TMP-7: Real Yield USD Sommelier Vault

Title: Real Yield USD Sommelier Vault Author(s): Seven Seas Created: 5/20/2023

Summary

This Treasury Management Proposal suggests that the DAO allocate 1.25M USDC to the Real Yield USD vault, which aims to provide best-in-class stablecoin yields on Ethereum mainnet.

Disclaimer

Jade Protocol is a decentralized autonomous organization, which means that all treasury management proposals are discussed with the community and voted on as a collective. No single member of the DAO shall be held responsible for the positive or negative outcomes of the TMP should it pass. This proposal put forth by the author(s) was synthesized in good faith as a result of due diligence and community discussion on Jade Protocol’s governance platform. There are no guarantees of financial gain and no individual bears responsibility for either the positive or negative outcomes that may result from executing this proposal. This proposal does not constitute investment advice, but rather presents an opportunity available to the DAO.

Should the community vote to pass this proposal, the DAO and its contributors are authorized to carry out the suggestions set forth in this proposal. If the proposal represents an investment opportunity, the community accepts the risk that the DAO may lose the entirety of its deployed funds. If new information comes to light prior to the execution of this proposal (i.e. a change in the investment thesis or exploit vector) then the DAO reserves the right to not deploy funds even with the successful passing of this proposal, as it may pose a direct risk to the DAO and its collective community.

There are risks associated with modifying token economics, moving funds across blockchains, yield farming, investing in seed stage projects, or purchasing liquid tokens, including but not limited to: complete loss of funds, counterparty risk, de-peg risk, economic exploits, smart contract exploits and/or the risk of impermanent loss. Due diligence is meant to mitigate these risks, however the DAO must still acknowledge and accept that even with proper due diligence – these risks will always exist.

Abstract

The DAO could benefit from depositing idle USDC held in the investment treasury into opportunities with outsized yields that fulfill the requirements outlined in TMP-1. More specifically, the DAO Treasury Management has 4.5M USD in stablecoins sitting idle earning 0%.

Sommelier is an innovative asset management protocol whose mission is to make DeFi more accessible, profitable, and efficient for everyone. Sommelier’s advanced technology, built on the Cosmos SDK, enables intelligent vaults that can optimize portfolios, trade long-short, borrow-lend, and farm autonomously based on strategist inputs. Independent strategists can leverage the power of off-chain computation to bring algorithmic vaults on-chain, allowing vaults to dynamically adapt to market conditions and provide enhanced opportunities and risk mitigation to users. All vaults are enabled by audited smart contracts and controlled by protocol governance, ensuring transparency and security.

The Real Yield USD Sommelier vault aims to offer best-in-class stablecoin yields on Ethereum mainnet. Just over three months old, the vault is generating ~5.2% APY (as of May 30th, 2023) in organic yield which has ranged from 5-7% APY since inception. Historical yields can be viewed by visiting this page.

The Real Yield USD vault is different from other vaults in that it is intelligent. It has the ability to predict, react, optimize and evolve to current DeFi conditions whereas other vaults are static and limited to simple functions like auto-compounding or leveraging one asset. The vault uses these intelligent capabilities to engage in lending activity on Aave & Compound, in addition to optimizing tick ranges on Uniswap V3 stable pools. This provides users of the vault a high-quality, diversified, organic yield that can outperform many other native stablecoin yield opportunities. Importantly, this vault’s rewards won’t go “stale”, which means the DAO can participate in this vault and know that the strategists will be taking advantage of the latest and greatest stablecoin yield opportunities as they become available.

Lastly, the Real Yield USD vault continues to offer additional incentives in SOMM tokens (4.1% APY as of May 30th, 2023). These SOMM tokens can be sold for income or staked to secure the Sommelier Network. Information about SOMM and its role in the Sommelier ecosystem can be found here. Staking SOMM earns a percentage of fees generated by various vault strategies and generates a total APY of ~10% as of May 30th, 2023. Current SOMM tokenomics can be viewed here.

Motivation

Many treasury protocols hold stablecoins to avoid volatility during times of market uncertainty. In the meantime, those stablecoins can be used in productive ways to generate yield. Given the USD’s yield curve inversion, it is important to look for organic stablecoin yield opportunities that are relatively safe while offering a premium over the risk free rate of treasury bills.

Real Yield USD offers the DAO a way to enhance its stablecoin yield by putting that capital to work within DeFi. The vault will initially generate yield using two primary techniques, but has the potential to integrate with other protocols for new capabilities, subject to governance approval in the future. These techniques include lending activities, which involves lending stablecoins to borrowers on Aave and Compound. The other yield generation technique is liquidity provisioning, which involves providing liquidity to USD based stablecoins (USDC, DAI, USDT) on Uniswap V3, earning fees from traders who swap between the three tokens. The vault will dynamically adapt to changing price movements to quote the optimal tick range(s) that collect the most fees while also minimizing impermanent loss.

Overall, an allocation to Real Yield USD has potential benefits in enhancing the DAOs investment treasury yields while maintaining a reasonable level of risk. The potential risks include impermanent loss as a result of concentrated liquidity farming. However, the Real Yield USD team has safeguards in place to mitigate risks and both lending and liquidity provisioning have proven effective in generating yield in DeFi.

Yield Farming Criteria

• The Real Yield Vault has an audit by a professional firm.
• Sommelier’s Global TVL is $14.4M, therefore the max allocation is $0.86M USD (6%).
• Sommelier’s RYUSD Vault has $8.4M TVL, therefore the deposit cap is $1.26M USD (15%).
• The DAO is potentially allocating 0.85M USD in ETH to the RYE Vault, meaning that if we do allocate that ETH, then current farming guidelines state there is only room for depositing 0.01M of stables into RYUSD. In this case, the proposal is suggesting we remove the global TVL restriction for Sommelier’s platform given that each vault is treated as an independent strategy.
• Rewards paid in native USDC and bonus rewards in SOMM, which can be staked for yield.
• Sommelier is compatible with Gnosis Safe.

Pros

• Adaptability: Unlike other vaults in the market which are typically automated and static, this vault has the ability to predict, react, optimize and evolve to evolving DeFi conditions.

• Diversified & Differentiated Yield: This vault generates “real” yield through lending and concentrated LPing. Sourcing yield from different protocols and DeFi activities makes the yield from the vault more resilient to shifts in market conditions and means that it is less exposed to any single type of risk.

• Organic Yield: The attractiveness of this opportunity is not contingent on temporary token incentives. Importantly the yield from this opportunity is denominated in USDC which provides the DAO more certainty around investment return.

Cons

• Stablecoin De-Peg Risk: Stablecoin selection was an important consideration in the vault design and thus the vault only supports the most widely adopted stablecoins in the market (USDC, USDT and DAI). However, these assets are still subject to de-peg risk as shown in USDC’s recent de-peg in March. While the vault was able to successfully navigate that incident, there is no guarantee that it will perform as well in future events.

• Impermanent Loss Risk: Liquidity provisioning always runs the risk of incurring impermanent loss. However, impermanent loss risk is less likely with stable pairs. Additionally, the vault optimizes between this risk and earning trading fees.

• Front Run Risk: Recently, the RYUSD vault was sandwich attacked during a rebalance call, which resulted in the loss of $8,500 USD from a $1.5M swap. Contingency reserves were used to refund the vault and no user funds were lost. This happened due to a high slippage tolerance configuration, which has now been lowered to 1%. Further safeguards have been put into place, and you may read them here.

• Yield Volatility: Because this vault partially relies on trading fees to generate yield, the vault can experience some yield volatility as trading volumes fluctuate. This is especially true on shorter time frames such as a day-to-day basis. However, as stated earlier in the proposal, the vault is over 3 months old and has generated ~5.2% APY since inception (as of May 30th, 2023).

• Smart Contract Risk: Sommelier’s smart contracts or the smart contracts deployed by Aave, Compound or Uniswap could have unknown vulnerabilities. All Sommelier contracts for Real Yield USD have been audited by independent third parties (Macro).

Next Steps

A high level summary of how the investment strategy will be implemented:

• A deposit of 1.25M USDC will be made into the Real Yield USD vault.
• The DAO has the option to bond their LP tokens to earn additional SOMM incentives. A separate proposal will be required to discuss bonding vault tokens for additional SOMM rewards.
• A review of the position’s performance will take approximately 30 days to determine if the position size should be increased, maintained or reduced.

Voting

This is a DAO Proposal that was drafted by Sommelier vault strategist Seven Seas on 5/20/2023. After 10 days of community discussion, the proposed edits were incorporated and consensus was reached. This vote will be subject to a 24 hour warmup period, followed by a 3 day voting window.

If you agree with this proposal, a [YES] vote would confirm the following:

• Lift the global deposit cap specifically for the Sommelier platform, given that each vault is independent.
• Deposit 1.25M USDC into the Real Yield USD vault on Sommelier.

If you disagree with this proposal, a [NO] vote would result in the continuation of operations as is.

Eligibility

All users with an sJADE balance on Avalanche and Binance Smart Chain will be eligible to vote.

Copyright

Copyright and related rights waived via CC0.