YIP Proposal: Treasury investment strategy and allocation - Updated

YIP Proposal: Treasury investment strategy and allocation - Updated

Basic Summary
YAM’s treasury is currently the Most Valuable Piece MVP of YAM. Until there are new protocols developed like the Yam Crop Protection we need to take good care of the treasury.

Instead of a piecemeal approach to allocating and investing the treasury we should formalize some guidelines / strategy / allocation on how we will put the treasury to good use. Similar to an investment portfolio when you work with a financial advisor.

This is only the asset allocation portion of the portfolio, which I expect to be only a % of the treasury. We can still start brainstorming and parallel processing this piece without knowing the % yet.

Abstract
My proposal is a to decide on a structure that would best utilize the treasury’s investment arm.

TL/DR:
Here is my professional opinion:
Going to be adjusting ideas as I receive comments. Thanks
A Conservative Portfolio == 75% Yield Farming / 20% Equities / 5% Risk Hedge
Allocated this way:
Yield Farming 75%:
25% farming UNI ETH/Stablecoin Pool
25% Index Cooperative DPI/WETH Pool or a safer Stablecoin Pool (CRV or yUSD)
10% farming UNI ETH/wBTC Pool (requires a buy of wBTC)
15% farming another ETH/xxx audited and established pool

Equities 20%:
Split into 4 pools of 5% each of other DEFI projects and potential partnerships

Hedge Risk 5%:
Put Options to hedge downside risk on ETH (which should be the majority of portfolio)

  • The importance of a stable and growing treasury investment arm is two fold, it grows in value = adds value to YAM, but also it shows stability which also adds value to prospective Yam hodlers. More Yam Hodlers = more positive rebases = bigger treasury.
  • We are moving to incentivizing Yam/ETH pool, where we will be buying ETH on the positive rebases. So the base holding of the treasury with be ETH, some of this should be diverted to a stablecoin like DAI or USDC for short term use. We should use ETH to yield farm to further increase treasury with little extra risk.

Motivation
Part of Yam’s beauty is the fact that there is a community governance of a treasury for the benefit of the whole. If we can manage this properly the value of the treasury will increase and along with it the value of Yams. We need a smart strategy to make sure we get good risk adjusted returns.

Structure is of extreme importance in decentralized governance, we can always change, but let’s get something together to start.

Specifications
Let’s take this thru a standard financial planner investment process

First step is Risk Assessment

High risk = high returns, low risk = lower returns.

  • This is not YOUR individual portfolio; this is a community governed treasury. Think of this like your pension fund for multiple beneficiaries so the decisions of what to invest in effect everyone in the pool.
  • Drawdown = is the maximum estimated amount the portfolio can lose from the investments. Very important is that the higher the potential draw down the more gains you need to achieve to get back to equal. Ie. If you lose 50% in the portfolio, it will take 100% gains to get back to even.

We should try to keep risk and draw down to a minimum, unfortunately in the crypto space, there is always fud as things go down and massive fomo when things go up, it would be best to achieve a good return but minimize risk for a community governed treasury. You can do whatever you want with your portfolio.

Second Step is Diversification:

Don’t have all your assets in one item. Ie. yUSD which I applaud the team for realizing that there are tail risks with yUSD and the yield has gone down significantly since this idea started.

  • Defi Pulse Index (DPI) is a diversified portfolio of multiple assets. If one asset loses a ton of value, the whole portfolio doesn’t go down.
  • DPI is diversified but not asset allocated, which brings us to the next step.

Third Step is Asset Allocation

  • Asset allocation is diversifying your “sectors”. Ie Don’t invest all into Restaurant stocks, because if they go down they all go down… refer back to step 1.
  • Unfortunately Asset Allocation is very difficult in the Crypto space since the whole space is positively correlated with each other.
  • Fortunately we do have some options which lots of them are in the DEFI space and we can hedge risk by using DEFI Put Options

Portfolios

From a regular investment portfolio there are 3 basic asset classes that we can invest in: Equities / Bond & Fixed Income / Cash & Equivalents. In our crypto world, we have thru defi developed a comparable equivalent to these three asset classes! (As a financial advisor I am ecstatic about Yam and the whole defi ecosystem)

Equities == Ethereum / Bitcoin / Uniswap ect. Anything coin or token that has no stability function and is adjusted to supply and demand.
Bonds & Fixed Income == Yield Farming (If possible use a low risk low volatility asset ie. stable coins)
Cash & Equivalents == Stablecoins

Here are some basic portfolios:

A Conservative Portfolio == 70% Yield Farming / 15% Stable Coins / 15% Equities
Moderately Conservative Portfolio == 55% Yield Farming / 10% Stable Coins / 35% Equities
Moderately Aggressive Portfolio == 35% Yield Farming / 10% Stable Coins / 55% Equities
An Aggressive Portfolio == 25% Yield Farming / 10% Stable Coins / 65% Equities
A Very Aggressive Portfolio == 10% Yield Farming / 10% Stable Coins / 80% Equities

Let’s get down to specifics for Yam’s Treasury.

  • Stablecoins aspect of the portfolio can be diverted to the general treasury pool since we will likely have to hold a significant of stablecoins for other items ie. Yam ecosystem, ragequit(), and other functions. We can ignore this aspect for the time being and focus solely on the investment growth aspect of this.
  • That leaves us with Yield Farming and Equities, here’s a quick list of Conservative investments:
    • Yield Farming – https://www.coingecko.com/en/yield-farming has a great list of current farms. We would want to stick to audited farms that allow us to use our underlying treasury assets that we would want to hold if at all possible, ie. ETH / Stablecoin / YAM but this is up for discussion.
    • Equities – ETH, wBTC, UNI any other equities that we could use to yield farm but beware of downside risk.
    • Risk Hedge – Looks like a majority of the assets in the treasury will be invested into ETH, it would be silly not to hedge risk a bit by buying puts on ETH.

Here is my professional opinion after going thru all this:

  • The importance of a stable and growing treasury investment arm is two fold, it grows in value = adds value to YAM, but also it shows stability which also adds value to prospective Yam hodlers. More Yam Hodlers = more positive rebases = bigger treasury.
  • We are moving to incentivizing Yam/ETH pool, where we will be buying ETH on the positive rebases. So the base holding of the treasury with be ETH, some of this should be diverted to a stablecoin like DAI or USDC for short term use. We should use ETH to yield farm to further increase treasury with little extra risk.

A Conservative Portfolio == 75% Yield Farming / 20% Equities / 5% Risk Hedge
Allocated this way:
Yield Farming 75%:
25% farming UNI ETH/Stablecoin Pool
25% Index Cooperative DPI/WETH Pool
10% farming UNI ETH/wBTC Pool (requires a buy of wBTC, which is a good hedge)
15% farming another ETH/xxx audited and established pool

Equities 20%:
Split into 4 pools of 5% each of other DEFI projects and potential partnerships

Hedge Risk 5%:
Put Options to hedge downside risk on ETH (which should be the majority of portfolio)

Poll to Measure Sentiment

  • A good idea + Conservative portfolio suggested by Feddas
  • A good idea + a different portfolio is needed TBD
  • Not a good idea + I hate money :blush:

0 voters

4 Likes

I like this a lot. This is exactly what we needed for someone to do, thank you.

Put this in bold, very important piece!!

I’d also like to take the opportunity to propose something pretty novel, which is putting this aspect of the treasury under a new Governor contract. This Governor contract could have a whitelisted address - the Treasury contract - which it has the ability to send funds to on a much shorter voting time period, as well as change the composition of the investments on a shorter time frame. I’m not 100% sure what this would look like but I do feel it may be necessary to have a more flexible governance process with appropriate guardrails.

Couple questions:

Feelings on overlap of DPI assets and equities assets?
Should farmed assets be sold and sent to stablecoin treasury?
Would it make sense to engage in this process prior to deciding the equities piece? I can imagine this being a contentious topic as people want to pump their bags.

Side note on hedging, we would need to be execute this on chain.

Yes, of course with appropriate guardrails. I wouldn’t expect the investments to change on a regular but just in case there is an issue, a speedy fix is necessary. I would even suggest a kill switch or something for the high risk section that would sell off to stable coins if activated.

DPI I would consider an “equity”, it’s diversified which is great, but only in the defi asset class. They tend to move together with the market. Using DPI/ETH to yield farm would be a good idea after a review of the contract.

This would be the best way to secure yield, then on a regular basis the entire portfolio can be re-balanced and these yields can be reinvested or diverted to the larger treasury fund.

Yes right now I am only suggesting an overall strategy and we can fill in the pieces as needed. For Equities section I kind of reserved those slots for future partnerships but it’s free flowing.

Yes, there are multiple on-chain options options (wh00ps) Opyn Hegic to name a couple.

2 Likes

我不太理解这个,如果只对冲eth,那对冲只能是总eth的百分之一,这是用实际操作总结出来的操作。

First, let me say this is great. Well done.

Overall, I’m in support of this initiative whether we went with your suggestion or a slightly different one. I’m not sure about the allocation, though. Is the 75% allocation to yield farming too much? The implication with the weighting is that the higher allocation is because it is considered “safer” and in some cases it probably is (like UNI), but in others (and I think in general) it isn’t.

I think also having such a high percentage as a guideline to farming might become an issue in a scenario where one farm dries up and there aren’t many other good farms to enter. I could see a proposal passing to enter a not so safe pool simply because our options are limited and we have a percentage of Yield Farming allocation sitting unused. I know you specify audited, but audits aren’t bullet proof. I think this matters less when we can get insurance.

I’m not sure about the composition of equities in the conservative allocation either. Limiting to only DEFI projects seems too restrictive.

I’m also a little confused about the grouping. Yield Farming blurs with Equities and Stables. It looks like you have all ETH in Yield Farming? And Equities at 20% consist of only Defi, but 12.5% of Yield Farming is also Defi?

My breakdown would be structured something like this 75% Equities/20% Stables/5% Hedge, with a yield farming max of 50% of equities or stables and deployed on a case by case.

If there is something I am misunderstanding or mistaken on please feel free to point that out.

**Edited to remove apprehension around Index Cooperative. I’m obviously not following closely enough, I didn’t realize it was a Set project.

1 Like

This makes sense, def need to re-evaluate the risk profile or use hedges.

We can also use 3x tokens like ETHBEAR to hedge a portfolio.

It’s just good to get the discussion going.

Translated:
I don’t understand this very well. If only eth is hedged, then the hedge can only be one percent of the total eth. This is an operation summarized by actual operations.

My Response:
No there are different options to hedge, like put options or even a 3x ETHBEAR token.
Also FYI, if you want responses to your statement, it’s best to provide translations on the post.

团队办事效率太差了,提案到实行要一个月了,等到实行的话,币价都变成零了

我为何同意你的观点,因为我们不要忘记这是数字货币,只有大概率风险控制。
所以根本没有完美组合,只能大概率可控风险。
至于投资比列多少,大家来投票吧!

2 Likes

你了解每天的资金费率了吗?

对冲只能用永续合约。

I like most of this. Although I wouldn’t call it conservative. I would change the 5% hedge. I would prefer this to be liquid: either in ETH, or an interest bearing ETH. This would be very conservative. However, just a matter of personal preference, I don’t touch options.

I’m very familiar with traditional market leveraged funds as I have had significant exposure to them for a long time. Assuming you pick the most liquid and predictable funds, you’ll be mostly fine.

I have been watching the leveraged bull/inverse tokens. On the surface it doesn’t seem that we would benefit much from this exposure of the bull/bear tokens. Liquidity is also poor.

The Hedge is primarily against downside risk. Since many of the farms will have some sort of volatile asset like ETH, we don’t want our portfolio going down 10% due to a drop in ETH. We’d like some protection against that just in case.

是不是应该在设置百分之五的基金,让团队发展好的项目进行私募?

1 Like

投票吧,我们不要浪费时间了,现在基本进入抄底区域了!逐步买入!

所以请不要讨论了,我们需要的是投票结果!

1 Like

Yes, more research has to be done, but I appreciate that you want to move forward (me too). Specifically I need to rework some of the numbers and produce a solid plan on yield / risk.

Hedging with options of leveraged shorts will need some work to figure out the optimal way to produce the desired results. We will be using some sort of on chain option like Opyn if needed.

Also some mining rewards are ending(UNI) and/or decreasing, so that must also be accounted for.

Overall great work @feddas!

这是个变化无常的市场,没有完美的时候。只要团队把项目进展好,比如保险和采矿设计好。
这就像底层基础,牢固!稳定的收益,国库是前进的,后期资金还需要跟进。
目前属于建仓时候,只要把比列调整好。如果百分之七十为股票,那对冲不要太复杂化,大部分应该都是以太坊。永续合约对冲就控制风险了,百分之一,每天的费率收益就不错。

说错了,应该是永续合约一倍就控制风险了,不是百分之一

没有完美的对冲方案,对冲是为了控制下跌风险。

@yuluzhang
I understand that you want to move quickly but this treasury isn’t just yours or mine, it’s a collective, and sometimes it’s better to move slow and smooth than fast and hard.
We are at a low right now and the team did a good thing by buying a stablecoin yUSD rather than recklessly investing in other things. Now is time to organize and plan to utilize what YAM hodlers have sacrificed.

I am putting together a list of farms to research.
Anyone have pros/cons/insights of these:
Sushiswap (audited)
DODO (audited)
Harvest.finance (not audited)
Pickle.finance (not audited)
IndexCoop.com (audit?)

I am familiar with these but wanted to reach out to the community for feedback.
Thanks in advance.