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Title: [ARFC] Treasury Management - Update Balancer Ecosystem Holdings

Author: @Dydymoon

Date: 2023-09-26

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Summary

Following the approval of this TEMP CHECK explaining AIP-42 potential impacts, this proposal will evaluate options to update holdings to maintain maximum emission power by acquiring AURA tokens to keep being exposed to the Balancer ecosystem while optimizing the voting power.

Context

AIP-42 leads to a decorrelation of the incentives amounts generated on veBAL & vlAURA, as veBAL emission power is limited to BAL + base Aura rewards, while vlAURA receives additional AURA rewards allocated by the DAO treasury.

Looking at the vote incentives market a few weeks after the update went live, we can observe that the majority of cost paid per vote decreased on both layers. However, it’s common to still see projects overpaying so it might take more time for the full market to understand these changes.

For more context, some veBAL holders voted for the GHO gauges over the past two months without receiving bribes, enabling to generate ~ $300k of incentives on GHO gauges.

Motivation

This proposal aims to propose several options to update the Balancer ecosystem holdings of the DAO by acquiring AURA to increase its maximum emission power.

Current data (September 30th) AURA price: 0,84$ veBAL/vlAURA ratio: 0,1598 veBAL value acquired per 1$ of vlAURA bought: 1,88$.

Initial Est. veBAL position

Aave DAO acquisition of 157K B-80BAL_20WETH was executed on this proposal 2. If the full amount was locked, the weekly emissions value would be ~ $7,7K per week.

Current DAO holdings

Shortly after this proposal 4 was submitted, TokenLogic submitted two proposals: a first time sensitive one to acquire 443k AURA OTC from Olympus DAO with DAI 1, executed on this AIP, and another to sell the corresponding value in BPT for GHO 2, approved on the following TEMP CHECK.

The table below shows the Olympus OTC deal data & impact on Aave treasury once executed using current GHO & BPT prices.

If the DAO was to lock its remaining BPT & AURA holdings now, the weekly emissions value generated would be ~ $10,8K / week.

Improvement scenarios

While an increase can be observed (7,7k to10,8k/week), the maximum emissions can still be improved, either by optimizing or increasing and diversifying the exposure. The tables below show an emission power overview post AIP-42 for both cases.

The current situation would also require to vote on both layers, which complexifies the management, however this option will be possible as Llama’s SAM contract upgrade ARFC to support both veBAL & vlAURA, and propose to grant the asset manager role to the committee will be published in the coming days (code currently in review by BGD).

As described in both options above, the goal of this ARFC is to acquire ~ 1,3M AURA units, either with BPT or with stables. The Option 3 proposed in the comments aims to find a compromise for all stakeholders by acquiring ~ 950K AURA units and staking BPT holdings.

1) Convert to remaining BPT to AURA

This option considers optimizing the current holding by selling the remaining BPT for AURA, which will improve the gauge power owned without spending more funds to increase the exposure value.

Despite proposing to convert BPT, Balancer remains a strategic partner and this acquisition will actually enable the DAO to grow more liquidity on Balancer, and partially support the SM strategy once live, creating an important amount of bribes for veBAL holders.

If the DAO was to acquire ~ 1,3M AURA, the weekly emissions value would currently be ~ $20,1K / week (almost twice the current situation including votes on both layers).

Pros:

• Maximal emission power (Full vlAURA)
• No extra investment (BPT conversion)
• Simple management (Vote on one layer only)
• Less locking restrictions (No decay & 4 months lock)
• Will enable to grow more liqudity on Balancer

Cons:

• Sell BPT acquired to lock veBAL according to the partnership (limited price impact)
• Can be considered as unfair for veBAL holders who supported GHO at launch
• Balancer DAO might sell the AAVE acquired during the TokenSwap

2) Keep remaining BPT & acquire AURA to lock both

After receiving some feedback including concerns about selling BPT (initially acquired before AIP-42 at the Balancer partnership to lock for veBAL), this option considers to retain the BPT for veBAL and acquire additional ~ 1,3M AURA to lock for vlAURA with stables from the treasury which increases both the emission power & the exposure value.

If the DAO was to acquire ~ 1,3M AURA with stables and lock the remaining BPT holdings, the weekly emissions value generated would be ~ $25,7K / week.

While this improves weekly emissions by $5,6K, this strategy is less efficient compared to the above as it would complexify the management with the need to vote on both layers (one on-chain, one off-chain), relock the veBAL holdings, manage the two voting periods (weeks/rounds), and cost an extra $1M in stables from the DAO treasury.

Pros:

• Increased overall emission power of the Aave DAO (veBAL + vlAURA)
• Favor good relations with Balancer by following the initial partnership proposal.

Cons:

• $1M extra investment (AURA acquisition with stables)
• More complex management (Vote on two different layers)
• Includes veBAL restrictions (Voting power decay & up to 1 year lock)
• Emission power not fully optimized

(Despite its maximal estimated efficiency, there isn’t an option to convert both BPT holdings + $1M for AURA as this amount would be complex to acquire with the current liquidity available)

3) Mint auraBAL & use BAL, use USDC/AAVE rewards for bribes & lock AURA rewards + Acquire $800K of AURA

This was initially suggested by Karpatkey in the comments, and updated to this revised option which aims to find a good compromise for all stakeholders.

The major update is the consideration of the classic auraBAL staking to allocate BPT instead of converting it to AURA. This strategy earns 18% APR in BAL + AUR, which can be used to create bribes & compensate for the reduced acquisition.

AURA can be accumulated to be locked for vlAURA, and the amount can be replaced with USDC/AAVE to maintain the rewards value which will be used for bribes with the BAL.

This also reduces the AURA market buy from $1M stables (in Option 1 & 2) to 800K$ in the Option 3:

• $400K on market (400K USDC)
• $200K token swap with the Aura DAO (2950 AAVE)
• $200K OTC Deal with AEF & Contributors (200K USDC)

• Emission power with vlAURA to be acquired:

If the DAO was to acquire ~ 950K AURA as described above, in addition to 440K acquired from Olympus, the weekly emissions value would be ~ $16,2K / week.

• Emission power with auraBAL staking rewards used for bribes:

If the DAO was to stake all the auraBAL minted with BPT in the classic staking, the weekly rewards would be ~ $5,4K / week. Assuming a weekly vlAURA bribe cost of $0,007 / week, ~ $8,9K / week can be obtained in emissions.

Option 3 Total weekly emissions: $16,2K + $8,9K = $25,2K / week

Pros:

• Mint & stake auraBAL instead of selling BPTs
• Very good emission power (vlAURA votes & bribes)
• Simple management (Vote & bribe on one layer only)
• Less locking restrictions (No veBAL decay & 4 months lock)
• Reduce AURA amount to acquire on market ($400K vs $1,1M)
• AURA long term accumulation (rewards replaced for bribes)
• Increase veBAL/vlAURA ratio
• 1,4M vlAURA locked & 157k BPT staked ( good for Aura)

Cons:

• Complexify the strategy implementation (where to stake auraBAL to be defined)
• Complexify rewards management (AURA to be lock, BAL + equiv USDC for bribes)
• Requires a $800K extra investment (including $200K in AAVE & $600K in USDC)
• Low liquidity & trading volume on auraBAL

In terms of emission value, the revised Option 3 proposed is similar to Option 2, which was the highest amount proposed ($25,7K vs $25,2K weekly).

Acquisition details

Regardless of which option above is voted on the ARFC, the proposal is to acquire AURA with USDC on market to reduce the price impact. If anyone reading this is interested in selling AURA OTC, feel free to comment.

Some Aura contributors & the Aura Ecosystem Fund Committee proposed a 200k AURA OTC deal for USDC (available on September 29th), using a TWAP price from the ARFC forum (posted on September 26th with Snapshot vote starting on September 29th) until snapshot vote ended if approved (October 4th).

Overview of the AEF deal using the current AURA price to facilitate estimations but may vary depending on the TWAP price:

The optimal way to execute these market transactions seems to be using the TWAP orders from Cowswap to split the trades into several orders.

While the price impact of selling the remaining BPT for USDC in one transaction is limited (3,5%), this can be reduced to 2,2% with a split of 5 orders. For AURA, the price impact if acquired in one transaction is quite important (42%), but this can also be reduced to 5,7% with a split of 10 orders.

Specifications

OTC acquisition: If the Aura contributors & AEF deal is approved, the 200k OTC can be implemented using a similar contract to the one used for the Olympus deal (only difference being the price defined with a TWAP). This AIP execution should fall under ACI’s Skyward program scope.

Market acquisition: As AURA are likely to be mostly bought on market using TWAP orders which can be used with a Safe, the AURA buy and potential BPT sell can be executed by the GHO liquidity committee using the multisig once live (require a fallback handler on it).

This should simplify the acquisition compared to creating new contracts for this purpose. More information on TWAP orders can be found here.

Next Steps

If Option 1:

• (AIP) Transfer USDC from the collector to OTC contract for AEF OTC deal
• (AIP) Transfer all BPT from the collector to the committee multisig
• Committee start TWAP orders BPT for USDC
• Committee start TWAP orders USDC for AURA
• Committee transfer back USDC equivalent for OTC deal on the Collector
• Committee transfer AURA on the SAM contract to lock once deployed

If Option 2:

• (AIP) Transfer USDC from the collector to OTC contract for Aura deal
• (AIP) Transfer USDC from the collector to the committee multisig
• Committee start TWAP orders USDC for AURA
• Committee transfer AURA on the SAM contract to lock once deployed

If Option 3:

• (AIP) Transfer USDC from the collector to OTC contract for AEF deal
• (AIP) Transfer AAVE from the ecosystem reserve to tokenswap contract for Aura deal
• (AIP) Transfer USDC from the collector to the committee multisig for market buy
• Committee start TWAP orders USDC for AURA
• Committee transfer AURA on the SAM contract to lock once deployed

Voting Options TLDR

• YAE (Option 1): Convert BPT for AURA to lock vlAURA
• YAE (Option 2): Lock BPT for veBAL + buy AURA ($1M in USDC) to lock vlAURA
• YAE (Option 3): Mint auraBAL with BPT & use rewards for bribes + buy AURA ($800k in USDC & AAVE) to lock vlAURA
• NAY: Do nothing
• ABSTAIN

Disclaimer

This ARFC can be useful to pending proposals from SPs but is published on my own initiative and is not receiving any compensation. It has been prepared to facilitate community decisions.