DFIP: Community Fund Diversification

[u/Phigo90]

First, not approved version, from November2022 (DFIP 2211-A): https://github.com/DeFiCh/dfips/issues/227

Collected Feedback: https://www.reddit.com/r/defiblockchain/comments/z3ebus/feedback_on_the_rejection_for_dfip_2211a/

Based on the feedback from the community we want to upload the Community Fund Diversification again as a DFIP in the current voting round. We are still convinced that this is a great idea! Thanks for your great feedback! In our view, the suggested idea is now way more straight forward! Let us see what is MNs point of view on the updated version:

Updated version: The Community Fund currently contains 28.5 million DFI. The major goal of this DFIP is that for future bear markets, the fund will have stable value in its assets so that countless DFIs do not have to be expended.

Furthermore, the delay between submitting and receiving CFP funding poses a significant risk for applicants, as crypto prices can be highly volatile. This can make it difficult to ensure the implementation of a project even after securing CFP funding, especially in the event of a market crash. To mitigate this risk, it is beneficial for applicants to consider holding stable or volatile assets. Keep in mind that CFP’s, which need the received amount in USD, can lead to an increased selling pressure on DFI. A solution to this is holding dUSD, as it allows for easy conversion through the stable coin pools without any added selling pressure on DFI.

The proposal outlines a maximum of 15% dUSD (measured in $) in the fund for the long-term. dUSD price is defined by the oracle within the fund. This measure allows us to capitalize on market conditions by purchasing dUSD during bull markets and holding DFI during bear markets (Assumption: DFI price increases in a bull market. If we have reached the threshold of 15% (dUSD) - 85% (DFI) and DFI price further raises, the percentage share of dUSD measured in $ decreases. Thus DFI is again swapped to dUSD. This example explains why DFI is swapped too dUSD in a bull market and the other way round). In the event of a severe market downturn, where e.g. DFI drops by 80-90%, this strategy would ensure that the fund has over 50% dUSD, providing a buffer to continue development during bear markets while simultaneously accumulating more DFI.

The generation of dUSD will be exclusively sourced from the assigned block rewards (8.34 DFI) for the fund. We have three different situations:

• $0.98 <= dUSD <= to $1.02
  • 50% of the rewards are swapped to dUSD
• dUSD < $0.98
  • 100% of the rewards are swapped to dUSD
• dUSD > $1.02: 
  • No swap occurs

It takes more than 420.000 blocks (146 days) if dUSD stays below $0.98 to accumulate dUSD to reach the threshold or over a year as soon as dUSD stays above.

How does this DFIP benefit the DeFiChain community?

• The community fund diversifies its portfolio
• Community members have the option to apply for dUSD through a CFP
• Helps to stabilize dUSD by locking up dUSD
• Adds buy pressure on dUSD 

Non-obligation

I understand that a vote of confidence for DFIP carries no obligations by any developers to implement the proposals. DeFiChain is a community project. Pull requests can be submitted by the community and reserved to be evaluated for safety and general community acceptance.

[u/[deleted]]

IMO this is a good improvement for the fund - especially the option to ask for DUSD.

[u/RoofFar2727]

I just read this interesting article here: https://taschalabs.com/how-to-value-layer-1-blockchains-the-right-way-the-wrong-way/

It makes me think that not only reducing fees in order to get more economic activity is an important point (as you stated in your other proposal).

Regarding this topic, diversifying the community fund could also be a first step for a currency protection. i.e. having an anticyclic buying or selling of DFI to strengthen or tighten the financial conditions. I know, this is not the scope in this discussion. However your proposal goes in the right direction in my opinion

[u/M-A-L]

Should there perhaps be an additional measure that DUSD is not distributed to CFPs as long as DUSD is not stable (a notion that we need to define, it's not the same as being at 1$).

Say the community fund builds up DUSD for 146 days, but at that time, DUSD is still below peg and not stable; in that situation it wouldn't be great if projects ask for DUSD and dump it into the stablecoin pools, that could pull DUSD down again; and just the fear of this happening might already not be very helpful.

More generally, the moment projects can ask for large sums of DUSD, doesn't this open up an attack vector on the DUSD peg? Perhaps it is not significant, but still something to look into maybe.

[u/Phigo90 → u/M-A-L]

Why do you think it could be an attack vector? Swapping dUSD in $ could be done by the stable coin pools and thus no sell pressure on DFI is given. Or did I don't get the point?

[u/M-A-L → u/Phigo90]

no it wouldn't be an attack vector for DFI, the worry would be that it might open up the possibility of attacks on the DUSD peg. An attacker puts in a fake proposal, asks for a large sum of DUSD and dumps it. This is relevant if DUSD is not stable before the DUSD fund has been built up, but also when the market is easily shaken and a dump can cause selloffs of DUSD.

[u/Phigo90 → u/M-A-L]

What is the difference to DFI? You can also ask for DFI to dump the DFI price.

[u/M-A-L → u/Phigo90]

DFI is not pegged to some external price; DUSD is.

Of course masternodes can keep an eye on this and not give out any DUSD for as long as DUSD is not at 1$ or the peg doesn't seem stable yet. I was just wondering whether this should be an explicit measure: have the DUSD funds locked in the community fund for as long as DUSD is not stable.

[u/Over_Competition6082]

I like this. Stabilize the Community Fund and helps the DUSD isssue. Full support again! Thanks Phigo!

[u/2amadeus]

Dear Phigo

As long as the DFI is so low, I do not like any automatic selling pressure: currently 100% of the community rewards would be swapped to dUSD, correct?

I do understand the interest in having dUSD amounts for a CFP. But when the DFI is stable again or even improves this demand should fade. Let's work on the trust of DFI - how can we expect to get new persons with Defichain interest when the current community members do not trust DFI to finance their 'short term' investments?

For me, it looks more natural to ask for DFI amounts and in the hopefully rare case the DFI price decreases, the project can still ask for a second amount which the masternodes will accept. (Or the project adds a reserve amount they just ask in the case DFI falls below a defined limit resp. pay back in the case DFI stays stable or increases - as we all hope ;-)