Financial Proposal: Aragon Dao x Galleon: Delta-neutral, Yield Generating Strategy

Proposal Title: Aragon Dao x Galleon: Delta-neutral, Yield Generating Strategy.

Authors: Duck from Galleon

Date: 23rd June 2022

Background

  • Galleon is a guild of experienced methodologists aiming to research, design, and create best-in-class thematic, leverage and yield-based structured products on-chain across all EVM-based networks.
  • A Set Protocol Ecosystem partner, with seed backing from 1kx, Co-founder of Polygon, Angel DAO and Fireeyes.
  • Latest product: The Basis Yield ETH Index launched on 22nd June 2022.

Purpose

The purpose of the Galleon x Aragon treasury diversification is to provide Aragon with a low-risk, high-yield return on treasury assets. Given the recent crypto market volatility, Galleon has just launched a new product The Basis Yield ETH Index ($BYE): (https://twitter.com/galleondao/status/1539613237003649024?s=20&t=R4plWJxfcEk8GmlqnBx9nQ) $BYE is an ideal product that aligns with Aragon’s treasury growth goals as a candidate to generate sustainable yield for the DAO.

How does the Basis Yield ETH Index work?

$BYE is a basis trading strategy token that integrates with Perpetual Protocol V2 to create a leveraged, delta-neutral position - eliminating market price risk within the token contract by hedging $WETH spot exposure with an equivalent, levered short $vETH position. This enables holders to generate one of the highest, most organic yields in DeFi today via funding rate arbitrage.

Maintaining this target leverage ratio is fully automated, Galleon operates keeper bots that execute rebalances upon threshold breaches derived 100% from on-chain data (readable from the product smart contracts).

Generating auto compounding yield when funding is positive; inversely, when funding is negative, there is NAV decay. However, because of this Galleon wants to create the highest level of alignment with BYE holders by deploying a performance fee revenue model. Therefore there is no streaming, minting or redeem fee; the product only charges a performance fee (10%) on the yield earnt. We believe this is the fairest way to operate $BYE and Galleon succeeds when our product holders are happy.

Backtesting

Galleon ran backtesting against the $BYE strategy between 27th November 2021 → 10th February 2022 and the projected yield was 15%. Funding was only negative for 11% of the time and even during periods of sustained negative funding the yield was positive.

Additionally, as per R72.fi historical data for perpetual protocol for 01/01/2021 - 31/12/2021 yield generated was 40.9%, in these conditions $BYE would have generated 27% yield while remaining delta neutral.

How will your proposal, if activated, benefit Aragon DAO?

If the proposal is activated, Aragon DAO would benefit from a delta-neutral yield generating strategy. Any deployed capital from the treasury would be protected against market price risk (which is ideal in the current highly volatile market conditions) and generate an attractive APY % which would benefit the DAO’s longevity by increasing treasury ROI and TVL.

Liquidity incentives

In addition to the yield generated by the product, Galleon is actively seeking an optimism grant proposal to add OP tokens via an incentives programme that will run from between 12-24 months to encourage liquidity provision for long-term alignment between LP token holders, perpetual protocol, Galleon and the Optimism Network.

$BYE Purchase Plan

  1. We propose an initial deployment of $1-2m, to mint $BYE from tokenSets. This would be a “test amount” for the Aragon DAO team to monitor the performance of their capital.
  2. After 3-6 months if the Aragon DAO treasury team are comfortable and happy with the returns of the $BYE product, we propose increasing the position to $5m.
  3. After a year, again if the treasury team are comfortable and happy, this number again could be further increased.

*Obviously, the above figures are fluid, whether the figures are increased/decreased at any stage of the Purchase Plan is entirely up to and at the discretion of the Aragon DAO team.

Phase 1 Purchasing

  • Initial purchases of $BYE would need to be minted from TokenSets via direct issuance, as we do not currently have enough liquidity for larger entities to purchase via uniswap v3. To do this all that is required is WETH & USDC.
  • Galleon is currently implementing a “flash issuance” feature for the product via our app on (https://app.galleon.community) this will enable an individual or entity to purchase via USDC only, useful for not having to have any WETH exposure prior to issuing BYE.
  • Galleon will be implementing either a xtokenterminal incentivised LP pool / an Arakkis (originally Sorbet Finance) incentivised vault, we would recommend that Aragon DAO join this LP pool for additional APR (from OP incentives) once this goes live (currently going through governance).

Phase 2 Purchasing

  • Discuss with the Galleon team performance/satisfaction of the product - if Aragon DAO is comfortable explore further deployment of treasury funds.
  • The flash issuance contract will be up and running, therefore this would most likely be the easiest way to deploy USDC into the $BYE product (due to slippage this most probably would be best in batches).

Timing

Start 2022 June / July

Other Considerations

Galleon prides itself on a “personable approach” to partners and investors, therefore the Galleon team would set up direct communication channels between Aragon DAO x Galleon so any queries or questions ongoing can be urgently addressed.


Review Process

Personnel

Galleon’s core team consists of:

  • Andrew - Galleon Founder & Advisor @ Set Protocol
  • Duck - Operations & Biz Dev
  • Crown - Dev Ops
  • Additional two Senior Solidity Developers who are joining the team as part of the Galleon <> Beverage Finance Acquisition.

Technical

  • The Basis Yield ETH Index product is a fantastic, low-risk, high-yield complimentary strategy for treasury diversification that performs well in any market conditions.
  • Aragon DAO would only be charged a (10%) fee on yield generated, therefore if the product is not profitable for Aragon DAO, Galleon does not earn a fee.
1 Like

Hi Friend, thanks for your post. @fartunov has much deeper knowledge than I in this particular respect, tagging him.

From my perspective there is rarely ever a “low-risk, high-yield return” product. Especially during this severe economic down-turn I don’t believe investing money is in the best interest of the DAO until some stability has been determined in the global economy (which I have a better understanding of). I would rather allocate that money to salaries to build.

Until there is more clarity on this potential recession including stabilising inflation I am hard pressed to say yes to this type of investment.

Looking forward to other responses though!

3 Likes

Thanks for the fast response and I completely understand the scepticism, “high yield” tends to be considered taboo. However I would honestly advise taking a deep dive into the product, $BYE this isn’t another copy paste token “farm and dump” yield strategy that plagued the market during DeFi summer. The delta neutrality is automated, and the yield is earnt via the funding rate fees on Perpetual Protocol.

Crypto as I’m sure you’re aware is a notoriously long only market, even with the wider macro inflation / recession narrative, we’re seeing APR fluctuations between 50 → 100% on $BYE. Even going off of 2021 performance at 40% APY, $BYE would of net 27% while simultaneously eliminating the market price risk.

Also with no entry or exit fees, if the capital is required else where at any point in time it can be easily withdrawn.

Looking forward to other responses too, and would happily arrange a call with the team if there is interest.

2 Likes

CC @AlexClay @Ricktik6 Got to say I’m a fan of Set Protocol and 1kx. Now may not be the right time to invest yet pending transfer of funds now is always a good time to be building relationships.

Thanks for the response @lee0007 thats great to hear, probably worth noting Andrew was originally part of the Set team before he founded Galleon, he’s remained an advisor there and has a great relationship with the team.

1kx also lead our seed round.

Totally understandable with the current macro and market right now, more than happy to setup a bespoke communications channel between Aragon <> Galleon though. We’re a fairly new DAO, with a small team but were first in the market to launch a recursive lending stETH/ETH product and our basis yield strategy is fire.

Galleon wants to work with the biggest and the best in the space and we’re just getting started!

2 Likes

Hey, @duck thank you for the proposal! @Anthony.Leuts thank you for the tag.

Big fan of Set (used the USDAPY back in 2020). A team I contributed to used to run the cash & carry trade on BitMex back in the day so I am somewhat familiar with the lucrative yield.

For a more normie explanation can you please provide a simple explanation of what BYE is, like the illustrative example below (my example can be way off):

  • User deposits both USDC and WETH
  • In case of contango (futures trading above spot) you sell the spot WETH and use the proceeds as collateral to purchase (long) the future, netting the differential as maturity approaches
  • in case of backwardation (futures trading below spot) you use the USDC to purchase spot WETH and collateralize with it a short future

In essence, the risk of the trade (if properly executed) is counterparty risk:

  • With Galleon I presume it’s mitigated as we will basically be minting shares of a managed pool where you cannot really withdraw from Perp, or?
  • With Perp - exposure remains, but it’s not really any different from any CEX, arguably it’s lower, or?

As @lee0007 pointed out the DAO currently doesn’t really have any meaningful assets under management, but this should change in November/December this year.

2 Likes

Let’s stay in touch! Based on the potential move of treasury assets to the DAO in November/December it might be wise a few weeks after that to pop back here? We might also have more understanding of the global macro situation at that time and our internal budgetary plans.

2 Likes

Thank you for the response fren!

Love all the Set fans/OG users here, we’re obviously bias but the infrastructure is top notch so definitely helps to align us! Also great to know you’re aware of the strategy and the potential yield.

An normie example:

  • User mints BYE from tokenSets using USDC and WETH. (When flash issuance is live, an individual can mint/redeem via the galleon app with just USDC).
  • When the funding rate on perp is positive >0% BYE accrues yield from funding fees.
  • When the funding rate on perp is negative <0% BYE experiences NAV decay.
  • There is no counterparty risk as BYE can be minted or redeemed at anytime directly on TokenSets.

As for the the yield itself, it accrues gradually on the BYE token itself over time, which is netted when BYE is sold/redeemed.

E.g. User mints BYE when the price is $100, over a 12 month period BYE earns 20% APY, the user decides to exit his position and therefore sells/redeems BYE for $120.

Liquidity-wise the risk is if PERP loses all it’s liquidity which would be a blackswan event.

Hope that helps!

2 Likes