SAEP-06: SubDAO Proxy Management Plan - November 24, 2025

Spark's Operational Facilitator has placed a proposal into the voting system on behalf of nested contributor Phoenix Labs.

Review

The Spark community can hereby express support or opposition to the following changes, as described by the author of the proposal:

Summary

This proposal is submitted by Phoenix Labs in its role as a nested contributor, as defined in section A.6.1.1.1.2.2.2.2.1.2.1.1.1 of the Spark Artifact. The proposal recommends that Spark governance adopt a SubDAO Proxy management plan to specify the strategy and uses of funds held within the Spark SubDAO Proxy.

Background

Spark DAO accrues net revenue from protocol operations to the Spark SubDAO Proxy. This accumulated balance serves as a reserve to support several critical Spark obligations and objectives. These include meeting Spark’s required risk capital (RRC) set by Sky, providing a capital buffer to backstop losses on other Spark products such as Spark Savings, and covering operational expenses of the Spark Foundation, service providers, and other protocol contributors.

RRC and other capital buffers help Spark grow the Spark Liquidity Layer and enable taking on more lucrative asset allocation opportunities, while an operational reserve ensures that Spark can continue to fund key protocol maintenance and growth projects despite short term fluctuations in net revenue. In cases where these objectives have ample funding, remaining excess capital can be used to repurchase SPK from the market, which will contribute to the economic security of Spark governance and ensure the Spark SubDAO proxy has an adequate reserve of SPK tokens to incentivize protocol participation.

Proposal Details

We propose for Spark to adopt a SubDAO Proxy management plan that balances a conservative approach to risk management and operational runway with a strong commitment towards increasing ecosystem participation and economic security.

First, we define a method for calculating a target SubDAO Proxy value based on Spark’s RRC obligations to Sky, risk backstop reserves for other Spark products, and target runway for operational expenses. Each month, a fixed percentage of the excess SubDAO Proxy balance above the target SubDAO Proxy value will be used to repurchase SPK tokens from the open market.

The Target SubDAO Proxy Value is defined as the greater of the following components:

• Capital Reserve, defined as the sum of
  • RRC Reserve, defined as the highest RRC Spark has needed at any time within the RRC lookback period, divided by the governance defined target Risk Tolerance Ratio
  • Spark Product Backstop, defined manually by governance according to anticipated product backstop needs and risk exposures
• Operational Reserve, defined as the higher of
  • Past month operational expenses (defined as governance approved transfer to Spark Foundation) multiplied by target runway
  • Trailing operational expenses over the past target runway number of months

We propose setting initial values for RRC lookback period as 12 months, and target runway as 24 months. The RRC lookback period helps ensure Spark does not excessively reduce its SubDAO Proxy stablecoin holdings based on short term reductions in RRC which may revert to previous levels, while target runway ensures that Spark maintains adequate resources to pay for key operational costs during bearish periods.

We propose setting an initial value for Spark Product Backstop of 5 million USDS. This should provide ample coverage for anticipated risk exposure of non-Sky related liabilities on the Spark Liquidity Layer, including Spark Savings v2 products, Sparklend assets provided by end users (eg. ETH), and Spark Morpho vaults.

We propose setting a standard buyback rate of 10%, meaning each month 10% of the excess of the current SubDAO Proxy assets over the Target SubDAO Proxy Value will be used to buy back SPK from the market. The received SPK proceeds will then be returned to the SubDAO Proxy and held in reserve. We also propose setting an enhanced buyback rate of 100% for SubDAO proxy funds above an enhanced buyback threshold of 200% of the Target SubDAO Proxy Value, meaning that all funds in excess of 2x the Target SubDAO Proxy Value will be immediately used for buybacks.

Justification

Using a longer lookback period of 12 months for assessing RRC, rather than just using the current value, avoids short term fluctuations in RRC due to allocation actions or Sky provided risk ratings from causing undue influence on SubDAO Proxy management.

Based on previous bear markets for stablecoin yield and lending activity, we find that a 24 month target runway strikes an appropriate balance and is adequate to cover expenses during periods when Spark may have depressed revenues and margins.

Using the higher of capital funding needs (for product backstopping and RRC) or operational funding needs (for opex) aligns the target SubDAO Proxy value with both of Spark’s key reasons to hold reserves of USDS, while avoiding excessive capital demands or distortions to risk tolerance ratio that would occur if Spark used the sum of these figures to set the target SubDAO Proxy value. In cases where Spark begins to run down its operational runway due to low spreads or limited yield generating opportunities, we anticipate that the protocol’s needs for risk capital will also tend to decline in tandem, because low defi yield environments typically correspond with less systemic leverage and lower excess returns on higher risk strategies such as crypto perp-basis.

Implementing a monthly Standard Buyback Rate of less than 100% of the excess SubDAO Proxy value up to the Enhanced Buyback Threshold is expected to result in better execution, more market stability, and a lower average acquisition cost per SPK over time. This is because both Spark protocol net revenue and the price of SPK are expected to be correlated with each other and pro-cyclically linked to broader market conditions, so limiting the pace of buybacks can delay some purchase activity until the price of SPK has fallen during more bearish periods, resulting in improved SPK accumulation that will allow Spark to better support the key goals of governance security and sustainable incentivization of participants in the Spark Protocol. In cases where Spark has significant excess value in the SubDAO proxy, as determined by the Enhanced Buyback Threshold, using 100% of excess over this threshold for buybacks ensures that the SubDAO proxy will not accumulate too much idle value and will provide more immediate support for the core goals of the buyback mechanism. Note that in cases where the monthly buyback amount is less than 100%, the excess will remain within the subDAO proxy and accumulate towards reaching the Enhanced Buyback Threshold.

Based on current operational expenses, the proposed product backstop parameter of 5 million, and recent history of Spark’s RRC, we anticipate that the target SubDAO Proxy value will be in the range of 35-45 million USDS. At the end of Q3, Spark SubDAO held 38.8 million in SubDAO Proxy value, indicating that Spark may reach a point where it begins accumulating excess funds in the SubDAO Proxy within a matter of months. However, this is subject to uncertainty based on the future net revenue generated by Spark protocol and potential changes to input values used to calculate target SubDAO Proxy value.

The proposed Spark Artifact changes can be found in the following pull request: https://github.com/sky-ecosystem/next-gen-atlas/pull/120

Outcomes

• If "For" receives the most votes, the proposal will be approved. The associated pull request will be merged into Spark's artifact. When required, the listed changes will proceed to implementation by the relevant actors.
• If "Against" receives the most votes, the proposal will be rejected. No changes will be implemented.