As discussed in the SourceCred Finances Discourse post, SourceCred can no longer afford to support a fixed $1 redemption price for Grain, while continuing to issue Grain. This issue is that while we do have financial resources and funding (totalling to about $425k through end of year), we have around 1M Grain currently outstanding. Thus, mathematically speaking, each Grain is only backed by about 42 cents, rather than a dollar.
I’ve offered to not redeem any Grain until SourceCred is on better financial footing, which brings our overhang down to about 535k. However, that means we still only have about 80 cents per Grain.
We have a plan to shift the SourceCred treasury onto much more sustainable footing: basically, by launching Grain as an on-chain token. As discussed in my presentation during the SourceCred retreat, this will remove the financial instability we have around the peg, and let the Grain price be determined by the market’s perspective on SourceCred as a project.
It will take some time to launch on-chain Grain. However, we need some urgent action, as right now every week of inaction worsens our financial position. This is because every week some people redeem Grain (removing money from treasury) and we also issue Grain (increasing claims on the treasury). Basically, if we don’t do anything, we’d run out of money, cease to be able to redeem any Grain, and leave anyone still holding Grain out of luck.
Therefore, I propose we make two changes.
First: for so long as we continue to have off-chain Grain redemptions, we’ll choose a price that matches the actual amount of proven funding in SourceCred treasury. Basically, this mitigates the issue where everyone who redeems Grain leaves the project in a less sustainable financial situation.
Since Grain issuance is predictable, we can predict how the Grain redemption price will decrease over time:
|July 22||$ 0.87|
|July 25||$ 0.83|
|Aug 1||$ 0.79|
|Aug 8||$ 0.75|
|Aug 15||$ 0.72|
|Aug 22||$ 0.69|
|Aug 29||$ 0.66|
|Sep 6||$ 0.64|
|Sep 13||$ 0.62|
|Sep 20||$ 0.59|
|Sep 27||$ 0.57|
|October 3||$ 0.56|
The downward trend in Grain redemption price is due to the fact that we continue to mint more Grain every week. If we were to stop Grain issuance, that would also stop the descent in Grain redemption value. Or, we could halve Grain issuance, and the Grain redemption price would drop much more slowly:
|Date||Redemption Price||Price with 1/2 Issuance|
|July 22||$ 0.87||$ 0.87|
|July 25||$ 0.83||$ 0.85|
|Aug 1||$ 0.79||$ 0.83|
|Aug 8||$ 0.75||$ 0.81|
|Aug 15||$ 0.72||$ 0.79|
|Aug 22||$ 0.69||$ 0.77|
|Aug 29||$ 0.66||$ 0.75|
|Sep 6||$ 0.64||$ 0.74|
|Sep 13||$ 0.62||$ 0.72|
|Sep 20||$ 0.59||$ 0.71|
|Sep 27||$ 0.57||$ 0.69|
|October 3||$ 0.56||$ 0.68|
Second: because we have limited liquidity (only 50k USDC remaining in treasury, and we don’t get another tranch of funding until the middle of August), we need to limit the rate at which people can redeem Grain. Basically, proposal #1 guarantees that the treasury won’t run out of money in the long-term, but because of the timing of when we get funding, it could run out in the short-term.
Therefore, to ensure that everyone has access to enough $ to cover their immediate needs, I propose capping the amount of Grain that any person can redeem per month at $4k. I hope this number will be high enough for folks who urgently need cash, but is low enough to ensure that a “Grain whale” can’t leave the treasury dry for the ~4-6 weeks until more funding comes in.
Between these two changes, this will fix the urgent issues with our treasury, and give us space to launch on-chain Grain instead.
I recognize these changes are uncomfortable, and we all wish that the project were in a better financial situation already. However, this will put us on stable footing to re-orient and build a better SourceCred.
Thanks to everyone who attended the DeFi WG today for helping tune this proposal, and to @scrabbleboy for helping us understand the financial situation, and @blueridger for organizing the emergency Core meeting to discuss this proposal.