The 2% Cash Grab
I believe that an index provider should try to build a reputation for being a dependable custodian of our users assets. They should feel safe knowing that we will not take risks, charge excessive fees nor make frequent changes. We care for a users interests as though they are are own. This includes consideration holders, Liquidity providers, arbitrators and other protocols within DeFi.
However, I want to do an experiment.
@Richard made an excellent proposal about DPI as a productive asset. In it he identified three methods that DPI can be productive
- Generating yields within DPI
- Becoming woven into the fabric of DeFi as another money Lego. Every time another protocol creates a way for DPI to be used increased the productiveness of DPI. A MakerDAO for DPI makes DPI more productive, as does the availability of aDPI or cDPI vaults.
- Becoming a positive influence within other protocol governance. By voting in ways that the underlying holders approve of, we help them gain confidence that we have aligned interests. Conversely, if we vote in ways against our holders wishes, they will be more inclinded to withdraw and hold the underlying tokens themselves.
Unsurprisingly, in this post I want to talk about the 1st method.
Aim
The aim of the experiment is to see if we can generate 2% yield pa on the DPI index. I want to run the experiment over one month, so the yield should target 0.16% [1.02^(1/12)]. i.e. $13 M AUV should produce $20,800 within one month.
Once we have demonstrated that we can generate the target 2% per year we can discuss how we can make this work for us.
I’m not a solidity programmer, so my proposal is pretty old school (circa 2019…).
Experiment parameters
- 1 month period (~Monday 2nd Nov 2020 to Monday 30th November 2020)
- On day one 45% of each and every undervaluing token in the DPI wallet (“DPI treasury”) is transferred to a multisig wallet (“DPI farm”)
- The underlying tokens are then deployed in a range of income generating methods with the following restrictions:
- Only deployed to protocols within DPI
- No potential for slashing, divergence losses or liquidation
- No withdraw fees
- No AUV based fees (profit sharing fees are ok)
- No withdraw time locks
- At the end of the period, the yielding strategies are unwound. The same number of tokens deposited will be returned to DPI treasury to make it whole. Any additional tokens collected will be transferred to INDEXcoop treasury.
Outline procedure
- Formal IIP which passes
- Communication of strategy with wider community (holders, protocols etc)
- Transfer of 45% of DPI Treasury tokens to DPI farm wallet
- Deploy individual tokens to yielding opportunities.
- Monitor and manage the DPI farm. The DPI farm should be maintained within a 40% to 50% operating window compared to total DPI AUV. This will be done by addition of funds from DPI treasury and transfer to the yielding strategies, or partial unwinding and return to the DPI treasury. During any periods of DeFi volatility / network congestion, the multi sig holders have the freedom to unwind any and all positions to the underlying tokens.
Note: All transfers between DPI treasury and DPI farm must be in perfect proportions compared to the most recent re balance. - On or before the 30 November, all DPI farm positions will be unwound fully and the farm tokens (excluding yield) returned to DPI treasury
- All remaining assets in DPI farm would then be transferred to INDEX treasury.
- INDEXcoop will review the experiment and decide the next steps.
Success criteria
- No loss of any underlying tokens
- No liquidity shock in the DPI treasury
- Captured yield is > 0.016% of average DPI for the month.
- DPI farm does not significantly deviate from the 40% to 50% of AUV range for more than 24 hours in a single instance.
- No damage to INDEXcoop’s reputation as a custodian and partner in the community.
Notes on experiment design
- The primary aim is pretty straightforward – to get some income.
- Conducting the experiment will help our holders understand that we are seeking to capture internally availability yield.
- Conducting the experiment will also demonstrate to other protocols that INDEXcoop are willing to risk underling assets for yield. This will impact decisions made by others on whether DPI is listed as collateral, and the collateral parameters used.
- Communication / promotion of the experiment will demonstrate the INDEXcoop is working in an open manner to help us build a reputation for being trustful.
- I’ve deliberately made the entire process off chain. I believe that with suitable parameters, the strategy can be implemented without significant coding.
- By relying on the mutisig, we can avoid the time taken to plan, deploy and test code.
- The start and end dates were selected to be within a single rebalance period (1st business day of the month) This means that the rebalance can be done on a single vault (PDI treasury) which contains all the AUV at that time.
- The intention is for the experiment to avoid the end of the INDEX liquidity mining programme around the 5th December. I think the end of the liquidity mining programme is likely to result in significant redemption of DPI for the underlying tokens to access other yield generation strategies. By being 100% native token within the DPI treasury at this point, we enable a smooth operation of the market and out smart contracts. Note at any time during the liquidity farming INDEX, a better farm may appear which could have similar effect on DPI AUV.
- I would also prefer to avoid runing the experiment over the holiday period to reduce demands on the multi sig holders (although it does clash with Thanksgiving)
- A cap of 50% in the DPI farm was selected to help others understand the experiment, and the impact on their holdings / collateral parameters “About 50% is locked away”. I also believe that 50% cap displays that we are taking a cautious approach.
- Obviously higher proportions could be deployed to the farm to increase the AUV yield. However, I do not think we have a sufficient understanding of AUV behaviour to go higher at this time.
- By restricting yield generation to protocols within DPI, we will use protocols that our holders already selected as suitable for investment. In addition we help build our place in the Defi community.
- For each token I would select a single strategy based on track history and leave it in place for the full month. Chasing yield between aYFI and yYFI is not intended to be part of the experiment to reduce workload on the multisig during the experiment.
- Diversification between yielding protocols should be considered. Say no more than 25% of total DPI AUV / 50% of the farm within a single protocol (COMP, AAVE, YFI…).
- If no suitable yielding method is available, the native token will be hold in DPI farm.
- Transfers between DPI treasury and DPI farm must be done using all 11 tokens in a perfect ratio based on the most recent DPI rebalance. I understand that the DPI issue and redemption smart contract looks at the ratios within DPI treasury, so withdrawing (or adding) any of the tokens individually will change that ratio and push the DPI vault out of alignment with the DPI index / market cap weights.
- Underlying protocol governance using the DPI tokens is considered within scope of this experiment. i.e. they may or may not be done under instruction by INDEXcoop
- All gas costs will be taken from the yield generated before calculation of the AUV yield.
- The yield will be distorted compared to DPI balances (i.e. we my gain lots of YFI, but zero REP). To avoid complexity, rebalancing of the income is not anticipated until after the harvest and making DPI treasury whole.
- INDEXcoop will need to decide whether the generated yield should be converted to other assets within the INDEX treasury (ETH, DAI, DPI).
Costs
Other than the opportunity cost of time and effort on the experiment. I don’t see many significant costs. There is minimal coding required and a few transactions to pay gas on. There will be a cost for the multi sigs as they will need to manage the DPI farm and DPI treasury to respond to market and AUV changes.
Risks
- I think total loss of the underlying tokens is unlikely given the use of battle tested protocols (COMP, YFI and AAVE).
- There may be a liquidity shock within a single token (e.g. cUNI can not be with drawn because of high borrowing demand). This would make it impossible for us to transfer DPI farm to DPI treasury.
- There is the potential for liquidity shock on DPI vault if there is a massive redemption of DPI. This could be caused by changes in the relative desirability of the DPI ETH liquidity mining. Another potential cause would be significant problems within a single underlying token.
- There is also an opportunity cost as our governance, technical, and marketing efforts are directed to the experiment and not other activities that have larger long term benefits.
Timing
While I have suggested November, I actually see two options:
- November has the potential to capture the larger total value as I anticipate enjoying ~$13 M AUV though all of November. However, it also means that if we get anything wrong (liquidity shock), then we make a larger loss compared to the DPI index which we may feel bound to compensate from INDEX treasury. Running the experiment during liquidity mining means that changing market conditions (LM incentives) make the total AUV harder to predict.
- January, is likely to have less AUV, and so less total income from the experiment. However, we would be deploying a smaller farm and we should have a better understanding of the change in AUV over time.
Personally, I think early November feels too quick to discuss, propose, communicate, and implement. However, January 2021 is eleven weeks away, and a week feels like a long time in crypto. Possibly we reduce to two weeks in November.
I am looking forward to your thoughts.
Regards
OA
- Yes
- No
0 voters
- 2nd November for 4 weeks
- 16th November for 2 weeks
- January 2021
- I still think it’s a bad idea
0 voters