karpatkey

Framework for an Active DAO Treasury Execution 04 Jan 2023 ● claberus.eth An analysis of a non-custodial and trust-minimised way to delegate treasury actions. The DAO Governance Conundrum DAOs are a crypto primitive. They represent a new organisational construct rooted in the digital age that advocates for permissionless and transparent governance through immutable smart contracts. Its decentralised ownership promotes cooperation through intricate incentive schemes governed by capital ownership. However immensely useful to prevent the arbitrary decision-making of hierarchical structures, this approach has ultimately been taken to an extreme. The “decentralise everything” movement quickly evolved into an “everybody should decide on everything” mindset that has slowed progress in some technical matters across most DAOs so far. Treasury Management is undoubtedly one of those areas. DAO token holders are the ultimate owners and decision-makers of the DAO. We could argue that voting on treasury-related actions is a logical central piece of every DAO. Isn’t this the whole point of decentralised ownership? In practice, there are some issues. We would not vote on operational smart contract upgrades or whether a bug should be fixed. Most DAOs usually avoid this and leave the work to the experts. The reason for this is two-fold: Not everyone has the expertise in every topic required for constructive discussion and decision-making; but mostly because These decisions often require immediate action, especially when risk is involved. Technical decisions should not be voted on, and treasury management decisions are usually just technical decisions. The Problem with the Status Quo Today, DAO treasury management is primarily a part-time job performed by operational teams. As a tiny subset of the activities required to run a protocol, its efforts hardly go beyond occasional community proposals containing a specific set of transactions for the DAO to vote on. This requires every portfolio allocation and strategy execution to go through a long period of discussion and voting before being effectively implemented. Voter’s apathy and fatigue sometimes lead to the lack of quorum to enforce decisions — but even worse — the public nature of this approach exposes the treasury’s strategy to potential frontruns, e.g. unbalancing a pool to profit at the expense of the treasury. Lately, many treasuries have started investing some of their idle funds to generate revenues in the emerging DeFi ecosystem. DAO Treasury Management is essentially a risk management activity: volatility, price, and other market conditions require continuous monitoring: Incentive Rewards markets are rarely stable — they change affecting economics, get paused, upgraded, and restarted again. Typically, it is worth optimising yield daily or weekly, as the size of treasury funds justifies gas and labour costs; The nascent nature of DeFi leads to events like flash crashes, depegs, and hacks — and they can happen quickly and unexpectedly. You want to have automatic risk-protection procedures in place to avoid being caught by one of these events. Ultimately, the crypto industry has been protecting the transparency ethos of DAO governance by enforcing the above-mentioned ossified treasury management approach at the very high expense of capital inefficiency. But it doesn’t have to be like that. There’s a way of getting the best of both worlds, and that’s precisely what Karpatkey has been doing for the last two years with one of the biggest DAO treasuries. Non-Custodial and Active Treasury Execution We believe only strategic frameworks (or those conflicting with the DAO’s mission) should be voted on. Beyond occasional token swaps or portfolio composition initiatives, this approach usually translates into proposing high-level portfolio strategies and agreeing on allowlisted DeFi protocols and parameter thresholds that limit the scope of the treasury team. That way, an assigned expert committee, e.g. Finance Core Unit can execute non-custodial dynamic strategy adjustments under a constrained environment — minimising attack vectors. Through this, capital efficiency and risk management are massively improved, while the funds never leave the DAO’s custody. Let’s dig a bit deeper to understand the technical implementation. The core of Karpatkey’s non-custodial and trust-minimised solution relies on the most battle-tested tooling to assist DAO treasuries: a proxy Management Safe and the Zodiac Roles Modifier. The DAO treasury fund is held in a Safe wallet, controlled completely (1 out of 1) by the DAO. On the other hand, the Zodiac Roles Modifier Module enforces role-based permission presets that can unilaterally make calls to any pre-approved addresses, functions, and variables the role has access to. These presets are initially subject to community approval, e.g. Snapshot, and they can execute different types of pre-established sets of transactions. Those can range from simple DEX token swaps and CDP or farming positions to more complex bundled transactions combining several actions from different protocols. The beauty of this execution infrastructure is that it allows for on-chain automation through custom-built bots while keeping the DAO’s ownership. These are valuable, especially for the more repetitive tasks such as rewards harvesting or those that require immediate action, such as disassembler procedures to protect against unexpected or less frequent events, e.g. depegs. In the end, there’s still a lot of room for improving the crypto-native treasury management primitives, and we invite every developer to build on top of the Zodiac Treasury Open Standard. We want to keep empowering DAOs to push community-driven professional risk management decisions. Still, we firmly believe that a small group of experts should take care of day-to-day execution under a constrained environment. Building the future of Asset Management 23 Jan 2023 ● claberus.eth The cost of trust In any economic environment, one considers the risk that others might unfairly exploit informational asymmetries to their advantage. There is thus the need to invest resources to assess their trustworthiness. We can think of Finance as the complex of institutions, standards, and technologies needed to minimise the transactional cost between parties who do not fully trust each other. The level of trust defines expenses and resource allocations. Financial intermediaries act as bridges of trust between economic agents, and their efficiency can be measured by their ability to reduce the cost of such activities. Historically, information limitations and asymmetries have generated strong incentives to exploit them unethically. The opacity and complexity of the financial system have created an environment where reckless and fraudulent behaviours are incentivised, and we have witnessed numerous unfortunate events throughout the years. This phenomenon has created endless cycles of market reflexivity, where downturns have inflicted severe social distress, especially for the ones with the least access to information, i.e. retail. On the other hand, the cost of the existing legacy and disconnected financial infrastructure has deferred financial inclusion, with potential negative impacts on economic growth, income distribution, and global poverty levels. This level of inefficiency will not change through incremental innovation. It rather requires a structural shift: a brand new technical infrastructure that addresses the challenges around transparency, automation, global availability, and credible neutrality. We think it will be DeFi. A global financial system built on top of DeFi. This is the first time in history we have access to a public and real-time auditable financial infrastructure that runs 24/7, without downtime. It is also the first truly global, not restricted by local rules, and neutral financial system that provides credible assurances to the actors building on it to transcend time. We believe in the world’s transition into trust-minimised, permissionless, and composable capital markets built on public networks and open-source software. DeFi will reshape the structure of modern finance and create a new landscape for entrepreneurship by broadening financial inclusion and encouraging permissionless innovation. Non-Custodial Asset Management in DeFi karpatkey DAO was created out of sheer necessity. In 2020, Gnosis announced that it would take an evolutionary leap into the newly created GnosisDAO. The transition of Gnosis from a traditional for-profit organisation to a DAO has created all sorts of coordination issues from a treasury management perspective that needed to be addressed. The GnosisDAO implemented autonomous open-source tooling developed by the Safe and Zodiac protocols. It also needed to find a solution to manage its assets that would adapt TradFi’s best practices to tackle the requirements imposed by the open nature of a decentralised organisation. A team formed by Gnosis and karpatkey members—and incubated in Gnosis—had been tasked to take responsibility for the research, execution, and reporting of the treasury management activities, and in December 2021, GIP-20 ratified karpatkey DAO as the official manager of the GnosisDAO treasury and later increased its scope in GIP-58. Fast forward, and: the GnosisDAO treasury generated 53% of the top 65 DAOs’ yield in 2021; karpatkey reports became a source of alpha for the industry; karpatkey is assigned with the Balancer treasury; karpatkey has set a benchmark for non-custodial active asset management in DeFi; and karpatkey wins the ENS endowment RFP. We inadvertently created an entire industry. We have spent the last two and a half years working in the most adversarial blockchain environment—where any vulnerability is a bounty that will eventually be exploited—and have been exposed to multiple cycles of market volatility. We have resisted mostly because of our prudent and rigorous approach to risk management and long-term sustainable strategies. We acknowledge the industry is still in its infancy. It still lacks the proper integrations, data monitoring systems, and interfaces to compete with TradFi. Throughout this period and after executing thousands of transactions on behalf of DAOs, we have been learning the challenges, designing the processes, and developing the infrastructure for the execution and risk management of institutional-level treasuries on-chain. By leveraging the benefits of DeFi we believe we can dramatically improve the finance industry's processes, from asset monitoring to portfolio accounting, reporting, and auditing, and many areas in between. Our conviction is that similar to the traditional finance world, a significant portion of DeFi’s total value locked (TVL) will be run by professional asset managers using the best tools and infrastructure available. It just won’t be the way we’re used to. Introducing the new brand identity of karpatkey 26 Jan 2023 ● Lea Filipo | rsousamarques We think that the global economic system will eventually be run on top of DeFi. In order for this trustless ecosystem to thrive, it’s imperative that governance models around DeFi protocols follow their own ethos of transparency. We think they should be akin to coordination mechanisms for basic infrastructure provision: they should be credible-fair and censorship resistant, so traits like predictability, robustness, and neutrality should be valued above efficiency. We think DeFi should be run by DAOs. karpatkey’s mission is to support DAOs into perpetuity by helping them to preserve capital through low-risk and trust-minimised DeFi treasury execution. In line with this, we joined forces between keen studio and karpatkey to create a radical and straightforward visual language and set the first stone of the brand. karpatkey is all about trustworthiness. To illustrate this, we tried to capture the immutability, decentralisation, and transparency that blockchain technology provides—hallmarks of a secure organisation for the community. On the other hand, we’ve always cherished a low-profile and functional approach to the industry, so traits like simplicity, moderation, and gentleness always came natural to us. That’s why we picked the Monospaced Plex Sans, an open-source font with a techy feel that is both recognisable and highly legible. We used it for the logo (lowercase for a balanced and sober aesthetic) and for title text, fitting into the old tradition of financial and research institutions’ typographical approach. For body text, we used the sans version to maximise the legibility. The font: IBM Plex Mono and Sans This is also reinforced with a stark black and white palette that serves both a practical purpose (it is timeless and versatile) as well as an aesthetic one (it emphasises minimalism). We wanted to create a memorable yet understated look that could be used by any one in any context. The font: IBM Plex Mono and Sans Generative visuals are also an important part of its branding as they emphasise its connection with web3 ecosystem protocols. By utilising fractal space filling curves in their visuals, we draw attention to their connection with mathematics—a scientific discipline that serves as a foundation for our daily practice. The font: IBM Plex Mono and Sans These patterns are also a reminder of the complex and chaotic nature of financial systems. Their behaviour has both systemic and random components—which makes them impossible to model with precision—and that’s why karpatkey never engages in trading. Keeping our brand elements simple also encourages scalability and allows us to make the most out of them by iterating over time on a variety of media. Not only do we benefit from its aesthetic appeal, but minimalism also streamlines use for a wide variety of materials: building an inclusive culture with accessible assets and document templates on Google Workspace so everyone can put their own spin on it. karpatkey’s new brand identity sets an example for web3 projects by embodying the values we believe in, which ultimately forged the ecosystem. From the colour scheme choice to the selection of an open source font to its use of generative visuals, each element has been carefully chosen in order to create a consistent visual language that reflects these values while communicating karpatkey’s commitment. Ultimately, our goal is to provide a strong foundation for us not just as an organisation but also as part of a larger community that allows us to grow together. Maker game changing move MakerDAO's recent decision to hike the DAI Savings Rate (DSR) to 3.49% is setting out to redefine the "risk-free interest rate" in the DeFi space. This move fundamentally alters the landscape of what we understand as DeFi, bridging Real World Yield on-chain, raising the interest rates, and potentially making DeFi competitive once again. However, there's no such thing as "risk-free" in crypto. In this piece, we'll dive into the potential impact of this development and the risks associated with it. Impact on DeFi The increase in the DSR introduces an opportunity cost of holding DAI at 3.49%. This is because the underlying risks become evenly distributed among all DAI holders, regardless of their participation in the DSR. Consequently, we can anticipate that most DeFi protocols will embrace sDAI (Makers tokenised version of the DSR), effectively turning DAI into a yield-bearing stablecoin. For example, Aave is already discussing the integration of sDAI, thereby increasing its supply interest rate, setting a floor, and consequently driving up the borrowing rate. However, if money markets fail to integrate the DSR fast enough, they might enter into a negative loop caused by LPs withdrawing their funds to get the higher rate with a lower risk of the DSR. We can also expect Automated Market Makers (AMMs) to incorporate sDAI starting to show higher APYs, and a shift of assets from high-risk to low-risk protocols, as their risk premium drops (similar to what we saw in TradFi last year). At the same time, the move will likely prompt a rise in the interest rates of other stablecoins in money markets. Whether these rates match the DSR will depend on how the market prices the risk. This could potentially stimulate more on-chain activity and capital influx, but concurrently, the elevated borrowing costs might temper leverage on ETH (and other assets), affecting their short-term price. This development also indicates a strategic shift for Maker. Originally a platform for leveraged long traders, Maker now positions itself as a bridge to real-world assets (RWA) yield. The escalation in the stability fee could result in a decreased share of DAI collateralised by on-chain assets. Other CDP-backed stablecoins might also feel compelled to increase their borrowing rates to maintain their peg. It will be interesting to see how the market values decentralised-collateral stablecoins. In particular, LUSD being significantly cheaper than DAI will serve as a sign to the market. So far, LUSD has faced challenges maintaining the peg at 1, as they don’t have a successful mechanism to drive the price down when it surges above this level. But the high spread between DAI and LUSD rates might finally be their solution. Critics might contend that this move further centralises DAI, but it's crucial to understand that Maker is intentionally reducing its reliance on Circle. Prior to it, DAI was predominantly backed by USDC, which posed a significant single point of failure. Now, the risk is dispersed among various parties, which could bring more potential failure points and reduce the dependence on individual entities, thereby bolstering the system's resilience. In a way, Maker is decentralising its centralised collateral. Furthermore, USDC was collateralised by T-Bills, which is most of the new collateral of DAI, enabling it to capture the yield that was previously captured by Circle. Risks There are, in our opinion, four main risks for this move: custodial risks, regulatory risks, collateral risks, and execution risks. Custodial Risks: 2022 demonstrated the issues linked with trusting entities with custody. Reputations notwithstanding, reliance on these entities will always carry potential risks. Maker's distancing from USDC diversifies these risks, which is only allowed by them sunsetting the PSM (replacing it with market-making strategies on DEXes). A default on part of the collateral no longer means you need to run off because if you are the last man standing, you are left holding air, giving DAI flexibility to lose the peg and find a new market price. But it bears the question: if that were to happen, would DAI find product-market fit as a non-USD stablecoin? In any case, it is strictly better than the alternative. Another consideration is related to payment delays. Monetalis' recent three-week delay is a case in point. Although such instances may be temporary, a combination of similar delays with other unpredictable events could potentially lead to worse consequences such as liquidity shortages, breach of trust, market instability, and in a very extreme case bankruptcy. Regulatory Risks: With DAI gradually morphing into a yield-bearing stablecoin, regulatory oversight from the US could increase, which may not bode well for DAI, and the recent lawsuits from the SEC to Binance and Coinbase probes that regulation is hotting up. Potential regulatory actions could include placing Maker on OFAC, implementing a “selective default, “ or direct asset seizure. None of these would be done lightly, as the US cannot afford to lose even a small bit of confidence in a context of necessity: the government needs to roll over billions in debt, and will want to keep enjoying relatively cheap cost of capital. Maker DAO is taking some cautions to protect themselves against these, such as choosing non-US custodians and legal nexus, and enforcing decentralisation in the endgame plan. Regardless, these risks cannot be ignored. Collateral Risks: Default on collateral assets is also a concern. While the majority is held in T-bills, which carries a low risk, some are held through ETFs which might add some layer of risk, and there are some other small positions to consider, such as the H.V. Bank loan. Execution risks: Finally, there's the question of whether Maker can generate yield quickly enough if its protocol-controlled value drastically increases due to the abrupt DSR change through the PSM. If not, who will foot the bill? The surplus buffer? A gradual ramp-up of the rate or some hard caps could offer some breathing room to allocate this capital. In conclusion, Maker DAO's decision to increase the DSR to 3.49% represents a bold step that significantly reshapes the DeFi terrain. While it presents an exciting transformation of DAI into a yield-bearing stablecoin and may stimulate more on-chain activity, it also invites a suite of new risks and challenges. The impacts are far-reaching, from potential custodial and regulatory risks to uncertainties around the ability to generate yield at a fast enough rate. But if we attempt to create a massively adopted worldwide open financial system, we must bridge the assets from traditional finance to DeFi. And it’s surely better for the ecosystem to have a native DeFi organisation trying to do it. Purely decentralised stablecoins still remain a challenge, and Maker has already ceded this responsibility to Liquity, Reflexer, et al. As the landscape of DeFi continues to evolve, these decisions will undoubtedly play a pivotal role in shaping its future. It will be intriguing to watch how these new dynamics unfold and influence the wider DeFi ecosystem.