Treasury Management

Treasury Management

The purpose of the PowerPool DAO is to execute a vision to drive maximum value to the CVP/xCVP token pair, in part by deriving fee income from structuring convenient, diversified, curated bullish and lower risk yield seeking investment pools across multiple chains and layers, and in part by managing the xCVP staked token and linked DAO Treasury to offer a defensive ‘cushion’ for investor portfolios during inevitable periods of declining prices in the market.

Traditional hedge funds keep the majority of their gains on bearish, short positions inside vehicles internal to their private partnerships, which is why the leading hedge fund partners are all so rich (see leading hedge fund listing in References). Initially, we want to market the CVP token as a defensive-minded ‘hedged’ token, with not only real fee income, but also with downside ‘insurance’ to reduce volatility of xCVP NAV. This adds value to CVP as collateral, for example, where DAO-managed lower CVP price volatility enables CVP holders to borrow against pledged CVP (and staked xCVP?) with much reduced risk of liquidations. The DAO Treasury would initially hold all these defensive positions centrally and track the NAV accruing to xCVP, which we all hope will rise, driving up the exchange rate CVP/xCVP for investors who wish to unstake and sell their CVP. Subject to DAO governance, however, PowerPool reserves the option to also package defensive pools for trading on the open market, with only fees for the DAO Treasury.

Obviously, this approach to investing the DAO Treasury makes risk management one of the key skills of the DAO, and the (multi-token) PowerPool protocol needs to be governed not only by dynamic listings management and continuous (re)weightings, but also by clear position limits or boundaries.

On behalf of the DAO, the SparkFin Team will be responsible for financial management of the DAO Treasury, CVP monetary policy, calculating the periodic NAV of the central accounts/wallets, controlling expenses and collecting rewards to maximise the value for xCVP stakers.

CVP Inflation/Monetary Policy-Liquidity Pool Management

Controlling CVP inflation relative to fee growth and buying pressure is part of maximising the value of CVP/xCVP. Treasury reporting shouls always include an overview of the CVP tokens issuance and the current rewards policies incentivising investors to stake thematic pool tokens in DEXes to maintain sufficient liquidity depth to facilitate trading. The SparkFin Team should also be the primary point of liaison with Wintermute, the CEX market-maker by agreement.

Liquidity pool rewards management is the primary cause of CVP inflation, and should be managed with the approval of the DAO according to this framework:

DAO Treasury inflows and outflows - periodic P&L/NAV

Over time, the Power DAO Treasury will have various inflows and outflows:

  1. Fees on CVP/xCVP staking & redemption
  2. Management fees on bullish & neutral high-yield investment pools
  3. Sales/purchase of treasury-held tokens, including CVP
  4. Rewards for staking Treasury tokens externally
  5. Rewards for staking public pooled vehicle tokens
  6. Yield from Treasury investments in neutral high yield strategies (YLA)
  7. Borrowing costs/rewards on tokens borrowed/lent
  8. Rewards for staking contrarian positions on synthetics sites
  9. Equalisation payments from perpetual derivatives positions-usually pessimistic
  10. Contributions to internal and external insurance sinking fund
  11. Purchased data feeds and revenue, if any, from data sales
  12. Issuance of rewards/incentives and expense allowances

CVP/xCVP Staking & Redemption fees - The DAO will charge staking fees (in CVP) for staking open market CVP for xCVP. If someone wants to buy CVP on the open market, stake it for xCVP, propose/vote in the DAO, wait a week for the outcome and then, if they don’t like the outcome, they can ‘rage quit’ the DAO and unstake their xCVP. But it will cost both xCVP staking and redemption fees to do this.  Allowing this process is part of keeping the floating free market price of CVP ‘pegged’ to the rising NAV of the Treasury, attributable to xCVP.  If the open market price of CVP falls too far below the NAV-tied value of xCVP, arbitrageurs will buy under-priced CVP, stake xCVP, wait the one week redemption period, then unstake and sell. Because they have to pay the fees, absent other factors, CVP will trade at a slight discount to NAV/xCVP by the amount of the fees, and the time value of the redemption period lockup. In the event that CVP starts to trade at values far above NAV/xCVP, any xCVP staker can unstake, wait the redemption period, pay the fee and sell their CVP in the open market. However, they will only do this if they think the trend of NAV value accretion is not likely to catch up to the open market CVP price. A more likely scenario if CVP starts trading at a big premium to xCVP is that the DAO Treasury will sell CVP in the Treasury, booking gains versus the basis at which those Treasury CVP are held.

Q: Will the PowerPool Treasury be able to stake/vote internal CVP as xCVP?

A: Given that the Treasury needs to continuously be able to buy, sell and otherwise hedge CVP, and there is a one-week xCVP redemption period, I can’t think of why the DAO would approve this? This means that fully-diluted metrics on NAV/xCVP need to note that Treasury CVP cannot/will not be staked into the DAO.

Management fees on public vehicles - Fees are currently charged on bullish/neutral high-yield investment pools operations. According to PWC, median management and performance fees for privately-managed off-chain hedge funds was 2% and 20% respectively, although in 2020 the average management fee increased from 1.7% to 2.3% and the performance fee decreased from 23.5% to 21.1%. PowerPool could consider introducing performance-related (versus fixed) fees but beating the 100% ETH HODL/ETH2 staking benchmark index (yes, this really is an index!) might be very difficult. Conceptually, it is a contradiction for a cooperative, community-managed DAO hedge fund to charge a performance fee to its members, the xCVP stakers.  Although not all investors in public pooled vehicles will also be xCVP stakers, many larger ones probably will be.

Sales/Purchase of Treasury tokens, including CVP - Operations to acquire or sell lots of any tokens held in the Treasury contract exceeding $10,000 in value must be authorised by the DAO, unless the operations are part of routine re-balancing of positions within limits already approved. Gains or losses will generally be reported as Trading gains/losses, but some operations may be classified differently for P&L purposes. (see model P&L below)

Rewards for staking Treasury tokens externally -  Unless these rewards are governance tokens being accumulated as part of an approved meta-governance voting plan, rewards will generally be sold to purchase CVP at moments of market weakness.

Rewards for staking public pooled vehicle tokens - In general, rewards earned by staking tokens held in public pooled vehicles belong to those vehicles. To the extent the Treasury has, or can borrow surplus tokens that can be staked, these rewards will accrue to the Treasury.

Treasury investments in neutral high yield strategies (like YLA) - Surplus resources exceeding the operational needs of the Treasury will generally be held in PowerPool neutral high-yield vehicles like YLA. In the event that the DAO authorises a shorting operation, then borrowed tokens would be sold and the proceeds invested in neutral high yield vehicles to generate returns to offset the cost of borrowing.

Borrowing costs/rewards on tokens borrowed/lent - DAO-authorised operations may include seeding a token’s lending pool(s) or borrowing and selling to short target tokens. Yield/interest revenues and costs would be booked to various operation sub-accounts in the Treasury accounts

Rewards for staking contrarian positions on synthetics sites -  Synthetix and other synthetics platforms offering inverse short positions which the DAO Treasury may hold on behalf of hedged neutral yield products may pay rewards on inverse holdings, with 1-year vesting in the case of Synthetix SNX. These synthetic position rewards will accrue to the Treasury, not the neutral yield vehicle.

Funding payments/rewards from perpetual derivatives positions - Under the guidance of the DAO, the Treasury may sometimes hedge its holdings using perpetual derivatives contracts.  Perpetual derivatives platforms periodically calculate funding payments for opposing long/short positions, with the direction of payments to/from longs/shorts depending on the current market price. The DAO would book these payments as revenue/trading costs attributable to the sub-accounts corresponding to the approved DAO project.

More detail:

Hedging vehicles using synthetics platforms like Synthetics also earn rewards on the hedging platforms. Synthetix rewards SNX stakers with two income streams - SNX inflation and sUSD trading fees. Inflation is programmatic and controlled by the Synthetix DAO. Its purpose is to incentivize Synthetix’s liquidity given that the total synth supply is a function of how much SNX is staked as collateral. Stakers earn SNX rewards each epoch, weekly, according to the inflation schedule and the staker’s proportion of the SNX pool on Synthetix. Stakers can claim their reward at the end of each epoch and must escrow their new SNX in the protocol for one year. Trading fee rewards are also controlled by the Synthetics DAO, and averaged 41 bps per trade on Synthetix.Exchange over the last year. Stakers earn sUSD trading fees based on their SNX pool share during each epoch with no escrow required.

If these market-neutral rewards/yield oriented ETH & BSC hedged DeFi products are successful, PowerPool could continue this pattern many times, looking to harvest rewards on (many) other L1 chains with emerging DeFi ‘villages’ like Avalanche, Solana, Elrond, Polkadot/Kusama, etc.

Contributions to internal insurance sinking fund - any trading entity that wishes to survive long term should accumulate an internal insurance fund which the DAO can draw upon if necessary. Protocol abuse (hack) insurance should be available for both xCVP staking members and pooled product investors from Nexus Mutual/Armor, but the internal DAO emergency fund is also available to cover trading loss emergencies and Treasury illiquidity episodes as well. The insurance/buffer fund is accumulated through periodic contributions, like any sinking fund. The amonunts in the safety fund are generally invested in very low-risk neutral strategies, but the value of the fund is included in calculations of Treasury NAV.

Purchased data feeds and revenue, if any, from data sales - one of the attractions of staking xCVP and participating in the Forum/DAO is that data feeds, analytics and visualisations unaffordable to even sizeable individual investors, are available, together with spirited informed debate, on the PowerPool Forum for only 1,000 xCVP. Coverage is limited to only short-listed tokens of interest as managed by the DAO. The evolution of PowerAgent to meet the evolving requirements of the DAO may permit analytics and visualisations driven by PowerPool/PowerAgent to be marketed externally. All data feed costs, and any possible revenues, are booked to the DAO.

Issuance of rewards/incentives and expense allowances - Many protocols view unissued tokens as something to be conserved for the future. This may be the case for some, but in the case of an investment manager like PowerPool, the time to attract and retain the best talent is NOW. All incentive rewards and other CVP disbursements proposed by the Management Board and approved by the DAO are booked to the Treasury accounts and reflected in NAV.

DAO Treasury Management

A traditional corporation has a number of options to finance its ongoing operations and invest in its future. Corporations can sell newly issued equity, take on debt, and also utilize retained earnings. The universe of options available to protocol DAO Treasuries can also be classified into analogous categories:

Sources of funds:

Revenue: The DAO can choose to reserve a portion of all fees taken by the protocol and have them flow into the protocol Treasury. The fees earned are paid in/denominated in the product it is earned from. For example the CVP staking & redemption fees are paid in CVP, but Power Universe pool token 2% management fees are paid in those tokens (PPDEFI, BSCDEFI, etc.)

Farming Non-Operating Income: The DAO can earn rewards by choosing to yield farm, stake, invest, or lend out different assets held in its Treasury

Issuing/selling native tokens: The DAO can sell existing circulating or non-circulating tokens held by the Treasury to other entities

Borrowing/Issuing debt: Secured debt: Given most DAOs do not have any assets to collateralize other than their native token, this would entail taking out an overcollateralized loans against native tokens held in the DAO’s Treasury Unsecured debt (or undercollateralized debt): Though this space is currently immature in DeFi and no options really exist, it might develop further in the future

DAO Treasury Instruments to consider

Treasury Diversification

Gradually repurchasing PDAOPOOL tokens will significantly diversift the Treasury holding of tokens, and allow flexibility for various risk management initiative. See PDAOPOOL Proposal here:

PDAOPOOL- Legacy Pool Consolidation
PDAOPOOL- Legacy Pool Consolidation