokens.

https://x.com/joeysantoro_eth/status/1560702416080683009

It may seem promising for the DAO to receive this many offers—except for one thing. Even though these assets are all liquid and tradable on the open market, participants do not have a reasonable consensus on how to price these tokens.

Buyers started their bids with a price lower than the market price. When explaining their offer, one team said this:

We realize this offer is below current market value; however that market value is heavily impacted by slippage, and thus we believe that a lump sum at a set price from the DAO may serve the Tribe's interests.

After more people swarmed into the bidding war, people started adding $50k on top of each other.

More importantly, the criteria to qualify a bid as a votable proposal is opaque. For example, a DAO member put Wintermute's $500k bid for $INDEX token to snapshot but ignored the $600k bid made later.

If Tribe's practice reflected a market failure, Lido’s series of proposals on diversifying treasury highlights the need for a new consensus on pricing tokens.

After the June market crash, a few members proposed to sell 10k ETH to DAI to diversify the treasury, which sold 2% of their gov tokens (worth $30m) later. In traditional finance, this type of order is usually executed by an OTC desk, a professional trading team settling large orders in exchange for a service fee. However, the entry requirement for becoming their client is pretty high. You must pass their KYC by submitting information about the legal entity or business representative--things that most DAOs do not possess.

I do not want to go through every detail of this story, as you can learn here. To sum it up:

• The first proposal of selling 10k ETH to DAI was rejected because people felt that it did not include parameters of a standard OTC trade, like price, time, execution venue, execution strategy, etc.,

• The second proposal was put up later. It proposed to sell 2% of Lido gov token (in liquid form) at a 7-day rolling average plus a 50% premium, and the VC Dragonfly would buy half of these tokens. It was rejected, too, as people wondered how the price was reached and why there was no lock-up.

By reading these posts on the gov forum, we can see how traditional OTC practice is incompatible with DAO organizations. Most OTC trades require some level of secrecy (negotiating in private telegram chats), which is against the transparent ethos of DAO.

If you read this far, I believe you've already felt something is missing-- a new consensus on pricing assets. It was not needed in traditional finance, as traders did not have to explain why they reached the price. But in the era of DAO, where tens of thousands of people are all stakeholders in these trades, it is necessary. Without a shared understanding and process for OTC, communities will naturally struggle to reach a consensus.

The new pricing mechanisms must be:

• Widely accepted for being fair and transparent

• It barely requires human intervention and is hard to be manipulated

• Usable for any order size

Interestingly, the best candidate for all of this is also nothing new. For example, in Lido story, they ended up with a strategy used in traditional finance: TWAP.

The passed proposal proposed to sell with a price that would be higher of:

• TWAP price + 50% premium (~$1.45).

• A 7-day backward-looking TWAP + 5% premium.

Lido's decision to use TWAP gave me so much confidence in building our product, Integral SIZE, a TWAP-based decentralized exchange. Although most people have not used TWAP in their lifetime, they view it as a fair price, as it is accessible and hard to manipulate.

It is a common ground for humans to agree upon, and it's scalable. Whether it's a $1 or $100mil trade, TWAP execution will always be applicable.

Just like Uniswap provides the go-to price for small swaps, Integral SIZE delivers the go-to price for large swaps of DAOs and pro traders. It is the TWAP price provider in DeFi.

In 2 weeks, we'll launch the product on Arbitrum, our first attempt on the Layer-2 network. We believe the product can help solve the liquidity issue plaguing L2s and make them as good as Ethereum in terms of trading.

https://x.com/IntegralHQ/status/1555611692209512448

And if you are a DeFi builder and want to put TWAP execution into your maths equations, check our SDK and API so you can integrate your product with us.