YIP: YDS Purchase of $125k additional ETH and $250k wBTC and Tail Risk Management

YDS Purchase of $125k additional ETH and $250k wBTC
and Tail Risk Management

Basic Summary
While the dev team is working with the set dev team on creating the necessary contracts for Yam governance to set guardrails and assign the portfolio manager, I would like to go ahead and start acquiring the assets that will be needed in the Yam Dao Set. Link to the most recent update:

Our current assets that will be allocated to YDS from the treasury are (assuming a $1mm starting allocation):

  1. yUSD 50%
  2. DPI 25%
  3. ETH 25%

This proposal is to buy using yUSD an additional $125k USD of ETH and $250k USD of BTC

Motivation
Motivation
General consensus from the community found that a moderate 3 was appropriate for our initial strategy:

A majority of the treasury is held in a yielding stable coin yUSD, I would like to diversify more of the yUSD into wBTC and ETH to approach our target of moderate 3 aggressiveness which would target a Beta (vs. ETH) of 1.5 and a correlation of 0.8. Since the Beta underlying target is ETH, this creates a fairly aggressive portfolio, which will contain a good amount of volatility. This is balanced by the fact that we only invest a minority portion of the entire treasury into YDS.

Even with this diversification out of yUSD into $125k ETH and $250k of wBTC our YDS portfolio will fit into our target beta of 1.5 and correlation of 0.8 as detailed in this chart by Krugman:

Adding the $125k ETH and $250k of wBTC into the portfolio will keep the beta at 0.59 and the correlation at 0.58 which are well within current bounds of beta of 1.5 and correlation of 0.8.

In addition, we will likely need to use these assets for additional strategies in YDS where we plan to use the assets to farm, stake and provide liquidity to earn additional yield. These purchase will be likely for the long term.

Specifications
Use the same OTC contracts that were developed by Brock and passed by on-chain governance to buy ETH and wBTC.

Tail Risk Management and SOP

While we are Umbrella there are numerous smart contract / economic exploits on other contracts, some of which we were considering to explore as a place to earn additional yield. This brings up the point where we need to consider how YDS would be able to manage a situation where an invested asset is being exploited or there is some sort of black swan event ect. Krugman has created a general Standard Operation Procedure SOP if one of our assets are actively being exploited or there is a similar black swan:

In the case of a hack or exploit where we are in a vault or liquidity pool and those funds are at risk or are already affected, we immediately pull funds. Yam governance has the option to control YDS via on-chain governance in case the Set Mananger is unavailable. Also the Set Manager can be replaced with a governance vote.

In the case where we own a protocol token and the protocol is undergoing an attack, where our funds are not DIRECTLY affected, we do not sell the position. We continue to hold the token and any allocation adjustment fall under the regular beta/correlation weighting adjustments. Of course the community can vote to remove the token from the whitelist but outside of that I suggest we continue to hold like normal.

In the case of a black swan event (think anything up to a March 12th style event) we continue to hold all positions and rebalancing only occurs during the standard beta/correlation weighting adjustments. If a black swan selloff happens then likely volatility will spike and position sizing will change dramatically, so once enough historical data comes in we can recalculate portfolio risk metrics and readjust if needed, otherwise everything remains the same. This one is particularly important, because the community needs to understand when they are choosing a portfolio risk level they are also choosing to have that exposure through flash crashes and huge draw downs. We will eventually have risk hedging, but that is not going to be the case for a while and even when it is, hedging isn’t bullet proof and we could still take moderate losses.

Poll to Measure Sentiment

  • Purchase $125k of ETH and $250k of wBTC
  • Do not purchase assets, leave as yUSD

0 voters

1 Like

I think we need to update these numbers based on current holdings – we bought $250k ETH and $250k DPI originally, but with positive rebases and price action our ETH holdings are ~$483k and DPI ~$342k. Plus we have some small allocations of Sushi ($23k) and INDEX ($10k)

I’m for adding some wBTC into the portfolio, but would like to see these correlation numbers run with our current treasury values.

1 Like

Good call @trente
We actually have a ton of ETH given that it’s appreciated so much since purchase (approx $230k gain assuming 50/50 ETH/DPI in uniswap pool).

I’d like to amend this proposal to only purchasing $250k of wBTC.

Here’s what the portfolio beta and correlation would look like if we only added $250k of wBTC.

Beta and correlation would still be in bounds:
|Beta = 0.66|
|Correlation = 0.65|

Portfolio composition based on 11/30/2020 prices:
image

Considering we are already exposed to yearn vault risk, would it make sense to deposit that wBTC into the sBTC yearn vault and earn a return on it? Or is it being held for other uses? Or even just dropping it into the ETH/WBTC sushiswap pool with some of our ETH.

I know this is a little off topic but it seems the place to ask.

Currently our YDS Portfolio Manager @krugman and others in the community have recommended that we delay the purchase of wBTC to wait till the volatility settles down.