YIP-80 YAM Treasury Rebalancing

Introduction

The health and security of the YAM Treasury is a reflection of how well it is managed. The treasury is a key part of achieving our goals. It is used to pay for the work the contributors do and used to bootstrap our products and is invested into projects the community thinks are valuable.

As it stands, the treasury is still somewhat unstructured and consists of pieces that have been voted on and implemented intermittently in the past. While most of these previous decisions were beneficial to the DAO, they may not be ideal to achieve our long term goals, or may no longer be adding the value that they once did. Like any garden, the treasury has become a little overgrown, and it needs to be managed and pruned back to grow optimally.

I have written a much more in-depth analysis of the YAM treasury and how it is structured here: Treasury Analysis

I encourage anyone interested to read the analysis above, but below I will give the TL:DR of the conclusions that I have come to.

  1. Our treasury is complex and has many different moving pieces that all support a part of YAM’s mission. Without a framework to make decisions about it, we risk becoming paralyzed in our ability to adjust it to take advantage of market conditions or new opportunities.
  2. There are a few distinct buckets that most treasury assets fall into. Those are Operating Funds, Productive Assets, and Reserves.
  3. We want to maintain a overall risk level for the treasury that protects from downside and still has exposure to the upside of the crypto markets.
  4. The success of YAM is going to come not only from our ability to invest the treasury, but from the collective work we do and our ability to build products and generate revenues. This means that treasury protection should be prioritized over treasury investment growth, unless that growth comes from product revenues.

Proposal

We should re-balance the Treasury now and pick the parameters for how we will keep the treasury balanced in the future.

Pick a Treasury Risk Profile based on @krugman25’s previous work:

  • Document describing the Metrics can be found here DAO House Portfolio Models v2 (StdDev Ratio Added)

  • This post describes the initial parameters for the YamDAOSet and the chosen allocation was a “3 - Moderate risk profile” with a Beta of roughly 0.75 and a correlation of 0.5.

  • This metric was not defined for the overall treasury, but right now our overall Treasury beta and correlation are significantly above this level, with a beta closer to ~0.85 and a correlation of ~0.7.

  • We can still achieve the goals we need in bootstrapping our own projects and growing the treasury with a less risky treasury balance. This will also insulate the Treasury from some of the volatility of the market.

  • I propose we set the overall treasury risk level to the same level as the we decided for the YDS. This is a “3 - moderate risk” level with targets for Beta, Correlation, and Std. Deviation at 0.7, 0.6, and 1 respectively.

Lets review the asset breakdown and we can choose another risk level if the community deems this overly risky or not aggressive enough.

Pick an asset breakdown that fits the above parameters.

  • There are many different ways that we can allocate assets to meet our risk parameters. A Treasury composition of 34% ETH, 33% DeFi Tokens, 33% stablecoins would put us within the “medium” risk factor that we discussed above. This breakdown would include all our existing treasury assets.

  • Set Max percentages of strategic assets in the treasury based on the above weighting and general liquidity in the market for said assets. Proposed max levels are:

    • Sushi - 6% (Currently ~9.3%)
    • UMA - 5% (Currently ~2.7%)
    • INDEX - 3% (Currently ~7%)
    • Gitcoin - 1% (currently 0.6%)
  • Rebalance the treasury by selling some of our ETH, DPI, sushi, and Index for stablecoins to bring these assets down to their target percentages. We would not buy any of the Strategic assets that are underweight, but let them accrue over time as we earn them. We may not be able to rebalance some of the less liquid assets (Index) all at once so this will need to happen over a longer period of time. DPI can be used as an “all-purpose” DEFI asset to fill in as needed. See more details in this spreadsheet: 21.07.19 treasury reblance analysis

Here is a sankey Diagram showing the proposed re-balance flow.

Monthly Treasury Rebalancing

Beyond this first rebalancing, we should be doing monthly rebalancings of the treasury based on the risk metrics and percentage caps for different assets in the treasury. This would be done by using Krugman’s monthly risk analyses and adjusting our different asset weightings accordingly.

The process will be as follows:

  1. @krugman25 will product monthly Treasury Analysis reports and present them to the community Mid-month.
  2. Using this report, a public forum post will be made with a recommendation for rebalancing if the risk factors have moved out of the governance approved range. Quantities of different assets to rebalance should be listed. Discussion will be open for 1 week.
  3. Snapshot vote to confirm rebalance. 3 days
  4. If Approved, the rebalance will be included in the omnibus on-chain vote that occurs monthly.

Enshrining this process and completing these steps would go a long way in making our treasury management process more transparent and digestible by the community. This then allows us to make more informed decisions about how to allocate revenues and profits.

Polling

Do you agree with the overall treasury risk factor of 3-Medium as a guideline for rebalancing?
  • Yes
  • No

0 voters

Do you agree with the overall treasury starting allocation at 34% ETH, 33% DEFI, 33% Stablecoins?
  • Yes
  • No

0 voters

Do you agree with the above breakdown for Max allocations of our strategic assets (UMA, xSushi, Index, GTC)?
  • Yes
  • No

0 voters

If you answers to the above are no, please explain why in a post below.

I support all of the principles outlined here; my only question is whether tx fees have been estimated or factored into the proposal for monthly rebalancing. Any active strategy will accrue fees, and the treasury is modest enough that these fees could add up meaningfully within the span of a few years. Would folks be comfortable with assets subject to rebalancing living on an L2 roll-up (Optimism, Arbitrum, etc) for low-cost rebalancing, or is the security risk not worth the savings?

1 Like

Hey. Good question and a reasonable concern. This is something that I would like our devs and maybe @krugman25 to weigh in on, but I think I can take a stab at how I would handle it.

My first thought on a way to mitigate this is to limit the threshold for rebalancing to only happen above a certain deviation from the risk metrics. This would may re-balances more infrequent and limit costs. This would need to be balanced by slippage/price impact for certain assets with lower liquidity.

My second thought is “which fees”? Lets go through fees we may have:

  1. Trading fees and slippage for swaps. This is an inevitable cost and we can limit it by only trading quantities below 1% slippage. This is par for the course and we won’t be trading enough for the fees to be crazy high. This is slow and steady re-balancing not swing trading or anything like that.

  2. Active Strategy Fees for products like Yearn Vaults. As far as I know, Yearn no longer charges exit fees for their V2 vaults, so it shouldn’t matter if you unwrap from them. I have to look into that though as I’m not 100% sure. Either way, we should research this for any active strategy we use.

    • As of right now, most of our treasury is not proposed to be used in active strategies that incur fees.
    • As a side note this reminds me that we need a snapshot vote for this proposal: Proposal: Transition yUSD to new Vault
  3. Other than these fees there aren’t many others. We already pay @krugman25 to manage YAMHouse and submitting these reports is basically included. So that is no added cost.

So basically I don’t think fees are going to be very high for this, and we can tune the transaction sizes so that fees are negligible.

Just based on that, I don’t think a rollup or lower cost network is necessary, but there are other reasons why it probably isn’t appropriate at this time.

  • Trying to juggle assets on 2 different chains is a pain and either requires a multi-sig or governance infrastructure on that chain. So a lot of work, or less decentralization.
  • The security properties of Polygon or another side chain are probably fine, but the added risk for a large portion of the treasury is probably not worth the savings on fees.
  • ORU and ZKRU aren’t battle tested or available to use yet, so they are out of the question for now. But when they become more battle tested I could see migrating everything to a layer2.

Let me know if you disagree with any of my assumptions!

Final numbers before Snapshot

@krugman25 has done his analysis on our risk factors and a new treasury weighting at 34% ETH, 33% USD, and 33% Defi Tokens comes out right in the sweet-spot for a “3-medium” risk factor.

I am going to lock this in as our allocation % for this proposal to keep the moving pieces in check (there are already a lot). Based on this, we have targets for what we are selling. My numbers and Krugman’s are not exactly identical, but I would guess that’s from different prices at different times. They are very close though, so it shouldn’t make a difference. I am going to use my numbers because it is what I have direct access to. Here is the updated spreadsheet: 21.07.19 treasury reblance analysis - Google Drive

If there are significant market movements, these USD numbers could change, but they are accurate as of August 16th, 2021. If they are changed then it will be to reflect the allocation percentage referenced above.

We would sell these amounts of the following assets for USD (DAI):
ETH: $420,000
DPI: $330,000
INDEX: $356,000 (Will need to be OTC)
SUSHI: $384,000

This would result in the treasury gaining ~$1,520,000 in stablecoins.

Future Rebalancing Criteria

In the spirit of full transparency, we would like to define the criteria for re-balancing in the future. The main factor to look at are the risk parameters that @krugman25 has defined. Assuming this proposal passes and a 3-medium risk parameter passes, the metrics that we should try to target are:

Beta (vs ETH): 0.7
Correlation (vs ETH): 0.6
Standard Deviation (vs ETH): 1

We will target a 10% variation in the targets as a metric to signal the metric is out of range. If 2 of the 3 metrics are out of range then this is where we should consider rebalancing. There is some wiggle room in these metrics, and as you can see from the chart above, std. dev. is below the target. This is deemed acceptable since the other 2 criteria are close to the target.

In general, we should re-balance as infrequently as possible. We will get reports on the state of the treasury monthly, but we do not need to rebalance every month. We aren’t swing trading, but making sure the treasury is safe and healthy.

I will be putting this YIP (80) plus YIP-81 and 82 up for snapshot votes shortly.

This YIP has passed and will be implemented as an on-chain vote in the future. Snapshot