This post will be the foundation for a proposal for treasury rebalancing and management that is forthcoming and will be linked to here when posted.
YIP-80 is a proposal to rebalance the treasury based on this framework.
The YAM treasury is the heart of YAM. Managing it effectively is one of the main tasks of the Operations team and YAM holders. But our treasury is complex and used in multiple ways that need to be considered when making decisions about it. From a technical standpoint, @krugman25 is going to be doing monthly risk analysis for the treasury similar to what he does for the YDS. This will be very helpful to provide us with data and context when making decisions about how to manage it. But this analysis is only a portion of the larger picture of how our treasury is used. The treasury contains funds that are used to pay contributors, bootstrap the products we are building, farm, and so on. Doing risk analysis on all these pieces is difficult, and even after the risk analysis is done, there may be good reasons why we choose to accept to be more or less risky.
As a decentralized organization, there are additional complexities around how we make these important decisions for the treasury. There are times when moving fast on a decision is optimal, but both moving fast and also giving the broader community to have input is not always possible. We are walking a fine line between giving control of decision making to a small group of people who can make quick actions (added centralization) and allowing token holders to have a real say in what happens in the DAO.
If we don’t want to have a core group of people who can make decisions about the treasury, but we still want to be flexible and somewhat nimble in managing it, we need to design frameworks that bridge that gap. This framework allows any community member to understand the methodology and process for making treasury decisions and gives clearly defined opportunities to join in the decision making.
In order to make decisions about treasury allocations and rebalancing, we must first define the requirements for the different portions of the treasury and different assets. This defines a structure on which to apply rebalancing parameters.
An Overview of treasury allocations can be seen here:YAM Finance
A more granular view of the treasury and the different addresses where assets live can be seen in the top section of this document: 21.07.19 treasury reblance analysis - Google Drive
The first factor used in rebalancing should always be our risk parameters. These define the larger scale structure of the treasury and should be the main lever to adjust the balance of the treasury. The structure that I lay out below is a more granular look at how the treasury gets used and allocated within the larger risk parameters.
Let’s break down the different pieces of the treasury and how they relate to the day-to-day functioning of the DAO. Understanding the different elements will allow us to have a conversation about what our allocations should look like and help us make decisions in the future about how to re-balance it. There are 4 parts to our treasury (as I see it, this is somewhat subjective):
This is the part of the treasury needed for day-to-day operations. This is working capital (typically stable-coins) used to pay contributors and expenses and is used alongside our contributor pool of YAM as working funds. How much of the treasury needs to be allocated to this category of funds should be determined by looking at expected expenses and payroll over a specific period of time (e.g. 3 months)
These funds can still be yield bearing by holding yield bearing versions of stablecoins, like yUSD. Some of these funds may live in the treasury proper and some may live in a multi-sig wallet for easier use and distribution.
This portion of the treasury is mostly quantifiable based on known and expected payroll changes and assumptions regarding other operating expenses. We have typically been adding some stablecoins to the general multi-sig for miscellaneous expenses and contributors are paid their stablecoins directly out of the treasury. This works well and as long as the amount of stablecoins in the treasury is greater than the need for operating funds before the next rebalancing, everything works well. Given the expected risk parameters and treasury size, this should not be an issue.
Yam is also part of the operating funds and is used in a similar way to the stablecoins to pay contributors, miscellaneous expenses, and incentive programs. Similar to the stablecoin portion of the operating funds, we will need to confirm that the amount of YAM in the treasury is sufficient to meet the needs before the next rebalancing. I will address different options for how we can do this in another post in the future.
- [ ] Determine Payroll and Expenses in stablecoins during the next quarter and make sure there are sufficient available to meet those needs.
- [ ] Determine Payroll and Expenses in YAM during the next quarter and make sure there are sufficient available to meet those needs.
This part of the treasury are the productive assets that are used in bootstrapping our own projects (minting synths, etc). These are liquid assets but they may be more risky than the operating funds (stables vs eth, btc, etc). These Should be allocated specifically based on a clear goal for their use and must be approved by governance. These, along with the strategic assets discussed below, are “mission-centric” assets that are deployed to further the goals of the DAO.
Current Treasury Assets included in this Category:
- ETH used to mint and LP uPUNKS and uGAS
- USDC used to mint uSTONKS
Stategic Assets are similar to active capital in that the DAO should have a thesis and intent in how they are deployed. Strategic asset could be assets earning yield, governance tokens that the DAO is interested in owning, or are governance tokens of projects that the DAO actively participates in.
Beyond earning yield, all strategic assets should have a purpose that is clearly defined. Each asset that the treasury owns should be there for a reason. This rationalization will always be somewhat subjective so clearly stating the goals of owning a specific asset will help the operations team and token holders evaluate whether the amounts owned are in line with overall DAO priorities.
Current Treasury Assets included in this category:
- $SUSHI Converted to XSUSHI to earn yield. This xSushi may also be used in the future for governance and to stake behind onsen reward gauges. Understanding of the new Onsen model will be key in determining the value of holding sushiswap tokens beyond speculation.
- DPI and ETH paired to earn $INDEX tokens. These tokens are deployed to farm because a) we have them and trust the farm and b) we have strategic interest in working with IndexCOOP and Set Protocol for Yam Treasuries.
- $INDEX Tokens could be used to vote on other protocol governance actions via DPI meta-governance. How much say we would have with a smallish amount is an open question.
- UMA tokens are not yield bearing, but we have a strategic interest in holding them due to our collaboration with UMA. If the DAO wants to participate in UMA governance then we would use these tokens and can earn rewards doing this.
- Gitcoin’s $GTC, which may be better considered a reserve, but if we want to participate in Ethereum’s public goods funding initiatives then we may want to keep these tokens without selling them (they were an airdrop).
Strategic assets must be deployed within the larger risk framework for the treasury. In order to do so, we must first determine the availability of different asset types and how we want to use them. If our risk parameters mean that we have $2M in ETH in the treasury, then that is the pool of ETH that we can use for all productive uses. At the same time, we should determine the desired quantities of different strategic assets in the treasury.
- [ ] Determine the value that each strategic asset has to the DAO and what the intended use of said asset is.
- [ ] Using the information about use and value of each strategic asset, as well as market liquidity, make a determination about maximum and minimum percentages of the treasury each asset should have, or in what conditions they should be sold.
Boostrapping Assets should also be assessed in context of the larger risk parameters and allocated out of those parameters. If an asset needed for bootstrapping does not already exist as a part of the treasury, then it must be acquired and needs to be accounted for the the treasury risk parameters.
The reserves is everything else. Depending on what is in this part of the treasury, this could just be the Yam Dao Set (YDS). The YDS is a risk-adjusted, diversified basket that has ETH as it’s main reference but tries to limit the volatility. This is actively managed by Krugman based on risk analysis metrics that were voted in when the product was created.
- You can read the metrics here: https://docs.google.com/document/d/e/2PACX-1vSCNRXqpIUTFS8AfHrdLJbNox2yRnvWV5EO4dySw3kuVlnwhq07X51Z-ZdUw393ReX1nszf4GXbGv1G/pub
- And discussion about those metrics here: https://forum.yam.finance/t/yip-investment-portfolio-strategy-polling-voting/927
- The initial risk metrics for the YDS were categorized as a “3” on the above risk metrics, which you can see here:
See the current allocation of token in the Set here:
Although there may be some overlap between the reserves and the strategic assets, the main difference between the 2 is conceptual. The reserves should be re-balanced based on market risk and parameters, while the strategic assets require more consideration when rebalancing.
The simplest option here is just to consider “everything else” in the reserves and rebalance accordingly. If the YDS and the treasury share the same risk parameters then, we can move reserve assets into the YDS easily, although it would need to be done in a balanced way to keep the whole treasury risk levels balanced.
In order to make this work, I would like to propose a change to how the Yam DAO Set works:
I propose that we limit the assets within the Yam DAO Set to only those that can be easily re-balanced without worrying about strategic uses. This would change the current YDS make-up to only include ETH, Stables, DPI, and WBTC. The SUSHI, UMA, and INDEX included in the set now would be moved into the treasury proper with the rest of those tokens and would be part of the Productive assets and not the reserves.
This simplifies the re-balancing process for the YDS and moves the onus of rebalancing our strategic assets to the larger treasury management process. It also allows the YDS to get larger with less impact on slippage for smaller assets. It may also help with solving for NAV issuance and our ability to offer the YDS as a product that anyone can buy, since it would simplify what functions it needs to perform and what assets need to be held. I also believe that a product like YDS that does not contain the tokens of projects that we are working with will have a larger addressable market and could be marketed to DAOs as a simple diversified treasury management tool.
A framework for the core contributors and community to understand the goals and risks of the treasury is an important part of keeping our treasury management process open and transparent. Coordination between general governance and our treasury manager is important and the goal of this framework is to allow the DAO to take the recommendations of the treasury manager and apply them to the larger goals of the DAO.
With the help of @krugman25 I will be making more specific treasury rebalancing recommendations in a future post.