[PRFC] Exploit Debt Denomination

General Discussion
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Purpose: Decide whether debt from the hack should be denominated in kind or in USD.

Context: According to the post-mortem, the exploit led to a loss of 3,479.24 ETH, or approximately $12 million USD. Recent proposals have focused on repayment methods, with an assumption that repayments should be made in kind. However, there is no consensus regarding repayment in kind and there is a strong case for USD denominated claims. The decision on the debt amount leaves the repayment options open, so these decisions should be split into separate specific proposals. Clarifying the debt amount first will help with formulating better repayment proposals and give clarity to token holders about the protocol’s liabilities.

Proposal: We propose a vote on how to denominate the debt with two binary options, either denominated in USD based on token value at the time of the exploit, or denominated in kind.

The case for USD denominated debt: At the current ETH price of $3756, the in kind denominated liability of the protocol has already grown by $1m since the hack. Following the approval of ETH ETFs, there is a strong possibility that this amount will continue to fluctuate.

By denominating debts in kind, the protocol is saddled with potentially unlimited liabilities that it may have no way of repaying. This creates a toxic relationship whereby a rise in ETH causes a rise in Prisma’s liabilities, harming the value of the PRISMA token which is essential to the flywheel model of the protocol design. In this situation, a bull market for ETH would be a bad outcome for Prisma. By denominating in USD, Prisma can benefit from any appreciation in ETH, raising revenues and enabling debt repayment.

In kind denomination also complicates repayment planning, as there is no fixed USD value for the debt, making it difficult to project repayment timelines. USD denomination gives clarity to creditors, token holders, and protocol governance, enabling better decision making and avoiding complex market operations.

Fixing the debt at the USD value of the losses at the time of the exploit ensures that victims are fully and fairly compensated for the value lost, regardless of market fluctuations. Whether ETH goes up or down, the value lost at the time will be restored. This approach is supported by numerous legal precedents which argue along similar lines.

Conclusion: This PRFC is intended to start a discussion on debt denomination, hear arguments on both sides, and gauge the consensus. A simple proposal can be raised following the discussion, which will move the DAO to forward on this issue.

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Denominating in USD is unfair to the victims. It effectively transfers the costs of ETH appreciating to the victims rather than Prisma. The users would effectively receive less ETH than they should.

Prisma made the mistake and lost the users’ ETH, it’s only fair to repay them ETH. Regardless of price swings that ETH has in USD terms.

Whatever amount that Prisma can swap from stables to ETH (and maintain a reasonable runway) should be done now (really it should have already been done when it was clear this would need to happen).

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Victim here. I agree 100% with @treacherous_f0x: Prisma made the mistake and lost the users’ ETH.

I held ETH and put ETH in the protocol because I believed in it’s upside against USD and as expected it went up.
I don’t think any of us victims would agree that it is fair we got USD back instead of the currency we lost.
In fact would anyone be happy to get some currency which has lost value against the one they held originally?

Besides Prisma would lose further credibility if it decided to lighten the burden on itself this way after an exploit so I don’t think this is good for Prisma token holders either.
An ETH bull run might actually help Prisma generate more fees if it plays its cards properly and restores people’s trust in it. It could be a win-win situation if it shows it can overcome such a negative event and come out stronger.

It is unfortunate for everyone involved but I think we can work out a solution that helps repay victims fairly if they are patient enough and which doesn’t weigh down on the protocol too heavily.

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As I Victim, I agree with treacherous,

Hi guys, another victim here I don’t have much thoughts to add as I mostly agree with Treacherous’s points. Unfortunate scenario

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this is exactly what the proposal tries to do.
Lock in the debt overhang and work towards repayment. if (more likely when) eth goes to 10k we would chase this repayment strategy forever. There is no scenario where victims aren’t taking a haircut here, and the sooner we all accept this the better. it’s clear (and understable) victim’s want to be made whole asap but in the long run this pov will be unmanageable

Locking in the usd value at time of exploit is just the first step of a plan we aren’t even close to finished. Its a tough situation all around, and denomination in usd is the first of many tough choices we will have to make.

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I’m in agreement with this. If we recover the ETH then payback in ETH makes sense. Even if we had the ETH in treasury as earnings so far then I’d agree we should pay it back in ETH right away.

But in the likely event that it is the protocol that is going to try to repay, this should be USD denominated at time of exploit.

I think in most cases where protocols don’t have the funds ready or no recovery was made, debts are converted to USD equivalent at the time of loss.

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If the protocol has debts of $12M and ETH goes to $10k tomorrow (2.5x from here), then the debt also expands 2.5x to $30M.

Considering the entire FDV of PRISMA right now is $30M, it would be entirely bankrupt the protocol, meaning nobody is getting repaid.

Having the debt denominated in ETH is no different than forcing Prisma to own a massive short position on the crypto market. The growth of Prisma and its fee income is heavily dependant on ETH price action already, denominating the hack repayments in ETH is a death sentence.

If for some reason the funds are recovered from the hacker, I’m all for repayments in ETH.

In any other scenario, it’s a bad idea to denominate the debt in ETH and it will bankrupt the protocol overnight. The standard in these scenarios is to convert the losses into USD and Prisma should do the same.

If hack victims pass governance for this, I’d bet they end up with nothing due to the protocol going entirely bankrupt.

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I wonder if we can move this to vote where we are provided with 4 options

  1. Debt be denominated in USD, unless ETH is retrieved from exploiter, based on the time of the exploit.
  2. Debt be denominated in USD, even if ETH is retrieved from exploiter, based on the time of the exploit.
  3. Debt be denominated in ETH.
  4. Debt be denominated in wstETH.

Unless someone else has another way to structure the vote or options?

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