A consideration for a DGD to ETH burn function

July 26, 2019

1 Short Description
DigixDAO raised about 465,000 ETH in an initial coin offering (ICO) in exchange for DGD tokens. The DGD
tokens represent voting power in DigixDAO governance platform. The votes concern the actions to be taken
using the raised ETH. Here a burn function is considered for DGD holders to burn their DGD for ETH in
DigixDAO. The ratio received would be (Total ETH in DigixDAO)/(DGD total supply) minus an optional “exit
fee" of x% of the ETH to be received.

2 Aims
To implement a burn function which has strong incentives in place to avoid burning all DGD and total
dissolution of DigixDAO.

The following are incentives not to burn DGD:

– The DGD/ETH market value being higher than the ETH received from burning
– An exit fee
– Rewards from participation in DigixDAO with DGD tokens are high enough to disincentivise burning
DGD.
– Reasonable restrictions to burning:
Only allow burning of DGD that has been locked in the DigixDAO governance platform for a
certain period of time
Only allow burning from addresses that have a certain amount of reputation points on the Digix-
DAO governance platform

The following are incentives to burn DGD:

– Arbitrage: DGD/ETH market price falls below the ETH received from burning
– The fact the ETH is being spent on proposals, lowering the pool ratio over time
– Believing that the ETH spent on proposals is not translating to higher rewards from participation in
DigixDAO with DGD tokens
– Rewards from participation in DigixDAO with DGD tokens are too low

The aim is to make sure that the disincentives to burning outweigh the incentives, to avoid all DGD being
eventually burned.

1
3 Details
3.1 Burn function
Equation (1) for burn function:

(Total ETH in DigixDAO)

(ETH received per DGD burned) = (x% exit fee) (1)
(DGD total supply)
The value of x is a percentage of the total (ETH received per DGD burned) in ETH units that acts as an exit
fee which remains in DigixDAO, and is an undecided value at this point. It can even be x = 0. A value of x > 0
provides some interesting consideration. It means that the value (ETH received per DGD burned) rises the
more DGD is burned, creating an incentive to burn later rather than earlier.

3.2 Exit fee definition

First, for simplicity the terms are defined in short-hand,

E = (Total ETH in DigixDAO) (2)

D = (DGD total supply)
R = The pool ratio, E=D
A = ETH received per DGD burned
f = (x% exit fee) : Exit fee per DGD burned

The exit fee is x% of the pool ratio at the time the burn occurs,

x
f= R; (3)
100
where x is a value between 0 and 100. This means Eq. (1) can be rewritten as,

x
A = R 1 100 ; (4)
= R f;

or equivalently,

A = cR; (5)

where c = (1 x=100) is a number between 0 and 1, c = [0; 1].

3.3 Total ETH in DigixDAO

The following two Ethereum addresses contain all the ETH in DigixDAO:

DigixDAO multisig: 0x75bA02c5bAF9cc3E9fE01C51Df3cB1437E8690D4

DigixDAO payments address: 0x24626FD95aD815bAB2136d6f91cA10562161CDa3

Adding both of the ETH in these addresses gives the value (Total ETH in DigixDAO). As of 20 July 2019,

(Total ETH in DigixDAO) = 395; 131:51 (6)

4 Incentive considerations
4.1 A non-zero exit fee
An exit fee x > 0 provides an incentive not to burn. The reason for this is once a burn occurs of y% of the total
DGD the (DGD total supply) decreases exactly by y%, wheras the exit fee gets added to the remaining (Total
ETH in DigixDAO) decreasing it by a lower percentage. This means that the more DGD that is burned the
larger the ratio (Total ETH in DigixDAO)/(DGD total supply) becomes, so it incentivises waiting for others to
burn because increases the ETH received. The graphs below illustrate this for various values of x, particularly
Figures 1 and 2.

4.2 Burn function places a rational floor on the DGD/ETH market value
If a burn function was implemented there is strong incentive to buy DGD with ETH below the value (ETH
received per DGD burned). This would push the DGD/ETH market price up to at least equal to
(ETH received per DGD burned),

(Rational DGD/ETH market value) (ETH received per DGD burned): (7)
See Figure 1 to see a graph of (ETH received per DGD burned) for various exit fee percentages x. This
graph can also be read as the (Rational DGD/ETH market value) floor for various values of x.

4.3 Burn function incentivising exiting as soon as possible

Due to the nature of how DigixDAO operates by funding proposals in ETH, the amount of ETH in DigixDAO
and consequently the pool ratio R reduces over time. This incentivises rational actors to burn their DGD as
soon as possible to avail of the highest possible burn ratio.
This means that immediately after the burn function is implemented a large percentage of total DGD will
likely be burned, reducing the amount of ETH in DigixDAO substantially. This could be allieviated with a large
enough value of x which provides the counter-incentive to wait to burn.
Another consideration here is to only allow DGD that has been locked for n days to be burned. This could
be complimented with only DGD addresses that have above a certain threshold of reputation points can burn.
One or both of these options provide stopgaps to immediate burning of a substantial amount of DGD once the
burn function is implemented.

4.4 Incentive to vote no to preserve burn ratio

Participants will be incentivised to vote no to a higher percentage of proposals to preserve the value of their DGD
(which is proportional to R). This incentive increases the likelihood that only proposals that are deemed to be worth
reducing R i.e. those that substantially increase the DGX total supply and/or volume would get funded, and a no
vote to everything else. This may lead to an increase in quality proposals, although it is unclear.

5 Graphs
Fig. 1 shows the amount of ETH received per DGD burned for various values of percentage exit fee x%. It is
the pool ratio (Figure 2) minus the exit fee per DGD burned (Figure 3). It shows that a larger value of x
increases the slope of the ETH received value with respect to DGD burned, meaning waiting for other DGD to
be burned is advantageous. This graph can also be read as if the y-axis is the rational floor of the DGD/ETH
market value as discussed in Section 4.2.
 Fig. 2 shows the pool ratio R as a function of DGD burned for various exit fees x%. For no exit fee x = 0%
the y axis stays constant, then with increasing values of x% the pool ratio rises faster the more DGD burned.
Fig. 3 shows the fee per DGD burned as a function of DGD burned for various exit fees x%. It is explained
by Eq. (3) showing the proportionality between the pool ratio and the exit fee per DGD burned.
Fig. 4 shows the ETH in the pool E as a function of DGD burned for various exit fees x%. It is exactly linear
for x = 0%, and slightly deviates from linearity for greater values of x. The end point is always 0 ETH remaining
in the pool because each DGD burned always receives the pool ratio of ETH (minus the fee) which increases
as more DGD is burned.

0.4
x = 0%
ETH received per DGD burned

x = 2%
0.35 x = 4%
x = 6%
x = 8%
0.3 x = 10%

0.25

0.2

0.15
0

5
1

2
.

DGD burned (millions)

Figure 1: ETH received per DGD burned as a function of DGD burned for various values of exit fee x.
 0.45
X = 0%
X = 2%
0.4 X = 4%
POOL RATIO (ETH/DGD)

X = 6%
0.35 X = 8%
X = 10%

0.3

0.25

0.2

0.15
0

5
1

2
.

DGD BURNED (MILLIONS)

Figure 2: Pool ratio as a function of DGD burned for various values of exit fee x.
 0.045
x = 0%
0.04 x = 2%
Fee per DGD burned (ETH)

x = 4%
0.035 x = 6%
0.03 x = 8%
x = 10%
0.025
0.02
0.015
0.01
0.005
0
0

0.5

1
5
1

2
.

DGD burned (millions)

Figure 3: ETH fee received per DGD burned as a function of DGD burned for various values of exit fee x.
 400
350
ETH IN POOL (THOUSANDS)

300
250
200
150 X = 0%
X = 2%
100 X = 4%
X = 6%
50 X = 8%
X = 10%
0
0

5
1

2
.

DGD BURNED (MILLIONS)

Figure 4: (Total ETH in DigixDAO) as a function of DGD burned for various values of exit fee x.