TMP-6: Real Yield ETH Sommelier Vault

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

Summary

This Treasury Management Proposal presents an opportunity for the DAO to allocate ETH to the Real Yield ETH vault, which aims to provide best-in-class ETH 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 ETH held in the investment treasury into opportunities with outsized ETH yields that fulfill the requirements outlined in TMP-1. More specifically, the DAO’s investment treasury has ~1,000 ETH 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 ETH Sommelier vault aims to offer best-in-class ETH yields on Ethereum mainnet. While just over a month old, the vault is generating 11.6% APY (as of May 30th, 2023) in organic ETH yield and the vault creators estimate that an APY range of 10-20% is achievable as the vault scales to $50M+ of TVL. Historical yields can be viewed by visiting this page.

The Real Yield ETH 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 take leveraged staking positions in various liquid staked tokens (LSTs), specifically stETH, wstETH, rETH and cbETH on Aave & Compound. Those LST tokens are also paired with ETH on Uniswap v3 to earn “real” yield from trading fees. This provides users of the vault a high-quality, diversified, organic yield that can outperform baseline ETH staking rewards. 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 ETH/LST yield opportunities as they become available.

Lastly, the Real Yield ETH vault is currently in a bootstrapping phase and is offering additional incentives in SOMM tokens (6.5% 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 20th, 2023. Current SOMM tokenomics can be viewed here & staking APY can be viewed here. Of note, SOMM tokens must be bridged to the Sommelier chain from ETH mainnet in order to be staked for yield.

Motivation

ETH remains a foundational asset for many portfolios, given the strength of the Ethereum ecosystem, protocol tokenomics, and the utility of ETH within the crypto economy. With the Shapella upgrade, ETH staking has become less risky, effectively making it the "risk-free" rate for holding Ethereum. Therefore, staking the investment treasury holdings or seeking audited farming opportunities that offer outsized yields makes sense. The risks taken on by obtaining outsized yields must be well understood and minimized.

Real Yield ETH offers the DAO a way to enhance its ETH staking 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 leveraged staking, which involves exchanging ETH for an ETH-denominated LST, using it as collateral on Aave or Compound, borrowing more ETH, and repeating the cycle. The vault is leveraged, but its smart contract enforces a minimum 1.05 health factor during each rebalance as a safety precaution, and it closely monitors on-chain conditions to mitigate liquidation risk. While this greatly minimizes the chances of liquidation, the risk is not zero.

The other yield generation technique is liquidity provisioning, which involves providing liquidity to ETH/ETH-denominated LST trading pairs on Uniswap V3, earning fees from traders who swap between the two 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.

At launch, the vault was heavily allocated towards cbETH because it believed it was trading between 0.5-1% below its intrinsic value, creating an arbitrage opportunity that could lead to substantial yields. Real Yield ETH acquired cbETH by collateralizing on Aave V3, borrowing ETH, swapping to cbETH, and re-collateralizing. Based on an average cost basis of 1.02629 WETH per cbETH, the vault expected an ROI of 3.83-4.43%, which if achieved within 30 days, could be annualized to 46-53%. In addition to leveraged staking, the vault heavily allocates to a cbETH-ETH LP pair on Uni V3, consistently generating ~3x or more of its corresponding TVL share. Over the first 30 days of the vaults launch this thesis largely played out, and cbETH is now only approximately 0.2% depegged. As the risk reward for ETH LSTs have changed, so has the allocations of the vault, which has now diversified into leverage staking of stETH on Aave V2 and wstETH on Aave V3.

Overall, an allocation to Real Yield ETH has potential benefits in enhancing the DAOs investment treasury yields while maintaining a reasonable level of risk. The potential risks include liquidation from market changes and the value of cbETH not returning to its intrinsic value. However, the Real Yield ETH team has safeguards in place to mitigate risks, and leveraged staking 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 RYE Vault has $5.9M TVL, therefore the total deposit cap is $0.88M USD of ETH (15%).
• Rewards paid in native ETH 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 leveraged staking, 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. No other vault offers this capability nor the LP performance (consistently earning ~3x of the fee pool relative to its corresponding TVL share) making Real Yield ETH truly differentiated.

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

Cons

• Leverage: This vault uses leverage which could result in assets being liquidated. While the vault enforces a minimum 1.05 health factor during each rebalance and closely monitors on-chain conditions to mitigate liquidation risk, there is no guarantee that it will avoid liquidation in all scenarios.

• Yield Volatility: At present, the vault assumes that the cbETH trading at a discount will re-peg to its intrinsic value. It has therefore allocated heavily towards this asset, including taking on leverage to buy more cbETH to further enhance yields. Although the price of cbETH has trended towards re-pegging (see chart), that progress has not been perfectly linear. Therefore, the yield generated by the vault is subject to volatility based on the price of cbETH. This of course can change once cbETH re-pegs or the vault reallocates to a different LST.

• 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 ETH have been audited by an independent third party (Macro).

Next Steps

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

• A deposit of 450 ETH (worth ~852K USD on 5/30/23) will be made into the Real Yield ETH 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:

• Deposit 450 ETH into the Real Yield ETH 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.