Endowment Frequently Asked Questions (FAQ)

This FAQ is designed to answer the most common questions about the ENS Endowment managed by karpatkey and Steakhouse.

For reference:

1. Why is ETH converted to USDC in the Endowment? Why Not DCA?

As outlined in the Request for Proposal (RFP) process, the ENS DAO requested for ETH to be converted to a stablecoin, specifically USDC. The RFP received overwhelming support with 99.95% of votes in favor on Snapshot. Karpatkey adheres to the decision made by the ENS DAO and will promptly convert ETH to USDC while taking measures to minimize slippage.

2. Why is the Endowment not waiting for 12 months to scale?

The Endowment proposal submitted by karpatkey has been available to the public for a while and is on the low-risk side. Delaying the investment of half of the Endowment by 12 months incurs an estimated opportunity cost of $800k for ENS, which is greater than the annual Endowment cost. Thus, there is limited advantage in waiting for a full year.

Compound (USDC and DAI) has a proven track record with increasing cDAI and cUSDC values.

The ETH Liquid Staked Tokens (LST) of Lido and Stakewise have been around for over a year without exploits. The Shanghai upgrade will enhance liquidity and make any significant depeg unlikely (except for tail risks).

The proposed dexes (Uniswap v3 and Curve) are among the most reputable and battle-tested protocols in the industry.

In the event that ENS is not satisfied with karpatkey, the partnership can be terminated and positions unwound, as the solution is non-custodial and requires little trust in karpatkey.

Most components of the proposal are well-established and tested, and the likelihood of tail risk events is reduced by the Lindy effect, although they can never be ruled out.

Nevertheless, to accommodate the community’s preference for a gradual scaling, karpatkey proposes two equal tranches, with the second funded after 6 months.

3. Does karpatkey have custody of the Endowment funds?

No, the Endowment funds are managed externally by Karpatkey using a trustless, non-custodial approach facilitated by the Zodiac Roles Modifier.

The Zodiac Roles Modifier allows Safe owners to create roles with granular permissions, which can then be granted to any address. These roles have the ability to make unilateral calls to approved addresses, functions, and variables to which they have access, even if they are not an owner.

The Endowment is owned solely by the ENS DAO and role based permissions are granted to the Manager owned by the ens-endowment.pod.xyz. The Manager will execute transactions on behalf of the Endowment based on the strategy outlined in the Endowment initiation post.

Further information about the Zodiac Roles Modifier can be found here and here.

4. How does karpatkey request an update on the granted permissions? Can they grant new permissions themselves?

Conditions in the market may change, requiring the need for new permissions. For example, a pool may become deprecated so a liquidity migration may be needed, or new strategies deemed optimal for the Endowment may be recommended.

Karpatkey cannot grant new permissions to themselves, as this action must be executed by the Endowment’s owner, the ENS DAO.

When the need for an update on the permissions arises, karpatkey should submit a request on the ENS forum that clearly explains the rationale behind the request. The ENS DAO will then vote on the request, and if approved, it can be implemented.

5. Are there new roles in the pipeline?

Yes, after the Endowment is initiated, karpatkey will request approval for new roles, including the Harvester, Swapper, and Disassembler.

The Harvester Role will be assigned to an EOA, which will automatically claim farming rewards based on predetermined criteria established by karpatkey.

The Swapper Role will be assigned to an EOA, which will automatically swap harvested rewards to stablecoins, in accordance with the Endowment’s mandate.

The Disassembler Role will also be assigned to an EOA, which will automatically disassemble existing positions when a monitoring alert is triggered.

These new roles are designed to improve operations and enhance risk management. It is important to note that the three roles are subsets of the Manager Role, and thus will not be granted any additional permissions beyond what has already been granted to the Manager Role.

6. Have there been audits on the Zodiac Roles Modifier?

Yes, from Ackee and Sub 7.

7. What if a liquid staked token depegs? Is there a contingency plan?

Our proposed strategies for the ENS portfolio are constantly evaluated and monitored through our risk management framework. We assess the risks involved in each strategy and monitor risk parameters, set up various alert systems, and have preventive and mitigation plans in place.

We initially created our risk management tools for the GnosisDAO portfolio, which now comprises over 50 positions, including ETH staking, lending, borrowing, liquidity provision, and other token staking strategies. For further information, a sample report can be found here.

At this time, we do not recommend implementing hedging strategies for ETH LSTs. The cost of implementation would result in constant financial losses, including the opportunity cost of the collateral and the debt interest rate. The projected APR from the suggested risk-controlled positions does not compensate for the cost. We are aware of existing decentralized options and will closely monitor any new, cost-effective options that become available.

For the reasons listed above, we only suggest taking a long ETH LST position. Our action plan does not include selling LSTs in the event of a negative price deviation from ETH, unless events indicate that the staking protocol is at risk. We closely monitor liquidity, prices, and governance topics for every staking protocol in which we have positions. We have various alerts that trigger if thresholds are met or if there are unusual activities involving corresponding contracts.

In case of a triggered alert related to a potential hack, exploit, or governance risk, we would sell the LST as a preventive measure. However, if the protocol at risk involves liquidity provision, we would disassemble the position immediately without selling the LST involved. Once the Disassembler Role is approved, we can deploy disassembler bots to minimize risks related to the protocol’s UI and speed up emergency plans.

Many of our alerts are developed in collaboration with Hypernative.io. We monitor all assets and contracts related to the proposed strategies for the ENS portfolio and design different thresholds for risk parameters and severity levels. These alerts are also triggered following Machine Learning models.

Event Potential Cause Decision Action Plan
LST’s price deviation from ETH Market, FUD Keep position Do nothing. Keep monitoring hard and soft data.
Hack, exploit in staking protocol Sell Sell following the most efficient allowlisted route in the Manager Role
Situation that might jeopardize the right functioning of the staking protocol Sell Sell following the most efficient allowlisted route in the Manager Role
Alert on a potential hack in the staking protocol Alert Sell following the most efficient allowlisted route in the Manager Role
Alert on a potential hack or on a governance risk in the AMM protocol Alert Disassemble position Activate disassembler bot

Additional information on our monitoring activity and alerts system:

Monitoring activity Category How
Pool balances (with hard value thresholds and Machine Learbubg set thresholds) Pool levels karpatkey’s dashboard + Hypernative alerts
Tokens prices (with hard values thresholds) Token levels karpatkey’s dashboard + Hypernative and karpatkey alerts
Anomalous activity Protocol, pool and token levels Hypernative alerts
Governance risks Protocols’ level Hypernative alerts and karpatkey’s own tracking tools, research and forums monitoring
Hacks and exploits related risks Protocol level Hypernative alerts
Impermanent loss Pool levels karpatkey’s own tracking tools

8. More broadly, what is the risk management framework?

Karpatkey’s approach to Risk Management was originally presented on the submitted proposal as per EP2.2.5.

9. What are the fees and how are they paid?

The fee structure has been presented and discussed here.

The fees for the investment proposal are comprised of two parts: a 0.5% management fee and a 10% performance fee. The management fee is a monthly accrual based on the non-custodial assets under management. The performance fee is calculated as a monthly yield on top of the base currency.

An initial transfer of 150 ETH will be made to the ens-metagov.pod.xyz wallet to cover the first months’ fees. Starting from Q3/Q4 budgets, fees will be covered through the Meta-Governance budget.

10. Why does the proposal have performance fees?

The proposal includes performance fees to align the interests of ENS and karpatkey. The fees are designed to share the upsides and downsides of the investment performance and to demonstrate karpatkey’s commitment to ENS’s goal of safety.

The performance fees don’t compensate karpatkey for excessive returns or alpha generation, as the endowment is not a speculative hedge fund. Instead, the value-add of karpatkey lies in its ability to monitor investment opportunities, operate the endowment in a non-custodial manner, stay up-to-date on potential threats, and report and react quickly to any unwinding actions required to protect the fund.

While some community members may prefer higher management fees and lower performance fees, changing the terms after the RFP process is completed would not be appropriate per respect to the RFP process and other competitors.

11. Could we have a 6-months trial first and decide from there if we pay karpatkey?

The endowment proposal from karpatkey and Steakhouse is designed for a long-term partnership with ENS. The investment opportunity represents a strong commitment from both parties and requires a lot of work that has already been done (examples here and here) without any assurance of compensation.

The proposal doesn’t have a lock-in period and ENS can cancel the partnership at any time if they are not satisfied. The investments are considered low-risk, and the partnership can only benefit ENS, assuming no unexpected adverse events.

Therefore, a 6-months trial period before making a decision on payment is not feasible for karpatkey and Steakhouse.