Discussion 🌱 Deploy strategic cash on Enzyme while establishing a long term Treasury Management WG

Table of contents
Authors
Link to Temperature Check + Demo
Purpose (what’s the “why”?)
Background (what is the reasoning behind the proposal?)
Functional description (what is this being proposed?)
Reasoning & analysis (what is the case for the proposal? What are the pros and cons?)
Technical implementation (who will be writing the code? what is the scope required?)
Impact (how does this contribute to the long-term resilience, sustainability and/or growth?)
Appendix (security & whitelabeling)

Authors
@Moss & @eek637 from Avantgarde. We are the core devs of Enzyme, the operating system for onchain asset & treasury management.

Temp check
Here you can find our initial Temp Check, published on Aug 4th 2022.
Also, here you’ll find a recording of the demo we gave to the Radicle community on July 28th 2022.

Purpose
There is an ongoing brainstorming within the Radicle community about strategic treasury management including short, medium and long term perspectives. It also involves the creation of a dedicated Treasury Working Group that can plan, propose and implement a well designed strategy.

We fully support this initiative as we believe professional treasury management is an integral part of any DAO’s long-term success. To maximise the chances for success, both short term cash management and long-term capital productivity should be well defined and executed. The goals are capital preservation, liquidity, and income generation.

First off, we would like to separate conceptually operating and strategic cash. The specific scope of this proposal is the management of the strategic part, thus increasing its usefulness as a tool to fund the protocol through responsible and risk-averse treasury management. We’ll therefore focus solely on the current USDC balance in the treasury.

Background
Radicle holds a substantial part of its treasury in $USDC, as there is approximately 20m USDC in the treasury at the time of this proposal. The treasury’s current balances are reported here.

Taking as a reference the estimated monthly and annual burn rate stated by @lftherios on this post, we can conclude that this would be the approximate split among operating and strategic cash.

In total, according to the estimated burn rate, operating and strategic cash would cover the DAO expenses for the next 53 months.

The rationale of the proposal is that:

  • Strategic USDC treasury is tied to USD, thus currently heavily outpaced by inflation, which rapidly erodes the purchasing power of the reserves. Those reserves could be earning yields for the DAO through a series of conservative but well defined/executed strategies on various high-quality DeFi protocols.

  • As stressed in our Temp Check, Enzyme allows Radicle to efficiently delegate the operation of the treasury without making any trust compromises or giving up custody of the DAO funds. Using Enzyme ensures the perfect mix of control, risk management, trustless delegation, efficiency, speed and transparency. See the graphic illustration of the solution below:

Functional description
We propose that the Radicle Treasury is through an Enzyme Vault where:

  • The Vault Owner is a Gnosis Safe controlled by the Radicle DAO core devs/founders.
  • The only permissioned Depositor is the Radicle Treasury Timelock.
  • The Asset Manager is an EOA wallet or several EOA wallets controlled by Avantgarde Finance.

Avantgarde Finance builds asset management products and services in the decentralised finance space leveraging its unique position of being one of the first development teams in DeFi. The team boasts an aggregate of over 60 years experience in Traditional Finance and nearly 6 years in DeFi having founded and built the first ever on-chain asset management infrastructure. Our experience spans across DeFi smart-contract and web3 development, asset management, understanding and structuring financial products, portfolio construction, technical and financial risk assessment and financial reporting. We are proud to service some of the industry leaders today and assist them with our Treasury Management services. You can see an example of a vault managed by Avantgarde for Nexus Mutual here below.

If this proposal gets approved by the Radicle DAO, we would suggest implementing a conservative strategy, diversified amongst blue chip protocols with varying degrees of counterparty risk. An example of a vault running a similar strategy is the following (can be found live on Enzyme here.)

Reasoning & analysis
As pointed out by @noturhandle in his reply to our Temp Check, there are some open questions:

- Who defines the future goals of the treasury and the strategy to achieve that goal?
- What is the exact treasury management strategy?
- What treasury management strategy would be executed? And, more importantly, by who?

The aim of this concrete proposal is to unbundle the different open questions, and avoid Radicle falling into a typical paralysis analysis situation.

We thus propose a step-by-step approach:

Phase 1: Radicle DAO starts with a conversative strategy for the strategic cash, run on an Enzyme vault and managed by Avantgarde Finance.

Phase 2: Once step 1 is implemented, Avantgarde works with the Radicle core team to define a clear path towards the formation of a dedicated Treasury Working Group.

Phase 3: The Treasury WG gets elected and is eventually appointed as delegated asset manager of the Radicle vault, replacing Avantgarde Finance.

Phase 4: The new WG defines, proposes and executes improvements and updates on the TM strategy on a regular basis, following the evolving requirements of the DAO. These further improvements could go in the direction of more speculative initiatives like the one proposed by @cloudhead in this post.

Pros :+1:
This proposal allows for a swift implementation and helps Radicle avoid getting “stuck”, which is otherwise a likely scenario. It moves things forward in a clearly defined and technically sound interim stage until the further steps are finally implemented.

Cons :-1:
The current proposal does not include taking immediate advantage of opportunities like acquiring ETH during the current bear market, which is the rationale of @cloudhead in his post. We acknowledge this, yet we believe that a more prudent approach based on stablecoin yield generation is the next best step for Radicle. In particular, given the unpredictable nature of the markets, any speculative moves would generate community pushbacks that can paralyse sound improvement initiative for months.

Technical implementation
This proposal does not require development work or resources from the DAO. The Enzyme smart contracts have been live on mainnet since February 2019, and subject to continual development from various teams coordinated by the Enzyme Council DAO. Here you can find the most recent audits.

Below is a list of the relevant parameters, along with our suggested configuration. Following that is a high-level overview of the steps to deploy and seed it with funds, as well as more information on Avantgarde Finance.

Parameters

  • Vault Denomination Asset: USDC
  • Management/Performance Fees: see relevant section below
  • Allowed protocols: Paraswap, Curve, Convex, Maple, Compound, Aave
  • Delegated Trader Permissions: manager.avantgardefi.eth
  • Target vault exposures: 100% stablecoin

Deploy and Seed Vault

  • Configure vault owned by Radicle multisig with appropriate policies as discussed and voted by Radicle DAO
  • Deposit denomination asset balance into vault (USDC)

Managing Vault

  • Delegated manager to optimise for yield opportunities within parameterized constraints and maintain target asset exposures
  • Coordinate with the DAO for proposal of strategy changes that are subject to DAO approval/vote.

Fees
To cover expenses involved in managing the vault, Avantgarde would propose the following fee structure based on value-adding performance

It is important to note the following:

  • Fees are payable in shares of the vault and are implemented using the Enzyme fee contracts. Performance fees are taken as a percentage of profit (i.e. not paid in case of negative performance).

  • As the Vault owner, the Radicle DAO will always be fully in control of the addresses to which it delegates trading privileges and the fees it pays in the form of Vault shares to those addresses. If it is the case that Avantgarde Finance is not living up to its end of the bargain, both permissions and fees can be easily terminated by the DAO.

Impact
We have a longstanding experience in governance matters and can help Radicle form an effective treasury strategy working group. If needed, we could help Radicle undertake the task of creating a WG, which is elected by the community.

The future WG would be in charge of day-to-day management of the treasury Vault, and tasked with making proposals to expand the scope of the strategies undertaken to achieve the treasury’s mandate. While the day-to-day tasks could be executed by the WG, any larger strategy changes would likely require a reconfiguration of the Vault to access new protocols, and hence a DAO-wide vote. Given the conservative nature of this vault, we would not anticipate many such instances. Members of the Treasury WG shall be elected by the DAO and one or more key members of the Avantgarde team may be picked to take a seat in such WG, thus further strengthening the bond and the strategic alignment among our projects.

Also, Avantgarde can help steer the product roadmap of the Enzyme dapp in order to build out new integrations and features that would benefit Radicle and thus help the DAO meet some of its pain points when it comes to treasury management objectives.

Appendix A - Security
Top Tier Audits
Enzyme’s contracts have been audited formally by PWC, Open Zeppelin and Chain Security and audits are available publicly here.

Security-oriented Governance
Any upgrade or change to the Enzyme protocol is implemented by the Enzyme Council DAO, which is composed of technical experts.

Bug Bounty Program
Enzyme runs one of the largest bounty programs ($400,000) and has recently teamed up with Immunefi to give it more visibility.

Contract Upgradability
In terms of upgradability, there are no admin keys or backdoors. Vaults are version-specific and can only be upgraded from one version of the protocol to the next if Vault Managers opt in and signal an upgrade. Depositors will be notified if this occurs and they have a 7-day window to opt out if they do not like the new upgrade parameters being signalled.

Appendix B - Vault whitelabeling
We recently launched a new feature that would allow Radicle to create its own whitelabeled Enzyme vault, under a unique URL. This URL can be linked to the Radicle website in order for Enzyme to become an invisible layer of DeFi technology that is seamlessly integrated in the DAO community experience. Here you can see a mockup we’ve prepared for Radicle.

4 Likes

Thank you @Moss & @eek637 for the proposal! While there still needs to be a larger discussion around overall treasury management strategy, Enzyme seems to be a great tool with customizable guardrails to already start experimenting with. I also believe it would be useful to work with Avantgarde to help develop Radicle’s treasury strategy via a treasury working group.

I would love to get @lftherios @cloudhead @abbey 's thoughts on this proposal.

2 Likes

Thank you for this proposal. I am generally supportive of starting to experiment with Enzyme and Avantgarde.

My thoughts below:

  • I would personally prefer to start with a smaller amount, then review the performance of the deployed strategies and scale accordingly

  • I am still really keen on us buying more Eth. Either DCAing or setting limit orders and buying at certain price points (per @cloudhead 's proposal). Maybe something that we do in parallel?

  • I would like to understand better the reasoning for the performance fee. Is 20% reasonable? Some comparable data points here would be helpful.

3 Likes

I did a little digging on some forums to try to find fees to compare with - found a few proposals from Karpatkey, another treasury development service provider:

GnosisDAO <> Karpatkey proposal
dxDAO <> Karpatkey proposal

2 Likes

Thank you @lftherios for your support. We are keen to make it happen for you guys.

In response to your thoughts:

  • We are open to work with a lower initial allocation for your vault. In our Phase 3 Proposal we can establish an agreed initial allocation and a timeline for regular review of specific KPIs that are linked to further deposits. In order to spare the DAO from voting on each future deposit, we would propose to tie the future deployment schedule to the successful achievement of those agreed KPIs.

  • Apart from yield strategies on USDC, we can set aside a certain percentage of capital to buy ETH on a regular basis. With some extra development we would also be able to execute limit orders that buy ETH at predetermined price “dips”. In other words, the DCA could be either time-driven or price-driven, or even a combination thereof. In addition, we’ll soon be able to stake ETH natively from the Enzyme vault, thus having increments of 32 ETH earn PoS rewards.

  • We believe the performance fee is in line with the asset management industry benchmark. Performance fee would only be charged on the treasury appreciation and not on the principal deposited, following the principle of progressive high watermark. Learn more here. It’s important to note that we would normally charge management fees too but in this case they are being waived in order to make your decisions easier in a bear market.

I hope these answers are exhaustive. We look forward to working with you on the next phase of this proposal! :wink: :mechanical_arm:

If there are any further comments from @abbey or @cloudhead, we would be glad to receive them and incorporate them in the next steps.

2 Likes

Hey @Moss, appreciate you addressing my questions.

There is still some risk that the DAO doesn’t yet have the expertise in place to make an informed decision on the initial parameters but any risk is sufficiently mitigated by the performance fee structure, you being open to working with a lower initial allocation (though we should agree what that is) and increasing based on pre-agreed KPIs, and the fact that you’re also volunteering to join the treasury working group.

Do you have examples of reasonable KPIs that you could link to deposits?

And I assume future deposits would still require manual execution from Radicle’s Safe, nothing automated on-chain?

Hello @noturhandle, you’re very welcome. Also, a great pleasure to meet you @ DevCon in Bogotá last week.

We also had the pleasure to speak IRL to @shelb_ee and we agreed on the following next steps:

  • Determine reasonable initial amount to get the proposal off the ground.
  • Define objective KPIs and frequency of assessment for future deposits.

Since there is generic support on the proposal and we simply need to flesh out those details, @eek637 and I will prepare the input for the next step Phase 3 - Formal Review :herb: as per the governance standard process, which will eventually feed the Snapshot vote.

Finally, to answer your question, yes, every deposit will still require manual execution from the Radicle Safe, but the idea is that the execution is pre-agreed as per the KPIs so we reduce the overall lead time and do not create unnecessary overhead on both sides.

1 Like

Slight change of plans with respect to the previous reply, as it’s better to publish on this same Phase 2 and receive all necessary feedback before moving to Phase 3. Thanks @lftherios @shelb_ee and @noturhandle for your comments!

Post redacted by @Moss and @eek637

Initial amount
We propose the Radicle DAO kicks off the strategic treasury management with an initial deposit of 2M USDC.

ETH purchase-and-stake program
As requested by @lftherios in his response, we agree and propose to set aide 30% of the initial USDC allocation to purchase ETH on a recurring basis (i.e. DCA), with weekly frequency, over the course of the each nominal quarter.

As we’re currently integrating native staking on Enzyme, every time a new increment of 32 ETH is accumulated, ETH will be directly staked on a validation node.

Also, we can also establish an initial limit order of ETH <$1000, below which we will execute the whole quarterly purchase program in bulk. This limit order will be executed manually until we enable the automated executions onchain (estimated by the year end).

During the quarterly checkpoint, we will discuss with the Radicle DAO core team whether it makes sense to increase/decrease the % set aside for the ETH purchase program, also based on the evolution of the overarching macroeconomic situation.

USDC allocation
The remaining USDC will be invested in an array of blue-chip lending and money market protocols to earn yield and potentially deposited into liquidity pools to earn transaction fees. In an effort to avoid basis risk between stablecoins, any non-USDC allocations will be made to over-collateralized stables such as DAI or LUSD or asset-backed options such as GUSD or USDP. The Treasury Vault will strictly avoid any exposure to algorithmic or undercollateralized stablecoins.

Future deposits and frequency
We propose a quarterly assessment of the status of the Radicle DAO treasury and the allocation of an additional 2M USDC so that ideally the treasury reaches the target allocation of 12M USDC after 6 checkpoints i.e. after 18 months. Once reached that phase, we’ll revisit the next quarterly allocations with the Radicle team and determine next steps. Also, the evolution will depend on the timing of the Treasury Working Group creation.

KPIs for assessment of future deposits
The Treasury’s performance should be judged on a number of factors relating to the USDC portion of its allocation.

KPI 1: Liquidity
Given that the DAO may need to draw from the treasury vault to fund operational expenses in the future, it is important that a large portion of its assets are immediately redeemable to USDC. We propose a target of 80% of the non-ETH portion of the vault be kept liquid, where liquid is defined as convertible to USDC and ready to be withdrawn from the Vault within 24 hours with no value loss.

KPI 2: Returns
There is little to no consensus on how to define the risk-free rate in the crypto capital markets. In this case, we believe that the next best option for the DAO would be to just stick its USDC into Compound or Aave. That being the case, it makes sense to use those markets as a basis for comparison when measuring the Treasury Vault’s performance. While Avantgarde is managing the vault, we will provide two sets of numbers for comparison. The first can be understood as “The return on USDC that we would have gotten if we had just split this allocation between Compound v2 and Aave v2”. The second will be “The return on USDC that we achieved’’. The delta between these two figures shall be at least 2x.

As usual @eek637 and I are open to feedback and flexible to adjust the implementation details accordingly.

Looking forward to kicking this off :mechanical_arm::chart_with_upwards_trend:

Hey @Moss and @eek637 !

Finally catching up on this proposal :slight_smile: First, I want to thank you guys for all the work (and patience!) you’ve put in to this proposal — it’s been great to see this proposal develop alongside the feedback of the community. I wanted to provide a couple comments that I hope can be addressed here before moving this into Formal Review (Phase 3).

I think it makes sense to make the Foundation Council (me, @lftherios, @cloudhead) + one external stakeholder (potentially someone from the Foundation’s Op Team @ange) the initial owners of the Safe, as it already manages the other DAO-funded multisigs (Core Team budgets & vesting contracts). However, I’d like to discuss the implications of this with @ange and Sally (Foundation Ops Team) before moving the proposal forward to Formal Review. I will check in with her and share my insights here, or ask her to contribute here directly.

The owners of the multisig should probably also transition as well right? How do DAO typical distribute the ownership of asset management? Across which stakeholders?

Can you expand on how you all have worked with other teams to set up Working Groups in the past?

So, is the proposal here to manage initial allocation of 2M and asses the vault’s performance quarterly over the course of 18 months? Or to manage an initial allocation of 2M for a quarter, and then increase the allocation by another 2M after a successful quarterly checkpoint?

If I’m understanding correctly, the latter makes sense to me — if started Jan 1st., the Avantgarde could experiment with the 2M for the entirety of Q1. By the end of the quarter (March 31st), I believe we will have at least the foundations of a working group that could manage the quarterly evaluation and make the decision to allocate the additional 2M. At this point, the WG should also be responsible for advising the Vault owners on whether or not to continue with its yield strategy. Basically, it would be up to the WG to make the decision to continue the relationship — not the owners of the Vault multsig.

  • So, it’s clear that the quarterly checkpoints play an important role. I wanted to reflect on what these checkpoints would include so we can ensure they are properly managed. Do these requirements make sense?

    • Avantgarde presents a quarterly assessment of the status of the RadicleDAO treasury that includes an evaluation of Liquidity (% of non-ETH portion of vault that’s liquid) and Returns (delta between “risk-free rate” and “return on USDC achieved”)

    • Avantgarde reports on ETH purchasing, including opinion on increasing/decreasing the % set aside for next quarter’s purchase program based on any macroeconomic developments.

  • Who will be responsible for managing these checkpoints throughout the period of managing the initial allocation? Should it be the owners of the vault themselves? How can we ensure that these reports/evaluations happen in public so the community is able to hold the participants accountable in the experiment?

All in all, I’m generally supportive of running smaller-scale controlled low-risk experiments while we work to establish the foundations of a longer-term treasury. I am positive that Enzyme/Avantgarde could effectively manage this short-term experiment — I just want to be sure we’re managing expectations from the get-go and are aligned that the decision to move forward with any additional allocations will be up to the Treasury Management Working group. I think once we discuss these questions I’ve outlined above, I’d feel comfortable supporting this proposal going to a Formal Review!

Again, thanks for the patience as we figure this out together! Looking forward to hearing your thoughts.

5 Likes

Hello @abbey. Thank you for your comments!

@Moss & @eek637 co-written post here.

Let’s wrap it up point by point:

  • Your suggestion for the composition of the Vault owner’s multisig makes sense. We think it’s worth reiterating that this multisig (the vault owner) will have control over the vault’s settings and parameters, but that all assets deposited into the vault will remain in the custody of the Governor contract (the vault depositor). We’re more than happy to discuss the implications and responsibilities of this role in more depth with anyone who has questions or comments.

  • The ownership of the Enzyme vault (via multisig) does not need to transition in the future, unless you decide to do so. This is really case by case so with time you can discuss it internally and decide what’s best for you. One instance we could foresee where it would make sense to change the ownership of the multisig is if team members cycle through the Op Team. This could be handled by either changing the addresses on the multisig itself, or by transferring the ownership of the Vault from one multisig to another. Bottom line: the Enzyme setup can accommodate any future changes with respect to the delegation and/or vault ownership.

  • The best example we can give is the decentralisation process of the Enzyme protocol, which led Enzyme to becoming a DAO, now governed by a Technical Council of DeFi experts. Similar guiding principles can be applied to the formation of this Treasury Working Group if required. We are ready to support you if needed or simply to take part in the WG if Radicle wants to lead this process from within.

  • The revised proposal is indeed to start managing 2M USDC and then review the KPIs quarterly in order to decide whether to increase the allocation. So yes the additional deposits would be subject to successful checkpoints against the agreed KPIs at the end of each quarter.

  • I agree with your thought process on the WG and its responsibility regarding advising vault owners and making future decisions on the treasury strategies.

On the quarterly checkpoint, we think your idea makes sense and we agree on the following format:

  • Avantgarde presents a quarterly assessment of the status of the RadicleDAO treasury that includes an evaluation of Liquidity (% of non-ETH portion of vault that’s liquid) and Returns (delta between “risk-free rate” and “return on USDC achieved”)

  • Avantgarde reports on ETH purchasing, including opinion on increasing/decreasing the % set aside for next quarter’s purchase program based on any macroeconomic developments.

  • Initially the management of these checkpoints will be up to the vault owners. For the sake of total transparency, those sessions can be performed on your Discord channel so anyone can join and see the status of the treasury and ask questions. Once the Treasury WG is formed, the WG will either replace Avantgarde in reporting the quarterly outcome or will become responsible for interfacing with Avantgarde if you wish us to continue the delegated management with us.

We understand the importance of managing expectations and all we can say is that we will remain flexible and supportive throughout the whole process and will adjust to your evolving organisational needs.

1 Like

Thank you for the thoughtful responses to all of the questions! I wanted to drop a note here for full transparency on our end.

After observing the ENS endowment process, we want to make sure that we can assess and communicate implications of different treasury decisions clearly and confidently as possible. We have recently been focusing our efforts to better understand what risks and legal implications come with diversifying the treasury and mechanisms to do so (use of external asset managers vs creating a working group with multi sig power over part of treasury vs leaving all decisions up to token governance, etc.). We have started discussions with legal council to make sure we are well informed before making any big moves on treasury diversification.

We are trying to set up a meeting in early January, but the discussion with them may continue well into January/February. That being said, I believe it would make sense to hold off on moving this proposal forward until we have more information on what legal implications come with various treasury diversification options. I would be happy to hear any reactions to this from the community!

1 Like