[EP 6.8] [Executable] Endowment permissions to karpatkey - Update #5

🗳️ Meta-Governance Treasury Management
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Abstract

This proposal aims to introduce new permissions for deploying Endowment funds, with a continued focus on diversification and alignment with the evolving market landscape and liquidity.

Motivation

The proposal seeks to request new permissions from the ENS DAO to karpatkey, such that the permissions are aligned with evolving market conditions and protocol updates.

The proposed new permissions focus on strategies involving:

  • Protocol update: MakerDAO migration to Sky Protocol
  • Continuous diversification of Ethereum LST providers: Origin Protocol
  • Continuous diversification to Stablecoin offerings: USDT, Real-World Assets (Mountain Protocol)
    • Why USDT? While USDC is a reliable and widely-used stablecoin, adding USDT enhances the diversification of counterparty and operational risks within the endowment. By holding both, the endowment mitigates potential risks associated with reliance on a single issuer, and USDT’s higher liquidity and wider acceptance in different market conditions can enhance resilience during periods of stress.
    • Why Real-World Assets (RWAs)? Stablecoins, although designed to maintain a 1:1 peg with fiat, carry counterparty and systemic risks that could be difficult to foresee. RWAs bypass these risks by directly linking the endowment to established, traditional off-chain assets. Tokenised T-Bills (or equivalent) provide a reliable venue to mitigate potential risks associated with stablecoin black swan events. For the selection of tokenised T-Bills, due diligence on products available in the market was conducted with the following non-exhausitve criteria: AUM/TVL, underlying assets, liquidity, legal design, and fees; this was assessed in conjunction with suitability for the Endowment (e.g. secondary liquidity). At present, on-chain yields exceed traditional risk-free rates, making immediate RWA allocation unlikely. However, we will continue to monitor both markets for future opportunities.

Specification

New permissions implemented in this payload

  1. Sky USDS
    • Upgrade DAI into USDS
    • Deposit and Withdraw USDS in Spark (Sky Savings Rate)
    • Deposit USDS in SKY Farm & claim rewards
    • Deposit USDS into Aave v3 & claim rewards
  2. Origin oETH
    • Mint oETH in vault
    • Redeem WETH via ARM and vault
    • Curve: whitelist oETH/ETH pool for swap, liquidity provision, staking, claim rewards, unstake, and withdraw
    • Convex: whitelist staking of oETH/ETH LP token, claim rewards, unstake, and withdraw
  3. USDT
    • Deposit USDT on Aave v3
    • Deposit USDT on Compound v3
    • Curve: whitelist DAI/USDC/USDT pool for swap, liquidity provision, staking, claim rewards, unstake, and withdraw
  4. RWA
    • Mountain Protocol: USDM
    • Whitelist Curve sDAI/USDM pool for swap, liquidity provision, staking, claim rewards, unstake, and withdraw
  5. Token Arrays for Swapping:
    • Add the following tokens for Token IN Allowlist in Cow, Uniswap v3, Balancer: [USDS, sUSDS, oETH, USDT, USDM]
    • Add the following tokens for Token OUT Allowlist in Cow, Uniswap v3, Balancer: [USDS, sUSDS, oETH, USDT, USDM]

Implications on the ENS Investment Policy Statement

The ENS Investment Policy Statement shall reflect the above changes, i.e. The ENS Investment Policy Statement will be updated to accommodate allowing US Treasury Bill wrappers as eligible holdings.

We also received feedback that the IPS requirement of holding at least 3 years of DAO operating expenses in stablecoin was unclear as to whether this referred to the endowment or across the ENS DAO wallets. This has been clarified to reflect the latter (at least 3 years of DAO operating expenses in stablecoins across ENS DAO wallets).

The updated Investment Policy Statement has been pinned on IPFS.

Zodiac Roles Modifier Permissions Policy

The payload to be executed upon the successful approval of this proposal can be found here (to be downloaded, unzipped, and dropped into Safe’s transaction builder).

The UI visualization of added (green), removed (red), and updated (blue) permissions is available here, as well as the resulting Tenderly simulation available here.

The permissions in this proposal have been tested beforehand through our Test Safe.

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Our team is reviewing the calldata provided. It has 116 calldata operations inside it, since it’s a lot to review and test we estimate something around 2 weeks for finishing it.

We’ll provide updates here in the thread. Also working closely to the Karpatkey team for speeding up the process.

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Calldata verification

After almost 2 weeks on it and a test file of nearly 10k lines of code, here we are!!

This validation was really demanding due the amount of role changes within the same transaction (116) and the required understanding regarding Zodiac Roles and the contracts being affected.

The simulation and tests of EP 6.3 can be found here. Calldata matched the proposal description as expected. The proposal was simulated by proposing, passing, executing, and asserting the difference between states after the endaoment permission update operations.

Example: Testing that karpatkey was unable to move funds to Origin Protocol before the proposal and then testing the success of this operation after the proposal got executed.

This can be checked by cloning the repo and running:
forge test --match-path src/ens/proposals/ep-6-3/* -vvvv

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Thank you @blockful

@karpatkey - We’ll confirm with you on the Tuesday Metagov call, but the Meta-governance group is supportive of this being submitted for vote.
At this time, we don’ t know of any other proposals to time this with. The next proposal we are aware of will be the Service Provider stream recipient selection, which cannot happen before March 31st.

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Hey @karpatkey — curious to get your take on something in light of the recent basis trade unwind and broader volatility in Treasuries.

T-Bills are usually seen as a safe haven, but that status feels a bit shakier right now. Do you think it’s worth revisiting the specific permissions being requested here?

Not suggesting a major change—just wondering if there’s been any internal thinking around how RWA exposure, particularly via something like USDM, might be impacted if stress in that part of the market continues.

Especially since some issuers are still relatively opaque about redemption terms under pressure.

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Hey kpk.eth—forgot to ask this during today’s meet as I was feeling a bit under the weather:

U.S. Treasuries have long been considered a ‘flight-to-safety’ maneuver, but growing concerns about their declining safe-haven status—driven by fiscal policies that may influence future yield movements—beg the question of whether that status will hold in the short to long term.

Just as an example, the 10Y Treasury yield has slipped 11bps over the last 6 months — I’m wondering how that squares with current market sentiment.

Could you share your thoughts on this, particularly as it pertains to tokenized T-bills in the upcoming PUR? And has there been any consideration given to other flight-to-safety RWA hedges, such as gold?

Thank you.

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Hey @estmcmxci, thank you for your questions - they are very timely and important.

While US Treasuries remain widely regarded as the global benchmark for risk-free assets, we agree that recent volatility, basis trade unwinds, and the US policy backdrop warrant a more critical lens when assessing their behaviour in stress scenarios and broader implications for RWA-backed stablecoins like USDM.

On safety and current market dynamics

T-bills continue to carry zero credit risk in conventional sense, given the US government’s full faith and backing. However, they are not immune to short-term volatilities and dislocations due to idiosyncratic factors (like liquidity risk, maturity transformation dynamics, and dealer/bank balance sheet constraints). This was most recently seen during March 2020 crisis (which impacted USDC peg as well) and recent basis trade stress where leveraged actors were forced to unwind their positions. That said, our exposures on RWAs will be limited strictly to short-dated underlyings with <1 year of maturity. USDM currently has <6 months of average maturity for its underlying, and this means it has very different risk profiles than long-duration bonds. T-bills are a lot less susceptible to duration risk and tend to retain liquidity even during stress events vs belly or long end of the curve (these are more sensitive to interest rate changes due to convexity in bond pricing).

On tokenised T-bills and redemption risk

The questions asked rightly point out liquidity risks and their implications. There are several levels of risks that are mitigated by USDM’s structure.

1/ Underlying asset liquidity: underlyings are mostly in US T-Bills (extremely liquid), and tokenised RWAs (i.e. BUIDL and USTB) which both offer 24/7 real-time redemptions.
2/ Issuer counterparty risk: this is truly the biggest question as off-chain aspects remain opaque. Thorough due diligence of various tokenised issuers has been conducted, including their asset segregation structures and legal redemption terms. Mountain offered detailed governance and risk policies (as required by the Bermuda authorities) and is licensed under Bermuda’s Class F (Full) license. We’re also in contact with Mountain Protocol and will work separately to ensure sufficient liquidity prior to deployment.

On alternative hedges (e.g. gold)

Gold is a traditional hedge that’s also been discussed internally, as there are multiple tokenised gold issuers we could potentially use, such as Tether and Paxos. However, the reason we didn’t include gold is because the suitability of the hedge depends on the context. RWA is a credit risk hedge (against stablecoin issuers); gold is a safe-haven asset, and often acts as a hedge against inflation or economic/political instability. Given the main concern we’re addressing now is credit risk, we believe our hedge aligns with that. However, we’re open to adapting exposures as macro conditions change, but short-duration T-bills still best fit that mandate today.

In conclusion, we still view T-Bills (RWAs) as a complement to achieve capital preservation, and a hedge against credit risk of stablecoin issuers. In future PURs, we’ll also look to include more RWA issuers to increase optionality for the ENS DAO. We’re happy to revisit specific permissions or parameters in upcoming governance proposals if market conditions change and/or community sentiment strongly calls for it.

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Ah, got it — since USDM is backed by short-term T-bills, it’s much less exposed to the kind of volatility that triggers a basis trade unwind.

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Nothing ventured, nothing gained! I presume there will always be some level of counterparty risk with RWAs—as you mentioned, offchain components are prone to remain opaque. It’s reassuring to hear that kpk.eth are conducting thorough dd!

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Got it, so the main focus is to offset credit risk and deploying capital into RWAs via USDM is the suggested approach.

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This was a great breakdown and really helped clarify the rationale behind including USDM in the upcoming PUR. Thank you, kpk.eth!

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This proposal is now live for on-chain voting as EP 6.8.

See the the proposal on Tally or Agora.

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The simulation and tests of EP 6.8 can be found here. Calldata matched the live proposal description. The proposal was simulated by passing, executing, and asserting the difference between states after the operations.

This can be checked by cloning the repo and running:
forge test --match-path src/ens/proposals/ep-6-8/* -vvvv

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Hmm my biggest issue with this is allocation to USDT. Why? Of the stables out there USDT is the one with the shakier ground under it and I personally try to not be exposed to it for fear of Tether ever going under.

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Hey @lefterisjp thank you for the question!
We understand and agree that baseline risk of USDT is higher across most factors, including 1/ transparency on reserve management and counterparties, 2/ regulatory risk, 3/ underlying asset exposures, compared to other stablecoins like USDC. As such, we will not be allocating actively to USDT for treasury management purposes for ENS. Instead, for both USDT and USDM (RWA), we are considering them as contingency hedge - a tactical measure to preserve operational liquidity in the unlikely event of a major disruption affecting USDC or DAI. We understand that this wasn’t clear in the request for the Permissions Request, and will make sure that this is clearly reflected in the Investment Policy Statement.

We believe that USDT is a good hedge for USDC and DAI exposures given its high on-chain liquidity, and track record of notable resilience in live stress tests, such as during Terra/UST collapse (May’22; USDT handled $7B in redemption; both USDT and USDC had depegs that were restored within the day, USDC fared better), FTX collapse (Nov’22; both USDT and USDC had depegs that were restored within the day, USDT fared better), Silicon Valley Bank credit crisis (Mar’23, USDC depegged to $0.88; USDT mostly maintained peg).

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Results are in for ⬡ [EP 6.8] [Executable] Endowment permissions to karpatkey Update #5 proposal: on-chain voting | 153 voters | 1,723,877 votes

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