How Tendermint Intends to Spend its IRIS Token Treasury

Executive Summary of our IRISnet Ecosystem Development Plan

Dear IRIS community,

In 2018, before the IRISnet mainnet had launched, Tendermint entered into a partnership with Bianjie, the team behind IRISnet. The two teams, Tendermint and Bianjie, had a symbiotic work relationship, as Bianjie’s roots in the Chinese market allowed Tendermint to penetrate that market and vice versa, allowing Bianjie to reach the North American market. Part of that partnership came with an allocation of 10% of the initial token supply of IRIS.

Those tokens had not been sold, staked, or moved, for that matter, since IRISnet’s mainnet launch. We decided against staking IRIS tokens originally, as doing so would give Tendermint disproportionate provisions compared to those earned by the broader ecosystem.

Since then, members of the IRISnet community have had discussions suggesting that undergoing IRIS token burning would “boost market value”, per the translations in the thread. The concerns raised in that thread reflected a collective sense of apprehensiveness within the Chinese community who’ve seen one too many token projects perform exit scams by dumping vast sums of their tokens onto the market before abandoning the project altogether.

As a major IRIS holder, Tendermint has financial incentive to want to see IRISnet succeed. To be clear, we have no plans of dumping IRIS and exiting our partnership with Bianjie. We have plans to stake them and spend them on ecosystem development activities, which I’ll go into more detail later in this post.

But first, we need to address the idea of token burning that was proposed. Token burns were pioneered by Binance as a means to control the circulating supply of BNB. Burning in blockchain land is similar to share buybacks in traditional market land, except that cash doesn’t go directly back into the hands of shareholders. In this case, the “buyback” is used as the means only to reduce the floating supply of an asset.

Token burns by a foundation or core development team behind a decentralized network is a double-edged sword. It can potentially pose a securities risk — at least for any token that seeks wide circulation across the US market. While it can theoretically result in short-term price appreciation, it comes with tangible adverse consequences in the long-run — not just from regulators, but from its community of token holders as well.

Exhibit A: Stellar Burns its Lumens

In November 2019, Stellar Development Foundation unilaterally burned 55 billion XLM, worth nearly $5B USD because the foundation found that simply airdropping those tokens didn’t grow its community. It was, consequently, met with severe backlash from the rest of the cryptocurrency community. An analyst on The Block even suggested that this “could possibly be a signal that XLM was overpriced to begin with.”

The end result of that mass burn, over the ensuing months, saw its spot price land only by about a penny above the price of where it was just before the $5B burn.

Token burns are a market cap exploit

A token burning strategy is merely an exploit of the way that we measure market cap. I want to highlight David Vorick’s tweet explaining this concept in greater detail.

In the thread, Vorick explains this market capitalization exploit in the context of rebasing. In our case, token burns are just the opposite of rebasing. Supply would go down, but people would not adjust their prices up accordingly. Let me explain.

A coin’s market capitalization = total supply in existence * spot price

Burning a token means decreasing the actual amount in circulation without changing the amount of tokens reflected in its total supply. To repurpose Vorick’s example, if the price is 10x below the target price, and you burn 10x as many tokens, in theory, this “redistributes” the wealth that was held by the entity that burned its own tokens, e.g. IRIS Foundation, into the hands of the token holders of IRIS via implicit spot price appreciation. In practice, however, this is rarely the case. That’s because an asset’s true value only adjusts upwards if people increase their buy orders by 10x, given no change in token supply. This rarely is the case because the act of burning tokens both fails to trigger buy pressure and to reduce sell pressure.

“The true value of a token is its market depth, which measures how much people will be willing to buy the token as the price goes down.”—David Vorick

“If the market cap goes up with no change to the market depth, you give people greater exit preference. The first person to sell can take a greater percentage of the market depth for themselves, leaving less for everyone else. The true value of your token holdings is the number you own multiplied by your ability to sell them. This needs to account for the risk that someone exits before you and takes some of the market depth for themselves.” While burning seems like it may increase the spot price, you likely aren’t, however, properly accounting for market depth and exit risk when evaluating an asset’s true value.

Tendermint’s Preferred Token Spend Strategy

The axiom by which we’ve operated by, as a well-established project in the cryptocurrency industry, is a focus on strategic investment for wholesome, sustained growth, rather than a focus on short term price action. Spending tokens for the purposes of reinvesting into public goods and infrastructural development of a decentralized network has proven to be a highly effective tool.

Ethereum Foundation sets a great example of how to do proper ecosystem bootstrapping to attain long-lasting network effects. When organizations approach it in this manner, fundamental value naturally accrues to those decentralized networks—because they’re becoming more useful and more widely integrated across the board. Indeed, share buybacks in traditional finance only make sense when the organization does not know how to invest the money to accrue fundamental value on its asset.

For the experienced team, $1 invested today instead of burned could yield $10 worth of value in the future, if invested appropriately.

Tendermint knows how to spend strategically on key focus areas for long-term ecosystem growth.

Our plan to spend IRIS is as follows:

1. Integrate IRIS token spends into Cosmos ecosystem development initiatives that have already been started and built out. Weave them into such initiatives like Cosmos/IRISnet microgrants, hackathons, AMA giveaways, etc. bounties. We are developing an IRIS tip bot to do Twitter and Telegram giveaways. Utilize IRIS delegations to reward IRISnet validators who demonstrate activeness and engagement by visibly contributing goods/services back to IRISnet.
2. Integrate IRIS token spends into Tendermint’s strategic partnership investments where the Ecosystem Development team will evaluate and identify key builders who can deploy productionized public goods for the IRIS ecosystem. Tendermint absorbs the overhead of identifying key players and paying out as deliverables are met.
3. Grow IRISnet presence in key markets where crypto penetration has been observed. Tendermint takes on the overhead of evaluating new regions and spending IRIS tokens to get them into wider circulation throughout the world.

We’re kicking off this initiative by, first, transferring all of our IRIS holdings into a new multisig address. There’s a caveat, though. Because Tendermint has Series A investors, 15% out of the IRIS treasury is earmarked for those investors. The rest will either be bonded to select IRISnet validators who are actively contributing back to the IRISnet community, or, will be earmarked for spends when investment opportunities emerge.

Below is a list of IRISnet validators we intend to delegate to. For this initial exercise, we are opting to delegate a uniform amount across the entire selected set. This is our default modus operandi until we become more familiar with the IRISnet community, which would result in more intelligent delegations over time.

We aim to be an active and engaged member of the IRISnet community. We believe this to be the most effective means to utilize the IRIS tokens that we have and that this will make positive waves for the IRIS Network, reflected in its true value to the rest of the cryptocurrency community.

Acknowledgements: Thanks to Avichal Garg, David Vorick, and Harriet Cao for your early inputs and valuable feedback that made this post come to life.