Authors: @patb, @blurb aka Nakamomo(Ɛ, 3)
Hello Index community, today we’d like to introduce the DAO Treasury Diversification Index or “DAO Jones Index.”
Summary
We propose that the Index Coop manage an index of DAO governance tokens of who mutually agree to diversify treasury holdings into a new Treasury Diversification Index token, DAOJ.
This new simple index product – informally known as the “DAO Jones Index” — provides a path for DAO Treasuries to diversify across DAO tokens, accelerate adoption of their own token, receive meta governance rights in participating DAO’s, and market their inclusion in a crypto index with strict eligibility criteria.
Motivation
DAO treasuries today remain heavily weighted in their native DAO tokens yet industry-wide diversification is modest or non-existent. We believe that more targeted Index Coop products beyond DPI or PAY are necessary to execute our vision to move $1 billion in DAO Treasury holdings to Index Coop products by 2024. DAOJ provides qualifying DAOs with a way to diversify into a broad index that simultaneously boosts adoption of their native token by new customers who are likely to hold on a long-term basis.
The proposed structure of DAOJ removes the complexity and expense of coordinating n-to-n token swaps among many DAOs and allows several whitelisted DAOs to mint DAOJ via a smart escrow contract. Finally, DAOJ marks a new epoch in DAO-to-DAO innovations led by the world’s leading provider of decentralized crypto indexes.
DAOJ Proposed Methodology
- Scope: The index will target a maximum of 30 DAO tokens
- Requirements for inclusion:
- Minimum (non-fully diluted) market cap of $30 million
- Purchase a minimum of $500,000 in DAOJ using the participant’s native DAO governance token.
- Commit to locking the $500,000 minimum purchase of DAOJ for a minimum of six (6) months in order to help fund a DAOJ liquidity pool.
- Token must be ERC20, available on the Ethereum blockchain and maintain reasonable and consistent DEX liquidity.
- Token must be a governance token issued by a decentralized autonomous organization (DAO) as classified by Coingecko or comparable third party listing. Token must have at least 3 months history of operation on Ethereum main-net, at least 3 months of price and liquidity history, and the DAO must not be insolvent. The DAO must be widely considered to be building a useful protocol or product and to have a functional internal governance system including voting rights for holders that allows for review and iteration of proposals before voting. DAO’s focused on competitive trading/holding, having Ponzi characteristics, or projects that exist primarily for entertainment are ineligible.
- Token must show results of an independent security audit to be reviewed by the product methodologist/Index Coop team.
- The DAOJ awards its holders the same voting rights as if they were holding a corresponding USD amount of INDEX tokens. By participating, DAO’s agree to participate in the meta-governance afforded by DAOJ by casting their votes or delegating them via the existing Index Coop process for delegating governance rights.
- Tokens must show a predictable inflation schedule and abstain from arbitrary and radical changes in emissions.
Index Weight Calculation
The DAOJ will use a combination of square root of market cap and liquidity weighting to arrive at the final index weights. We believe that liquidity is an important consideration in this space and should be considered when determining portfolio allocation.
TW = 75%*S + 25%*LW
where,
TW – token weight in the DAOJ
S – square root of market cap weighted allocation
LW – liquidity weighted allocation
Maximum per token TW of 30% of index if only 5 tokens are contained in the index, progressively dropping to a single token maximum weight of 10% when 25 or more tokens are contained in the index.
Value Proposition for DAO Treasuries
- DAO Treasury diversification via a single broad basket of uncorrelated DAO tokens. Alternative to default DAO practice of debating diversification into individual DAO tokens, other crypto assets
- Boosts demand for DAO governance tokens included in the DAOJ
- INDEX liquidity mining rewards for staking DAOJ tokens and providing liquidity to the DAOJ pool
- Meta governance voting rights for large number of DAO’s contained in DAOJ via a single token
- Possible brand equity boost for participating DAO’s, shows DAO-industry leadership
Value Proposition for Index Coop
- Unique approach to address large DAO Treasury market opportunity
- Built-in TVL minimizes launch risk. DAOJ does not launch without a minimum of $2.5 million in guaranteed DAO purchase & hold commitments.
- Sensitive to Index Coop engineering, liquidity, and marketing resource constraints. DAOJ is structured as a simple index with an escrow module to be developed by a trusted third party and approved by the Index Coop. Low engineering upkeep due to bi-monthly rebalancing. The founding DAO’s commit baseline liquidity and likely provide marketing support by promoting the index
- Opportunities to cross-sell participants on DPI, MVI, DATA, PAY, etc.
- INDEX allocation in DAOJ increases overall demand for INDEX, raises importance of INDEX as the leading meta governance token
- Places Index Coop at forefront of DAO Treasury leadership, DAO-to-DAO alliances
Value Proposition for Non-Treasury Investors
- Unique vehicle for broad exposure to emerging category of DAO-only crypto assets, backed by the direct participation and support by each DAO represented in the DAOJ.
- Liquidity mining rewards for providing liquidity to the DAOJ pool and staking DAOJ tokens
- Meta governance voting rights for large number of DAO’s contained in DAOJ via a single token
Research
- We are in touch with @Feddas from Yam Finance, who recently attempted to launch a DAO Treasury diversification initiative last quarter with multiple DAO’s. @Feddas shared details about the effort with each DAO and says several are positive about the concept but each DAO has its own decision process that varies in process and pace.
- @Nakamomo(Ɛ, 3) is active with Olympus DAO (~$50MM DAO treasury) and preliminary conversations with them suggest they are actively searching for diversification options and a $500,000 commitment from them for DAOJ is a straightforward first ask, with $1,000,000 requiring more deliberation and $2,000,000 probably a longer-term ask. Olympus is launching a new non-rebasing token that would qualify for inclusion in DAOJ.
- Low correlation coefficients between assets included in the DAOJ index are attractive to DAO treasuries and preliminary analysis using 15 tokens included in the sample DAOJ below indicate low levels of correlation.
Size of opportunity:
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As of July 22, 2021, DAO Treasuries are managing over $6.17 billion in assets, up from $10 million in June 2020.
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DAO Treasury diversification remains limited:
- Today there are 25-30 DAO’s that meet all or most of the inclusion criteria for DAOJ. We expect this number to increase with additional DAO launches and an improvement in market conditions.
Differentiation
DAOJ is distinct from other DAO-oriented proposals as well as other crypto indices due to:
- It is exclusively built with governance tokens issued by DAO’s and not limited to any single category of DAO (e.g. DeFi).
- Each DAO represented in DAOJ is required to purchase a minimum of $500,000 DAOJ. DAOJ will not launch without at least $2,500,000 in guaranteed purchase/escrow commitments from founding participant DAO’s.
- Each DAO must lock a minimum of $500,000 in DAOJ for at least one year, or provide liquidity for DAOJ through the escrow contract for 6 months.
- DAOJ is targeted primarily at DAO Treasuries, though it is also available on DEXes for purchase by any investor.
- DAOJ includes INDEX and therefore provides meta-governance votes. It is the first crypto index to include INDEX.
There is potentially some competitive crossover with DPI since several DAO’s are represented there, however since DAOJ addresses a wider set of DAO’s beyond DeFi and is primarily targeted towards DAO Treasuries who are required to buy and hold a minimum amount of DAOJ, the opportunity for cannibalization is modest.
Escrow, Lockups & Liquidity Mining
DAOJ uses a unique blend of escrow and participant-supplied liquidity to enable a successful rollout and ongoing development of DAOJ with reduced LP costs for the Index Coop:
- An escrow smart contract is used to facilitate initial purchases of DAOJ by founding DAO’s. Whitelisted DAO’s transmit native tokens to the escrow which are in turn minted during initial creation of DAOJ or during the next rebalancing event. (Note: given existing IC engineering resource limitations, we have identified a third party development resource from Olympus who expressed interest in leading development of this functionality.)
- Founders in DAOJ are required to maintain their initial $500,000 purchase of DAOJ in the escrow contract for 365 days unless they commit it to the ETH/DAOJ liquidity pool.
- Founders in DAOJ receive liquidity mining rewards in INDEX tokens for having the escrow contract deposit their DAOJ holdings in an ETH/DAOJ liquidity pool, locked in for 6 months. This reduces liquidity mining expenses for the Index Coop while providing additional opportunities to earn yield for participating DAO’s on their DAOJ holdings.
Meta-governance Voting Among DAOJ holders
The INDEX tokens within the DAOJ provides DAOJ holders with meta-governance votes for all tokens within the index. To vote, DAOJ holders utilize the same Snapshot-based process used by the Index Coop which will be updated to count votes cast by DAOJ holders and delegate them if quorum is not reached.
Target Founding DAO’s
Below is a sample of DAO’s that would meet the criteria for inclusion in DAOJ including in bold those we believe are already favorably inclined to join the DAOJ project. This list is preliminary and provided purely for discussion purposes as there are other DAO tokens not listed below that also are eligible for DAOJ. Note that analysis of liquidity weighting for candidate tokens is still underway and not reflected in the allocations below:
Sample DAOJ Index
Liquidity analysis
The tokens included in the Sample DAOJ above are readily available within DeFi as ERC20 tokens and can be purchased via SushiSwap, Uniswap, or Curve. While liquidity for many of these is reliably high, some smaller market cap tokens, similar to the Index Coop’s experience with MVI, come close to the $1 million in average daily liquidity mark despite having relatively large DAO Treasuries. We are continuing to model minimum liquidity requirements, gradual rebalances over a 60 day period, and utilizing the smart escrow contract to allow participating DAO’s to temporarily provide liquidity during rebalances.
Correlation Analysis
DAO Treasuries seeking to participate in the DAOJ are likely to be more attracted when the underlying assets in DAOJ are not highly correlated with one another. While the sample DAOJ included in this proposal is meant for discussion purposes, our preliminary look at correlation coefficients for those tokens as well as other potential assets for DAOJ indicate low coefficients of correlation.
Technical & Safety Requirements
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ERC20 available on the Ethereum blockchain.
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The token must not be considered a security by the corresponding authorities across different jurisdictions.
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Any network/protocol must have conducted sufficient security audits and/or security professionals must have reviewed the protocol to determine that security best practices have been followed, have well-established safety guarantees, and follow opsec best practices.
Potential Challenges
- DAO’s may be sensitive to large sales of their native token in order to participate in DAOJ due to potential downward price pressure. Our hypothesis is that this can be mitigated via more gradual minting/rebalancing over a 30-60 day period and/or via use of a smart escrow contract.
- While we see multiple avenues for making DAOJ productive (e.g. xSushi, depositing in Kashi, lending strategies), as of this writing we are awaiting the resolution of internal Index Coop discussions regarding intrinsic productivity before considering IP for the DAOJ.
DAOJ Launch Phase Implementation
- The launch phase takes place during a 60-day period when the IC methodologists/BD team identifies DAO’s willing to participate in the DAOJ, presents the opportunity, and secures their commitment as a “founding member” of the initiative.
- At any point during the 60-day period, founding DAO’s contribute a minimum of $500,000 in their native token to a DAOJ smart escrow contract using a price snapshot from a pre-agreed date and time for all potential DAO tokens.
- A minimum of five DAO’s are required to execute the smart contract during the launch phase. If five DAO’s do not transmit their native tokens by Day 60, the smart contract is terminated and native tokens are returned to the sender’s wallet.
- At the conclusion of the 60-day period, the DAOJ tokens are minted over a 30-60 day period using the tokens contributed to the smart contract. This 30-60 day period is required to minimize undesired price pressure on the supplied tokens as well as to accommodate potential low levels of liquidity. Allocation of underlying tokens is based on a combination of square root of market cap as well as a per-token liquidity weighting.
- Minted DAOJ is staked on the prevalent liquidity market in order to provide liquidity for the DAOJ token.
DAOJ Index Maintenance
Due to developer resources workload, DAOJ is to be launched and maintained in a developer lite format. This means DAOJ will rebalance less often than DPI or MVI. Rebalancing happens when an allocation within DAOJ deviates more than 20% of its desired, or in the later of every 2 months. This approach is expected to reduce the maintenance efforts of the product during the initial few months post launch.
The other type of rebalancing is when a new DAO token is added to the fund or when a DAO token within the fund is replaced by another DAO token. The smart escrow contract used during the launch phase is re-used when adding new DAO’s to the index. Regardless, we propose scheduling new DAO additions every two months.
One note regarding removing a token from DAOJ: we plan to use a trailing 30 day average market cap and if a market cap floor is breached, issue a warning, and if market cap remains below the floor begin removal at next rebalance. For removing a token based on low liquidity, we are studying the use of a model based on the price impact of a $100,000 sale.
DAOJ is initially maintained in three phases:
1. New DAO Addition Phase
New DAO tokens may be added (using a TBD minimum commitment that is greater than that required in the founding phase) during the final (8th) week of the two month period. The additions in the New DAO Addition phase will inform the allocations in the DAOJ during the Determination Phase.
2. Determination Phase
The determination phase takes place during the 8th week of the two month period. It is the phase when the changes needed for the next reconstitution are determined.
3. Reconstitution Phase
Following publication of the determination phase outcome, the index composition will rebalance to the new weights beginning on the first Friday of the following month. I.e components will be added or removed. This reconstitution phase will occur over a 30 day period.
How We Recruit DAO’s To Participate in DAOJ
Unique among all crypto index products, DAOJ requires the active participation of DAO’s representing the underlying assets in the DAOJ. In addition to the attractive benefits of DAOJ to a founding DAO, we recognize that the heterogeneity of DAO’s and their unique decision making processes requires a plan with a combination of incentive windows and leveraged outreach.
1. Friends and Family. DAO’s where current Index Coop members are also active (e.g. Olympus) and where informal discussions about Treasury diversification are already occurring will be among the first DAO’s we target for inclusion in DAOJ. One of these DAO’s has already offered a developer resource to assist if necessary.
2. Inbound DAO interest. Friends from Yam Finance, who themselves recently attempted to build a DAO Treasury diversification effort, have already signalled their interest in bringing UMA, SushiSwap, Alpha Finance Lab, and others to this discussion, all of whom are said to be positive about the general concept.
3. Higher costs for joining late. DAO’s that fail to join before the founders’ participation deadline yet later seek to join DAOJ will do so at a) higher buy-in (e.g. $1 million) and with a longer (e.g. 12 months) lockup. A cap of 30 DAO’s in DAOJ should also create an accelerated sense of urgency as available slots in the DAOJ become more scarce.
4. DPI & MVI Relationships. Other DAO’s represented in DPI and MVI in some cases have expressed interest in Treasury diversification to the Index Coop or are publicly on record stating their plans for diversification. The Index Coop BD team has already begun outreach to DAO Treasuries and DAOJ is an opportunity to focus their attention and accelerate internal DAO Treasury diversification discussions.
5. DAOJ Launch Event and Announcement. Another forcing function for getting hard commitments to DAOJ may be an Industry Coop-sponsored Annual DAO Treasury Summit in a TBD (sunny) location this year. A smartly curated invite list in addition to YouTube simulcast, planned media coverage, and airtime for each confirmed participant may both help close the founding group of DAOJ participants but also provide participant business development teams with valuable opportunities for individual DAO-to-DAO deals.
In addition, with the inclusion of more prominent/larger DAO Treasuries who have signaled interest in treasury diversification to the Index Coop, DAOJ will likely develop into a “prestigious” index, a la the Dow Jones Industrial Average, that DAO’s can reference when marketing to investors, community members, customers, etc. Being included in the DAOJ, we believe, will be a proxy for a DAO’s strength and token quality.
Fees
- Fees will be determined before the DG2 vote and subsequent product launch.
Proposed Path Forward
- The authors recommend that we begin testing the hypothesis of DAOJ with target DAO’s. Beginning this month we would like to begin working in collaboration with BDWG team members on presenting the DAOJ concept to target DAO’s (online presentation, coordinated Discord interactions, live discussions, etc.)
Author background and commitment:
The authors are committed to maintaining and creating indices as well as driving the continued growth of the Index Coop.
@patb has been involved in crypto for four years, built “proof of location” systems, has extensive experience in technology strategic alliances and industry standards organizations, joined the Index Coop community in April 2021, and manages the Index Coop’s competitive analysis function and contributes to the Business Development WG.
@nakamomo joined the Index Coop community in December 2020, one year after getting into crypto, and has been contributing to the GWG through View from the nest, CwtC, MVI podcasts and also translation for Language Ops. Nakamomo is also a council member in the Olympus metaverse project Alpha Omega.
Sources:
https:// Top Governance Coins by Market Capitalization - CoinGecko
https:// Top DAO Tokens by Market Capitalization | CoinMarketCap
https:// DeepDAO
https:// app.boardroom.info/screener
https:// apy.vision/#/liquidity-pools
, and the strengths of DAO product offerings, communities, Treasury sizes, liquidity, etc. which are already assumed in existing IC products like DPI. Looking at most of the market caps, treasuries, liquidity, and YTD performance of the assets listed in just the sample DAOJ in this proposal, we believe a strong product is totally within reach.