**There is a vote currently active to redeem a portion of the treasury for YAM tokens that if passed will effect the evaluation and recommendations. Updates will occur when necessary.
The Yam Re-Org that Ross and Designer have been working on for the last few months is a change to the operational structure of the DAO. Yam’s new operational structure is to allow anyone to request funding from the treasury to add value to Yam DAO and/or YAM Tokenholders.
Based on past behavior, managing an on-chain treasury is difficult and subject to many personal interpreations of best course. Considering the restrictions and limitations for Yam’s Treasury, this document hopes to define best course rules and guidelines in order to minimize friction for long term maintainace of Yam’s Treasury. There is NO PERFECT SOLUTION to invest and manage a treasury.
There are 2 directives of the treasury:
- To support funding requests for approved Yam projects/silos
- To grow the value of the treasury to support directive #1.
Understanding how we got here to determine how we move forward.
The treasury initially was created from the rebasing function of YAM token which has since been turned off.
Yam DAO and its treasury is entirely governed by YAM Tokenholders. The treasury has been utilized in a number of different ways:
- Investment Treasury
- Current investment strategy of a moderate portfolio targeting < 0.75 Beta and < 0.5 Correlation.
- UMA Synthetic Liquidity providing, earning fees and UMA rewards
- Sushi DEX liquidity providing, earning fees and SUSHI rewards
- Index Coop DPI / ETH liquidity providing, earning fees and INDEX rewards
- Proof of concept for Yam DAO House treasury management solution
- Expenses for Yam DAO operations and contributors
Yam’s Treasury has a history of effectively utilizing assets to maintain the DAO but also to grow the treasury.
The current composition and size of the treasury can be seen here: YAM Finance
Numbers as of 7.15.2022
Current Value: $3.2 million
- USDC (deposited in Yearn) - ~50%
- ETH (some deposited in Yearn, some not) - ~30%
- DPI (some LPing and some in treasury) - ~12%
- UMA, INDEX, SUSHI, GTC - ~8%
Current inflows into the treasury:
- Yearn Vault USDC Interest: $1.6m @ 1-2% APY
- Yearn Vault ETH/stETH Interest: $165k @ 4-7% APY
- xSushi: $62k @ 1.89% APY
- Total Estimated Inflows: ~ $24k per year
Current outflows from treasury:
- Yam Design Studios for June: $10200 70% USDC / 30% YAM
- Specific Architectures Ross for June: $12,250 70% USDC / 30% YAM
- Mona Community Management for June: $1,666 100% YAM
- Designer Silo for June: $10,200 70% USDC / 30% YAM
- 0xE Developer Compensation for June: $14,167 70% USDC / 30% YAM
- Subscriptions, backend costs and gas fees for June:
- Total outflows for June: ~$33k USDC / ~16k YAM
We have a healthy treasury utilizing ~50% of its assets earning interest.
Currently there is no active or in-development project to earn revenues from.
Current investment metrics and strategy. Current investment strategy of a moderate portfolio targeting < 0.75 Beta and < 0.5 Correlation.
- As of 7.13.22, Beta = 0.45 and Correlation = 0.38
- Beta / Correlation fall well below targets
- For complete list of assets refer to yam.finance dashboard
Investment strategy targeting a specific beta and correlation initially was created is generally a good metric to assess risk for non-crypto portfolios. Since the creation of Yam’s treasury and investment strategy it has become apparent that this method of assessing risk is not the most optimal. A few reasons why:
- Crypto assets in general are highly correlated therefor using beta and correlation with respect to ETH as a metric is not as helpful as originally intended. For example, since most assets that an on-chain treasury can acquire either very close in beta/correlation to ETH or a stablecoin, so it does not provide any quality information on which assets to hold in the treasury.
- Beta/Correlation does not account for liquidity, inflation, potential revenue and etc of tokens.
- There are crypto primitives that allow for hedging risk but the hedging space has not fully matured and carry additional risks beyond the financial instrument (liquidity risk, smart contract risk, ect)
- Rebalancing assets becomes a hard question to answer. If the treasury needs to rebalance and there are multiple ways to do it, which assets do we sell, which do we buy?
- Original investment strategy relied on yield farming which many of the farms have ended rewards. Original forum post: YIP: Investment Portfolio Strategy Polling / Voting
In addition, there are several limitations of an on-chain governed treasury:
- Any transactions that involve the treasury require someone familiar with the governance module to write the code to interact with the treasury.
- Swaps require a contract that can interface the treasury with a DEX or Aggregator DEX. Currently we are limited to Uniswap V2 DEX because the contract has not been created to interface with others.
- The time lock on interacting with the treasury is 5 days after a 2 day on-chain vote approval. There is no immediate asset to treasury assets, therefor smart contract risk is of greater concern than normal.
My recommendation is to simplify investment strategy, allocation model and use rebalancing as a tool to manage risk. Using sushiHOUSE investment strategy and allocation model from sushiHOUSE - A Treasury Management Proposal - Proposals - SushiSwap
Using the same investment strategy risk level of 3, the Investment Strategy would target allocating 55% ETH 20% BTC and 20% Stablecoin 5% DPI.
Current model targeting beta and correlation. In addition:
- Create framework on which assets to be kept in treasury and how to rebalance to maintain targets.
Use sushiHOUSE investment strategy and allocation model (above) with risk level 3 - Medium. Strategy would target allocating 55% ETH / 20% BTC / 20% Stablecoin / 5% DPI. Additional rules and guidelines to maintain efficiency:
- Investment strategy does not include operations reserve which would be a 12 times monthly expenses.
- Assets that do not fit this model will be disposed of as long as slippage doing so does not exceed xxx% otherwise it will be kept in treasury but ignored.
- Rebalancing trigger limits will be set at ± 10% allocation. All assets will be sold/bought back to stated allocations when triggered. Rebalancing can be done at most once every 30 days.
- Current Model = Beta / Correlation Target
- Allocation Model = 55% ETH / 20% BTC / 20% Stable / 5% DPI
- Seek another alternative
- Don’t do anything with treasury
The Yam treasury should be split into an operations reserve and the rest into the investment fund. Operations reserve should accommodate a runway of 12 months (subject to vote) in a low risk yielding stablecoin. Recommended general guidelines to easily maintain reserve:
- If the reserves fall under 3 months of expenses, the operations reserve will be refilled to 12 months runway and then a treasury rebalance will occur.
- Any project or silos that require funding in excess of 3 months of expenses will require additional approval and funding will come from the investment fund. Anything funding requests under 3 months of expenses can come from the operations reserve.
This process is similar to many corporate accounts where payroll and expenses are kept out of the at risk investment accounts.