Treasury Committee Yearly Revision

Executive Summary

The following post will touch on the learnings the treasury committee has experienced in its first 12 months of operations. Building on these, the following sections will also discuss the next steps the committee now intends to take and how will it focus its efforts. Finally, this document is meant to provide further clarity on the objectives of the treasury and on the role and scope of its committee members.

Table of content

  1. Context
  2. State of the market, before and today
  3. Learnings
  4. Conclusion

Context

The Treasury Farming initiative was initially discussed here and had a goal to accrue the value of the treasury by pursuing farming opportunities and taking directional positions when conditions appeared favorable. These with the ultimate goal to generate value for veDOUGH holders and to guarantee runaway and operational perpetuity. Since inception on July 4th, 2021, the treasury has distributed nearly $2,000,000 to veDOUGH stakers. In order to meet its goals, during this first year, the committee has experimented with multiple farming strategies and directional postures. The following sections will aim at discussing the learnings the committee underwent during this year, as well as to outline what are considered to be the logical and desirable next steps to take in the interest of the DAO.

State of the market, before and today

The committee began operating the treasury in a period of ranging market conditions, right before the start of the second leg of the most recent bull run. With the goal to protect capital and ensure survivability, the committee tactically derisked part of its crypto holdings into DAI. Following this period, having the bull cycle resumed, the committee started leaning towards a highly profitable directional posture which eventually led to a first distribution of 223 ETH to veDOUGH stakers. While this proved to be a good strategy in a period of up-trending market conditions, it did not turn out to be so in the first half of 2022, where markets have been rough and the treasury has underperformed the benchmark for several months.

Given the suboptimal performance of the treasury in recent months, the risks of an extended bear market, and mostly, the risks tied to trying to overperform benchmark in choppy and down-trending market conditions, the treasury committee has decided - again, in the interest of survivability - to dismiss any further directional betting until further notice and re-focus all its efforts on spotting and pursuing farming opportunities.

Practically, this means the treasury will always maintain at least 24 months of runaway in high-quality stables. These risk-off funds will be farmed exclusively in secure and battle-tested protocols. The remaining portion of the treasury will be kept in ETH, which will likewise be farmed across several protocols and possibly pursue some multichain strategies. ETH exposure will always be central in the posture of the treasury as we are inherently long-term bullish on ETH both as an asset and as an ecosystem. A smaller portion of ETH holdings may be utilized in the future to accumulate high-quality projects which the committee may be fundamentally bullish on. In this regard, it is worth mentioning that the committee will NOT attempt to time the market, and eventual accumulations will have long-term time horizons and attractive yielding opportunities.

As a result of the discussion above, the metrics and concepts of benchmark and minimum distribution as utilized in the first year of the treasury committee cease to be relevant and now turn to be obsolete. Given that the treasury will focus solely on farming from this point forward, the distribution of rewards to veDOUGH will therefore be only dependent on the yield generated by the treasury on a monthly basis. Since there will no longer be an effort to generate ‘directional alpha’, there no longer needs to be a benchmark for the committee to measure against. In the same way, there no longer needs to be a minimum distribution in case the alpha generated is negative or below the benchmark. Distributions will now be exclusively deriving from farming revenues.

Learnings

The points elucidated in the section above also derive from a thoughtful process the committee carried out to better understand what are the strategies to be pursued in order to increase the likelihood of meeting the goals of value generation and sustainability. After a year of exploring different profit opportunities, the team discerned that leveraging the composability of DeFi to find yield farming opportunities is only more in line with its overall skillset, and it is also more exciting to aim for. While on one hand, trying to time the market and take directional bets carries its degrees of risk and is a job for portfolio managers and traders (which recent events have shown how difficult it can be even for experienced professionals), on the other, creating farming strategies withing DeFi itself is at the same time beneficial and helpful for the very industry we are all collaboratively building.

Furthermore, in this regard, we believe that pursuing yielding strategies which can then potentially be automated and rendered into products marketable by PieDAO, works in perfect synergy with the objectives of the DAO as a DeFi native and an asset allocation protocol. Eventually, developing profitable farming strategies which can be implemented by the treasury itself and can also be launched as a new product, would turn out to be beneficial for the health of the treasury on one side, and for the long-term vision of the protocol on the other. More and better products translate into more fees generated, which finally creates more opportunities and value for the DAO and the entire ecosystem. By framing the subject in such a manner, the path the treasury now intends to undertake becomes self-evident.

Conclusion

To summarize the arguments above, there is broad consensus among the committee that given its overall set of skills and current market conditions, re-focusing its entire efforts on farming is likely the right risk-adjusted strategy to pursue in order to produce positive inflow for the treasury and as a result, for veDOUGH holders.

Accordingly, previously established parameters as the benchmark and minimum distribution become no longer necessary as there will no longer be the need for measuring directional performance versus farming, given the dismissal of the former. In this regard, it is also worth noting that previously established benchmarks of 10% on stables and 5.8% on Ether are no longer representative of the current ‘risk-free’ yielding opportunities. As a matter of fact, they have not been for the longer part of the TFC’s first year, meaning veDOUGH holders have consistently been distributed either value above benchmark or a minimum distribution which was actually above what the market was currently offering.

Consequently, from this month on distribution will take place every single month from the revenues generated by different farming strategies exclusively. As far as for the current yields the treasury will now intend to farm, the net revenue for veDOUGH holders will be higher than the minimum distribution they are now receiving, proving this to be the correct risk-adjusted strategy for the current market conditions while also simplifying operations.

By taking last month (June '22) as an example, veDOUGH holders would have received around 20% more than what they received through minimum distribution. As noticeable, having a sole farming-oriented strategy is simultaneously more profitable for the DAO, less risky, and allows the committee to align its incentives and R&D with the ones of PieDAO.

In sum:

  • The treasury committee pivots its focus exclusively to farming opportunities.
  • Keep in treasury always at least 24 months of runaway in stables, farming in low-risk battles tested protocols.
  • Keep remaining treasury mostly overweight ETH, to produce yield across diverse farms.
  • Develop farming strategies that can potentially be productized.
  • Benchmark is removed as no longer meaningful.
  • Minimum distribution removed as no longer necessary.
10 Likes

Sounds good. Much better direction for the treasury committee.

Can you explain how this results in a higher distributions to veDOUGH holders?

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This seems brilliant. I think a more passive strategy more aligns with the DAO’s mission rather than leverage, which adds unpredictability. The consistency this strategy will provide is perfect for the DAO.

As for 24 months’ runway, how much would this be in stables in $ terms?

Looking at the June Distro, under current market conditions, the minimum distro would have been around 20% lower compared to distributing 60% of the total farmable rewards.

Can you share the calculations/formulas used?

Can you elaborate on the actual farming strategies? I have some cash that I’d like to use for yield farming, but I can’t put it into veDOUGH because it needs to stay liquid.

The minimum distribution applied was computed as:
treas_value_beginning_month * 0.065 / 12 * 0.6

The benchmark vs new distro is meant to be just indicative (not apples 2 apples) since computed on the June end of month treasury value:
treas_value * weighted_avg_farming_APR / 12 * 0.6

FYI: An apple 2 apple comparison run on beginning July data between minimum distribution and new proposed distribution would currently see the minimum distribution method distributing approx 75% less than the new distro.