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):
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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:
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Identify risks
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Analyse (likelihood + impact in numbers/values)
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Prioritise risks based on business objectives => complement strategy, guide Hi-level asset allocation and make annual proposals
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Treat/respond to risk conditions
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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:
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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
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Strategic Investments (which are Hi-Risk)
- Private Equity => with proxy price risk mitigation
- Token Swaps => with price risk mitigation
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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:
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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.
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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.
