There is a lot of misunderstanding of financial mechanisms here… To give a more realistic representation to the community we’ll try to bring a relevant example to explain the range of possibilities.
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You might be familiar with “dividend stocks”, often called “value stocks” as they generate sustainable revenues to the shareholders on a periodic basis. The coupon (dividend) is derived from the generated net revenue of the company and distributed proportional to the amount of shares each investor owns. As the profits generated are disbursed via these coupons, the price of the stocks is more stable as most of the profits are externalized. To drive supply and demand for the stock, investors then use the discounted cash flow (DCF) valuation. This economic model puts a price on the asset based on the future cash flows (discounted by the cost of capital). This is what most people don’t understand with dYdX. The token itself has a measurable value based on the DCF calculations of the future cash flows.
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On the other hand, let’s assume the same company is compounding the net profit (accounting for everything that is left after deducting all operating costs and investments). As this generated cash flow is now part of the company’s treasury instead of being disbursed to investors, then in this situation the trading price of the underlying stock is immediately affected to the upside, as a stock is a claim on a share of this company. To model the price mechanics of such asset, investors will generally look at FCF (Free Cash Flow) and its evolution through time (the rate of change) to balance supply and demand, and therefore the market price.
Of course the reality is much more complex than that but let’s say this is an high level overview to express our purpose. Now comparing the two versions of this stock, one is delivering constant revenue flows directly proportional to the company’s revenue, the share price itself remains relatively stable over time, the actual profit comes from the dividend distribution (in the case of dYdX we’re talking about the USDC you receive each block). Now to the second case, by setting an automatic compounding mechanism, you’re essentially removing the dividend payment and direct it to create direct buying pressure instead. This transpose into the second case mentioned before. The revenue is directly transposed into the asset price.
Key Element: Now if you truly look through the surface, both these mechanisms are the same for the long term investor. The value generated will either transpose into dividend payments or price appreciation. But there is one big caveat though… Short-term speculation. As you might have guessed, the actual value doesn’t change in both cases… But one will result in more volatile prices than the other. Moreover, the first method incentivize users to hold the token and dispose of the coupons to their own will, where the other forces the investor to arbitrage the price volatility.
Without getting into too many details… this volatility arbitrage can be very costly for a long term investor with sizable amounts invested. The TLDR is that dividend stocks generally favor more stable, long-term investors. At Govmos (the governance arm of the PRO Indicators’ validator), we share that vision and we think it is essential to remain focussed into long term sustainability instead of looking solely at raw price appreciation and short-term speculative behaviors. Surely the crypto market is boasted with speculation, but dYdX does not have to play this game. The reason they are not is one of the main factor that has brought us to choose them among other competitors to participate in their consensus.
To conclude, we will firmly oppose any attempt to change this business model beyond certain acceptable limits. We think each individual investor should have the ability to choose on its own whether to compound their rewards or not, the chain itself shouldn’t have to impose a decision on this front.
