[Social] Routine DAO treasury management

It seems to me that the DAO “running out of money” or not being able to continue operating without a timely financial plan put into place is presented as a prerequisite fact to any other discussion, but I feel it’s important to first discuss…

  • What are the absolute essential operating costs? Bare minimum to continue operations? The core infrastructure of smart contracts ideally operate autonomously after a certain point, no?
  • What are the costs that aren’t strictly necessary, but are nice to have? Eg - enrich the lives of those that receive the income?
  • What are the costs that most reasonable people would consider superfluous? Completely unnecessary or excessive? An example I can think of off the top of my head would be 5 star lodging and 1st class plane tickets. What was lodging expense last time… half a million dollars?

I guess what I’m getting at is that I would feel way more comfortable discussing future financial security plans if I first had some kind of thorough audit information to show what expenses are actually required to “continue operations.” Because without a doubt it isn’t the huge numbers being passed off as essential currently.

And no, I’m not saying everyone should work for free or some other hyperbole like that. Just that I feel it smarter to clarify the most vital expenses before attempting to make a plan to cover ALL expenses, both necessary and extremely unnecessary.

I think building a a large contingent of stables is part of the ‘long-term future of ENS’. We have a significant revenue coming in, and as that gets larger, I would like to see our appetite for risk reduce rather than increase. The current proposal is, keep a static amount of runway (24 months) that gets topped up by the endowment, and the endowment is dynamic that gets topped up by income from registrations/renewals. I would propose something that is dynamic on both sides that would build a solid endowment, but also build a larger security net. A proposal could look like the following:

  1. The DAO shall at all times aim to keep funds equivalent to 24 months expenditures available in a combination of USDC and DAI in its primary timelock account.
  2. This figure will initially be set at $16,000,000 USD. After each term’s working group budgets are approved by the DAO, the Lead Steward shall provide an updated estimate of the DAO’s expenditures for the next 24 months.
  3. The .eth controller funds will be split 50:50 between the timelock and the endowment fund . ~17500 ETH will be sent to the timelock and converted to stables approx USD $21.5 mil giving ~2.5 years runway. ~17500 ETH will be sent to the Endowment fund contract.
  4. Every month 50% of the ETH sweeped from the .eth registrar controller contract will be sent to the timelock and converted to stable coins. 50% will be sent directly in ETH to the Endowment fund contract to be invested according to the rules established for that fund.
  5. If the runway in the DAO timelock contract drops below 2 years of runway (initially set at $16 million), a greater portion of the revenue shall be converted to stables and sent to the timelock.
  6. If the amount of revenue is not enough to top-up the DAO timelock to 2 years of runway, the endowment fund will help to top-up the timelock.
  7. Upon passing this proposal, the DAO will vote to implement an executable proposal that:
    1. Converts sufficient 50% of the ETH from the .eth controller to USDC.
    2. Implements a non-custodial system to automate the regular collection, conversion, and transmission of revenue. This may make use of an automated process with limited permissions to conduct these actions without taking custody of the funds.

If the endowment is doing a good job, we would expect the amount inside the endowment to grow and exceed the ratio of DAO wallet to Endowment. If we believe the endowment is stable/performing well/confidence grows/a higher runway in built-up we could lower the ratio sent to the timelock, and increase the ratio sent to the endowment in an additional proposal.

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I like this, I would prefer if the DAO held ETH beyond the runway instead of converting it all to stable coins. This gives us an interesting benchmark to compare the endowment to. Can the endowment beat a very simple strategy of holding stable coins and ETH?

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This proposal isn’t concerned with how money is spent, it’s concerned with ensuring that we have funds in a stable currency. How they are then spent is out of scope for this proposal.

Can you elaborate on why you believe it’s advantageous for us to do this? If we don’t need the funds for runway, why are we sitting on them doing nothing when they could be helping ensure ENS’s long-term future?

I disagree. We will already have ample exposure to ETH (>50% of our current treasury) in the form of unearned income. Adding more is adding risk to ENS’s sustainability in the hopes of more return, the opposite of what we ought to be doing.

It certainly ought to, as it’s predicated on low-risk investments of stablecoins and ETH that are risk-neutral with regards to those currencies. The only way it would do worse is due to hacks etc.

Oh so this whole discussion is only about earned income? We are not discussing sending 70% of all of our ETH to the endowment?

If the goal is “having enough for ENS to continue development long term” we need to make sure we have capital available no matter the circumstances. I think this gives us an advantage in the short to medium term where we aren’t at any contract risk (barring the timelock/governor) in any DeFi protocols. ~2 years runway is a good start, but doesn’t seem enough get us through a significant bear market + black swan event. E.g. if something happens with a significant portion of the endowment + revenue goes to 0 then we will be up against the wall. If the endowment is there to create a long term future for ENS, the DAO timelock treasury is there to ensure the short-medium term future of ENS.

I think runway is something that flexes over time, so in the current proposal, we are relying on the lead steward to update estimate expenditure to make sure we have enough, but if we codify growth into the stable timelock treasury, we could avoid a situation where the expenditure grows significantly in a short period of time, but funds are already allocated in something inside the fund that if sold immediately could cause things like slippage. Or if the black swan hits us during a period we thought we had 24 months of expenditure but actually short-term growth means we have much less.

So to me the advantages are:

  1. A larger stable treasury to fall back on incase of a black swan
  2. Gives the DAO more breathing room (with more runway) to know much we really need in the short-medium term. With more time for decisions, since DAO decision often take longer than normal companies.
  3. Codifying growth into the runway without needing as much input from the lead steward
  4. Allowing a period in which the DAO can get comfortable with how the endowment works with optionality to change the ratio as we review the performance of the fund.
  5. Keeps a greater ratio out of DeFi contracts that have greater contract risk than holding the coins themselves.

Even if we started with 16 million USD instead of 50% of the current treasury, I’d be in support of building the short to medium term treasury of ENS independent of the lead steward having to manually increase expenditure (that is based on estimations that could change significantly over the course of those 24 months)

The unearned income would go to the endowment to be managed while retaining exposure to ETH. That’s not the subject of this proposal, though.

I agree - but I think enough runway to hold us for 24 months with zero revenue is more than enough; going to zero revenue and losing the endowment is more than a black swan, it’s the world telling you to knock it off.

At some point we end up committing so many resources to trying to insulate against extremely unlikely scenarios that we fail to insulate against much more likely ones. In my mind having the endowment is better security against a long-term threat to ENS’s income than having a large amount of cash sitting around.

I see an argument for “24 months isn’t enough” - though I disagree with it - but I don’t really see the argument for having it just grow and grow unbounded. We should have a firm idea of how much we think we need to set aside, and the rest should be doing something useful.

Right so I think there is value in the DAO holding some ETH that is not under the management of the endowment, and also naturally not part of the runway since it’s in ETH.

I echo a sentiment that the DAO retain a large portion of any ETH exposure that would be intended to remain as ETH, (if applicable) to avoid any unnecessary management fees, on possible upside performance medium-to-long term. And to reduce any third party risk.

I don’t agree with this. Often these things can spiral together. If a blackswan event happened on the endowment, it’s likely this would have spirally effects on the confidence of ENS surviving. The naming landscape could be much more competitive at that time and funds for registering/renewing names could flow elsewhere.

I agree with this. I just don’t think it’s mutually exclusive.

I don’t necessarily think 24 months wouldn’t be enough if we could know exactly how we will grow in the future. It definitely restricts us to budgeting very tightly and for much larger expenses we’d need to really go through very long discussions on how/when to liquidate part of the endowment to fund something unforeseen - more than likely we wouldn’t be nimble enough to do this.

I wouldn’t be against binding it to an upper limit. It could be 24 months as a lower limit, 48 months as an upper.

Can you elaborate on why you think that?

Even if revenue was 1/4 what it is today, we would still be bringing in more than we spend. If it was 1/8th, our 2 year runway would be more than 4 years.

This seems like an argument for a longer runway - but not one for letting it grow unbounded. What purpose is there in holding more liquid funds than we could foreseeably need?

It is insofar as every dollar we hold in cash is a dollar we don’t have in the endowment.

Can you elaborate on this? What sort of expense would require us to dip into the endowment that shouldn’t involve long debate?

I keep reading those threads filled various comments and suggestions to modify the strategy. May I suggest something with regard to this process.

From my experience, from similar processes where I used to work hands on, typically it would be organised in the following way, with some modifications of course, but this is the general idea.

  1. We are missing a single table, where at least one “basic” or call it “general” scenario would be displayed. It would be clearly formatted, so that anyone can read it. We can incorporate various rules and tools to allow participants to introduce changes and suggestions to this table, so that it would still be in interpretable format after suggestion is introduced. This would require some “hard” rules, which everyone has to follow in order to introduce changes, and “track changes” tool, allowing to clearly see what were the changes and how they would impact “basic” scenario.

  2. Within the framework of document (1) build QA tracking log, which would include fields like - author / question / date of question / response / who responded / when / history of responses / maybe assign some rank to what extent suggestion was acceptable / actions taken as in were there in changes introduced into “basic” scenario as per this discussion / what was the impact on the output value

This is certainly not a fixed approach, more like a suggestion how make a process more efficient. It would allow to easily track input from the community, and track the debate. When this document would actually be implemented, it would most likely contain different / modified structure to what I outlined above.

Google sheet perhaps, with different rights for everyone to manage the document. It would require some effort, but I could build this.

Otherwise if this discussion would continue in similar fashion, very soon, forum will be overrun with threads, suggestion, numbers and so on. As more time passes by like this, it would be increasingly difficult to disentangle everything. Some good ideas may be lost in the process, some people may feel unhappy about having their ideas not being considered.

Once this framework is setup, and rules to edit it are established I would suggest to push responsibility of actually displaying information correctly and in readable form to the person who is making a suggestion. Alternatively they could approach me for example, I would interview the person, to fully understand the nature of idea and implement it in the table.

EDIT: this look a lot like something I’ve seen in the past - very long chain of e-mails from different people, putting in a lot of different, sometimes conflicting opinions. It would be impossible to keep track of and put together efficiently. Corporate setting is more rigid, in a sense that there is less space for such discussions, because the final say would be with director who would steer the discussion. Even though that this is the case, these things can get messy. Given that we are a DAO, and collective input is a basic requirement, then building a tool like I described above is pretty much a necessity.

EDIT2: How do I know all of this? I used to work in corporate finance, executing fairly complex deals. These kind of processes involve careful and disciplined management of financial information continuously flowing from different sources.

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Monthly revenue has reduced to 1/4 to what was in May. 2 years ago today it was 1/12 of what we have today.

For things we cannot foresee. Maybe I’m being too conservative in this regard? But it’s just a gut feeling.

I don’t have an answer to this, but as a DAO, we move much slower than private companies making decisions. Possibly something that we as a community did not foresee and that is time-sensitive. With positions in the endowment, we have to make two decisions: how to properly exit a locked/staked/LP’d position in the endowment and whether or not to deploy funds for an unforeseen circumstance. I’m not saying it shouldn’t be a long debate either, I’m saying since things will likely be a long debate and we should account for that in our runway.

Right, and November revenue was $1,667,822 - $20,013,864 annualized. It could still diminish by 60% before we would even have to consider touching our runway funds.

I still don’t understand why that would imply ever increasing amounts of runway needed. Can you put a number on how many months your gut says we need? It makes more sense to me for that to be a fixed figure that is revised periodically, than one that just gets automatically increased over time.

This would need to be a large enough expense that we can’t satisfy it with runway funds, though. I feel like we should at least be able to quantify what that might be if we’re expected to plan for it.

Just to diversify our ETH exposure between managed and unmanaged.

The managed ETH is still only invested with their advice and our approval, though. What’s the benefit of having unmanaged ETH?

Hello ENS community! I am David, a builder of ownable and decentralized off-chain automation systems. I’ve been reading this discussion with interest and, while there are differing opinions, several commentators agree that there is a pressing need to begin managing the DAO’s runway. Clearly, once this would be in place, this runway would need to be maintained.

I would like to share with the community, in case it helps, the possibility to implement a decentralized off-chain system to automate the routine management of the ENS runway, directly owned by the ENS DAO.

I’ve put together an initial description of how that could work here. Any comments are welcome! Thanks.

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Well to protect us from ourselves to a certain extent. Incase every safeguard we have fails, we still have some ETH that’s outside of the whole management system. We also know it won’t get lost to a bug in aave or something like that. Unless you think management introduces 0 risk then that’s where the benefit is, either less risk or just a somewhat decoupled risk.

I don’t think it introduces zero risk - but I think that if we’re concerned about insuring against that, the runway is the way to do that, not holding speculative assets directly.

Ok, let’s agree to disagree at this point!