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 should 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:
The Art and Science of Native Token Liquidity
August 10, 2021 Fundamentally, having liquidity for a token is important so far as it allows new investors to easily buy into a project and inactive ones to exit. Any less will not derail a strong project and any more is just in vain.
If you haven't been in the Discord with us (or even if you have), the above diagram is a brief reminder on how depositing assets to earn farming rewards works within Tokemak's Cycle system. If you deposit mid-Cycle, you'll begin to earn TOKE at the start of the next Cycle.
DAO Treasury inflows and outflows - periodic P&L/NAV
Over time, the Power DAO Treasury will have various inflows and outflows:
- Fees on CVP/xCVP staking & redemption
- Management fees on bullish & neutral high-yield investment pools
- Sales/purchase of treasury-held tokens, including CVP
- Rewards for staking Treasury tokens externally
- Rewards for staking public pooled vehicle tokens
- Yield from Treasury investments in neutral high yield strategies (YLA)
- Borrowing costs/rewards on tokens borrowed/lent
- Rewards for staking contrarian positions on synthetics sites
- Equalisation payments from perpetual derivatives positions-usually pessimistic
- Contributions to internal and external insurance sinking fund
- Purchased data feeds and revenue, if any, from data sales
- 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.
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
Liquidity After Bootstrapping
Balancer Liquidity Bootstrapping Pools (LBPs) have proved themselves as an optimal mechanism to conduct a new token launch. LBPs have consistently grown in usage and typically the immediate next step for projects at the end of their IDO is to migrate some amount of their newly raised capital to seed a liquidity pool that will best serve their protocol and their community.
Treasury Diversification With Range Tokens
UMA's flexible and secure infrastructure enables DAOs (decentralized autonomous organizations) to build custom tools to drive their community and manage their treasury. DAOs are now using KPI options to incentivize a desired activity or behavior as illustrated by Badger Dao's Digg Options and Aragon's KPI Options.
Gradually repurchasing PDAOPOOL tokens will significantly diversift the Treasury holding of tokens, and allow flexibility for various risk management initiative. See PDAOPOOL Proposal here: