Make ETH investment with treasury USDC funds

The Radicle DAO treasury is currently sitting on about $20M in USDC. In our current inflationary environment, the purchasing power of these dollars is decreasing by around 10% per year.

I’d like to propose that we use half of that ($10M) to purchase ETH or stETH at the current prices to hold long term (2+ years) in the treasury.

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Very curious what @lftherios thinks about this (have chatted to him about crypto markets a few times). Seems risky to me! Are there any other more stable ways to invest? Like some kind of staking or something?

Staking (and holding) USDC carries its own risk:

  • USDC addresses can be blacklisted by Circle, so we could lose 100% of the treasury if that were to happen.
  • Staking USDC comes with the smart contract risks of whatever staking platform you choose.
  • Holding USDC carries the risk of depreciation and higher inflation rates than we even have today.

On the other hand, investing in Ethereum is investing in the platform on which Radicle (and USDC) is built, so it’s a risk we are already exposed to.

I’d be very careful with getting off USD-pegged tokens. Ether has lost 2/3 of its value over the past few months, that’s way more than USD has. Sure, Ether can bounce back to the moon, but that’s making the treasury speculate on a currency way more volatile than USD. It may or may not be fine, but we must be aware that it’s speculation. How about Dai?

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I will share some thoughts below, but I am generally supportive of this proposal.

Having already experienced two bear markets I definitely think that bear markets are a) the time to build and b) the time to invest.

During bear markets noise and distraction are a lot lower and people that lack conviction panic sell their assets or either leave the industry completely. The same happens to both contributors and investors. While I previously suffered with this phenomenon, I eventually got to accept it and embrace it, as in my opinion it brings together people that share the same views of the future and it creates opportunities to build, partner, hire and invest more easily, especially if you are prepared for it.

A question that logically emerges is the following: is this bear market different to the ones before? In my opinion yes and no. Yes, as I expect everything that I write above to play out again the same way. No, as its the first crypto bear market that takes place within a broader economic bear market ( inflation, war, energy and supply chain crisis etc.). Also no, as in my opinion it’s the first bear market where many crypto projects have already found ‘product market fit’ and the crypto industry is proven and in explosive macro growth (with defi, NFTs, DAOs being the three categories with the most growth).

So, on the one side we have a lot more economic uncertainty than before and need to be prepared for a longer bear market, on the other side we have an industry and platform (Ethereum / ETH) with proven product market fit, proven demand and macro growth.

With regards to the specific proposal, I absolutely think that the RadicleDAO needs to be diversifying it’s treasury and getting more exposure to other speculative and productive assets that can outperform the dollar in the next few years. But first some numbers.

At the moment the DAO holds around 21m in USDC and I think another 2m USDC are provided as liquidity to Uniswap. The DAO also holds around 51m RAD which I personally wouldn’t touch, given the low RAD price and our desire for those tokens to be used for community incentivization.

In addition all contributors (currently 38 if I am not mistaken) are expected to transition from the Radicle Foundation to the DAO by February 2023 and as a result to be paid directly from the treasury. The expected burn rate for the Radicle Foundation in year 2022 is around 4.5m USD, and the current monthly burn rate is around ~350k USD.

Taking all of the above into account, I personally think that it’s a great idea to move a portion of our stablecoins towards a more productive asset that has the potential to outperform USD in the next few years, rather than certainly losing money every year because of inflation.

While there are thousands of ways to approach diversification and investment, the way I would like us to approach it is the following:

  1. Agree on a timeframe where we think it’s wise to have stablecoins to cover expenses, without engaging in any fundraising activity. Usually start-ups operate on a 18 month timeframe, but given current conditions I would assume a prolonged bear market so I would double that to be prepared for the worse (36 months).

  2. After we do that, I would calculate projected expenses for that period for each team and add some buffer to that.

  3. What’s left, I would move off stablecoins and into a different asset. For that I think ETH is the way to go. The reasons are:

  • proven product market fit and significant demand and growth
  • unquestionable market leader at a high growth industry, in my opinion unlikely to be challenged from another layer 1, given the amount of projects and devs building on it
  • proven economics
  • major event ahead (merge) that is introducing risk but also improved economics (likely a catalyst for even more growth)
  • productive asset (4% yearly staking return today using Lido or simply staking after the merge)
  • currently likely ‘oversold’ as the market is in panic mode (imo you want to be investing after an asset has corrected in price, not the other way round)
  • crypto native, meaning that we don’t need to use any intermediary to get exposure. This is something I value highly and I personally would be against investing in non-crypto native assets for reasons I would be more than happy to elaborate on.
  • Radicle is building on it, so interests are aligned
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A couple of questions come to mind reading through this:

  1. Does it have to be invested in only ETH? Have you thought about diversification in multiple assets, and if so, what are the reasons for or against it?
  2. Why just hold for the long term “2+ years”? I would think a more in-depth strategy might be useful to consider, not that I’m a financial trading expert :upside_down_face:
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Good questions:

  1. Only ETH because that has the highest risk-adjusted returns, and the markets are correlated anyway. Adding any other asset would increase risk with no guarantee of increased returns.
  2. This is the MVP of investment strategies, for now we don’t have the resources to manage more actively, and it’s been shown that simply holding ETH is often the best long term strategy.
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I hope that’s true for my own personal investment :joy:

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Not my strongest subject here, but it is pretty clear that treasury diversification will be important for sustainability in the long-run - especially as we transition to the DAO. The reasoning provided above by @lftherios & @cloudhead around sticking with ETH makes sense for right now, but I am curious about what happens when we start taking about potential token swaps with other projects in the future or diversifying with other assets going forward. Is the goal to stick to a more battle tested ETH for now and start doing token swaps/exploring other assets when they mature/ markets improve/the treasury reaches a certain balance or performance, etc./all of the above? Do we already want to define the criteria or make a general plan/timeline for treasury diversification, or is it still too early? Maybe not the place to have this broader treasury diversification discussion, but it came to mind while reading through the comments here.

I will be attending a treasury diversification round-table on Thursday where learnings, best practices and common problems will be shared. I will be happy to share any relavant findings afterwards that might help shape the discussion here!

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This is definitely only the first step, but we get quite a lot of bang for the buck here. More elaborate strategies will take more time and more active management, and so I’d hope to have a treasury team to execute on anything more complex.

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Thanks @cloudhead for starting the conversation and @lftherios for providing more context here. I am generally supportive of this proposal but I’d like to make sure we’re approaching our DAO’s first venture into treasury diversification with intention. I’ll start with feedback specific to this proposal first:

I agree with this approach. What I’m hearing is that your proposal is to 1) calculate our 36 month runway costs 2) deduct from current USDC balance and 3) divest the rest into solely ETH.

On the first point: It seems like that calculation should be something that’s included in this proposal. This will help contextualize the $10M amount that @cloudhead proposed. Potentially, *in addition to the diversification, we could even propose to move the 36-month runway costs into a multi-sig (who would control this is another question, maybe its just the Council at the start and we transition ownership once we have a better idea of our Org Design. This would already allow us to start transparently managing our DAO budget — something we will have to be increasingly doing as we transition to the DAO.

On the third point: While the value of ETH is obvious, I think we need to include some more context into how this fits into our longer-term treasury management strategy. If it’s the MVP of our investment strategies that’s fine. But I believe it’s important for this proposal to come with a bit more analysis of the risks that come with diversifying into ETH. @cloudhead you say:

I think the draft of this proposal needs to provide some more clarity on why it is. Seems like @lftherios already started providing some helpful points there but in absence of a dedicated team or treasury management strategy, we need to make sure everybody is on the same page with potential risks & rewards.

Finally, management of our DAOs treasury is definitely something we need an informed and well-thought out long-term strategy for. Since this is being treated as the MVP of investment strategies, IMO it should come with some more context into what the plan is for making sure we can develop a longer-term strategy for treasury management. Some open questions for this that could maybe be elaborated upon in the draft of this proposal:

  • Who’s responsible for tracking & reporting on the financial performance of the diversification?
  • Is there a working group we should form or hire that we should prioritize?
  • What expertise can we bring in to ensure we’re thinking about this in the smartest way possible?

We don’t need to figure it all out now, but for me to effectively evaluate this proposal, I feel like I need to see a bit more detail into how this move would fit into the bigger picture.

But all in all, I’m generally supportive. I’m looking forward to seeing the drafted proposal published for discussion :seedling:

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Really great discussion happening here! I think it would really benefit the conversation to see some more details fleshed out from points mentioned above. @cloudhead how do you feel about escalating this Temperature Check to the second phase of governance - the Discussion phase? This includes drafting a more concrete proposal for the community to review.

Besides pulling from the exciting discussion above, you can follow the guidelines for what to include in the proposal from the Radicle Governance Process README.

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