First of all, this thread shows how active our community is on solving this issue. There have been many great points and suggestions within this thread, but I will summarise some of the main points from the Mutant Meetup call where the wNXM discount was discussion. For those of your who weren’t able to join the call, you can listen to the recording here.
Buying wNXM below book value. Everyone in the community agrees that buying wNXM while it’s trading below book value is the logical move. However, there are several issues that make a buyback somewhat complicated:
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Limited liquidity within DeFi. The deepest liquidity for wNXM is currently on Bancor. For a buyback to be effective, the mutual would need to use ~2% of the Capital Pool to conduct a buyback. Using the current holdings (162,406 ETH), 2% is equal to 3,248.12 ETH ($13,890,260.37) at current prices. On Bancor, there is currently $12,394,366 of liquidity within the pool.
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Deepest liquidity is available on CEX (Binance). Conducting a buyback within DeFi would likely take several months to make enough trades without incurring significant slippage. If the mutual were able to send ETH to a CEX such as Binance and have their OTC desk conduct a trade, we could conduct a buyback within a short amount of time. However, at some point, a single person would be required to transfer the wNXM back to the Capital Pool. More details and discussion can be heard on this week’s Mutant Meetup call.
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Tax advice for the Mutual. Hugh spoke on the call about the tax advice, which the mutual has received and is reviewing before presenting to the wider community. Conducting trades using capital pool funds could be delayed until there is more clarity on the tax implications.
Buying back wNXM when it trades below bonding curve price. A few members of the Investment Hub weighed in, as did Hugh, on this point. The bonding curve is used to control capitalisation levels, and book value differs from the bonding curve price. Buying wNXM back up to the current bonding curve price would require the mutual to buy wNXM above book value, which wouldn’t deliver value to the members of the mutual. There’s wider discussion on this as well.
Buying back wNXM and burning it? Or buying back wNXM and providing liquidity on Uniswap V3? The discussion touched on two points. Buying back wNXM and burning it keeps the corresponding ETH in the pool. When wNXM is redeemed for ETH, it is burned, so burning wNXM effectively keeps ETH in the capital pool. However, other members brought up the issue of low liquidity for wNXM within DeFi. Buying back wNXM and providing liquidity in a concentrated range above book value up to the bonding curve price would establish a price floor going forward and provide deeper liquidity for wNXM in DeFi.
Solving for the arbitrage issue as MCR% rises above 100%. If a wNXM buyback occurs and the mutual’s investments continue to grow, the cashflows (in addition to cover buys) will push the MCR% above 100%. With bots arbing the profits away, it’s unlikely that the mutual can grow the capital in the pool. There were several possible approaches to solve for this issue, which included:
Disabling NXM sells on the bonding curve. Potentially resuming MCR growth slowly over time. The Investment Hub advised against this approach and shared that it would be received poorly by the market. Hugh also pointed out that any modification to the mutual’s smart contracts introduces more risk. There was a discussion about slowly resuming MCR growth by possibly no more than 10% annually to retain profits in the capital pool and grow the size of the pool over time. Other ideas were presented on the call and above in the comments on this post.
Given this summary, the community could use the conclusions reached in this discussion to further research the most effective way forward.
If a buyback were conducted, would selling ETH for wNXM on a CEX like Binance using an OTC desk be an issue for members?
If wNXM is bought back using capital pool funds, should the mutual burn the wNXM or provide liquidity in a concentrated range on Uniswap V3?
How can the mutual prevent bots from arbing away investment earnings and profits from the capital pool in the longer term?
We can discuss these points and any others regarding the wNXM discount, possible buyback and strategy, and the use of funds if a buyback were conducted.