TCD #39 - Diversification of Treasury AURA From DIGG LP
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 From DIGG LP
TLDR; AURA that the Treasury was holding in DIGG LP is no longer being used in the LP. The value of holding AURA in the treasury has reduced with falling yields. Because of this the treasury will swap AURA into ETH now that it is no longer in the LP.
The rationalization of the original AURA divestment remains the same. The AURA that was being used in the DIPP LP is no longer being used for liquidity and so therefore should be divested in a similar fashion.
Here is the excerpt from TCD #36 explaining the background for the divestment:
“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. “
There is currently 137,532 AURA to be swapped and in current market conditions this would be a -4% loss due to slippage. To minimize slippage the Treasury will execute this order with three ladder orders at market and +1% and +2% above the current price. This order will expire after 7 days and be re executed until the divestment is complete.
The Treasury should:
- Divest remaining AURA holdings into ETH using the ladder order described above.
Metrics of Success
How long will the investment thesis take to play out?
The orders may roll over for 3 weeks if the above market orders do not execute, i.e. maximum execution is 3 weeks.
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 using the ladder order strategy suggested.
- 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, the alternative is executing in a market order and taking the 4% loss due to slippage.
- 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.
2 - This decision may require execution of multiple multi-sig calls over 1-3 weeks.