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- Portfolio holdings and APY do not provide a complete picture of Treasury performance
- TempleDAO Treasury is transitioning to a v2 system that turns an approved Treasury Strategy into a Treasury Borrower subject to an internal funding rate
- Treasury token flows and changes in equity will be comprehensively tracked to improve transparency and ensure compliance with the deployment scope
The advent of the Decentralised Autonomous Organization (DAO) has revolutionised the way that people can organise themselves in the pursuit of a common cause. Much progress has been made with respect to how governance power in such a self-governing organisation can be democratically distributed to token holders and exercised. However, the implementation of Treasury management through current DAO governance rails such as snapshot elections and trusted managers do not facilitate execution that is informed, accountable, and transparent. Let’s examine how current Treasury management implementations fall short.
Treasury Governance Requires a Financial Framework
Across the DAO landscape, various forms of elections and delegated voting systems are used to select individuals who can exercise executive power as signers on a multi-sig Gnosis Safe on behalf of the DAO. The colourful history of DeFi has borne witness to instances of malfeasance or incompetence from Treasury managers who did not act in the best interests of the DAO. A critical gap remains when it comes to transparency and accountability when it comes to tracking the allocation performance and the flow of funds post-deployment of an approved Strategy. We believe that proper oversight of deployed Treasury funds require a financial framework — not a political framework — for robust implementation.
Strategy Management Decisions Are Not Informed
Most Treasury dashboards consist of a list of holdings with the current market value displayed along with a returns metric such as APY. A typical Treasury Strategy involves a token swap and a subsequent deposit into a liquidity pool, money market, or a staking contract with returns being denominated in inflation, swap fees, interest, or reward tokens. What is missing is an analysis of the deployed Strategy when discounted by risk and opportunity cost. How does the DAO objectively assess whether the investment is doing well relative to alternatives? At what point does the DAO compound into the same position, realise gains, or write-down losses? And most importantly, how does the DAO know if those entrusted with the power of purse are operating within the scope of the Strategy?
A snapshot glosses over these key position management details and only focuses on the initial movement of money. This creates a situation where the DAO rarely exits a position that it had previously entered even if the rationale for the original allocation is no longer valid, or if changing circumstances dictate that the position should be de-risked or re-allocated to a better opportunity. Outside of a raw APY number which is an unreliable snapshot, there is no token flow or bookkeeping framework to facilitate the critical financial analyses that are required for stakeholders to come to an informed conclusion.
Equity Is the True Measure of Strategy Performance
We believe that a state-of-the-art Treasury should be built on a robust accounting foundation that leverages the power of on-chain immutability. Equity is a well-understood metric that can be used to characterise any given financial position in terms of assets and liabilities. Most commonly, equity serves as the health indicator for a leveraged position in a money market and oscillates on a spectrum that ranges between positive and negative, or between unrealised gains and losses.
From the DAO’s perspective, a desirable allocation should eventually generate positive equity (unrealised), or negative Net Debt (realised). If the asset value of the position minus the outstanding Debt or Liability is greater than zero, then equity is positive. If the result is less than zero, then equity is negative. All else being equal, a Strategy that generates more equity growth is superior to one that generates less equity growth per unit allocation over the same period.
We can calculate equity for the illustrative allocations shown below.
- DAO initially supplied 1,000,000 DAI to Aave and earns yield through the Aave Interest Bearing Token (aDAI) which rebases at the variable interest rate for DAI borrowers on Aave. The Strategy currently holds a balance of 1,025,000 aDAI. Therefore the net equity of this strategy is the USD value of aDAI less the initial DAI allocation, or +$25,000 USD.
- DAO initially supplied 10,000,000 USD worth of liquidity to the FRAXBP Curve pool. Assuming that stablecoins pegs have held, the current equity of the Curve LP can be estimated as $1 times the underlying token balances minus the initial $10mm deployment plus the current value of the accrued FXS, CVX, and CRV farming rewards which we can value at $150,000 USD (unrealised). The current equity of this allocation is +$150,000 USD.
In the examples above, the USD value of the position is relatively stable, but it is possible for equity growth to be negative due to market factors including exploits, impermanent loss, depegging, reward token price volatility, or interest rate spikes for a leveraged position. The volatile nature of the market makes Treasury allocations not amenable to management by snapshots, particularly if the Strategy is highly sensitive to equity changes. The current solution is to give far more discretion to the managers to manage the outstanding position.
Contrary to the ideals of transparency and accountability, most DAO Treasury Managers are currently left to their own discretion after the initial funding approval. By incorporating an equity-based approach to position management, and by utilising various subgraphs and price oracles, TempleDAO can bridge the current knowledge gap. All Stakeholders will have visibility to the token flows and be able to assess the equity of the current DAO Treasury positions on-chain in real-time.
Treasury Funds Are Borrowed and Repaid by Strategy Borrowers
In money markets, Lenders generate positive equity and Borrowers generate negative equity because typically there is a spread between the Supply APY and the Borrow APY. The Borrower hopes to generate equity elsewhere in excess of the accrued Debt (initial principal plus interest). If Borrower’s net equity becomes too low because the loan has breached loan-to-value (LTV) thresholds, the position must be deleveraged or face liquidation.
Utilising this familiar money market context, a Temple v2 Treasury Strategy will be treated as a Borrower. In the new framework, the Lender would be the Treasury Reserve Vault contract–also known as the TRV–which holds the reserve currency e.g. DAI or TEMPLE, and each Strategy is borrowing DAI or TEMPLE from Reserve. Initially the Strategy would gain governance approval to borrow up to a certain Debt Ceiling, and subsequently the TRV would lend to the Strategy contract. Once a Strategy Borrower reaches its borrow cap, no additional TRV funding will be forthcoming until its current Debt Ceiling is lifted via governance.
The key operator in the new Treasury framework is the Executor, which is a Gnosis Safe that can call elevated-access functions in the TRV contract and the Strategy contracts. The signers on the Executor are elected delegates chosen from the DAO. The Executor will call the appropriate functions to facilitate the transfer of funds between the Treasury and the Strategy. The Executor Gnosis is not a Strategy contract and therefore cannot force the TRV to lend money to itself.
All token flows between a given Strategy and the TRV are fully balanced and categorised as a loan or a repayment. TRV Circuit Breakers are in place to prevent unexpected or unusually large transfers of funds from the TRV to one or more Strategies. Strategy operations such as borrows and repayments may be automated as long as the Strategy e.g. Ramos is sufficiently well-defined and non-discretionary.
Some Strategies that are not amenable to automation may need to be executed manually. In this scenario, the deployed funds still originate from the TRV as a loan and debt shares are still issued to a Strategy integrator that acts as a “wrapper” to ensure that the underlying manual operations will adhere to the v2 bookkeeping framework. This wrapper will then transfer the borrowed funds to a designated multi-sig wallet to carry out the requisite manual operations.
Treasury Funding Rate is Used to Discount Strategy Returns
To understand relative performance and opportunity cost across all Strategies, internal Treasury Borrowers will incur interest. The Treasury Benchmark Rate, also known as the “risk-free” rate (RFR), is the DAI Savings Rate (DSR) which currently stands at 5%. When a Strategy contract receives a DAI loan from the Treasury Reserve, the TRV will issue a systemic debt share token called dUSD that is equal to the borrowed DAI. This debt token will rebase according to a continuously compounding composite rate consisting of: 1/ Benchmark Rate and 2/ Risk Premium Rate.
Net Strategy Equity = Total Market Value — Debt (dUSD or dTEMPLE) + Credit (TEMPLE)
where dUSD is a USDeq debt token that compounds at the current Benchmark Rate and a Risk Premium Rate and where Credit is token considerations (e.g. burned TEMPLE) that can be applied toward TRV Debt repayment (dUSD burn) or future loans (dUSD mint)
The TRV contract utilises an interest rate model that will apply dUSD token rebases to each Strategy according to its bespoke Risk Premium Rate plus the baseline interest that is growing at 5% (Benchmark Rate). The risk premium for a given Strategy will be approved by governance and configured in the TRV contract by the Executor. The Treasury v2 framework also supports TEMPLE token borrowing. For a TEMPLE loan, one dTEMPLE would be issued per minted TEMPLE transferred to the Borrower. The Benchmark Rate for TEMPLE is set to 0%.
All Strategies must pay down their debt, or have it repaid on their behalf by a 3rd party such as a hot wallet or a helper bot tasked with selling the farmed tokens held by that Strategy. Whenever DAI is repaid to the TRV on behalf of a Strategy, an equal number of dUSD tokens will be burned. The dUSD balance and the Net Debt of the given Strategy will be updated accordingly via a subgraph and reflected on the dashboard. A Strategy can liquidate its holdings to repay its outstanding dUSD debt with a surplus of DAI to create a positive return. In contrast, a Strategy that has realised a loss after a complete unwind will leave surplus dUSD.
A Strategy cannot be literally “liquidated” by the TRV because the loan was never collateralised in the first place and the issued dUSD debt token is only used for internal accounting purposes. Nevertheless, any residual dUSD post unwind is still “bad debt” and represents loss of capital to the TRV either in relative terms i.e. compared with allocating capital to sDai (DSR), or in absolute terms (nominal loss). The new Treasury framework is designed to support multiple Strategies in parallel to smooth out the equity performance from any individual Strategy.
Strategy-Specific Funding Rate Varies Based on Risk
The dual interest rate design enables the DAO stakeholders to discount yields by 1/ Risk Premium i.e. instrument-specific risks such as illiquidity or price volatility, in addition to 2/ Global Cost of Capital or opportunity cost. The Risk Premium Rate helps to put into proper context the high nominal rate of return advertised by risky Strategies. The Benchmark Rate that represents Global Cost of Capital can be adjusted by the Treasury while leaving the bespoke Risk Premium Rate intact for the more risky allocations. Alternatively the DAO can adjust the Risk Premium Rate for one Strategy without impacting the borrowing costs for all other Strategies. We should note that the Risk Premium Rate is inherently subjective and may need to be updated periodically.
Interest rate parameters for a given Strategy are finalised at the time of governance approval and configured on the TRV contract as an elevated access function that can only be called by the Executor. The Treasury Interest Rate Policy can be fine-tuned to selectively constrain Strategies globally or individually. Stakeholders can force a deleverage event to improve system liquidity, or lower the interest rate to improve utilisation.
Key Strategy Levers Are Activated by Equity Thresholds
Once returns are put into focus through the lens of equity and the Treasury funding rate, we can apply the familiar concept of stop-loss or limit order to refine the scope of the Strategy. In other words, an approved Strategy proposal is specified with not just the requested funding amount, but also the funding rate and the equity thresholds at which the Executor has a mandate to take a prescribed action.
For instance, if the liquidation threshold of Strategy X is set to negative 5% relative to its current debt, the Executor should unwind the position expeditiously and realise the loss unless a threshold update is approved by governance. Similarly, positive equity thresholds can also be set to realise gains when certain price targets are met, or for the routine compounding of reward tokens back into the underlying position.
In the Temple v2 Treasury framework, the Executor does not have autonomy to unilaterally move preset equity thresholds, nor to operate outside these limits without further approval. Where feasible, equity threshold actions should be automated by bots, or implemented on the Strategy contract itself. Care must be taken to ensure that the Strategy does not get front-run, or have transactions triggered maliciously or thoughtlessly. The v2 framework does not preclude sensible manual intervention to fill operational gaps.
Closing Thoughts on the New Temple Treasury
Transparency and accountability in Treasury deployment are long overdue in the DAO space. TempleDAO has taken an important step toward this goal by implementing a set of smart contracts that adhere to the Treasury framework described here. The new contracts underwent a comprehensive audit from yAudit before mainnet deployment. Ramos was the first v2 compatible Treasury Strategy to be migrated as well as the Base Strategy for DAI (DSR) that we use to set the global funding rate for DAI deployments. Current non-v2 Strategies will be migrated or deprecated over time. Our engineers have also built a user-friendly dashboard on top of the new Treasury contracts for public consumption at https://templedao.link.
In a future article, we will delve into the novel permissioning system behind the Executor Gnosis that serves as the Treasury operator and how we will constrain the delegate signers.
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