TCD #36 - Diversification of Treasury AURA
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 Diversification of Treasury AURA
TLDR; The value of holding AURA in the treasury has reduced with falling yields. Because of this the treasury will swap AURA into ETH as it becomes unlocked.
The initial investment thesis for AURA was that it was distributing significantly more value than its trading price. This hasn’t been the case for a while now. When the investment in AURA was proposed over a year ago, $1 in vlAURA was distributing $3.4 in BAL without any AURA emissions, compared to $1 in veBAL distributing $0.64. Based on this ratio, the “fair price” for AURA at the time was at $7.45. And as expected, that value has been deteriorating at a high pace due to AURA emissions entering the circulation. Today, these metrics are at $0.40 for vlAURA vs $0.26 for veBAL. So a 5.4x difference has become 1.5x - with a significant reduction in the overall value distributed.
It is expected that without any major changes in the Balancer or AURA ecosystem that yields will continue to diminish. There are no known catalysts on the horizon and so the price of AURA is expected to be correlated with ETH in the coming quarter(s). The price of AURA has been declining steadily since February against USD and ETH and this trend is likely to continue due to inflation of circulating supply.
The Treasury will still be able to incentivize pools in the AURA and Balancer ecosystem via Hidden Hands where it makes economic sense without holding the remaining vlAURA in its portfolio.
Due to the nature of the unlock schedule any bullish catalysts in Q3-Q4 would benefit this decision.
The Treasury should:
- Divest current AURA holdings into ETH as it becomes unlocked using Cowswap market orders on the day each tranche unlocks.
Metrics of Success
How long will the investment thesis take to play out?
The last unlock will be November 23, 2023 at which time all AURA will be swapped to ETH.
Will the treasury recoup funds or does the investment represent an outlay?
The treasury will decrease its AURA holdings and increase its ETH holdings.
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
0 - Swapping into ETH reduces the overall protocol risk of the Treasury portfolio.
- Liquidity risk (0 - 10)
Liquidity risk refers to how easily an asset can be bought or sold in the market.
2 - There is plenty of liquidity on-chain to facilitate the size of this swap.
- 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.
4 - The price of AURA could continue to decline during this program, however there is no way to get around the unlock schedule.
- 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…
- 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.
3 - This decision will require execution of multiple multi-sig calls over several months.
Parameters For Program End
- This program will end if the treasury council deems the yield environment lucrative again and decides on an alternative destination for the AURA, or if all AURA has been sold…