Proposal for compensation for xToken hack

Compensation for xToken Hack

Purpose

With the goal of retaining early project supporters, capital, and achieving a stronger community, this proposal seeks a fairer restitution for victims of the recent xToken hacks, resulting in $25m in losses. The current Team proposal offers 1% of XTC supply, a current market value of $2.5m, vested over 1 year. The following proposal reflects a consensus view from victims: a fair restitution would be 2% of XTC supply, vested over 1 year.

Fair restitution

The expectation of fair restitution, when possible, should be an insurance policy for users of early stage protocols. New protocols, like xToken, are high-risk ventures. Of course this is understood and the high APYs are to help compensate this risk. But project communities, and the teams behind them, can be more attractive by adopting a social contract involving the expectation that losses resulting from hacks be answered with reasonable compensation.

The pre-hack market valuation for XTK was ~$500m FDV. This valuation could be restored if trust, capital, and community were bolstered and interests aligned around ensuring a successful future for the xToken project. The $25m lost is around 5% of this prior FDV. 2% restitution is a fair compromise between the fault of the project resulting in the loss of funds, and the inherent risk participants should have expected.

Current xToken Team Proposal

What Team
Total XTK Supply 1,000,000,000
1% XTK 10,000,000
Total Funds Lost $25,000,000
XTK per USD Lost 0.40
FDV to Break Even $2.5b (10x current)
Example Funds Lost $5,000
Example XTK Restitution 2,000

Fair Restitution Proposal

What Value
Total XTK Supply 1,000,000,000
2% XTK 20,000,000
Total Funds Lost $25,000,000
XTK per USD Lost 0.80
FDV to Break Even $1.25b (5x current)
Example Funds Lost $5,000
Example XTK Restitution 4,000
9 Likes

Thank you for your input.

I tend to agree 1% is not enough and won’t be perceived well not only by affected LPs but the rest of the community.

3 Likes

I believe the 2% XTK proposal above makes a lot of sense and strongly support it. I’m going to call it “option A”

Additionally, I wrote this draft below earlier based upon the conversations observed in the discord community. Several other members also provided feedback/edits to it, so I’m also including this alternative approach down below that proposes a slightly larger grant, vested over 2 years instead of 1 year. This provides more reparations to the affected LPs and drives longer-term loyalty, but has the disadvantage of being more complex. You can call this “option B” **


We propose that we invest 2.5% of the “Community Vesting” XTK reserves into reparations for the victims of the 5/12/2021 hack. This would have two vesting periods:

  • 1.5% vesting over the first year
  • 1% vesting over the 2nd year

What’s the ROI for xToken? Why is this a better use of the reserves than other options?
Members of the community appreciate the team’s response and handling of the situation so far, but many have voiced that the 1% is lower than expected or hoped for, given the size of the losses. We believe that 2.5% would feel more commiserate to the size of the losses for the LPs, which would help retain users, strengthen brand value/trust, and foster long-term community. While there’s a lot of appreciation potential for XTK and we fully expect XTK’s price to reach $2 or more in the future, that doesn’t account at all for the opportunity cost of the losses today (ETH, SNX, BNT) likely also being worth 2-3x more in 1 year. Which is why we believe 2.5% would be more appropriate.

By providing 2.5%, I think a lot more of us would walk away being stronger supporters and continued users of xtokens. We think of it as a long-term investment in community that’s higher ROI than saving an additional 1.5% of XTK for future community emissions programs. This is also a long-term investment in xtoken’s reputation in the Defi community, which is a small world and word travels fast.

Why 2.5%? Why over 2 years?

As covered in the table up above, before the hack, the FDV was ~$500m. The ~25m loss is ~5% of this. Splitting the difference (~2.5%) and vesting it over the long-term (2-years) is a more equitable approach to affected LPs, driving long term community engagement and loyalty.

What are the negative tradeoffs? Is it still worth doing this despite these risks?

Risk #1 - we are using up too much of the reserves
I think this is risk is mitigated by the fact that there is still a sufficiently large amount of XTK in reserves (e.g., Community Vesting portion started with 50% and likely has more than 35% available for future incentives). We believe the spirit and outcomes of providing this would align with the Community Vesting portion’s goals, and this still leaves the vast majority of emissions incentives untouched. So I believe this risk is minimal.

Risk #2 - this will negatively impact XTK price
Given that this is being gradually vested over 2 years, that should minimize most of any selling pressure by those that don’t believe in XTK. Of course this will still have some increased selling pressure, but we believe in the team’s ability to execute and by that point, XTK’s brand, market cap, and value will grown a lot, resulting in fewer sellers and more liquidity to absorb any selling. One way of mitigating this if needed is to add a 6-month cliff, so that the first investment doesn’t occur until after XTK has even more traction

We wanted to share this perspective on behalf of the community. We have seen that you always value the community’s perspective, so we hope that you may reconsider the 1% investment as you see this increased feedback from us.


Anyways, this was the draft proposal. Looking forward to people’s thoughts. I think either Option A or Option B would be a fair and high ROI investment for xToken to make in building loyalty/brand/trust with affected LPs and the larger DeFi community.

6 Likes

I vote against this motion. 1% will keep token inflation in check. Doubling the rewards is a socialist distribution method and I’m in xiIncha. I’d rather see those funds be allocated more efficiently than subsidizing butthurt bagholders. There’s no need to have an inflation tax on all XTK.Invest in a 401k if you want to make insane farming rewards with no risk

Any restitution is a “socialist distribution” of the losses on the entire community. You can invest in crack cocaine if you want to make insane gains with no consideration for the commons you’re doing it in. But if you extend that thought experiment out a bit, you’ll probably realize that you’d rather not invite the social ills from doing such things… even though it may net you more cash upfront. And calling token holders ‘butthurt bagholders’ makes me wonder if maybe you’re the one weighed down by these bags and lacking faith in the project / community. hope im wrong tho.

How about you return the SNX & BNT that was drained?
The value of both could increase exponentially in comparison to XTK.
The cost of opportunity would be tremendous. Do right by your EARLY supporters!

2 Likes

I completely support that 1% is just not fair for the amount of losses incurred.

I would suggest a 3rd option,

2% vested for 1 year + 0.5% vested for the next 1 year. This will be more fair considering opportunity costs.

4 Likes

TL;dr: We need more information before we start accepting any real figures.

The 1% figure the team threw out was premature and low-information in my opinion. How are we to evaluate the economics of this as a community if we don’t know exactly what is being reimbursed, and how it’s calculated for any individual?

I propose we take a step back and get xToken to clearly answer the following.

Using xSNXa as an example here as it’s the more complicated and was affected more. What exactly is being reimbursed?

A) The value of our xSNXa held in an EOA at the time of the exploit
B) The value of our xSNXa held in the Balancer LP at the time of the exploit
C) The value of our ETH and SNX held in the Balancer LP at the time of the exploit
D) The value of of the pending XTK rewards we were told to exit and claim yesterday after the exploit which haven’t appeared as vesting

From the information I’ve gathered so far the answer appear to be:

A) You will get around 90%+ of this back very soon when we re-launch the xSNXa token. Net immediate recovery: ~90%.
B) You will get 90%+ back of your xSNXa side representing 50% of the Balancer pool when the xSNXa token is re-launched. Net immediate recovery of total LP position: 45%
C) This is gone and maybe we’ll repay you with XTK? Currently assuming 0% recovery until told otherwise.
D) @mjc716 has indicated they are thinking about this (maybe repay you with XTK?) Currently assuming 0% recovery until told otherwise.

@mjc716 indicated on Discord some concerns with gas costs in the team fixing D) and if that’s the defining roadblock there, a very simple and battle-tested approach is the Merkle Distributor model where we you deploy a single contract with the hashes of our claims, send the reimbursement to it, and allow us to pull our claim on our own and pay for the gas for this. I can advise and have a fully tested and operational code suite for this.

Let’s not jump the gun and start negotiating above 1% or anything before we know exactly what is being reimbursed and how. Obviously a higher amount returned to us is better, but I feel the importance of the scenarios above is being overlooked, essentially since high net worth liquidity providers and those supporting the network since day 1 are quite possibly in all four categories.

6 Likes

I can only echo this.

I think it well written and well argued. No platform can survive if affected users are left hanging.

The number i had in mind was closer to 50/50 or 2,5%, as i fully agree that victims has part in the responsibility as well. And this can be funded without compromising future growth perspective of the platform or for other non-affected users.

Running users under the bus, is not a sustainable way to achieve hyperbolic growth in long term.

Coming together as a community, and sharing the responsibility is.

6 Likes

I’d like to make this proposal stronger in terms of what the project/community can expect in return for fair restitution - perhaps the quid pro quo can be more explicit. What about ensuring (via locking) that capital matching what was lost remain with the project (in some xToken, or staked LP, etc) for the duration of the vesting period. Locked capital could be a requirement for receiving the restitution.

1 Like

Agreed 100%. 5 - 10 % with any length of vesting (years long) seems much more fair. 10% value of funds lost is very disappointing.

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Could the 1% be adjusted up or down towards a 50% value lost target based on the XTK price in a year from now?

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I like the idea of a staggered vesting period with 2% vested over one year, and .5% vested over the second year. Or 1.5% vested over the first year and 1% vested over the second year. Even 1% vested over the first year and 1.5% vested over the second year. The supporters who were the earliest and strongest should be acknowledged for their contribution.

1 Like

This proposal refers specifically to losses to LPs. All xBNT value and the vast majority of xSNX value will be returned in full.

First of all, many thanks to all the community members who contributed to this post. It’s great to see coalitions of stakeholders debate the best path forward and then taking the time to follow through with a gov post.

From tracking conversations in the Discord and now here, there does not seem to be a clear consensus on the best resolution. It’s clear that our community has a variety of opinions and voices, ranging from full immediate compensation to no compensation at all.

We floated the idea of 1% of total XTK supply (1% of the permanent equity in our protocol) allocated to xBNTa/xSNXa LPs over a 1 year vesting period. There are some voices who want a higher payout. In some cases, it’s quite difficult to determine which voices are advocating for the best long term interests of the project and which simply want higher payouts.

In order to bridge this divide, I’d like to propose an increase in compensation to 2% of total XTK supply allocated in a way that most benefits true long-term believers in the project. We are extremely disheartened about the loss of LP funds and we want to keep the community members who are aligned with our long term success as engaged as possible.

Here’s how it would work:

  • We (xToken) will calculate total $ value of xSNXa and xBNTa LP losses for each address and distribute vXTK (vested XTK) proportionately

  • We will deposit 2% (20m) of total XTK supply to the vesting contract. These tokens will vest linearly every second over the course of one year

  • At any point, anyone can burn their vXTK for their proportional share of currently vested XTK. An example:
    – Person A owns 100 vXTK
    – Total vXTK supply is 1000, meaning their share is 10% of total
    – The year is 20% complete and no one has burned vXTK yet
    – 4 mil XTK (20% of 2%) has been linearly vested
    – Person A’s 100 vXTK are currently redeemable for 10% of total vested, which equals 400k XTK (10% * 4m)
    – Person A burns 100 vXTK for 400k XTK

    – Total vXTK supply is now 900
    – Person B owns 90 vXTK
    – Pre-burn, they owned 9% of vXTK supply (90 / 1000 = 9%). Now, they own 10% (90/900 = 10%) of vXTK

    – Fast forward a few months. We’re 50% into the year, meaning 50% of XTK is vested and 9.6m is available ((50% * 20m) - 400k) = 9.6m. No one else has burned.
    – Person B decides to burn their vXTK. They own 10% of vXTK supply and will receive 960k XTK (10% * 9.6m).
    – Person B owned less vXTK at the beginning of the period but received far more because they waited longer to burn.

While not always true, we can generally assume that those that wait longer are more long-term aligned with the project. This model for compensation achieves a higher payout for LPs while rewarding long term believers as well. Looking forward to the community’s feedback.

10 Likes

Thanks for updating this. Can we do 2% on the first year + 0.5% in the 2nd year? That is what most of the community seems to think is fair.

Total loss was around 5%, so splitting it midway is only ethical. And its vested overs years so no threat of immediate dumping.

1 Like

I like MJC’s proposed solution a lot. It’s elegant, as it rewards long-term holders, and it provides an early exit for those that don’t believe in XTK’s long-term success. It sounds like it’s even tradable/transferable as well.

My only suggestion would be to see if we can make vXTK a total of 2.5% spread over a longer period of time (so a larger grant, but spread over 1.5 years). I think this is meeting a little more in the middle, per the calculations others have shared, while not having much negative tradeoffs/risk.

If that’s not possible, then I think MJC’s currently proposed solution is a great upgrade and sign of progress, and demonstrates that xToken really listens and cares about its community. Thank YOU!

[EDIT - Per dass2’s comment below, I edited this slightly, as I agree I didn’t think enough about opportunity cost. Also I believe delitzer makes very good points down below that I agree with.]

1 Like

Hi, I don’t think increasing the vesting period of the entire 2.5% is beneficial at all. 2% in 1 year is much better than 2.5% in 2 years considering opportunity cost.

I think if anything, it should be 2% in the first year + 0.5% in the 2nd year.

2 Likes

I like this idea too. 2,5% still isnt that much but way better then 1%.

I know its also hard for the project and all holders but to compensate early investors/members/users seems really important for the trust into the project and the trust into the coming new products of it. If this will be done in a generous way this will be remembered over a long time.
If people stay salty, this also will be remembered forever.
I am just a small holder but to be honest for me its more bullish if the project tries to regain some trust here.

The loss was 10% with current worth of 25c. So 2,5% is 1/4 of that.

1 Like

This mechanism seems overly complex, introduces MEV risk, and is designed to further delay the already under-sized compensation being offered to affected LPs. [EDIT: @mjc716 corrected my understanding of the mechanism and I no longer believe it introduces MEV risk]

That last point should be emphasized further: I believe the overall compensation proposal to LPs is far too low. The increased proposal is only 20% of losses, paid out over a year, which is significantly below the standards set by other teams who have experienced hacks, such as Alpha Homora, Harvest, Yearn, and Rari Capital. In the latter case, their core team is contributing 100% (an overly-generous amount, IMO) of their allocated tokens back to the DAO, and the community held a vote to overwhelmingly support 100% reimbursement of losses.

All of the protocols mentioned above should be considered much higher-risk for users than xToken, whose core value proposition is “we help you capture the native yield of a token as simply and safely as possible.” While I think the xToken concept has incredible potential, this reimbursement plan sends a message from the team and community that users should not view xTokens as a safe place to allocate their capital, because even with massive team and community allocations held in treasury due to a quite sizable fully diluted network valuation, there is no willingness to fully backstop the users. This message will be heard loud and clear and will ultimately be far more destructive to long-term token value than the risk of market impact from making a much more generous reimbursement proposal now.

If we really want to make sure we only reimburse users who will hold XTK over the long term (which I think is misguided, but alright), we should consider working with UMA to do KPI options that are redeemable for XTK only once certain targets of TVL or liquidity are met. Current tokenholders should not be worried about this dilution, given it will only actually happen if the protocol is doing well and therefore the price should be up significantly from today.

Full disclosure: my fund (Nascent) was among those affected by the hack, but our loss was significantly less than the 7-figure (USD) exposure to XTK we have between what we currently hold and are vesting. We benefit far more from XTK increasing in value than getting reimbursed for our losses from the hack. We want to see xToken succeed over the long term, and hope XTK holders and the team reconsider this reimbursement proposal and move towards something more generous, which we believe will ultimately lead to better outcomes for all.

17 Likes