BIP 48: Treasury USDC Productivity

BIP | Badger Improvement Proposals
1

Category: Treasury Management

Scope: Take the portion of USDC in treasury not operationally critical for the next 18-24 months and use it to farm no-or-low IL stable pools within three tranches of risk.

Status: Community feedback

Objective: Earn a basket of promising, upcoming, or saleable assets by using idle treasury assets; increase diversification, acquire utilities, further the decentralized stable asset market.

TLDR: Deposit a portion of Treasury assets into protocols like Aave, Compound, Yearn, Float, or some more risky. Earn tokens. Hold or sell.

Thanks to the Council for early feedback on this BIP!

Diversification so Far:

Before we dive in, quick overview of treasury and revenue holding diversity resulting from BIPS 23 and 31 which outlined one time and recurring diversification respectively. You can see the official Badger DAO Revenue Dashboard here: https://duneanalytics.com/summmason/badger-dao

The assets represented in the breakdown below are typically located in the following addresses:
DAO Revenue, BADGER Treasury, DIGG Treasury, DEV Multisig.

Revenue (USDC revenue below accounts for diversified funds per recurring revenue diversification)

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Treasury (bDIGG/ETH SLP and bBADGER/ETH SLP positions were taken per BIP 39 in order to provide an oracle price for money market protocols (like unit) to price $bBADGER and $bDIGG collateral)
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All Assets (as of the capture that produced the above results)
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Overview:

Badger DAO has roughly 21MM USDC from the strategic partnership diversification. I propose we put these assets to work farming for the DAO by 1) retain a multiplier of 18 month run rate (LTCC + misc) in a wallet for near term use and 2) send the remaining stable to a separate wallet to be split amongst three risk tranches.

Farmed assets will be held, staked, or sold at the discretion of Core with input from the Council.

Why: The DAO Treasury sits near 77.72% BADGER, 16.75% DIGG, and 5.53% USDC. Growing the USDC portion of DAO assets will offset expenses & increase diversification.

Reserve Methodology:

Using a 2X multiplier of our current USD expense schedule (LTCCs) we can arrive at a safe reserve of USD assets for the next 18 months: $4.5MM dollars, this will be kept separate from other assets and used to fund the ops multi-sig. (calculation non-inclusive of funds set for purchase of badger.com.)

The lower case accounts for one new LTCC / month for a year. The Base-Case (2X mult., $4.5MM reserve) on 18 months of retained runway is recommended. You can see the calculations here.

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I propose the remaining $16.1MM be deployed productively in defi farming activities. You can vote below on Base - Lower - Upper reserve methodology.

Risk Methodology:

To establish if a candidate farm has the right risk/reward the team may take the following into consideration: AUDITS, TVL, team, use case, APY, and correlation of farmed asset to basket.

The following shows the three tranches of risk under which our stable allocations can fall.

Tranches: (core/council have the right to add new farm allocations should they arise, additionally farms may be reclassified if their risk/reward parameters change greatly)

  • A (Low)- Established protocols: 5-40% APY
    Aave, Compound, Yearn 3crv pool

  • B (Med)- Next level of risk/reward: 40-100% APY
    Yearn Curve USDP, Curve USDP pool (earn CRV), Float, FRAX, etc.

  • C (High)- High Risk: 100%+ APYs, or 60-100%
    New/Unproven Projects: Fei, Vesper, Belt Finance, Quickswap maUSDC-USDC Pool, Fei

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Modelling a number of different allocation outcomes using an average APY for each tranche gives us the following results that you can play with here.

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I recommend the first option. 60% in tranche A, 30% in tranche B, 10% in tranche C. You can see given the inputs this has an expected return around $7.2MM or roughly 44% ROI. The DAO can rest easily with 60% of assets in very low risk allocations. The returns on tranche A in this case also outweigh the initial assets deposited in tranche C (as shown highlighted green).

Moving Forward

The first step of this process is this BIP, the community will decide what expense calculation we use (1), whether the assets and strategy presented above are fair (2), and the balance of allocations between tranches (3).

The second step of this will be more active. New assets can be brought into the mix either through core/council alignment or community proposal. Anyone may propose to rebalance risk allocations.

This is a call to Badgers! Know a good farm? Know an awesome asset providing liquidity incentives on stables? Youā€™re in the next best zero IL pool for stables? Letā€™s hear about it and discuss it below!

Next Steps

Upon passing of this snapshot the 18 month runway will be separated from farming allocation. The farming allocation will go to itā€™s own wallet and 100% of tranche A will be immediately deployed between the three current allocations.

Tranche B assets will be deployed over the following weeks with an initial % being deposited to USDP pools, Float, Frax/USDC LP, and Fei protocols. During this time the DAO will look for other tranche B (and C level) investments, if we fail to find any that have the correct risk/reward then the DAO will deploy the remaining assets to tranche B and or tranche A.

Tranche C assets will be deployed slowly and with not more than 40% of total tranche allocation towards any given project at a given time, allowing us to spread risk.

Recommendations

  • Base Case - 2X multiplier on 18 months of retained runway.
  • Option One - 60% in tranche A, 30% in tranche B, 10% in tranche C.

Vote

1. What Expense Multiplier should we use?
  • Base
  • Upper
  • Lower
0 voters
2. Do you agree with the risk tranche-ing structure and the position of presented assets in the structure?
  • yes
  • no
0 voters
3. What do you think the balance between A-B-C tranches should be? (This is purely for sentiment, youā€™ll be able to choose exact preference in scattershot)
  • 60/30/10
  • 33/33/33
  • 80/15/5
0 voters

The binding vote for this BIP will surround vote 3 and take place on scattershot.page/#/badgerdao.eth. Scattershot letā€™s you split your vote to the various choices. For example if you had 100 $Badger and wanted to vote for a degen risk profile of 10% - 5% - 85% you could do so by adding a weight of 10 to A, 5 to B and 85 to C (or 2-1-17 for less clicks). The precision that scattershot allows is a big step forwards towards DAOā€™s decision making power. Weā€™re excited to give the full range of choice on this BIP!

6 Likes
2

For #3 there are only 3 options presented but the model had more. I actually wanted to vote for 50/30/20 but if itā€™s too much trouble I guess the 60/30/10 is ok. I think this is a great way to make use of our treasury and help it grow. This will only be on Ethereum I presume? We wouldnā€™t be using BSC to farm right?

1 Like
3

sounds like good risk management. thanks!

1 Like
4

if youā€™re looking for stablecoin APY, the best position at the moment is lending DAI to the DYDX protocol; So exchanging the USDC for DAI could open up this strategy to higher returns

info:

3 Likes
5

For #3 when we get to the scattershot youā€™ll be able to choose the exact balance you like. The forum vote has less granularity but as Iā€™m looking at it right now itā€™s 45% for 60/30/10, 33% for 33/33/33, 22% for 80/15/5. In the scattershot these votes would give us an outcome of ~ 56/28/16.

To start the plan is ethereum. As we are working on crosschain solutions we may want to expand outwards soon, at the end of the day however, clearing back to ethereum on a regular basis would probably be a good idea.

6

Maybe the 60% pool or one of the 33% pools could be use to farm and then the farmed value could market buy Badger with it to increase buying pressure/growth? As an OG badger I would love to see initiatives like this.

2 Likes
7

This is a great proposal and I think Iā€™m going to adopt it for the BlockchainMan.eth treasury!

Additionally Iā€™d like consideration to be on the team that assesses risk, since Iā€™m actually in the process of pulling significant portions of my portfolio to USDC in order to yield farm and am very familiar with most of the protocols mentioned here.

1 Like
8

great proposal, plus we should always take care of the risk first.
hedge the risk to make sure the capital safe and then we chase the alpha.

1 Like
9

Have you also considered utilizing Alchemix as part of Tranche A or B? We can employ their DAI vault and borrow the reserve as ALUSD, which can be converted to USDC with basically no slippage. This increases amount of capital being productive while the loan pays itself off through the Yearn DAI vault APY and is not subject to liquidation risk.

5 Likes
10

Thank you for taking the time to put all of this together. While I look everything over, before I cast my votes, can I suggest that whatever strategy is chosen, that it be given a time limit of maybe something like 12 months? Before the 12 months are up, if the strategy requires changing, then of course it can require a change. But otherwise, at 12 month, it can be put to the community to evaluate the strategy as well as the DAOā€™s position, and they can either vote to continue, or vote on changes. 12 months is just an example time period, but every organization has protocols for re-evaluating everything every year, usually as part of their budget process. Putting a clock on these deployments could help serve a similar purpose.

Thanks again!

2 Likes
11

I think that there should be stronger risk management guidelines - for example how to select protocols (avoid scams, anon or non-audited), guidelines to buy insurance for those deployed assets, etc.

Not more than 40% of total tranche allocation to a high risk project? Isnā€™t that too much?

3 Likes
12

We should put some in the USDC pool on pooltogether and farm some POOL :wink:

1 Like
13

Good idea. I think periodically letting the community review the strategy would be good for getting some fresh ideas.

1 Like
14

Thanks, I didnā€™t realize the scattershot averaged it out.

1 Like
15

Iā€™m glad that weā€™re thinking about treasury management, but I am a strong NO against investing USDC treasury funds in anything other outside of the safest pools.

I run finance & ops teams for technology coā€™s for a living so deal with this a lot. Corporate treasuries have two mandates when it comes to managing cash on balance sheet: A) maintaining liquidity to meet operating needs and B) value preservation vs. an index. In DeFi, problem A) goes away, but weā€™re not approaching this correctly wrt to B.

Given that the majority of our treasury consists of high Beta assets like Badger & DIGG, we should keep our USDC reserves safe by investing them in established yearn vaults to earn 15% APY. Treasury assets should NOT be used to for more speculative purposes, especially if the remainder of our treasury portfolio is so volatile.

The only other asset I would be open to parking some treasury funds in is something like $DPI, as the native index for DeFi.

Support our ecosystem partner, benefit from their best-in-class security, and enjoy the 15%. Donā€™t overthink this, and donā€™t get greedy.

5 Likes
16

Also - we donā€™t need to keep 18 months of runway in cash on hand. DeFi is so liquid as it is. Keep 6 months cash on hand and park the remainder in a SAFE yearn stable vault. Set it and forget it.

1 Like
17

I want to pitch the idea that a deposit into the PoolTogether USDC no loss prize pool should be considered for the tranche A funds as the risk profile is functionally the same as Compound with much higher upside.

Here is my argument to support the idea that a deposit into PoolTogether is functionally the same risk as a deposit into Compound:

  • All USDC deposited into PoolTogether goes directly into Compound. The cUSDC returned back is escrowed in the PoolTogether ā€œprize poolā€ contract. So this prize pool contract is the only difference between a deposit in PoolTogether and Compound.
  • Crucially, this prize pool contract is non-upgradeable. Meaning you know that it is impossible for that deposit and the contract to be moved or modified in anyway. This is a way lower risk profile than a deposit into yearn where strategies can be swapped out.
  • This exact USDC prize pool contract has been live on mainnet for 3+ months securing $50 million + dollars
  • Previous to this prize pool contract, the PoolTogether protocol has been live on main net for 1.5+ years with no security incidents
  • The protocol has no external dependencies outside of compound (i.e. no oracle risk, impermanent loss, etc). So the only way to lose funds would be 1) if compound is hacked or 2) if a previously undiscovered flaw in the non-upgradeable prize pool contract is found.
  • The prize pool contract has been audited by the best security auditors in the space (Consensys & Zeppelin)

ROI on your deposit
Mathematically speaking, a deposit into PoolTogether will offer you the same returns as a deposit into Compound just distributed non-linearly. Additional to that, youā€™ll also receive the value of the POOL tokens distributed to all depositors. For the USDC prize pool that historically has amounted to a 25%-45% additional effective APR (earned in POOL tokens). Those POOL tokens could be sold or they could be held by BadgerDAO leading to an even strong long term relationship.

Summary
There is a lot of natural overlap in the BadgerDAO and PoolTogether communities. A deposit into PoolTogether strengthens this and provides BadgerDAO much higher ROI vs. Compound without any meaningful change in risk.

5 Likes
18

There should be an option in the poll to only invest the USDC in safe pools. After all, that was the point of buying USDC in the first place.

3 Likes
19

Unless thereā€™s something out there Iā€™m unaware of, thereā€™s going to need to be some sort of framework to determine whatā€™s ā€˜safeā€™. For example, Mason mentions the 3crv pool (DAI+USDC+USDT) as safe, but the 3crv+USDP pool is a higher risk, as is I would assume the sUSD pool (DAI+USDC+USDT+sUSD). How do we rate the Yearn pools? V1 vs. V2? Single asset vs. multi-asset?

Iā€™ve been thinking about this a lot since I read the proposal yesterday, and it seems like weā€™re we seem to have consensus that some amount of funds can be deployed to these safe pools. Maybe we can limit the scope of this BIP to deploy funds to two or three of these and then provide some sort of risk assessment toward the higher risk ones.

3 Likes
20

Totally agree. USDC pool at 15% for for 6 months.

Everything else seems like overengineering our treasury, while we should be focused on building BADGER utility.

1 Like