Treasury Reserve Mechanism

"Wen Sweep Ser?"

The phrase appears in every projects' Discord channels, one way or another, often asked in the context of a project's less-than-desirable floor price. More often than not, the question posers are flippers, bombarding the Discord channel when it's less than a week after mint. Sometimes, it is a legitimate question from long-term supporters.

While we empathise with both sides, we think that projects could do more to give a certain degree of floor price stability.

Currently there are primarily two ways a typical project will go about to try to raise the floor price:

1. Using mint proceeds to sweep the floor (buying back a sizeable portion of NFTs listed at or near floor price)

2. Burn un-minted tokens

These two ways have serious drawbacks.

Sweep the Floor with Mint Proceeds

The core problem with sweeping the floor is that the temporary floor price pump is artificial, and extremely short-lived. Because, the supply stays the same, but the demand may not necessarily increase.

It becomes clear when we think about what a team typically does with the swept tokens. They are either distributed via lucky draws and contests, or they are burned.

If the tokens are re-distributed at no cost to the receivers, the receivers will likely just re-list at floor price, since the proceeds that come in, no matter how insignificant, are almost pure profits for the receiver. Then it will be a vicious loop of sweepings and giveaways.

Burn Tokens

The tokens that are burned presents a separate set of challenges. The major one is that the team will lock away the much needed future revenues from secondary market. This is important for any team that plans to continue progressing the project. Rome is not built in a day, it is also not built at a low cost. A team cannot support a project for long without sufficient long-term incentives.

The other major problem with burning tokens is that it is probably not addressing the root issue, and that it does comes with a cost. An analogy would be the airlines and airports during Covid times. To deplete the overstocked fuel, airplanes have to fly for the sole purpose of burning the fuel. However, that itself does not resolve the root weakness, that is the pandemic. No matter how much fuel is burned, the pandemic is still there, airlines will still be facing a financial crunch.

The point is, no matter how much tokens a team burns, it does not correct the weakness in the roadmap. Burning tokens also takes a toll on the team, and the community's morale.

We believe that the tokenomic of an NFT is different from a fungible token (ERC-20), which does require careful burn and mint metrics. But for NFTs, it is often futile to burn the tokens of any meaning projects.

The Treasury Reserve

The team will be implementing a treasury reserve mechanism. The basic idea is that for each minted token, a portion of the mint proceeds will automatically go into a treasury reserve. The reserve has the sole purpose of maintaining a price peg for each token, and will increase as the secondary market activities increases.

Because the price of each token is backed by the treasury reserve, should a token holder require liquidity, the treasury will be able to dispense whatever pegged price in ETH the token is currently at to the owner, in exchange for the owner's token(s).

So suppose the mint price is 0.07 ETH, and 0.01 ETH is allocated to the treasury reserve for each minted token. Because the 0.01 ETH is locked within the contract, tokens holders have the option to exchange the token for 0.01 ETH from the treasury reserve. This mechanism will make it counter-intuitive to list the token on secondary markets below 0.01 ETH, and therefore achieving some form of floor price stability.

As the secondary market activity increases, the royalty can then be used to increase the pegged price per token, up to a maximum of the original mint price.

The treasury reserve will exist within the contract on-chain, and separate from the community wallet. This ensures that the mechanism is open, transparent, decentralised and most importantly, trust-less and therefore rug-proof.

Note that the injection of royalty to the treasury reserve will not be governed by the contract for technical and practical reasons.

This solves half of the floor price problem. The other half is that what do we do with the tokens that the contract has received?

The tokens will be put up for adoption in the adoption market, which we will explore in the Catto Shelter section, along with the incentives for adopting a Catto.

Implementation Details

For each Catto minted, 0.01 ETH will be allocated to the treasury reserve. Given Catto Katsu's supply of 7000 NFTs, this means a total of 70 ETH locked in the contract after all tokens are minted.

Increasing the pegged price can be done via manual interaction with the contract, using funds from the secondary market royalties.

Pegged price can be increased up to a limit of initial mint price of 0.07 ETH per token. This an especially important detail, because this prevents Catto Katsu from promising a profit to the token holders, which could lead to Catto Katsu being deemed as a security by the SEC. This is our safeguard against that.

The treasury reserve funds can ONLY be used for its intended purpose (allowing token holders to exchange for ETH), and cannot be withdrawn, dictated by the contract code. The only exception is via the withdrawal governance contract which we explain in details, why and how.