Less USDC, More Staked Ether

In short, we should increase our exposure to ETH

I am proposing that we lower our stablecoin holdings from 63% to 20% and re-distribute to various staked ether products. Then, to increase the yield on our staked ether, I recommend a hyperstaking strategy that would earn a leveraged multiple of the basic staking yield.

Sparately, to earn passive yield on our stablecoin reserves, I recommend providing liquidity on trusted AMMs to stablecoin pairs.

The rest of this proposal will explain why I think this is a good strategy and how we can structure it.

If this proposal is passed, what can be expected?

This proposal would grant the investment team (including myself and any others who wish to be involved) the responsibility to allocate the treasury according to the parameters specified below. Within these parameters, the investment team would have the freedom to allocate the treasury as it best sees fit.

In other words, the investment team would not need to pass proposals each time an investment is made, as long as it aligns with the general strategy that is being proposed here.

This proposal can be seen as an extension to the last one

A few months ago, the community voted in favor of swapping 5,000 USDC to an equal weighting of stETH and rETH over a 20-week period. In doing so, 16% of TSYM’s USDC treasury has been converted to staked ether products that will earn yield for the community (approx. 4% annually) in addition to any price appreciation on the ether itself.

So far, our staked ether products have increased in value by 25%, mainly due to price appreciation of ether itself.

Here is a snapshot of the DAO treasury today

I have added up balances from the DAO’s multisig and hot wallet. It’s worth noting here that the DAO’s stablecoin reserves (USDC) still represents over 60% of the treasury. With more than 26K held in USDC, I believe we are leaving gains on the table.

Here is a snapshot of what the DAO treasury could look like

If we lowered our stablecoin reserves to only 20% of the total treasury, we could then increase our liquid staking positions from 15% to almost 70%. The treasury composition would look something like this:

Why should we do this?

Since most protocol DAOs like Maker and Gnosis are responsible for managing risk, it does not make sense for them to hold large balances of semi-volatile tokens. But unlike these DAOs, TSYM’s treasury is mostly sitting idle right now with no explicit purpose. And so with no large outflows on the horizon, we could be taking more risk.

For this reason, I believe we should aim to maximize a risk-adjusted yield on our community treasury, which can then be paid out to token holders or used at our discretion.

By allocating a more significant portion of our treasury to staked ether products, we can participate in the upside of the Ethereum ecosystem without having to take on the risks associated with actively managing a portfolio of small-cap tokens and ERC-20s.

What does the investment strategy look like in detail?

The investment strategy can be divided into two parts - hyperstaking liquid staked ETH utility tokens (stETH, rETH, etc.) and using the remaining balance of stablecoins to provide liquidity to stablecoin trading pairs.

1. Hyperstaking

This involves using leverage to increase the APY earned on liquid staking derivatives by 2-10x. To do so, we would supply our stETH (wrapped) and rETH to a lending protocol like Aave, and then use this collateral to borrow additional ETH. We would then supply this borrowed ETH to a liquid staking protocol, allowing us to capture the staking rewards on additional tokens.

This strategy works because the borrow rate (APR) on staked ether is currently lower than the liquid staking yield (APY). For example, by borrowing against our staked ether at around 1% and then using that collateral to earn a staking yield of around 4%, we would capture the delta between the two rates. It is important to note that any open positions must be monitored, as borrow rates may change with increased demand for liquidity on lending protocols.

It is also worth noting that a hyperstaking strategy (lending staked ether and borrowing ether) has a lower risk of liquidation than a pure leverage long strategy (lending staked ether and borrowing a stablecoin to then buy more staked ether on the open market).

In the first case, both the lent asset and the borrowed asset move in tandem since they are both denominated in ether, whereas in the second case the lent asset (staked ether) can be volatile while your borrowed asset (stablecoin) remains fixed. This means that a decline in price of your lent asset (ether) could seriously affect the loan-to-value ratio and health score of your position. Alternatively, a sharp decline in the price of ether would not negatively affect the health of a hyperstaking position.

However, in a high gas environment, manually setting up a hyperstaking position could be expensive as several separate transactions are required. To save on fees we can make use of a DeFi “front end” that automates the entire strategy into one gas efficient transaction. EthSaver and Definitive are two providers that can help set this up, and I have personal experience using Definitive.

2.Providing Liquidity on Stablecoin Pairs

With the remaining stablecoin reserves, I suggest we diversify away from strictly holding USDC by swapping some USDC for USDT. Then, I recommend allocating 50-75% of our total stablecoin reserves to liquidity pools of stablecoin pairs on Uniswap, such as this USDC / USDT pool.

While providing liquidity on AMMs for volatile assets can lead to impermanent loss, this is not a risk when doing so for stablecoin pairs. For this reason, I believe that we should feel comfortable about providing liquidity using our treasury’s stablecoin reserves.

If the APYs on stablecoin pairs falls below 5%, we could then consider other alternatives such as lending out our stablecoins on Aave or Compound.