Buy, invest, vest

Aragon DAO
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UPDATE: This has already achieved its goal, which is to kickstart a public discussion and brainstorming of proposals from ANT holders. Don’t take this proposal as final. I plan to still draft more proposals myself and iterate on this one, and I encourage other ANT holders to do the same.

Disclaimer: This is purely my personal take. I’m not involved in the day to day of Aragon. I’m in the Aragon Association’s committee, and I plan to stay until most of the token sale proceeds have been safely transferred to the Aragon DAO. Not investment advise.

Intro

Aragon is still the leader in the DAO space, with >$6bn AUM and >5k DAOs. Heavyweights like Curve, Lido or Decentraland rely on Aragon.

However, the risk of a 51% attack has been keeping the Aragon Association from transferring all funds to the Aragon DAO.

We have seen that over the last week. Aragon attempted to decentralize with a huge book value gap on the treasury, and no incentives to combat it. The Aragon Association has been trying to solve the side effects of this problem but, in my opinion, not the core issue itself.

This proposal is a work-in-progress attempt to solve the core issue. This proposal aims to kickstart discussion and brainstorming in an open forum, instead of behind closed doors. Things are subject to change, numbers might be wrong, needs legal review.

Problem

  • Book value higher than price incentivizes short-term treasury capture.
  • Treasury higher than market cap means market values the guilds contribution as a liability/net negative.
  • Core contributors have low ANT packages and high compensation in other assets, resulting in lack of skin-in-the-game.
  • “Infinite money” problem encourages non-sustainable team growth (Aragon guilds now employ 50 people) and discourages core contributors from breaking status quo (since funding won’t stop anyway).

Solution

In a sentence

Buy ANT back, launch veANT, invest and vest the treasury.

In a paragraph

Transparently perform an ANT buyback. Aragon DAO can use that ANT to incentivize core contributors, partners and users. Invest the treasury and generate yield. Transition from wANT to veANT and incentivize veANT holders to govern the Aragon DAO. Vest the treasury, disincentivize 51% attacks and solve the infinite money problem.

Short-term actions

  • A $30m ANT buyback, using YFI’s buyback smart contracts (or similar), and done fully transparently.
    • That would effectively set a price floor for ANT; the contract will buy ANT at any price higher than 30-day moving average e.g. today it is $3.09 (this will change day to day). The buyback will adjust to the 30-day moving average each day it is active.
    • The predicted amount of ANT purchased back if bought at book value is between 5m-6.6m tokens which are 11% to 14.6% of the supply.
  • Set a smart contract as the minter of ANT, being able to mint up to a maximum of 5% per year. The DAO can later decide to make ANT deflationary. But it capping the amount that can be minted per year is a must.

Long-term alignment

  • Engage a firm (or multiple ones) to generate yield on-chain and provide LP in ANT pools (example). This firm would be restricted to only doing a subset of actions on-chain (e.g. cannot run away with funds).
  • Lock most of the treasury away for four years, whatever shape that might take (e.g. LP tokens).
    • This could be done with a smart contract that sits between the firm’s fund management smart contracts and the DAO, ensuring that the DAO is the ultimate recipient of the principal but can only withdraw 25% per year.
    • The DAO is the ultimate recipient of the yield, which is sent whole (without vesting).
  • Every year 25% of the treasury would unlock to the Aragon DAO.
  • All yield generated is set aside for veANT rewards. veANT holders are the governors of the DAO and they have quite an important job steering the wheel. They need to be rewarded.
  • Perform more token swaps with loyal Aragon users and other top-notch partners.
  • Keep Guardians and the Aragon Shield Foundation as protectors of the mission of the DAO, making sure of the legality of the proposals and also of their legitimacy towards the project’s mission and vision.
    • Incorporate a court system to replace them ASAP.

Available funds

The treasury currently consists of ~$172 million in liquid assets and 8.1m ANT.

With the move to the DAO there are tax, legal and other liabilities (like previous grant commitments), which are ~$40m. The Aragon Association, which currently holds the treasury, negotiated a tax agreement with the Canton of Zug (Switzerland) to legally transition funds to the Aragon DAO, but it requires the payment of taxes.

After 5 years, the leftover funds (after tax payments and liabilities) will be transferred to the DAO. In the meantime, some of them can be used to generate yield that can go into the DAO’s yield pool.

That means liquid treasury other than ANT after buyback = 172 (liquid) - 40 (tax and liabilities) - 30 (buyback) = $102m. If including existing ANT and ANT bought back (let’s say at $4.5 per ANT) = 102 + (8.1 + 6) * 4.5 = $165m.

Example treasury scenarios

As mentioned before, we are proposing that we run it all through an Enzyme fund (or similar) to allow for the active management of the pools and reduce the risk of upgrades to smart contracts.

Locked LP tokens

  • $65m in ETH, stETH, WBTC, USDC, ANT to Uniswap and Balancer LPs. Mainly ANT in 80/20 pools, to put the ANT to work.

Yield generating tokens

Aragon’s current position of ETH is 57,521.75 ETH (~$105m at current USD value, according to Zapper). According to our analysis, staking this amount could generate ~$5m per year, based on a 5% APY.

  • $100m to generate yield.
    • At 5% annually, that’s $5m.
    • Yield to be distributed to veANT holders that vote.
      • If 20% of ANT is veANT and ANT = $4.5, that’s $4m to distribute to $40m worth of tokens, or 12% yield.
    • Again, the principal is locked in a 5 year vesting contract, the DAO is the recipient.

We should use Lido, as they have $11bn AUM and it’s one of the largest DAOs powered by Aragon, and one of the case studies to highlight.

Benefits

  • 4 year treasury vesting discounts book value because of risks of:
    • Long-term treasury assets depreciation.
    • Long-term ANT depreciation.
  • Yearly veANT rewards incentivize holders to hold long-term to capture yield, instead of doing short-term attacks to capture the treasury.
  • veANT holders are incentivized to vote for funding proposals that increase the treasury’s value or ANT’s value (up to 4 years). If they vote to fund proposals that wouldn’t, they would lose on yield. This incentivizes staying lean until a flywheel is kickstarted, but then investing in such flywheel.
  • Guilds would be more productive because:
    • Contributors have higher ANT packages.
    • There’s vesting, so there’s no “infinite money” problem making contributors too comfortable or unfocused.

Risks

There are a number of risks that need to be addressed including slashing risks, smart contract risks, liquidity risks and regulatory risks. All of these will have to be assessed and managed over time.

Aragon Association’s role in this

The Aragon Association’s mandate is to spend its treasury on Aragon’s mission. That mandate also applies for transferring the funds to the DAO. So whichever proposal the AA decides to go with, it will need to be reviewed by the legal team. This is usually slow, painful, and requires a lot of back and forth.

I am just posting this draft here, but it will need to get picked up, worked on and ultimately agreed upon by the AA.

Conclusion

Tokenholders keep holding, core contributors keep building, and the >5,000 DAOs using Aragon keep getting a great product.

11 Likes
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post deleted accidental:

Hey Luis,

New Forum account here since first one was weirdly blocked… hope it doesnt happen again. I like the direction of the proposal. I think there are a few areas that can be improved upon including tokenomics ect. I think users who were banned hopefully get unbanned so we can all come to a agreement here.

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Generally agree but i think risks overcomplicating and adding many layers of smart contract risk with active management. Simpler is better - i think staking all our ETH is a good first step. I dont see the reason for holding many of the altcoins in the treasury such as Uniswap tokens, unless there is some sort of partnership. Why not just simplify to Eth, btc and stablecoins which can more easily generate yield.

5

Really like this direction and it seems team and holders are aligned. ANT tokens are far too cheap and trade at half of cash.

Some initial thoughts

  • buyback method should just be a 3 month long reverse lbp. if the twap of the lbp exceeds the target price for 24h then it gets paused.

  • there should be no floor or ceiling price, just a “target”

  • there are too many things being voted on. First we should focus on buybacks to book then focus on future discussions around how the funds are locked, vested, spent etc.

  • target price should be book value so we need to decide a methodology to define book value (are dao held ant considered circ? The standard process is DAO Assets / Non DAO owned ANT)

  • optional: to generate yield the dao should provide liquidity and use it to farm various things. Ie bunny, aura, curve, etc. by owning our own liquidity we can also use clever rebalances to keep the market price healthy when there are sellers (ie. removing single sided ANT or stables or eth instead of explicit buybacks).

6

Interesting approach for investors but high risk for the Aragon Project. Commitments to any buyback of tokens would re-qualify ANT tokens as securities. As a result:

  • ANT would be delisted on most centralized exchanges and banned from the front-end of most DEXes;

  • Aany future bulk sale of ANT would require compliance with securities laws i.e. registration, prospectus approval and publication requirements, unless an exemption applies;

  • Aragon Project would become exposed to potential enforcement actions supevisory authorities worldwide.

  • Incentivization to contributors to the tech becomes much more burdensome and in some cases illegal without complying with securities laws.

*The beneficial tax regime may be revoked and the tax admin may tax the Aragon Association’s assets like it does for for-profit entities.

In addition, participating with substantial amounts in liquidity pools bears the risk being qualifies as a money exchange under the AML-laws of many jurisdictions.

Always keep in mind:

  • Aragon Association is a separate legal entity with its own members and committee. Neither this forum or any governance system has any rights in the Aragon Association. By inputting decisions to the Aragon Association, you should always keep in mind depending on the involvement and the topic you may qualify as de-facto body of the Aragon Association and become personally liable towards third parties and the members.

  • The Aragon Project aims to further the growth and development of Web3 open-source software applications and tools for the easy, transparent, borderless, permissionless and secure establishment, administration and operation of decentralized organizations and ecosystem. This is also “hard coded” into the articles of association of the Aragon Association. Contrary to what is claimed by unqualified people in various forums and social media channels, the Aragon Association is bound to its purpose and cannot just do whatever it wants. Otherwise, there is not only a huge tax liability but also a risk of losing the status as a non-profit association.

  • The proposals here should focus on creating value towards the purpose of the Aragon Project, which is not the people that holding ANT just for investment purpose but the ecosystem creating tools and applications decentralized governance systems.

“In honorem iustitiae et legalitatis”

7

We’ve bought back in size in the past, so there’s no new additional risk buying back again

If this buyback adds any legal risk, that same legal risk already is applied regardless of if it happens or not since we already did it

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Who is we? This is not how law works. if you do a criminal activity for which you have not been convicted in the past it doesn’t mean that such activity is legal. It is a difference whether you publicly announce a buy back or just buy back occasionally in your own discretion for benefit of the project. This is proposal sees to benefit investors and not mainly the project.

Law is not code - law is no exact science an does not know the if this then that mindset

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Some subtle differences - buyback is now being discussed in the forum. There was significant market movement around the publishing (some before and some after).

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Hi everyone, Hi F.C

Would you mind listing the laws and the jurisdictions you’re referring to? The mere fact that a country forbids something (say, discussing on an uncensored forum) doesn’t mean we shouldn’t/can’t do it, as it may not apply to us.

For instance, as a non-US person, I’m not concerned by the securities law, most of humanity isn’t anyway, as it was stated many times, Aragon Association is not AragonDAO. Hence, if AragonDAO chooses to act forward to restore the fair value of its governance token, I’m not convinced there’s an issue here.

@BearBudget The discussion is public, the liquidity of the token is quite low, hence a lot of volatility. This is very common in the life of projects.

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HI Yakitori - sure. Applicable financial market laws cannot be chosen but they just apply. As the Aragon Association and the Aragon DAO (Aragon Ecosystem Association) are incorporated in Switzerland, I’m mainly referring to Swiss financial market laws i.e. the Swiss Financial Services Act article 3 (b) FinSA Fedlex and the Financial Market Infrastructure Act article 2 (b) FinMIA https://www.fedlex.admin.ch/eli/cc/2015/853/en#art_2 . If you are interested I’m happy to provide you with background on the practice of the Swiss regulator on how it applies the term securities to digital assets.

At the end the aim must be to protect the treasury of Aragon Association against any risks that it can be used in the best possible interest for the Aragon mission.

1 Like
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Thanks for sharing your thoughts, @luis! I’ve been following the recent discussions and, as a long-term ANT holder myself, I wanted to chime in with my opinion.

I believe that we should pursue both short and long-term strategies simultaneously or, alternatively, focus on aligning the long-term plan first and then address short-term goals. This way, the value generated from long-term initiatives may eliminate the need for a buyback. I’m confident that every ANT holder would agree on the importance of long-term sustainability.

From what I understand, @Yakitori, the DAO currently holds 300k, which it can allocate as it sees fit. However, the remaining assets have yet to be transferred to the DAO. Correct me anyone if this is incorrect.

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Just to be clear:

there is no legal obligation of the Aragon Association to transfer any funds to the current Aragon DAO nor to anyone else - both are separate independent legal entities. The only obligation the Aragon Association has is to follow its purpose in the of association. On the other hand, the Aragon Association can and does also not control the Aragon DAO. You see the Aragon DAO is a real autonomous decentralized organization governed by wANT holders.

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Ok so to be clear, say a vote passed in the AragonDAO that breached the laws you reference the Aragon Association would not be able to implement it regardless?

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Thanks @luis for your thoughts. I think it’s healthy to have such discussions before too many proposals congest the pipeline. I have had to do with risk management most of my career and hence developed a passion for this typically less popular topic. Let me thus share my 5ct.

The Buy

I cannot comment on whether buying ANT is an effective approach to prevent a 51% attack. To manipulate price floor of ANT and steer supply for treasury management reasons I would rather deem a risky bet. Buying significant size transparently does not necessarily set a floor, but attracts more speculation which can go both ways (since the purchases are finite, an attacker could speculate that once the program is done, the project holds a bulk position and may short against it… the lower the price goes un-supported, the more holders exit and at one point the treasury will be forced to liquidate too). Not sure if this will shine a good light on Aragon either.

For the DAO to maintain a certain balance of ANT, particularly for incentives and liquidity purposes, is certainly a reasonable thing to do. Given the legal and tax aspects of the AA, it may make sense to manage the treasury (with limitations of course) in the DAO. Question is, how would the individual decisions be made and who would have that responsibility?

The Invest

If ANT or other crypto investments shall be made, the market risk should definitely be managed. Aragon already has significant intrinsic exposure to the crypto industry (price, counterparty, regulatory, tech, adoption risks, etc). Further, correlation with ETH, BTC, etc is very high and typically even intensifies in downturns. Sure, we all believe in the potential of crypto but “we” should not put all eggs in the same basket. There are different effective ways to mitigate market risks (or combinations of the below):

  • Risk Diversification with low correlation assets. Allocating assets to different strategies, managers and assets effectively reduces overall portfolio volatility.
  • Use systematic and non-emotional trend models to determine feasible buy and sell levels and thus reduce drawdown.
  • Use derivatives (options, futures) to hedge price risk temporarily or implement accumulation and liquidation strategies.
  • Apply Portfolio Risk strategies such as CPPI/TIPS, to implement a portfolio floor.

What Aragon DAO requires, before making such investment decisions, is a well thought-through risk model and a long term investment strategy which finances opex, incentives allocations and fosters long term growth. Maybe this is already available, then never mind. I think it is an important piece which can, if set up properly and transparently for stakeholders, add tremendously to an effective governance. The alternative to risk management is risky management.

  • Protect against losses
  • Improve decision making
  • Enhance stakeholder confidence
  • Promote compliance
  • Encourage innovation

I know it adds to complexity but some kind of Risk Guild/Commission may be an idea. Its responsibilities would be to:

  • Identify risks
  • Analyse (likelihood + impact in numbers/values)
  • Prioritise risks based on business objectives => complement strategy, guide Hi-level asset allocation and make annual proposals
  • Treat/respond to risk conditions
  • Monitor results + adjust

This would provide reasonably adjustable guidelines for sustainable treasury management and effective risk management in addition to a mitigating effect of a 51% attack. And how about having an economic/treasury guardian to also check if proposals are in line with the long term portfolio strategy?

A well-diversified treasury in the current total size should easily allow for an annual yield that covers all opex and incentive requirements for Aragon. With the above as basis it can be well positioned to address various risks, including risks outside the crypto industry (e.g. inflation which is very relevant for wages, but also geographical, regulation, etc.) and ensure cash flows for the long term.

Treasury should not be “locked away” but put to work in a diversified portfolio. A part should be invested with low risk but off-chain imho. This is to diversify away some industry exposure. E.g. US Treasuries pay 5% p.a. with much less volatility than ETH and less counterparty risk (sure we can argue about this, but if the US goes bust we have other problems). They are further more aligned with real risks like inflation. Holding USD cash or USDC is no option in my view. Actual 10yr inflation risk of 30m USD cash assuming 2% average inflation rate is approx. 20% (current rate is 4.98%). ETH staking yields ~5% now but will be affected by activity and $ yield is extremely dependent on price development. Please also keep the additional issuer and custodian counterparty risk of USDC et al. in mind. Regulation is also a constant blackbox here.

Treasury could for instance run a TIPS model which effectively gives it a floor value, and could include:

  • Crypto (all Hi-Risk unless price risk mitigated)
    • ANT => with price risk mitigation
    • ETH (staked) => with price risk mitigation
    • BTC => with price risk mitigation
    • DEFI yield portfolio => with proxy price hedge
  • Strategic Investments (which are Hi-Risk)
    • Private Equity => with proxy price risk mitigation
    • Token Swaps => with price risk mitigation
  • Traditional (Lo-Risk portfolio, can be individually implemented token based)
    • Low risk equity/bond portfolio
    • Alternative strategies with zero correlation
  • Mitigation tools besides effective diversification could be:
    • Asymmetric exposure strategies: I know a friendly Quant Shop that runs very effective models on real cash since >4 years. The model could be implemented fully automated using Aragon tech.
    • Derivatives use: This is in fact my expertise, we advise other foundations in that field. If there is interest, I am happy to shine more light on the topic. Such strategies may also be packaged into token-based structures.

The Vest

The above imho takes away the need for a vesting scheme. Available resources may be discussed in the Hi-level asset allocation proposals of the Risk Guild, which naturally consider the risk tolerance, strategic requirements and risk buckets. Hence, to address your north star metrics the treasury strategy can simply define a bucket with size that allows for larger contributions if strategically required.

Any fix contributions to proposals naturally reduce the available resources over time. A crypto winter accelerates that process. I thus highly suggest Aragon implements a treasury yield strategy that allows the project to live and grow from the effective annual $-yield (as long as salaries and expenditures are not paid in crypto).

Hope this helps in any way. Happy to discuss and assist with concrete proposals. It goes without saying that this is just personal thoughts and experience shared and NOT financial advice.

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Not exactly. The Aragon DAO can vote on whatever they want. If they decide to distribute the USD 300k transferred, then the Aragon DAO (remember is a Swiss association) would be in breach of Swiss association laws and the association may be re-qualified as general partnership with unlimited liability and pro rata taxation of the funds based on wANT holding.

The votes in the Aragon DAO are not binding for the Aragon Association i.e. they are independent and separately governed entities. My point here is that the Aragon Association should not commit to a buy-back, as this may result in a re-qualification of the ANT tokens.

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Thank you for clarifying. One more question who are the members of the Association governing the DAO?

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Its the wANT holders and delegates (received delegated wANT). You seed that in the articles of association that you have to accept in the DAO App when you wrap ANT.

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It’s not a distribution, it’s a swap. The ANT tokens can then be used to pay contributors and improve the general state of the protocol, as Luis outlined.

As you explained, AragonDAO and Aragon Association are different entities. You could frame this as a treasury diversification.

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can you dig in more about the specifics behind why the buyback is is problematic? Is it the methodology? market buying in a dex.

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Sure. The main challenge is that the commitment of a buy back of own tokens results in a requalification of a token as a security in many jurisdiction (for sure in Switzerland). The regulator applies the approach “substance over form”. Arguing that Aragon Association buys back ANT to pay contributors i.e. it is only a swap will not hold up. They will ask: why can you not just pay in ETH, fiat or other currencies that are in the treasury?

@Yakitori : again it is not up to the Aragon DAO to decide what the Aragon Association shall do with its treasury.