Last week ETHLend introduced a system to reward token holders for participating in the token sale. Profit sharing was considered as a method of reward. ETHLend has decided to improve the reward method by introducing systematic buybacks. Instead of paying ETH to token holders addresses, ETHLend will use the ETH that is accumulated from lending on ETHLend (the 5% + 1-5% of the platform fees) to buy LEND from exchanges and ‘burn’ it.
The aim is to reward token holders by limiting the total supply of LEND which will increase the value of LEND tokens. Each buyback and burn will increase the token holder’s percentage of the ownership (reducing supply). It is up to the token holder to decide whether the token holder wishes to sell or hold the increase of ownership to realize profits.
What does it mean?
The percentage of token holder’s ownership grows each time ETHLend buys LEND and burns it. The token holder can sell accrued percentage to realize profits.
The same model (5% + 1-5%) is used to calculate the amount of LEND that ETHLend will buy from the open market and burn.
Buyback and burn will occur every quarter of the year.
EHTLend will issue a quarterly report to advise on the buyback and burn statistics.
What is the purpose?
Avoid paying profits to exchanges. When token holder wishes to trade tokens, tokens are sent to the exchange and the ownership of the token is changed to the exchange’s custodian address. This means that the exchange receives the profit. Since there is no profit sharing structure currently adopted by the exchanges, this would create a risk. Moreover, holding assets at centralized exchange is subject to higher risks (e.g. Mt. Gox). Buybacks and burning ensures that the ‘real owners’ of the token is the will benefit from the reward.
Transaction costs are avoided. When profit share will be distributed in dividend-like manner, there would be thousands of transactions monthly or quarterly. Each transaction would exhaust a small amount of gas. With buyback there are only few transactions, which means that the saved gas will be utilized to buy and burn more LEND.
Regulatory uncertainty. If assets are associated with dividend-like profit sharing, LEND could be seen as a security by regulators. Buybacks ensures that more jurisdictions will allow usage of LEND resulting in larger demand and use for LEND.
Profit sent to LEND addresses that are dead. There are situations where Ethereum addresses are lost. In these circumstances tokens might be lost as well. This would mean that profit would be distributed to addresses that are dead. Sending ETH to addresses that nobody uses does not provide any value to anyone. On the other hand, if this value is used to reduce the supply of LEND, the value is distributed amongst all token holders.
Uncertainty on taxation. Dividend-like profit share might be seen in the near future as taxable income for token holders since the profit accumulates for holding an asset. On the other hand, buyback increases the value of LEND but might not trigger taxes on income. Of course, this does not avoid the fact that any value increase is taxed once sold, just as any other cryptocurrency.
Impossible to collaborate 100% with exchanges. It is understandable that most token holders will keep LEND tokens on exchanges for trading. It will be impossible to achieve 100% collaboration with exchanges to distribute ETH accumulated from lending on ETHLend.
Buyback solves all these issues and supports the aim to deliver strong token on the market.
The mechanics of the buyback will be advised after the ICO with community inputs.
For more information about ETHLend, read the full White Paper here.
Author: @ethlend
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