ENS DAO Treasury Management - Fixed Rates Using Element Finance

Myself and @MazyGio would like to propose that the ENS DAO allocates a percentage of its treasury’s USDC and ETH holdings into Element Finance’s fixed rate vaults so that the current operating expenses can be reliably and predictably covered and budgeted in advance.

Summary

The ENS DAO is currently electing Stewards for its new DAO working groups structure. This new structure will allow the DAO to continue functioning efficiently and effectively in a more organized way moving forward. Within this new structure, it appears that the Meta-Governance Working Group will be in charge of Treasury Management for the DAO.

It’s reassuring to see how important this topic is for the DAO. We’ve taken a look at the financial data that @nick.eth put together (ENS Dashboard), and understand that, just like the DAO has a large volume of Unearned Revenue, it also has a wide range of operating expenses such as:

With this in mind, we consider that allocating a portion of the Treasury Funds into a set of conservative and safe yield-generating positions can be a solid diversification strategy for the DAO. We propose using part of such allocation towards Element Finance’s Fixed Yield products.

Element Finance’s Fixed Yield products offer a reliable and predictable way of growing the ENS DAO’s treasury. Its fixed nature is particularly well suited for long-term planning and operating budget allocations. The ENS DAO’s treasury holds USDC -which Element’s vaults support- and ETH, which Element supports indirectly through Curve’s ETH/stETH pool (Info: A Guide for Getting crvSTETH). This means the DAO would have to hold ETH/stETH LP tokens rather than native ETH. However, it wouldn’t lose any exposure to ETH since stETH is simply a liquid representation of staked ETH and is pegged to the value of ETH.

Some of the expenses that the ENS DAO has to cover can be quantified well in advance (Foundation expenses), while others are less predictable (grants, Steward/contributor compensation). We want to provide the treasury with the ability to plan budget allocation by relying on Element’s fixed yield generating positions.

Proposed Action

The data available today shows that the ENS DAO holds ~10MM USDC and ~4369 ETH (~13.7MM $USD value at $3250/ETH). Element Finance offers Fixed Yield positions which are liquid and capital efficient. As such, we would like to propose the following allocations:

~25% of ENS DAO’s treasury:

~10% of ENS DAO’s treasury

The Fixed APR in the tables above is provided by Element’s AMM design for the fixed rates positions, while the Other APY is coming from the underlying asset’s properties: Curve stETH LP tokens accrue ~2.5%-3.5% trading fees APY and, since the Curve pool holds about 50% stETH, it gets an additional ~2.3% APY from ETH staking rewards (total ~4.8%).

We’ve aimed for an allocation between 10% and 25% of the current ENS DAO treasury holdings as an initial experiment so that the DAO can explore the benefits of this solution while maintaining most of its treasury available for other immediate purposes. With the yield from this strategy, the DAO can easily cover the yearly Foundation expenses (~$42,050) and use the rest for contributor compensations and grants programs.

We want to highlight that while Element’s fixed yield positions function on a fixed-term basis, and can be exited with the accrued profits at any time, the funds are not ultimately locked up or unavailable for the entire duration.

We’d love to hear thoughts from the ENS DAO community! Keep in mind that this is just an example distribution, and the amounts that have been proposed can be modified.

Sentiment Poll:

  • Allocate 10% of ENS DAO’s treasury into Element Finance’s Fixed Yield positions
  • Allocate 25% of ENS DAO’s treasury into Element Finance’s Fixed Yield positions
  • Use Element Finance’s Fixed Yield products, but under a different allocation structure
  • Don’t use Element Finance’s Fixed Yield product

0 voters

Next steps

Let’s all discuss what is the best option for the ENS protocol! We want to take the community’s feedback into account in order to figure out the best path forward. If there is support for using Element Finance’s fixed yield products, we plan to write a formal governance proposal that reflects the DAO’s best interests according to the community’s feedback.


/fin

10 Likes

:fire:_ :fire: supports this proposal to allocate 10% of the ENS treasury to Element’s fixed yield positions.

Leveraging a small portion of the community treasury to earn <$100k per year in DAO income makes total sense. On top of the income component, being able to lead the space in terms of DAO treasury management and DAO > DAO interactions is another fantastic win for the ENS DAO.

1 Like

I’d like to consider how we can better educate DAO members to make an informed decision if this moves past a temp check. I’m not fully educated on liquidity pools myself.

I pulled up your article on Fixed Rate Interest Markets, which compares this to a Certificate of Deposit. Does this comparison accurately reflect the risk of this investment?

For completeness, I would like to see your proposal include links to your whitepaper, organizational docs, and any contract audits to wholly evaluate Element.fi

Questions

  1. What are the potential downsides of exposing 10-25% of the treasury to this?

  2. Is Impermanent Loss a factor? If so, is this a concern, vs. HODLing, with the potential price fluctuations that may be seen during Ethereum’s switch to PoS?

  3. Does Element have data to verify performance? (Is this necessary?)

This could be a great opportunity for the ENS DAO, but this temp-check appears to be a sell and only addresses the potential upside.

8 Likes

I support the idea of investing assets into conservative yield generating bonds so expenses from the DAO are covered from interest and seldom from the principal.

If elements finance (a respected defi app no doubt) is the place to do that, then we need to have better due diligence. Which steward/working group would be the equivalent of a CFO, @alisha.eth ?

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Great points! Thanks for your questions. Education really is the first step to finding better solutions.

  1. What are the potential downsides of exposing 10-25% of the treasury to this?

Element’s system is designed so there is no market downside exposure for Fixed Rates. You’d purchase e.g. 10,350 discounted USDC (Principal Tokens) for a price of 10,000 USDC on our platform, which will be redeemable for the full 10,350 USDC at term maturity.

PTs are minted when users deposit assets into Element (which then deposits these into a Yearn vault), and are burned when users redeem those assets at term maturity. The discount comes from our AMM logic, which uses the constant power sum formula and makes sure that the price of PTs gradually converge to 1:1 with the underlying asset at maturity. For these reasons, there are never more PTs in circulation than the underlying assets in our contracts.

Potential downsides would be related to negative average Yearn vault performance throughout the whole term, and to hacks/exploits on one of the contracts on the stack:

  1. Element’s pools
  2. Yearn’s vaults (and underlying strategies)
  3. Curve’s pool (for crvSTETH, but not so for USDC)
  1. Is Impermanent Loss a factor? If so, is this a concern, vs. HODLing, with the potential price fluctuations that may be seen during Ethereum’s switch to PoS?

Great question! Impermanent Loss (IL) wouldn’t be an issue. IL would affect funds deposited on Liquidity Pools, for assets whose prices diverge from each other.

For the USDC portion of the proposed allocation, those funds are not deposited in a Liquidity Pool, so there’s no IL there.

For the crvSTETH portion of the proposed allocation, ENS DAO would hold ETH and stETH in a 50:50 ratio in Curve’s Liquidity Pool. There would also be no IL in this case, since the price of stETH follows the price of ETH, especially after The Merge when it’s expected to be directly redeemable on Lido for the underlying ETH, further strengthening its peg. Holding ETH vs holding stETH is very similar in performance, stETH having the advantage of additional staking APR.

  1. Does Element have data to verify performance? (Is this necessary?)

Because of the way the system is designed, the user knows their deposit’s returns beforehand, and those returns are fixed at the time of purchase. When you purchase Fixed Rates on Element, you’re buying discounted assets which will be redeemable for the full value at term maturity.

Thank you for your questions! We want to be transparent throughout this process, and improve the proposal if needed, with the help of the community’s feedback. We’ll add informational links to the post to help with the community’s reviewing efforts. For more information on some of your inquiries:

  1. Element’s docs
  2. Construction paper
  3. Audit reports
2 Likes

Thanks for writing this all up in such detail!

My thoughts on this are that the concept probably makes sense, but I think it’s hard to determine the amount of the treasury we should be thinking about putting in before we have a sense of what the operational budget needs for the DAO would be.

Reason being, in line with the mission of this being a public-goods DAO rather than a profit-seeking one, I imagine we should be seeking an interest return close to the operating costs (as @AvsA alluded to), which would be the most conservative approach. I think that means I would probably recommend we hold off on actually choosing an amount until after the working groups have had a chance to propose budgets.

I think it’s worthwhile to start the discussion now on whether doing this at all is something we want to do though! Does that make sense?

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Agree that may be it a tad too early but certainly a topic for the Meta-Governance team to address in the near future.

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Agree with doing robust due diligence and it should probably be done using a sub-group within the meta governance working group once it is set up. We should also compare Element to other potential options to ensure we are using the best option to meet the needs of the DAO. We may also want to consider Protocol Insurance. In general I think the DAO should take a conservative approach toward its treasury.

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Not to mention the risk of loss for STETH due to an issue with Lido.

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I suggest generalising the proposal by removing the actual product name from the title as it will be treated as a shill like Proposal to automatically manage $ENS UniswapV3 liquidity through concentrated liquidity provider (which I actually asked the proposer to remove the product title) and allow DAO members to research and propose multiple. The intention of the proposal is to earn some yield from the treasury to prevent the decrease of the total asset amount (and diversify the asset allocation) not about using a specific product. I have no negative thoughts against the proposed product but we should make it a consistent rule across all proposals.

4 Likes

I think conservatively putting the ENS treasury to work is a sensible thing to do. Element’s fixed interest products seem like a good solution to me. Insofar as the exposure to ETH can be retained, I think it also makes sense to do this with the DAO’s unearned income, which is fairly substantial.

I think it would make sense for the Meta-WG stewards to chime in, and probably to form a finances sub-wg to handle things like this at their initial stages.

4 Likes

Ok, I wouldn’t use my admin right to remove the product name from the title, but (to the proposer) please be aware that some people see it as a marketing shill if you put your product at the front of your proposal (especially for those who are unfamiliar with your product).

2 Likes

In agreement with all of the points above;

  • Makes sense to use the Treasury to generate passive income
  • The %s seemed reasonable to me, but it would be good to understand if its a “1 shot” and you can’t deposit more, or if future deposits could be made. If I missed it above, apologies. It would make sense to do it in increments, if that is possible.
  • Covering the fixed Op costs with passive income would be a great result, if that were possible
    :slight_smile:
  • We could also opt to fix the total PGs donated in any given period, in order to maintain a certain Treasury position - to me, that would be prudent. Forces each PG request to be given due consideration and avoids the perception there’s a perpetual pool of funding. Whilst there is a reasonable Treasury, it’s not infinite. Some proportion of unearned income x far into the future would be another potential way to do this.
  • Due diligence should be undertaken by the correct WG (pan-offering, but no issue to consider Element as a vendor)

If the DAO adopts a fairly conservative posture, that would be in line with the Constitution, where part of our role it to try and perpetuate the DAO into the future (e.g. help it to survive). Can’t do that if we consume the Treasury too quickly :wink:

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Hey @nick.eth @rrylia a couple of thoughts here

From fund management perspective, it’s a fallacy to automatically assume that it’s a good thing to have “passive income” generated from treasury.

Primarily because there is no such thing as passive income, and at this stage it’s even premature to consider any specific instruments.

As first step, overall fund management strategy should be formulated answering a very broad list of questions such as:

  1. do we use leverage
  2. do we use decentralised instruments only or CEXes are also acceptable
  3. how conservative or risky do we want allocation to be
  4. do we want to have diversified portfolio
  5. how is structure of treasury aligned with broad goals of protocol

this list of questions goes on

In traditional finance, investing into “passive income” instruments, such as fixed income deposits and bonds is considered a conservative move aiming for “wealth preservation”, however the only reason this approach is valid is because underlying mechanism for such instruments have substantially lower risk vs other instruments such as equity or crypto currencies even.

This is not the case for blockchain based instruments. Placing tokens into smart contracts which are “quasi fixed income” may even significantly increase risks and as such render whole purpose of such instruments redundant. I’m calling them quasi fixed income, because they may look like ones on the outside, but their substance is entirely different to what you would normally call FI and as such they have completely different “risk profile”.

to sum this up, this vector of discussion is not productive, because as a first step broad picture should be analysed, and as the very last step you should be making decisions on specific instruments.

4 Likes

I can imagine staking some Eth. It seems like this is almost a public good, to secure the Ethereum network. The problem becomes how we do it. If we do it ourselves, I think it would be a good IRL DAO experiment, to see how well we manage actual infrastructure, tech challenges, etc. The team could obviously pull it off, but adding work to the team seems like not the right thing to do. @daylon.eth might be interested in working on this?

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@rrylia Thanks for the comments! We could’ve indeed given more clarification: it doesn’t have to be a one-off deposit. You can deposit as much and as many times as needed, so it could definitely be done in increments. That was part of the idea behind presenting smaller allocations: the ENS DAO can first try out the platform and later decide on whether to invest more.

@SpikeWatanabe.eth you raise really interesting points! The DAO should definitely create a broad, big-picture treasury management strategy for its funds. Many different things would have to be taken into account for this, and a lot of analysis work would need to be done before a “final” decision on how to allocate the treasury, as well as during whichever investment horizon the DAO decides to set, in order to make any necessary adjustments. Until such work is completed, It’s our opinion that the treasury should be kept in conservative, safe, liquid investments such as the one we’ve presented.

What we’ve proposed here is for the ENS DAO to take the most conservative approach towards treasury management by acquiring an instrument akin to zero-coupon bonds, from the DAO’s point of view. The DAO would purchase tokens at a discount (Principal Tokens) and redeem their full value at maturity. Aside from smart contract risks -which would be present on any blockchain-based solution and could also be insured against (via InsurAce and Risk Harbor, with more options coming soon!)- the substance is very much a Fixed Income approach.

@CPSTL & @MazyGio - thanks for taking the time to bring this idea forward.

It is undeniable the importance of leveraging the DAO"s treasury to earn additional yield and income.

Two quick questions:

  1. What is your and @MazyGio’s involvement with Element?

  2. Why not other fixed yield products? Would you be open to considering different protocols?

Looking forward to hearing your answers here!

Thanks for your questions! You’re absolutely right, I should’ve intro’d myself there.

  1. What is your and @MazyGio’s involvement with Element?

I currently do Community and Business Development work at Element Finance, and @CPSTL is one of Element’s founders.

  1. Why not other fixed yield products? Would you be open to considering different protocols?

I agree that ENS DAO should consider its options before committing to one specific product. That said, I do believe that our proposed solution is the best-aligned with ENS DAO’s conservative nature regarding treasury management. Other existing options have a variety of trade-offs compared to Element’s:

  • Liquidity constraints (Element has the liquidity to facilitate fixed rate purchases of this size)
  • Potential illiquidity of positions (Element positions can be exited at any time)
  • Mechanism for providing fixed rates (Element’s fixed rates are not directly attached to the market’s variable rates)
  • Support for ETH as an asset (with Element, the ENS DAO can keep its ETH exposure)

@SpikeWatanabe.eth Yes, I totally agree. I wasn’t proposing a vote tomorrow on this and have funds committed next week - sorry if it gave that impression! I’d support the steps you set out:

  1. Form a sub-workgroup to work on this exact topic (“Treasury Policy and Management”?)
  2. Brainstorm and agree on the key questions we need the Policy to address
  3. Write a serious of options under each of those proposals
  4. Formulate a draft proposal for review by the DAO as a whole (including the options considered, but dismissed)
  5. Achieve consensus
  6. Go through the DAO voting process to formally adopt it
  7. … and finally, evaluate vendors/options (such as Element) that might help fulfill this brief

I think there are two precursors not yet resolved before this can be fully done, which is some estimation of the amount of Treasury that would be consumed by (a) Working Groups and (b) DAO participation (unagreed, but its probably the hottest topic on the forums right now). But we can get started on it and leave room for whatever the outcome of those is. Or we can even suggest a cap, as part of this subproject.

On the “passive income” point, all I meant is that having a Treasury strategy of solely sitting on crypto assets, as we do now, is unlikely to be the optimal strategy. To equate it to a non-crypto example, its like owning 5 houses and not renting any of them out and hoping the price goes up on all of them as your sole strategy. To me, renting some of them out would be sensible diversification. Like crypto having a bad smart contract, chance of default, price crash, wallet theft - there is a risk that your tenant wrecks the house, storm and your insurance doesn’t pay out, force majeure event, etc - but having the same policy for your entire stock of assets I doubt is the right decision to balance risk and reward.

We do also need to assess in which currencies the costs of the DAO are in - if 99% of outflows are consuming $ENS, then buying and holding lots of USDC probably makes less sense as you’re totally unhedged. I think it would make sense to try and match the inflows and outflows to some specification TBC. That being said, we need to ensure the portfolio is sufficiently diversified to protect us against shorter term price risks :slight_smile:.

I think we’re saying the same thing, I just made a late night rushed post :smiley:

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I agree that we should be putting the DAOs treasury to work. It’s not clear to me that Element is a good place to start for a DAO that is dipping its toes into treasury management.

You can acheive ~5% APR from just ETH staking alone. It would seem prudent to take the lower risk option to start with, removing the risks associated with Element and Curve, whilst still obtaining a decent return. To reduce risks even further, you can diversify that ETH staking across providers (Lido, StakeWise, etc…).

Ultimately we should be building a treasury management framework which consists of varying strategies from high risk through to low risk. Following the recent MG elections I’m sure it’ll become a topic of discussion very soon. @James @nick.eth - I am happy to be apart of these discussions if you end up forming a sub-group.

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