[Social] [EP2.2.5] Selection of an ENS endowment fund manager

DAO-Wide Draft Proposal
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Status Passed (winner: Karpatkey)
Discussion Thread Discuss
Votes Snapshot

Abstract

Following the RFP process approved in EP2.2.4, the Meta-Governance Working Group stewards have selected a short list of potential fund managers for the DAO to elect to manage the ENS Endowment.

Specification

EP2.2.4 set out a process for fund managers to submit proposals to the Meta-Governance Working Group for consideration as fund managers over an ENS Endowment. The Endowment’s goal is to ensure the long-term viability of ENS by ensuring it can meet its ongoing financial obligations even in the face of reduced ETH price and registration/renewal revenue.

Eight submissions were made as a result of the RFP process, and the stewards have narrowed this down to three finalists. All three finalists are established actors with track records of fund management, and their proposals reflect an understanding of the low-risk, long-term sustainability approach that an endowment should take.

Rather than select a winner themselves, the Meta-Governance Working Group Stewards believe that the selection of a fund manager should be put to the DAO. This EP implements a Snapshot vote using Ranked Choice voting with the following options:

  1. Avantgarde
  2. Karpatkey
  3. Llama
  4. None of the above

Submissions for the vote are listed in alphabetical order.

Following the conclusion of the vote, the Meta-Governance Stewards will work with the winning team to develop an initial treasury allocation strategy, resulting in a separate executable proposal to enact the initial setup of the endowment.

Submission Summary

The table below summarizes the final submissions made by each candidate.

Submission Initial Size Target Size Performance Fee Admin Fee Breakeven Return
Avantgarde 25,000 ETH $100,000,000 USD 12.5% 0.5% 0.57%
Karpatkey $52,000,000 USD $69,000,000 USD 10% 0.5% 0.56%
Llama 30,000 ETH $80,000,000 USD 0% 1% min. $500k USD 1% - 1.28%

Breakeven return is calculated as admin_fee / (1 - performance_fee).

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This EP will go up for vote on Snapshot on the 18th of November at 00:00:00UTC.

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Steward’s View - nick.eth

Having spent a lot of time reviewing the RFP submissions and talking with their teams, each of the three Meta-Governance WG stewards will be posting a short message summarising their personal views on each of the finalists. This is mine. This post represents my personal views and biases, not those of the WG or the DAO.

Avantgarde

Avantgarde and Enzyme are headed by a team who have been around as long as ENS, originally going by the name of Melonport. They have a solid track record building the infrastructure for what is now known as Enzyme, and their code has gone through multiple audits. Although their TVL is currently quite low, I personally think that Enzyme’s infrastructure is well tested and carefully thought out.

I invited Enzyme/Avantgarde to participate in the RFP after seeing a talk by Luca Mossini at ETHBarcelona in July, where he described the Enzyme architecture, which seemed like a natural fit for ENS’s needs. Their RFP proposal has borne that out and demonstrates a solid understanding of what we are looking for.

Avantgarde’s proposal shows a cautious approach primarily focused around lending USDC to well-established protocols such as Aave and Compound, and staking ETH via various staking providers.

Using Enzyme to manage the funds means that the DAO will be required to approve accessible trading strategies for the fund managers, after which the managers can make changes to the fund within those parameters. The DAO can at any time withdraw the funds or change the set of allowed strategies.

Enzyme has also proposed a token swap of up to 50k MLN tokens for 75k ENS tokens, which the DAO could choose to accept or reject if Enzyme/Avantgarde are selected as the fund managers.

Avantgarde/Enzyme’s latest updated proposal also includes financial reporting similar to Karpatkey’s (see below).

Karpatkey

Karpatkey is a well established player in the industry, and notably manages Gnosis’s treasury. Their proposal describes a cautious approach to earning yield via liquidity provision on low-slippage pools such as cDAI-cUSDC and stETH-ETH.

Karpatkey proposes to use Zodiac, a Gnosis safe plugin that allows a fund manager to be authorised to perform certain actions on a Safe. The DAO would transfer endowment funds to the safe, which can have the DAO itself as sole keyholder, and subsequently approve a set of operations the fund manager is allowed to execute via Zodiac. This is similar in effect to the structure of Enzyme’s vaults.

Notably, Karpatkey was the first to propose including broader financial reporting as part of the package they bring to the DAO, including budgetary forecasting and reports on the financial impact of specific EPs. This is a valuable service that the DAO should consider seriously even if Karpatkey is not selected.

Llama

Llama is another well-established player in the industry, managing Aave and Gitcoin’s treasuries. Their proposal provides less detail on proposed investments, choosing instead to leave those as a matter of negotiation post-acceptance, but mentions lending to Aave and Compound, as well as staking ether via stETH and rETH.

Unlike Karpatkey and Avantgarde, Llama plans to manage the endowment directly onchain; all changes to the endowment would require direct execution by way of DAO vote. This minimises smart contract risk, but also places more burden on the DAO for day-to-day management, and limits the ability of the fund managers to react rapidly if needed.

Llama’s fee structure is different to Avantgarde’s and Karpatkey’s, in that it has a higher admin fee but no performance fee, and a minimum annual fee of $500k USD.

At $1300/eth and an initial size of 30k ETH, this is more cost effective than Karpatkey’s proposal if yields exceed 7.8%, and more cost effective than Avantgarde’s if yields exceed 6.3%.

At an eventual size of $80M USD, Llama’s proposal is more cost effective than Karpatkey’s proposal if yields exceed 5%, and more cost effective than Avantgarde’s if yields exceed 4%.

My vote

I will be voting for Avantgarde/Enzyme. I believe their track record in the industry distinguishes them as an excellent partner, and the technology they have built is well suited to managing ENS’s endowment. Further, the DAO structure of Enzyme has good value alignment with the ENS DAO.

A reminder to anyone delegating to me that redelegation is currently free; if you do not agree with my vote, consider redelegating to another steward who better represents your interests!

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I’m not feeling to hot on this at all. Too much to risk in current market conditions, hacks, exploits, theft has been absolutely rampant. I really really think that putting treasury assets into any new contract is a not a good idea right now.

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Initially I was weighing towards “none of the above”. Admittedly my due diligence was somewhat limited, due to time constraints, but I would like to share some thoughts.

I’ve seen zoom presentations, spoken with some of the teams in person, obviously had a look at formal proposals. I would like to benchmark this process vs my experience as corporate finance professional. Frankly my main objection here is that I don’t see a strong conviction that any provider is spot on.

My ideal client / provider relationship is where client has a very clear understanding of the kind of service he will be receiving, how it will be provided, is the price justified to him and so on. In that way provider should never be hired just for the sake of it. Making sure that this is so, is mainly a responsibility of a service provider - that is to educate the client and manage expectations.

I was talking with meta group and attempted to conduct very light informal casual even client / consultant interview, trying to gauge the general sense of where this is all going, more of a thought provoking conversation rather than any kinda of assessment. I raised some of the questions on the “economics side of things” and frankly the response was such that I just couldn’t see a fairly clear and robust picture. What this tells me, is that work performed by any provider to establish that kind of quality client connection is insufficient.

Voting “none of the above” is a way of saying that we could use more time to make sure that service provider is right and potentially conduct wider “RFP search”.

My alternative reasoning was that the very base layer of this operation is clearly engineering. It is the kind of language developers can understand and make sure that fund management is transparent and secure. It appears to be a natural limitation of the process, as in that talking “engineering” in the first place is probably the most efficient way to run this process.

Universe of blockchain financial instruments admittedly complex but not that wide, on top of it if you factor in the fact ENS funds should be managed very conservatively - then it narrows the scope of instruments even more.

In that way, building that work on a robust engineering layer and subsequently tweaking approach towards “economics side of things” on the go feels like a fairly efficient and prudent way to approach the task.

Suddenly Nick is saying that

That just organically shifts my preference from “none of the above” towards Avantgarde.

Either way, I’ve spoken with some very interesting people along the way - very well qualified competent professionals. I wish everyone best of luck, there are quite a few heavy weight delegates involved in the process who are (I’m guessing) still undecided.

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While my inclination is to lean to Avantgarde given my view of what ENS needs to do a Treasury Manager is overkill and invites unnecessary added risk. I am well familiar with MelonPort though not as familiar with Enzyme and I have heard many times contracts are audited, rock solid etc. only to find out later they weren’t. I still have my caveats. Right now all ENS needs to do is to start DCAing incoming ETH to USDC to raise next 3 years of funding in cash. I don’t believe ENS needs to waste time with a manager and pay extra fees for any ‘Treasury Management’ at this point. I may be willing to change my mind in the future once significant cash is in the Treasury to fund operations.

Given rate of income here getting to 12M shouldn’t take more than 6 months. I think ENS should put together a higher level team to discuss what the real needs of the DAO are. I have significant concerns about keeping anything over 1/2 of the treasury in anything but stables and the lack of real volume and liquidity in the ENS markets generally.

As stated previously I will be voting my delegated ENS on None of the above.

MakerMan.eth

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Hi there, just chiming in here to clarify the Melonport / Enzyme relationship for the record:

  • Melonport (a private company) built the original Melon Protocol
  • The Melon Protocol was deployed to mainnet in the winter of 2019
  • At that time, Melonport was dissolved and governance of the Melon Protocol was passed to the Melon Technical Council DAO
  • The Melon Technical Council coordinated a rebranding in q4 2020, changing the name of the protocol to Enzyme (and the council’s name to the Enzyme Technical Council)
  • In the two years since, the Enzyme Technical Council has continued to maintain the protocol, continuously upgrading its feature set and capabilities

Cheers,
Erin

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My vote is tending towards KarpatKey, then Avant Garde, then None of the Above. Honestly I think I would rather put a proposal to put all funds in Balancer/Compound/Aave rather than paying 500k for a consultant to tell us to put all funds in Balancer/Compound/Aave, so Llama is a no for me.

I’m mostly concerned about the underlying tech: The main issue for me is Enzyme vs Gnosis Safe. I’ve heard about Melon port from the old days, but never personally used and don’t know anyone who uses it so I have no experience. On the other hand I know, use and know lots of people who use Safe. That already tells me something about the maturity of both codebases.

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I’m going to vote None of the above. As has been the case several votes now, I don’t feel giving an articulated reason for my opinion will change anybody else’s, and my vote is too small to matter anyway. So I guess the only reason I participate in situations like this is for some archivist years in the future to see it and be like “…huh. interesting.”

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To be, or not to be… active in financial management.
The sad events of these days reiterate that the apple never falls far from the tree and we should ask ourselves if by reinventing the tools for finance we risk only shedding the skin of what is the real weak point… human behavior . This should always be a warning in everyone’s mind: Tools alone do not improve the inherently sick way in which finance operates.
On the other hand, DeFi wants to demonstrate that there is a better way to operate and only positive experiences can support such innovation; in addition, a DAO with a treasure has a moral duty to administer it and must undertake the commitment to act for the best and not stand still due to uncertainty. Therefore I think we have an obligation to act but we must preserve freedom of action and accountability, the possibility of changing our minds and correcting our choices, all while reducing the risk of losses. Hard but due! This reflection for now leads us to eliminate the None of the above option.

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I want to emphasise that the goal of the endowment is not to secure a short to medium term runway for ENS - we already have that, and registration revenue continues to exceed our expenses.

The point of the endowment is to ensure ENS’s long term sustainability, even in the face of an extended recession and reduced registration/renewal revenue.

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Voting for this is now live on Snapshot.

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Stating for the record that this will be the first vote I miss, because I can’t just select “None of the above.” Edit - nevermind.

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Stewards View: griff.eth

Wow! I am very torn between Avantgarde and Karpatkey. I will need input from my constituents to vote, but will break it down as I see it.

I’ll start with the two answers I don’t like and why, then talk about what i like about the other 2 options:

None of the above

We are leaving a lot of money on the table by not actively managing our holdings… We should pay a professional group to do it, not just yolo with some community members with other roles and priorities.

Llama

Requiring a DAO vote for every change is a nonstarter, honestly i stopped reading after that… but they were already at a huge deficit because i don’t like their fee structure. I would prefer to share the profits to align risk and rewards. Incentive alignment is a thing I care about.

Karpatkey

Karpatkey is THE leader in this space. They have 100’s of Millions of US dollars under management and I love their reports in Gnosis DAO, honestly, I check them on the reg for alpha :-D. They have a lower performance fee than Avantgarde and are using gnosis safes to manage the funds, which reduces smart contract risk, although zodiac does add some extra risk here, its still much safer than managing these funds with Enzyme’s very complex contracts that have not had the same level of TVL in them for as long, which slightly triggers my PTSDAO. I love that Karpatkey’s strategies are focused 100% on defi and also think they are pretty good strategies. It is also a plus that since they are just using gnosis safe, there is a lower barrier to entry to use other options that exist in the market.

Avantgarde

Avantgarde are the OGs of OGs in this sector. They have been doing it for as long as I can remember and Nick.eth prefers them, and I am sure he has done his research on it so this means a lot. They have much less assets under management than Karpatkey which probably means they will focus more energy on us than Karpatkey would. Also supporting Avantgarde helps diversify this corner of the crypto space which is always a plus. And if we open up the allow list we can let the community also invest in this fund along side of us, and frankly, that is just really cool! They also are taking this beyond a service agreement; it is an offer of a deeper partnership as they have offered us a seat on their board and a fat token swap. This is all very attractive IMO.

Portfolio Summary

I love that both Karpatkey and Avantgarde are taking their fees based on the assets they are working with, so they only get a performance fee on ETH if they get more ETH the price of ETH doesnt matter, and the same for stables (obv).

ETH Strategy

Avantgarde is very conservative with the ETH side of the portfolio, only doing vanilla staking.

Karpatkey does a lot of pools stETH/ETH pools and other more flavorful ETH staking options.

Stable Strategy

Avantgarde is taking more risk using centralized services like Maple and Goldfinch to earn larger returns then what defi can normally give.

Karpatkey is taking a more conservative approach, suggesting to put Aave and Compound interest bearing stables in pools to also earn trading fees along side the interest.

Karpatkey is proposing the better portfolio IMO

Personally, I like Karpatkey’s approach more as I don’t really want to support centralized services with ENS, but this is a minor factor in the overall proposal.

Final Decision (Edited)

  1. Karpatkey
  2. Avantgarde
  3. Llama
  4. None of the above

Karpatkey gets my nod, it was a real close call, Avantgarde is a great team and did a fantastic job promoting themselves during this process, but in the end, their use of custom smart contracts is a little more risky IMO than using Zodiac + Safe. I like Karpatkey’s investment strategy for ETH better and they have a great history with Gnosis DAO.

I was happy to learn more about Maple and Goldfinch and how Avantgarde works with them, I am less worried about those issues after further research.

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You can select “none” as your first preference, followed by the others in your “least bad” preference order.

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I get that, but I don’t understand why I need to rank the others if my choice is “none of the above.” When voting for delegates, you could just select the options you wanted without having to rank every option. Not a big deal though, no need to discuss it any further.

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In case you or others care: because it allows you to express a preference amongst the alternatives if “None of the above” cannot win.

I’m not sure why Snapshot requires you to rank all the options, but as far as I know it’s always strictly better (from a “my vote will count” POV) to submit a complete vote.

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Thanks to all the Meta Gov Stewards who put time and energy into this. I know there were many hours of complicated coordination and deliberation. :pray:

Overview

My belief is that each of the three proposals describes strategies that are more complex and require more active management than the ENS treasury currently needs. The cynic in me worries that the complexity is a byproduct of a need to justify fees as opposed to complexity being the right answer for the treasury.

Specifics

Avantgarde’s proposal is fairly conservative in strategy, but will use both collateralized and uncollateralized loan protocols, as well Goldfinch and Enzyme vaults.

Karpatkey’s proposal commits to keep the funds all on chain, but still uses a number of different instruments for diversity that introduce contract risk.

Llama’s is the one I partially prefer because it seems closest to the DAOs ethos. It’s simple and it actually leaves the funds in the DAO Treasury. We’re all advocating self-custody in everything as the right stratgey for the space, so having a solution where the DAO retains the keys to the edaowment/treasury wallet is attractive. This would keep us in the “Not your keys, not your crypto” style of bulletproof safety. That said, this proposal comes with the downside of needing DAO votes for investment changes at regular intervals. While it’s not perfect, I don’t see that as a disqualification. It should be pretty painless if done with other budgeting or executable votes. If the voting worries anyone or it seems like it’ll be too much trouble, you’re welcome to delegate your votes to me and I’ll commit to track the proposals and vote for the conservative option each time.
Llama’s desire to become an active economic advisor to DAO structure, strategy and budgeting is also a great value add.

While I like that Llama’s fee structure is flat in this scenario, I do worry that $500k is still high. That could fund two full time employees working 40 hours a week on the ENS endowment, and I think that’s certainly more resources than we’d need.

Makerman made some excellent points in his posts, and he led me to believe that “none of the above” might be the best answer. That said, out of respect to the meta-gov stewards who put tons of work into refining and curating these proposals, I’ll vote the following way:

1. Llama
2. None of the above
3. Avantgarde
4. Karpatkey

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To be clear, all three proposals have this property; the others provide limited authorisations for the fund manager to make certain transactions, but custody remains with the DAO.

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Delegate Perspective - slobo.eth

The following are my views and voting rationale as a delegate of the ENS DAO.

My number one concern is the sustained and continued funding of ENS labs which draws $4.2m in funding per year in stables. ENS Labs is critical to the health of Ethereum Name Service.

The treasury has 2.5m in stables, as of Nov 17, 2022 per tally.

This amounts to less than a year worth of runway. Until there is at least 2 years of stables in the treasury I cannot in good conscious put ENS Labs and thus ENS at risk. Therefore, my number one choice is None of the Above.

To reiterate, I consider the continued funding of ENS Labs as an existential risk to the protocol and want minimize risk as much as possible. Having at least two years of runway in stables makes sense.

I realize that recent daily eth revenue exceeds the funding demands.

Eth is volatile.

Revenue is volatile.

Stables are stable.

My second choice is Llama because I perceive it to have the lowest smart contract risk compared to the other two. I lack the requisite skill set to evaluate smart contract risk for the other two companies and thus rely heavily on Nick’s judgment for my number three choice.

My vote:

  1. None of the Above
  2. Llama
  3. Avantgarde
  4. Karpatkey
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