A couple days ago I had trouble understanding why my AUSCM rewards were reduced by 20%. At first I thought there was some programming error. However Quantstamp reviewed Auric’s smart contracts, so I started thinking there was something nefarious going on. I was wrong. Taxing farmers is one of the ways Auric funds its DAO. Let’s get to the bottom of the underwriting of the Auric DAO.
The Auric Network is building an elastic supply cryptocurrency (called AUSCM and pronounced “awesome”) that is pegged to the price of gold. Apparently, the anonymous team behind the Auric Network (or Auric for simplicity) wants to hand the reigns of the fledgling project over to a global community of persons interested in ensuring that the project achieves its lofty objectives.
The Auric DAO
This community of concerned individuals is known as a decentralized autonomous organization (or DAO). Those governing the DAO are obliged to effectively manage AUSCM’s peg and ensure that the coin eventually becomes a cornerstone of decentralized finance (or DeFi).
Governance is performed by those with some stake in the DAO. Proposals to improve the project are put to a vote and, ideally, those with more at stake have a greater ability to influence decisions made by the DAO. [1]
The Auric DAO Fund
In the case of the Auric DAO and thanks to on-chain voting, an individual’s stake in AUSCM exhibits some commitment. Financially, incentives are aligned because AUSCM holders suffer if the project is poorly run.
The ability to vote alone is not a sufficient condition for a successful DAO though.
A DAO must be funded.
Without funds to deploy to make stuff happen, a DAO can’t actually do anything but vote in vanity (or depend on charity). Funding this incipient Auric DAO breathes life into the organization and should make it self-sustaining. [2]
Yield Farming
For the last seven days, Auric has been offering free AUSCMs those token holders that were willing to handover custody of their beloved coins to Auric smart contracts for 14 days. This is act of faith is called staking.
Even though the Auric team published their smart contract code on github, most speculators can’t read code and need to trust that the open source code indeed hides nothing. When they take the gamble and start staking, they are rewarded with AUSCM for doing this.
This process is known as yield farming because there is a meaningful reward (yield) for staking idle coins that could be lucratively deployed elsewhere. [3]
Given the information asymmetries at this stage, the most nervous farmers pullout prematurely. Indeed, there is no obligation to hold AUSCM. So why gamble?
These rational actors dump as soon as they lose faith in the ability of the coin to sustain price increases.
Thinking “there is free money to be made right now”, they bail without really making the effort to vet the project. They take the initial reward (which at one point went up as high as 8,000% APY) and run. While there’s nothing wrong with this behavior, they don’t get off scotch free.
Pre-Mined Supply
Effectively, Auric embraces a pre-mined supply approach to bootstrapping. Think of the pre-mine as a primary issuance of sorts. It’s a portion of the token supply that doesn’t immediately make its way into the hands of farmers (the secondary market).
Auric goes about pre-mining supply by charging a tax of 20% of staking rewards issued to farmers. [4] Those funds are then used to bootstrap the Auric DAO Fund.
These days many founders aspire to create a DAO with no pre-mined supply. This is part of the fair launch concept. Auric’s founders made a deviation from the fair launch concept and embraced a fair distribution aspiration instead. [5]
This decision to engage in pre-mining means that the Auric DAO Fund immediately starts accruing wealth. The funds are evenly bucketed as follows:
- The Auric DAO Fund: This synonymous fund is essentially the fund’s capital account. Inflows are akin to contributed capital. This is the discretionary part of the Auric DAO Fund. The remaining inflows are allocations.
- A Governance Rewards Fund: An allocation for participation in cultivating the Auric Network. Inflows are akin to a top line contribution to compensate the virtual board of governors.
- Secondary Rewards Fund: An allocation for future staking rewards.
- Developer’s Fund: An allocation for engineering and marketing.
At this point in the launch, many AUSCM farmers, like honey bees, have come and gone without realizing the value they provide to the flowering ecosystem. If they didn’t dig into the Auric documentation, they’d have no idea that while they were earning yield they not only created a coin out of thin air, but also bootstrapped the Auric DAO Fund.
This is not financial/investment advice. This article is informational only. To discuss the merits of fair distribution versus fair launch, please join the discussion on Discord.
[1] It’s not true that those that hold more AUSCM have more at stake. The most ideal measure of a person’s financial stake in the Auric Network is technically AUSCM / WEALTH. This measure indicates how much AUSCM an individual holds relative to their entire net worth.
Until blockchains and DeFi advance to a level where this is easily determined, every governance-token run DAO will be susceptible to manipulation from those token holders that possess a relatively large amount of AUSCM, but have less relative wealth at stake. This is why every DAO serious about stakeholder diversity and resilient management aspires to fairness at launch.
In any case, a DAO is arguably an improvement on a top down organization.
[2] With the days of the ICO (or initial coin offering) long behind us, the yield farming of a token for governing a DAO has become the fundraising vehicle of choice. DAO governance tokens are like stock which may (or may not) pay dividends.
Unlike the tokens generated via the ICO mechanism, governance tokens don’t seem to offend the sensibilities of the US Securities and Exchange Commission and thank goodness for that!
[3] This issuance never actually makes its way into farmer’s mitts.
[4] The value of AUSCM is created from the opportunity cost of staking.
[5] Yeah, I also thought fair distribution meant fair launch. It doesn’t. Marketers will do marketing. However, it is a fair method of bootstrapping the Auric DAO in the sense that every actor in the bootstrapping process contributes equally to the Auric DAO Fund irrespective of how much they stake.
