Valuing An Investment - Managing Stable Coin Risk
The performance of each treasury asset and the treasury as a whole must have clear accountability to allow future governance by BADGER token holders. The following is research by $1500Badger on Treasury Stable Coin Risk Exposure.
TLDR; Due to recent information BadgerDAO’s Treasury Stablecoins may be susceptible to systemic risk in the Banking industry. The Treasury should divest 30% of its USDC exposure into LUSD.
Silvergate capital and Silicon Valley Bank have experienced deterioration and have at this point lost nearly all depositors funds. Circle, which manages USDC withdrawals, has announced that they had assets in these banks estimated to be ~%2.75 of their total assets; the majority of Circle’s assets were revealed to be in US Treasuries. Given the number of additional banks Circle has cash holdings with the total potential losses could be > 10%. This could not be easily met with treasury yields within shorter time frames (1-2 years). Considering BadgerDAO’s stablecoin holdings are intended for short term (1-2 years) there would not be enough time for this hole to be filled and restore the stable coin to $1 if a depegging event occurs. Based on this the probability of a depegging event in the given moment is estimated to be near 10% or possibly higher. In the event of a depegging funds could possibly go to $0.
Crypto companies keep USD in banks equal to the value of potential cash requirements including redemptions. The remainder in treasuries.
If 22% of Circle reserves are in banks, that equals 100% of estimated cash requirements.
If it’s assumed US Treasuries are not accessible, then the risk is that 25% of immediate cash requirements are in Silvergate and SIVB and not available.
Cash Requirements - 25% unavailable, 75% available. 33% de-pegging risk.
If it depegs, it creates a run on the bank which is emotional, not rational. This can cause price = 0.
There are few options on the Ethereum network that the DAO multisig has exposure to that can act as a hedge against this risk. The best initial option is to divest 30% of treasury USDC exposure ~$700,000 into LUSD.
The Treasury should:
Divest 30% of Treasury USDC exposure into LUSD
Metrics of Success
How long will the investment thesis take to play out?
Indefinitely. The funds will remain in LUSD until a new option is found.
Will the treasury recoup funds or does the investment represent an outlay?
The treasury expects LUSD to remained pegged 1:1 to USD.
What are the risks associated with each investment?
Protocol risk (0 - 10)
Likelihood of a smart contract or a system of smart contracts (protocol) is exploited or funds are lost
2 - This investment takes on the smart contract risks of the liquity protocol.
Liquidity risk (0 - 10)
Liquidity risk refers to how easily an asset can be bought or sold in the market.
2 - LUSD has maintained peg through many severe market events and had ample liquidity.
Market risk (0 - 10)
Market risk is the risk that arises from movements in stock prices, interest rates, exchange rates, and commodity prices. Metrics to consider : VaR, skew, sharpe.
2 - There is a chance LUSD depegs due to irrational behaviors in extreme market conditions.
Credit risk (0 - 10)
The risk of loss from the failure of a counterparty to make a promised payment, this should cover airdrops expected
0 - There is little to no counterparty risk in this decision; the counterparty risk is instead transferred to the protocol risk.
Execution risk (0-10)
How long will it take to execute, how many signers on a Multisig or queue of things that must be signed first.
1 - This decision requires little execution and low demand on the multisig.
Parameters For Program End
This program will end when another stablecoin is found to have better risk features