[BIP-103] Karpatkey Balancer Treasury CU Proposal Update

Karpatkey Balancer Treasury CU Proposal

Background

This is a proposal to provide limited delegation of the Balancer treasury to Karpatkey DAO in a non-custodial, trust-minimised way.

Karpatkey is a DeFi native DAO that has been constantly evolving to maximise capital efficiency, manage risk, increase security and optimise yield by combining industry-leading research with best-in-class tooling to prevent collateral liquidation.

Our operation would be completely transparent at all times, and any member of Balancer DAO would be able to monitor it on-chain and through the weekly reports posted on the Balancer Forum.
Also, Karpatkey would suggest the creation of a Treasury Core Unit (CU) within Balancer DAO. If Balancer DAO approves this initiative, we would hire full time contributors to work exclusively with Balancer under our guidance and training. The scope of the CU would be determined after the assessment meetings where Karpatkey would find out Balancer’s needs.
Karpatkey has been supporting Balancer since 2020, by being a top liquidity provider of ETH and stablecoins, and participating in governance, successfuly proposing a GNO-BAL treasury swap.

As a token of our long term commitment and financial alignment with Balancer, the performance fee (detailed below) would be charged in BAL and vested for 1 year. We intend to hodl the collected BAL, and we would transparently report on our BAL holdings.

Motivation

In order to focus on its core business, Balancer DAO must secure enough runway to keep developing its market-leading products, regardless of economic junctures.
An idle fund has a significant opportunity cost (e.g.: circa USD 120,000 a month for a $20M treasury at current market values). Therefore, delegating limited access of the treasury to a specialised DAO such as Karpatkey would optimise its growth through carefully curated and tailored strategies within a risk-controlled framework.

The chart below shows our past performance managing the treasury of our main user, GnosisDAO, when the main goal was to obtain a sustainable growth of funds with a low exposure to risk, before the focus was shifted to maximising the growth of the Gnosis Chain. As the chart illustrates, the yield obtained by Karpatkey’s strategies was greater than the yield of all the other DAOs in the ecosystem put together.

Source: Autonolas independent research (link to original report here)

Core Proposal

Trust-Minimised Fund Allocation Strategy

The process of fund allocation starts by Karpatkey DAO proposing a list of allowed protocols on Balancer DAO Snapshot, which must be approved by the majority of token holders. Once this happens, the target addresses and transactions’ call data associated with such protocols will be allowlisted in a smart contract, so that funds are always under Balancer DAO’s custody. As a result, Balancer DAO will have the power to withdraw or transfer funds without Karpatkey’s intervention.

If Balancer DAO has a specific need which wasn’t included in the approved strategy, such as incentives/rewards, payments, etc., Karpatkey would post another ad-hoc strategy including the additional services for Balancer DAO to approve.
An alternative would be to operate with trusted signers from Balancer, using the Safe multisignature wallet. Karpatkey would not hold enough signatures to be able to execute transactions on its own. Therefore, approval from Balancer signers would always be necessary.

We would put together a periodically reviewed emergency withdrawal protocol to be able to quickly derisk/liquidate/swap all positions in the event of a market crash, hack or any fortuitous event that requires to stop loss.

Karpatkey DAO’s professional treasury development consists of carrying out tailored strategies that vary twice a week, adjusting to the constantly changing DeFi market.

Daily Strategy Reevaluation

Each step of the strategies would be designed and monitored daily by our research team, keeping in mind different risks and opportunities.

Impermanent/Divergence Loss

To minimise the risk of Impermanent or Divergence Loss, we carry out the following tasks:

• Identification of profitable and low IL pools (assessment of assets’ correlation evolution)
• Definition of thresholds for exit strategies
• Accurate IL tracking*, also considering different variations of deposited volumes over time.

*The way in which we calculate IL differs across protocols and specific cases within protocols, but it’s primordially based on the formula detailed below, which calculates the IL per LP token for any AMM with constant swap fees. Our Financial Engineering team is currently preparing a paper on the equations that we use for IL calculation in different cases, encompassing single isolated financial positions and more complex positions including composability.

Impermanent loss evolution tracking example:

Treasury Core Unit

After reviewing Balancer DAO’s structure, we came to the conclusion that creating a Treasury Core Unit (CU) would increase the efficiency of the overall management of the tokens held in the treasury. If Balancer DAO agrees, this CU would be composed by full time contributors that would be sourced and recruited with Karpatkey DAO’s support.
The CU members would be trained and assisted by Karpatkey DAO, observing strict security standards. They could be on Karpatkey DAO’s payroll and would be in charge of the following tasks (among others):

• Balancer Value Proposition: Improve the value proposition of Balancer and the Balancer DAO treasury
• Availability: Increase Balancer availability on other networks and markets
• Liquidity: Increasing Balancer liquidity so more traders and investors can acquire it with a lower price impact
• Balancer Health Monitoring: Propose buybacks if we consider Balancer is undervalued
• Fund Proposals: Any proposal involving funding will be comprehensively analysed by the CU to plan how token transfers should take place in a timeline, and ensure that liquidity requirements are met and executed properly
• Fund OPEX: All of Balancer DAO’s operating expenses will be analysed and projected to meet liquidity requirements and make timely transfers if needed
• Drafting and Maintenance of an Emergency Token Withdrawal Protocol: In case of a sudden black swan market event, the team will execute a carefully structured protocol to de-risk all positions and avoid losing funds. This protocol will be periodically updated to ensure it’s ready to be executed at all times
• Capital Optimisation: CDPs will be continuously monitored and managed to prevent liquidation (more details in the Risk Management section below)
• Reporting: Dashboard creation and maintenance to monitor the yield of investments, rewards distribution and overall treasury growth trend, health and diversification
• Bridge Monitoring: analysis of funds allocation to allow the Balancer token to be transferred across networks without friction.

Yield Strategy

The yield strategy would vary weekly to keep it within target. It would resort to different combinations of staking derivatives solutions, AMM, same asset leveraged in money markets, carry trade, arbitrages, etc. Given the risk that it entails, we don’t do trading.

In alignment with Balancer’s treasury allocation policy, the strategy would not extract value from directly competing protocols. The following protocols would be considered to obtain an adequately diversified yield strategy with low risk and reduced ETH price exposure. This is just a sample list, the final one would follow Balancer DAO’s preferences and risk profile:

Aave, Agave, Ankr, Aura, Balancer, Bancor, Compound, Element, Honeyswap, Idle, Lido, Liquity, Maker, Nexus Mutual, QiDAO, Reflexer, Rocket pool, Stakewise, Sushiswap, Swapr, Symmetric, Synthetix, Uniswap, Unit.

Reporting

Karpatkey DAO will post a weekly treasury development report on the Balancer forum, and support in identifying data elements upon request from the Balancer community. Also, Karpatkey DAO would review data reported and assist in performing analytics and quality reviews to confirm the accuracy of the information.

The following metrics would be included:

• Portfolio Summary: shows the current holdings in USD and ETH equivalent, considering the allocation by blockchain, as well as the allocation of the most relevant assets
• Revenues: shows the performance of the portfolio strategy, displaying the current APR, annual revenues, capital utilisation and past performance
• Positions: shows the complete strategy implemented for the considered time period, explaining the type of investments, protocols, underlying assets, expected APR and expected revenues
• Loans Management: shows the loan strategy to quickly assess the health status of the active loans, considering the borrowed assets and funds, the lent assets and funds, the collateral ratio and the minimum (liquidation) collateral ratio
• Portfolio details: shows the complete composition of the portfolio by type of asset
• Improvement Proposals: shows the list of executed proposals, as well as a summary of the weight of each proposal
• Incentives program: shows the incentives strategy, displaying the amount of assets used on each protocol.

Fees

Karpatkey DAO will charge the following fees, which have been adjusted to make this proposal self-financing, without burdening Balancer DAO’s growth:

Management fee

A yearly management fee (in monthly instalments) of 0.5% of the AUM would be charged to finance fixed costs like hiring full time contributors to Balancer DAO.

Performance fee

We’d charge a monthly performance fee of 20% of the yield obtained during the last month in BAL tokens, and every payment will have a vesting period of 1 year. We intend to hold it long term, as a token of our commitment to Balancer.

Termination

Balancer may terminate Karpatkey DAO’s engagement under this agreement for any reason by way of Governance Mechanism. Kapatkey DAO may terminate this agreement upon four week’s notice posted as a new discussion thread in the Balancer forum. In case the termination is requested by Balancer without at least a 4 week notice, Karpatkey DAO will be granted an exit fee equal to the fees collected during the last 2 months, which will be paid in ETH. Regular fees will be collected until the day of termination.

Custody of Funds

Karpatkey DAO is not a custodian of funds. The funds will be in possession of authorised signers of Balancer at all times. Karpatkey DAO will sign transactions using two addresses, which won’t suffice to execute transactions.

Karpatkey DAO is not responsible for the loss of funds caused by the existence, identification and/or exploitation of vulnerabilities through hacks, mining attacks (including double-spend attacks, majority mining power attacks and “selfish-mining” attacks), sophisticated cyber-attacks, distributed denials of service or other security breaches, attacks or deficiencies with smart contracts or protocols which are not owned by Balancer or Karpatkey DAO.

The plans outlined in this proposal are subject to discussion by Balancer and may need to be (re)structured to take account of legal, regulatory, or technical developments as well as governance considerations. This document should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in any transactions.

Dependencies

Upon approval of this proposal, Karpatkey DAO would post a yield strategy in Balancer’s Snapshot, holding a broad list of protocol options without granular specification of parameters nor exact moment when transactions would be executed. We would then operate within those boundaries, without having to go through a DAO-wide vote on every trade, while ensuring that only transactions approved by Balancer DAO could be carried out by Karpatkey DAO.
Alternatively, at least one trusted signer should be appointed by Balancer to approve each transaction. This could be a member of the Treasury Core Unit.

Risk Assessment

Risk Management

Every decision made and action taken weighs in risk exposure. Most large treasury holders have one thing in common: risk aversion. At Karpatkey DAO, we go above and beyond standard risk assessment protocols, and we have developed a multilevel approach to curate yield strategies, assess protocols and carry out transactions safely.

(see the full list of risk factors in the forum post due to max char. limit for Snapshot)