The purpose of this is to discuss several severe issues in the recently approved proposal, HIP 5 – Improving HMX’s Tokenomics for Long Term Growth, whereby the decision was made to extend the vesting period of staked esHMX both retroactively and going forward. The proposal left out the key requirements showing potential risks to the change, and more importantly poses an ethical concern that has precedent in most jurisdictions.
For clarity, I don’t think the short-sightedness of the proposal was intentional, but the details that were left out change the outlook of the proposal entirely. We need to make sure we’re doing things the right way as well as include all details that would help with an informed vote.
At the end of this writing, I will request that the proposal is resubmitted with appropriate details and elimination of the requirements that pose ethical concerns.
We can think of this in two parts:
- Ethical - Changes to existing vesting schedules, which should not be non-negotiable item up for vote without compensating those users
- Strategic - Changes to future vesting schedules, which can be up for vote, but the proposal as-is lacked certain conditions as outlined in the governance process to make an informed decision.
Part 1: Existing Vesting Schedules – Ethical Considerations
This vote was a retroactive change to users who had existing vesting schedules, not just for users going forward. This poses several problems in the reputation of HMX as a platform and may not even be consistent with existing regulations in several jurisdictions. As a rhetorical concept, I don’t think anybody would agree that we could vote on changing the vesting schedules of private investors. But think about why.
It’s because those investors entered a contractual agreement based on certain terms and conditions, and each would need to agree to a change individually, but each could negotiate on their own terms.
In our case, when existing traders first used the platform, they performed an economic transaction (trading) and received eHMX tokens as a reward. The rewards were outlined in the HMX docs with having a vesting period of 1 year. Whether we like it or not, this is a contractual agreement. HMX docs did not include a “right to modify" clause at the time those traders would have entered their transaction.
Extending the vesting period on those tokens lowers the perceived economic value of the tokens. Would those users still have agreed to transact in that manner, specifically on HMX, if the original documentation stated a 3 year vesting period? We don’t know.
Most of us may intend to hold our tokens for a long period of time, but we cannot just change the terms on other users who already performed an action based on written documentation without just compensation. An example of compensation would be a reimbursement of the trading fees they incurred to acquire the esHMX, or an option to convert esHMX to HMX in a “fair” ratio. Given the complexities of such compensation, changing past vesting schedules should only be a last option.
As a real-world correlation, if anybody opens the terms and conditions for any loyalty rewards program, it will likely have some sort of “right to modify”. Even with that clause, most companies would only modify a rewards program retroactively in the most desperate situations, as doing so would cause a significant reputational risk and lose the trust of its customers, and in some cases, still not protect them from lawsuit. The same applies to why many companies will use “right to terminate” in the job offers that many of you are familiar with.
While I am not saying to get legal involved, nor do I think we have anybody in the community that would, we should operate within a framework that doesn’t expose the platform to this possibility. Precedents are there for a reason. Doing what’s right is more important than speculating on how we can manipulate the token price in the short-term.
Key point: Governance should not be able to make changes to existing vesting schedules without making existing users whole, especially if HMX did not include appropriate clauses that would allow for such a change. If we add those clauses, then we can only modify from the date at which it was added. (Adding such clauses to documents is the more appropriate use of governance, ironically).
Part 2: Future Vesting Schedules – Strategic Considerations
HIP 5 lacked in the following categories as outlined in the existing governance process, and therefore should be resubmitted to include the missing details:
- No presentation of quantitative analysis – The claim is that this proposal would impact token price, but how (and what magnitude) without analysis of current buyers and sellers. As written, it only mentions one very specific type of seller. But how would the change in the vesting of the esHMX token impact the HMX’s goal to attract new traders when the market returns, and therefore the incentive for new buyers? This latter point is key as this appears to be a key offsetting factor if we are to consider long-term token price.
- No supporting data points
- No risk assessment to the protocol. Consistent with the above, there are obvious downfalls to this tokenomics change, but the proposal does not even attempt to present those as possibilities. This is misleading to the community.
The original purpose of the token issuance for trading rewards and open positions was to attract and retain users. Lengthening the vesting period for the esHMX token lowers the perceived economic value of the reward. The proposal does not even begin to speculate (much less provide analysis) on the impact this will have on obtaining or retaining new users, but instead only focuses on a narrow point of view to reduce the current sell pressure of the token, without providing the supporting details of the current buyers and sellers of the token. The proposal even begins with noting the “recent” market conditions, making the shortsighted view of the proposal clear. The HMX token price has declined with the rest of the market but has also failed to recover as the market has rebounded. This shows a lack of buyers, which I think we all intuitively know this already.
As the esHMX token is used to attract new users to the platform, and those users create more trading fees. More trading fees mean higher APRs on staked HMX, and higher APRs create incentives to buy the token. It would seem counterintuitive to make the esHMX token even less attractive to obtain through using the platform. This proposal does not consider the role esHMX token plays in attracting new users, and instead only focuses on putting a restriction on the existing holders. Token price is at any given time a function of supply and demand. If there is no demand, these minor changes to supply are only short-lived, if any impact at all. Without a vibrant user base, this proposal adds no value. At least the value wasn’t demonstrated in the proposal aside from surface-level speculation.
Metcalfe’s Law states that the value of a network is proportional to the square of the number of connected users or devices in the network. Other assertations, such as Reed’s Law and Beckstrom’s Law, while containing other considerations, also imply that a larger network is a more valuable network. While this doesn’t always equate to precision in “value” in the open market, in general terms, it’s clear that a more valuable network (larger network) would lend itself to more demand to own part of that network. I.e. the larger networks in crypto tend to have higher valuations. To simplify, strategically, HMX needs to attract new users as it’s number one goal, rather than attempting to force the market to revalue the platform with these new restrictions.
All successful companies, at one time or another, had a challenge of turning short-term temporary users into long-term loyal customers. In no case was this done by force except in the most restrictive government regimes. It is always done by creating a product or service the attracts those customers back, as well as new ones. I would much rather focus our time on new methods for acquiring users, marketing, etc, than lower the incentive value of esHMX. We should reward behavior that benefits the platform more. Staking with no traders is not the end goal. Staking with the existing user base does not lead to long-term token price appreciation either. We need growth in market share.
General Governance Note – Quorums
As a general governance note, HMX governance was implemented without a requirement of minimum voter turnout (quorum), which in HIP5 led to under 400k voting shares, and 1 wallet separated the 1st and 2nd categories, despite the top category receiving “50%” of the votes. A quorum is recommended to prevent a small number of votes from passing a proposal that does not have sufficient support. Lack of votes can signal that the proposal was not clear, did not provide sufficient details, or many other reasons. The writer of the proposal needs to receive sufficient support among all token holders for his/her proposal to pass. A quorum is best used where an option of “do nothing” is acceptable. In cases where there must be an action/result, such as the election of HMX Council, that would have made sense to not impose a minimum voter turnout.
My immediate suggestions:
- Kill HIP 5 as non-compliant as it lacked sufficient details for an informed vote, and contained actions that have a precedent to harm brands, if not pose potential legal issues. The only scope up for consideration should be the vesting schedule for esHMX earned after the implementation date. Not everything can be voted on. That’s why countries have constitutions, companies restrict shareholders form certain decisions, etc.
- Have the submitter resubmit with sufficient supporting analysis for the changes on a go-forward basis only.
- Also included need to be the counterarguments, not just what I’ve written above. There were several key contributors on HIP-5 that gave valuable feedback that need to be included for the community to have an informed vote.
- Implement a quorum (minimum voter turnout) and guidelines for when imposed – exact level can be voted on via governance
- Consider adding language to docs where necessary for “Right to modify” – this is an appropriate use of governance
- The governance process should be updated to include topics that should be off limits. Example we’re seeing here would be changes that impact prior agreed-upon rewards or incentives programs. We should also consider a more robust enforcement process to ensure future proposals meet the requirements already outlined.
A governance proposal should have both pros and cons. For comparison, marketing literature might leave out or downplay the risks to sway users. We should not be writing marketing pieces as governance proposals. Linking to this forum is only useful when the voter wants underlying discussion, not to replace what the proposal should have highlighted in the first place.
I’m obviously open to further discussion. Dismissal of others’ opinions should not be encouraged here, as I saw was done in the previous forum.