BIP 37: Treasury Diversification through Strategic Partnerships

Category: Treasury Management
Scope: Diversify a capped portion of the treasury to reputable groups committed to providing BTC liquidity and strategic resources, use assets to start a “Badger Backstop” Insurance Fund
Status: Accepted

Thank you to @Spadaboom for his guidance on this and @DeFiFrog and the rest of the core team for their invaluable feedback as I put this together!

Objective: To start a discussion around how Badger DAO addresses strategic partnerships and maximizes the benefit from any allocations made by these protocol participants.

TLDR: Over a three month period diversify a portion of Badger Treasury through strategic partnerships from a maximum pool of 4% of BADGER supply. Strategic allies will commit to deposit BTCs in Badger Setts. This will: Bring bear market sustainability. Start a Badger Backstop Fund. and Bring in Key Strategic Resources we need to grow.

Overview:

“Badger DAO has a singular purpose… accelerating collateralized Bitcoin across blockchains.”

Badger now sits at about $2 Billion TVL, roughly 6% of the total DeFi markets TVL. With some housekeeping out of the way (DAO Decentralization, Long Term contributor incentives, and The Grants Program), it’s time for the DAO to take further actions to ensure continued success.

Badger Treasury Assets (BADGER, DIGG) currently sit in the $600MM-700MM range. With appreciation of native assets, and a desire to maintain sustainable operations through less favorable market conditions, Badger should begin adopting a barbell investment strategy.

When managing risk your positions should fall on either end of the risk spectrum, some high risk, some no risk. We can consider non-stable assets to be high risk portfolio allocations.

Badger Backstop

With diversified funds Badger DAO can do a number of things: 1) attract higher capital inflows, 2) receive capital to help the DAO through bear market conditions, 3) use dollars in treasury for acceleration of critical goals.

The Badger Backstop fund falls under 2 and 3, providing safety for users is a critical goal. This will give the DAO capital to set up an insurance fund for users depositing in our products which will increase user trust and lead to even greater TVL being stored in the Badger ecosystem.

Two Paths

The DAO Treasury has two options:

  1. Diversify assets on the open market
  2. Diversify assets to strategic investors

In September 2018. MakerDAO received a $15MM investment from A16z, representing 6% of MKR supply. 75% off it’s all-time high, the MKR market cap was sitting just under $300MM, this helped them weather a bear market. Uniswap’s Hayden Adams recently talked about the benefits Uni has gotten from it’s investors including funding them in the depths of the bear market. Most recently Synthetix announced a $12 Million round lead by Paradigm, Coinbase Ventures, and IOSG.

Badger DAO, hub of BTC in DeFi, must continue to add value to users. Diversifying now allows us to start the Badger Backstop fund and for stable operations through market drawdowns, DeFI is still in its infancy and the actions herein will allow Badger to keep growing steadily.

While the DAO could undertake diversification selling through an AMM, the reaction may be less favorable than what we’ve researched and are presenting here, essentially as follows:

  1. Diversifying the treasury
  2. Without selling to the market
  3. While getting strategic value from it

This will bring lower risk through diversification and key resources needed to continue growing.

The DAO Has:

  • Strong community first ethos
  • Product market fit (billions in TVL, ecosystem partnerships growing daily)
  • New products being delivered quickly
  • A capable and forward looking team
  • And… Interest from potential strategic partners

The DAO Needs:

  • Steady growth through diverse revenue streams (products) & user growth (customers)
  • To further diversify the treasury for long term sustainability (barbell investment strategy)
  • Legacy finance/tech “skin in the game” contributors with experience and relationships (for help navigating legal, market, and otherwise)
  • A path to onramp institutional money

How Much: We propose allocating between 66,667(.93%) and 840,000(11.72%) BADGER from the treasury to strategic partners over the course of three months. This is .32% and 4% of total supply respectively to ensure no partner can receive a controlling interest. 840,000 BADGER is 4% of supply and 11.72% of treasury. You can play with the parameters surrounding this.

The USDC from allocations should be put into very low risk dollar lending positions on Aave segregated from, but similarly to, revenue assets.

DAO Benefits:

  1. BEAR MARKET SURVIVABILITY
    • Starting a “Badger Backstop” Insurance fund for depositors
    • Further development of products that help protect users
  2. User & TVL growth
  3. Help paving the way for institutional money to enter DeFi
  4. The optics of “smart money” buying in to Badger
  5. Asset diversification

What to think about

The market is free, if this gets voted against these investors may still make allocations in an unofficial capacity. What we offer here is a diversification based on a 7 day rolling average, in return we get valuable resources and capital. The question isn’t whether we need to diversify, it’s how we should do it.

Alternatives:

Instead of strategic partnership allocations, the DAO could sell a small % of the treasury on a recurring basis for a period. As mentioned above this may not be effective

If you want to look into this type of model you can see and play with it here.


What should be obvious from looking at this is that while we could undertake slow, steady diversification, the ease and benefits with which we can undertake a strategic partner diversification far outweigh the benefits of slow selling.

Recommendations:

  • Set a cap of 4% of BADGER supply for this three month round of partner diversifications
  • Allocations made in USDC
  • Allocation of BADGER subject to 12 month vesting
    • Tokens held at agreed address and can earn interest/multiplier benefits
  • Exchange based on a 7 day rolling average from allocation inking
  • Require BTC be deposited to Badger setts by each partner

Undertake individual allocations at the discretion of Badger Core, to be reported as soon as they’ve been completed due to market and volatility considerations. Core will ensure no individual allocation has a lion share of investment.

Specifics:

Upon passing snapshot Core may begin diversification with interested parties.
As allocations are agreed upon and undertaken they will be shared on Badger channels.

Vote:

Are you in favor of this general framework for strategic partnerships?
  • yes
  • no

0 voters

Do you support the maximum strategic investment cap for the next 3 months being set at 4% of Badger Supply, 11.72% of Treasury?
  • yes
  • no

0 voters

5 Likes

Thanks for putting this together.

Does the percentage of treasury you have proposed include or exclude the Badger set aside for the failed initial airdrops and the gitcoin grant airdrops?

Many thanks

2 Likes

Thanks for your comment Ben. The treasury excludes the amount unclaimed in the initial airdrop as well as the badger set aside for gitcoin

2 Likes

Thanks for the well documented proposal. To help us to understand the economics of this decision, can you confirm:

a) the quantum of BTC you would expect the strategic investors to deposit
b) any lock-up term attached t that
c) how these deposits will impact the cashflows into treasury - i.e. fee shares etc (I am sure this is in the docs but would be great to have it here for ease of reference)

I think the key thing to balance is the impact of pool dilution, vs the benefits of having this committed capital in pools, vs the impact of simply divesting some treasury shares on the open market.

Thanks.

3 Likes

A) we’ve discussed a $500K minimum but per allocation a decision would be made and shared
B) none as a part of this, again, would be agreed with each individual allocator
C) Any BTCs deposited would be subject to the same fees as other non native assets deposited(.5% of withdrawal, 20% of performance with 10% going to revenue 10% to strategist)

Thanks for taking the time to read through and comment! If this passes, as decisions are made, we can share more in depth data surrounding each allocation so these are good questions will work to answer

2 Likes

I was under the impression, we were looking at a minimum 1 year lock up? Could we double check this?

There will also be revenue generated for minting via our badger bridge

3 Likes

To be clear: we agreed to one year lockup of the BADGER, the lockup for BTCs will have to be decided on an individual basis. Any ideas for how we could manage and monitor these positions are welcome as we still need to decide that

5 Likes

These two things are the most relevant in signalling my support for this BIP.

DeFi has been incredibly bootstrapped to this point by both HNW individuals and smaller power users alike. While this is wonderful to see and makes me proud to have been a supporter of this space, I believe we are soon going to plateau on how much further we can take it without outside support.

The current legal and regulatory structure surrounding DAOs is largely, a complete mystery in many regions, and this will prevent the entrance of institutions from entering DeFi as a whole. I believe that as a protocol, BadgerDAO (and many others) will benefit by having investors fighting for us in an enviroment that frankly, many of us don’t even want to think about.

A question comes to mind here. Was there any discussion about opening up the treasury with other DAOs that we are building a future with? Token swaps from treasury to treasury gives skin in the game to further build stronger relationships/products and could create a system that is slightly more resistant to overly harsh regulations.

6 Likes

Thanks for the great reply. You’re usually on point.

We’ve had some discussion of what you mentioned, would love to formalize a structure around swaps with other DAO’s, I think it’s a fantastic avenue for us to use our assets!

1 Like

No to this proposal, and no to the team continuing to make very complex decisions and proposals while informing members of the DAO with only half of the information. I listened to the Clubhouse discussion between Andre Cronje, Chris Spadafora, and the founder of Sushi (via YouTube since Clubhouse is exclusive and not available to all of the DAO) and made the following observations:

  1. Chris, with all due respect, is a bit naïve compared to his counterparts. We’ve made such rapid progress but his optimism, for the good and bad, seemed to outweigh the responses of the other two DeFi leaders, especially as it pertained to building sustained community input and encouraging governance participation. They were warning him repeatedly that things get worse after the “honeymoon period,” and this proposal continues to sweeten the pot for the HNW individuals but is not delivering value for the entire DAO. It’s essentially trickle-down economics, and when the Whales have made their money, they will derisk and leave the DAO holding the bag.

  2. This BIP continues to add new projects to the team’s plate when older projects have not been completed, and it is causing (no pun intended) discord amongst the community and negative sentiment. Lets focus on CLAW, BTC bridge, that damn Gitcoin donation airdrop, and REVENUE SHARING for holders of the BADGER token instead of giving our revenue to “Strategic Partners” who are basically projects that don’t have the revenue stream or momentum of BADGER. Produce value for the community and we will continue to have diamond hands. But with APYs decreasing every week, and now more suggestions on giving our governance token to outsiders, I just don’t think the timing of this BIP is a wise decision.

  3. We’ve voted to pay our team a significant amount of BADGER, and now we are giving a significant amount of badger to more whales with this BIP. Has anyone on the team considered the consolidation of voting power? Voting is even more useless when 20-30 people will have the majority of circulating supply, as well as multi-sig control of how that power is further distributed.

I’ve benefited from investing in BADGER, but I think this proposal continues to stray away from some of its initial proposed values. Yes we need to bring as much BTC to BADGER as possible, but I think a large community with positive sentiment is more valuable than sweetening the pot for only a few HNW individuals.

19 Likes

To clarify, I was suggesting treasury share with other protocols as an option instead of VC investment/support. What I’m picturing in this case is something of a DAO coalition that works together for certain common goals. Legalities and regulatory clarification being prime examples.

This would be a much harder approach than what is being proposed, but I think it should be brought up as a possibility.

These options could also be utilized together, or none at all.

2 Likes

This BIP continues to add new projects to the team’s plate when older projects have not been completed, and it is causing (no pun intended) discord amongst the community and negative sentiment. Lets focus on CLAW, BTC bridge, that damn Gitcoin donation airdrop, and REVENUE SHARING for holders of the BADGER token instead of giving our revenue to “Strategic Partners” who are basically projects that don’t have the revenue stream or momentum of BADGER. Produce value for the community and we will continue to have diamond hands. But with APYs decreasing every week, and now more suggestions on giving our governance token to outsiders, I just don’t think the timing of this BIP is a wise decision.

I agree and have brought up the point prior that while it is good to move fast, sometimes you lose sight of what got you there. We should be wrapping up projects and getting things over the goal line before looking at expanding due to a bear market that is not yet here. Voting No for now, but hoping for a revision.

2 Likes

Correct me if I misunderstand. These strategic partners would give us usdc for the badger that we would then put in Aave and they would also deposit btc in our setts? Also who are these partners?

1 Like

Let me be clear about something. I definitely support treasury diversification through strategic partnerships, that create value. And the Badger Backstop fund is a great idea as well.

I also support adopting a Barbell Investment Strategy as it makes the most sense. However it requires thorough risk management and is labor intensive. This BIP is just an outline and does not mention specifics regarding how it would be managed or by whom.

Furthermore, It does not provide enough information about the Badger Backstop and does not outline what a “strategic partner” is. What are the requisites an interested party should meet in order to be considered “strategic”?

So, as much as I support the idea around this BIP and as much as I trust and support the Badger team and want them to have enough flexibility to take decisions (governance should not get on the way and should not stop evolution and innovation), I think in this case it gives too much leeway to be honest. This is the reason I cannot fully support it the way it is currently redacted, and voting against.

However, if some precisions can be made, better defining risk management aspects, more details regarding the Badger Backstop fund and a basic criteria for a partner to be considered “strategic”, I would gladly change my vote.

7 Likes

If we adopt the Barbell strategy, treasury swaps are not as attractive, as we would swap one non-stable asset to another.

Also, if we swap treasuries with a partner, it means that we can’t spend this money.

2 Likes

You’re right of course, we could earn with them however. As I said, this route would be much more challenging in terms of time and very likely, success vs. taking on investors and gaining what they have to immediately offer.

It’s something I would like to see considered on even a small scale, if for no other reason than a sign of solidarity.

2 Likes

@mason I think it would be helpful to the community if you could provide a model that includes the data from your previous BIP 31. Will help to show a larger picture of actionable plans.

1 Like

The goal of this proposal gives a slight discount for a large USDC investment, assets that will be held by the DAO and could be used for anything that can be constructively proposed and passes voting.

We aren’t giving and they aren’t outsiders to the crypto community.

There are a lot of things coming down the pipeline, we need to get better at communicating where they are and we’re working on it. The execution of this proposal is a medium lift but doesn’t constrain devs. Further, regardless of whether or not a bear market is here or not we should act like an Organization that will weather a bear market.

I’m fully on board with this, especially the part about a DAO coalition. The cap on this BIP was set where it is to act as that, a cap, what you’re proposing, a more protocol to protocol type of deal flow, could easily fall into this. Getting a public conversation going around this, and what the DAO is looking for in partners, is a good step.

Yes, those deposits could later be used in the interest of the DAO to build a Badger Backstop security fund. Aave is just a safe way for those assets to be stored and earn interest until a further framework is brought forth. You would be familiar with the partners.

That is why I said begin adopting, and from our perspective, holding native assets of Badger and partner protocols on one end and synthetic fiat positions on the other end is the balance we have to play with, I’m happy for any specific ideas surrounding using barbell as I’d love to expand on it.

Expect more on Badger Backstop in the next 2 weeks, anyone reading please feel free to reach out if you’d like to have constructive conversation around what the best backstop for badgers could be. In terms of strategic partners, they’re individuals (or groups) in crypto that have voiced a desire to have a stake in BadgerDAO’s success through holding Badger and depositing or LPing ~$500K minimum assets. In return the DAO can tap into a broader array of experts across fields, like @Justsomeguy mentioned above, the DAO can only benefit from pooling resources when it comes to regulatory and legal.

1 Like

Good call. Fyi here’s a quick overview of the One Time Diversification event, note that this is revenue assets. What’s being discussed here is Treasury assets. I’ll work on putting together a better picture of our Treasury Assets, I believe you are right that having some more insight into that would be helpful

Thanks for all the effort you have put into this.

RE: treasury diversification, insurance fund, and barbell strategy- great. However this is an odd way to begin a post with a central proposition that is really about allowing venture capitalists to purchase badger at a discounted price. This should be multiple BIPs in my opinion. In politics they call this pork barreling.

Without knowing more details such as what value a specific investor can bring and what kind of deal they are to be given- I vote no. There is not enough information here.

If there is a big push for this, perhaps let them come forward with a ‘term sheet’ of sorts and let the DAO decide if they are worthy of discounted badger or if they should purchase on the open market. Could be an interesting experiment. Badger is a fairly launched project, and I haven’t seen anything in this post that would make me want to vote to end that.

1 Like