Voting TLDR

Here’s a summary of the primary aspects of the proposal being approved:

1. Pay ~1-1.5ETH to the senior developer for his present and future aid in reviewing the contracts.
2. Earmark the remaining ~3.5 ETH of S2 treasury ETH to help pay for a future Code4rena audit.
3. Fundraise through bond NFTs that receive a % of revenue up to a specified amount, to help pay for a future Code4rena audit.

Section 0 - Context

Degen Dwarfs launched with a few primary pillars that make up the project - the Art, Defi Education, and the treasury. DeFi education has found a potential growth avenue through education sessions. The treasury, per the Degen Dwarfs gitbook, is used as a DeFi educational tool while also being available to fund any endeavors that the community feels will enhance the ability of the guild to grow its reputation, enhance its offering to Dwarf holders, and/or build future revenue streams for the guild.

The treasury and its profits are not currently intended to be shared with Dwarf Holders, and outside revenue streams are necessary to get to a point where its worth figuring out if/how this is possible. See here for more information: https://degendwarfs.gitbook.io/degen-dwarfs/guild-features-and-roadmap/treasury-investing

We have the opportunity to explore the last option - building a future revenue stream for the Dwarfs. This would be through the project PlutoPawn, which is in the early stages of development.

Section 1 - The Product

PlutoPawn is a peer to peer NFT style pawn shop where users can obtain fixed rate loans using their NFTs as collateral. The protocol accepts ANY ERC-1155 or ERC-721 as collateral, and can accept any ERC-20 token as a loan token. Borrowers can create listings defining the loan amount, length, interest rate, token, and collateral. Lenders can accept listings or create counter offers.

When a loan is originated, the lender will receive a pawn ticket. The pawn ticket NFT can be traded like an LP token, enabling future composable use cases in DeFi. The borrower will receive the funds, at which point they have until the end of the loan period (plus grace period) to pay back the loan+interest+fees, otherwise the NFT pawn ticket holder can redeem for the NFT (ie, liquidate).

The intent is that token approvals enable offers to be made in a gasless manner, meaning there will be no sunk cost in making an offer that is not accepted. This is imperative in UI/UX considerations.

PlutoPawn serves a few different counterparties:

1. The first is users that wish to unlock value from their NFTs. Many NFTs are illiquid or held as status symbols and therefore not likely to be sold. However, this also means that value unlocks from NFTs would likely have significant demand. If you are a defi-savvy farmer, then its intriguing to unlock capital from your NFTs in order to leverage your farming.
2. The second is users that wish to earn sustainable yield on ERC-20 tokens. The demand for NFT loans could result in high APRs for lenders.
3. Lenders are also exposed to tail risk of receiving a liquidated NFT, which can be used to earn high yield while waiting to “buy the dip” on an NFT collection.
4. Additionally, the fact that borrowers may have this same logic (and therefore be willing to repay a loan in full to get their specific NFT back) could reduce the risk to lenders.

Plutopawn offers specific use cases for both sides of the product, all while taking no counterparty risk and earning fees. This is a product that could take off with continued adoption of NFTs. In future, this could move far beyond accessing leverage on PFPs. For a true pie-in-the-sky example, imagine buying a property to rent as an airbnb. You could take a loan on the property in order to make an improvement when you buy it, so that you can charge more per night when you are ready to list it.

This idea has a lot of potential, which is why it’s also not completely unique. There is no secret that other protocols are working on similar concepts. Lets look at what makes PlutoPawn different!

Section 2 - Competitors

The largest competitor is AbraNFT. They have since deleted their medium article, but they do have a live code4rena audit. AbraNFT obviously has significant brand awareness, however some of that is negative PR surrounding the Sifu/Dani/Frog Nation events of the last cycle. Most importantly, AbraNFT only allows loans to be taken in MIM. This forces a product somewhere where it is not necessary - PlutoPawn would enable loans to be taken in any approved ERC-20, including ETH (the price basis of almost every NFT), which is a significant user experience advantage.

Other competitors include backed_xyz, astariaXYZ, and NFTfi . Astaria is not peer to peer and only offers loans in Ether. NFTfi requires two-way approvals (less gas efficient), only allows certain collections, and only does WETH/DAI loans. Backed is most similar to degen dwarfs, but again with less of the Pawn Shop style (more restraints). Usage on backed can be viewed here: https://www.withbacked.xyz/network/ethereum, filtered by repaid and closed. There is competition, but also demand showing up in terms of users. Backed also does not appear to be doing any liquidity mining and minimal other efforts to create users. Additionally, at the current investment required to launch, PlutoPawn would not need to carve out a significant market share to return value. All protocols are also very early into their launch, which means PlutoPawn would still be an early mover in this specific sector of DeFi.

Section 3 - PlutoPawn x Degen Dwarfs Problem Statement

PlutoPawn is first and foremost intended to be a Degen Dwarfs project, should the guild wish for that to be true. The intent of this proposal is to determine the best approach to launch PlutoPawn under the Degen Dwarfs umbrella.

There are a few primary considerations when determining how to best include PlutoPawn as part of Degen Dwarfs, all of which will be touched on in this proposal. They are:

1. Launching an NFTxDeFi project carries more up front costs, mostly code reviews, audits, and servers.
2. Regardless of how engrained PlutoPawn is within Degen Dwarfs, it needs organizational separation to some degree.
3. The necessity of an official audit is debatable, but if we proceed with an Audit then funds will be necessary outside of what S3 mint revenue can provide.

This proposal is being made early in the development of PlutoPawn in order to give Dwarfs a voice. This also means that many specifics have not yet been figured out and are subject to change, but can continue to take the Dwarf Voice into account for active community members that wish to participate.

Section 4 - Costs

The initial upfront cost is from a full time developer with another NFTxDeFi protocol. Due to this developers connections with the Dwarf Team, they have agreed to work at a discounted rate to informally review and optimize the code. Currently they are working in good faith with an understanding that payment is dependent on the passing of this proposal, or securing funding from outside sources should the proposal fail. A typical senior solidity developer contracting rate is $250/hour, however we have been offered a discounted rate of $150/hour.

This proposal would authorize an initial expense of $1500 (10 hours of work) for the senior developer's aid in getting the contracts ready for audit.

The other primary up front cost is for auditing. Code4rena is one of the more respected approaches for a cost-efficient audit. The minimum cost would likely be around $22,000. Currently, the Dwarfs have 5 ETH from Season 3, of which ~1.5 ETh would go the developer above. This leaves 3.5 ETH for auditing costs, which does not cover the expected $22,000 expense.

This proposal would reserve the 3.5 ETH to be used in a future audit, with separate funding secured as necessary when the time for audit comes

Section 5 - Dwarf Integration

There are three main ways that the Dwarfs would be integrated into PlutoPawn:

1. Fee share. In the long term, The Degen Dwarf treasury would receive 40% of the revenue generated by PlutoPawn (the rest being used for PlutoPawn expenses). A portion of the initial revenue would be diverted to purchasers of PlutoPawn NFTs (see Fundraising Approach below).
2. Governance. PlutoPawn would be governed by the Degen Dwarfs in the same way the Degen Dwarfs project is currently governed - through a multisig that puts large decisions to vote, at the discretion of the PlutoPawn team.
3. Utility. There are numerous ideas being discussed for Dwarf Utility within PlutoPawn. Some ideas include a longer grace period for Dwarf Holders, Dwarf Governance to determine Allowed/Verified collections, revenue discounts, etc. The exact nature of the benefits will need to be determined as the project evolves.

Utility and Governance are fairly self-explanatory, but fee share needs to be expanded upon. PlutoPawn, just like Degen Dwarfs, will use a % of revenue it generates to retroactively pay contributors. This is why 60% of generated fees will be utilized for contributor payments and to pay for continuous expenses.

The remaining 40% is available to share as revenue. The intent is that this entire 40% would go to the Degen Dwarfs treasury in the long term, however a portion of this initial revenue would be earmarked in order to raise funds for the audit costs.

Fundraising Approach

Here is the proposed path to Fundraising:

1. When getting ready for audit, create an NFT that is earmarked to return a multiple of the initial USDC or ETH investment through fee sharing (should the protocol generate fees)*. The treasury would also receive one of these NFTs for its investment. Each NFT purchaser may/could (TBD) also receive a free S3 mint.
2. Source 3rd parties to purchase these NFTs
3. Release a testnet or unaudited mainnet version of PlutoPawn. Align this with the release of Season 3 of Degen Dwarfs. Advertise the intent of PlutoPawn to send revenue to the treasury.
4. Get the audit done, launch PlutoPawn
5. Fees would eventually pay off the NFTs (of which the treasury would also own one), at which point 40% of revenue would go exclusively to the Degen Dwarfs treasury, giving the Degen Dwarfs long term ownership of 40% of the revenue.

*note the exact technical nature of the NFT is TBD