Authorize the TWG to use limited leverage and hedging in stablecoin portfolio management

Forum Post: https://forum.inverse.finance/t/authorize-limited-leverage-for-use-by-the-twg/618

TL;DR

• What: Permit TWG to deploy low-risk, USD-stablecoin-only leverage and hedges to improve risk-adjusted returns and reduce protocol balance-sheet risk.
• Why: Increase sustainable yield, hedge protocol exposures (e.g., collateral/borrow side risk), and harvest DOLA volatility in a peg-supportive way.
• How: Strict guardrails on exposure, LTV, liquidation buffers, per-asset/protocol limits, transparent reporting, and an emergency pause.
• Scope: On-chain only; FiRM, Curve Lend, Aave v3, Morpho Blue, FraxLend, Fluid and Pendle primitives to start. Start with conservative caps; broaden only via DAO ratification.

---

Background

The TWG has managed Inverse’s treasury and liquidity for ~4 years, growing assets from just under ~$2m (INV-heavy) to >$17m with significantly more diversified holdings. To date, stablecoin reserves have been deployed conservatively (seeding liquidity, earning modest yield). This proposal expands the toolkit to include measured leverage and hedging exclusively within USD-stable markets to enhance returns and reduce risk on the DAO’s balance sheet.

---

Objectives (in order of priority)

1. Principal safety & peg stability (DOLA first, everything else second).
2. Balance-sheet risk reduction (hedge material protocol exposures).
3. Stable, defensible yield (net of borrow costs, fees, and slippage).
4. Transparency & repeatability (clear playbooks, controls, and reporting).

---

Scope of Strategies

All strategies are USD-stable oriented (collateral, debt, and instruments):

• Leveraged carry / basis: borrow one stable to long a yield-bearing stable, stable LP, or Pendle PTs to lock in net positive carry.
• Hedging: short specific stables where the DAO is long (e.g., collateral on FiRM or treasury assets) to reduce tail risk without forced user unwinds.
• DOLA volatility harvesting (peg-supportive): buy DOLA below band and (optionally) borrow-and-sell small sizes near/above band, with strict limits and circuit breakers (details below).

Allowed venues (initial):

• Debt/credit: FiRM, Curve Lend, Aave v3, FraxLend, Fluid, Morpho Blue (stable-vs-stable markets).
• Yield legs: yield-bearing stables, stable LPs (Curve), Pendle PTs (fixed-income style).
• Execution: on-chain DEXes and routers.

Any additions require DAO ratification.

Explicit exclusions (initial): perps/centralized margin, non-USD assets, under-audited new primitives.

---

Risk Guardrails & Definitions

Portfolio sizing

• Max Net Exposure in leveraged strategies: ≤ 20% of Stable Reserve NAV.

Concentration

• Per-protocol cap: ≤ 10% of Stable Reserve NAV (except FiRM)
• Per-asset (unhedged long) cap: ≤ 10% of Stable Reserve NAV (except DOLA, which can be longed without a cap).

Borrow-side risk

• Min liquidation buffer: ≥ 4% to liquidation price when a market-based price oracle is used.
• Min liquidation buffer: ≥ 1% to liquidation price when a hard-coded price feed is used (such as PTs on FiRM).

Ops & controls

• On-chain custody: TWG controlled multisig only (no CEX custody).
• Emergency pause: any TWG signer + RWG may pause new position entries for a protocol/asset and start an unwind of existing position with rationale shared within 24 hours

---

DOLA Policy: Peg-Supportive Volatility Harvest

Intent: Allow the DAO to capture some of the volatility that traders currently capture without harming the peg.

Definitions

• Longs: When DOLA is below target peg, long sDOLA by using it as collateral, borrowing other stables, and using to buy more sDOLA collateral
• Shorts: Use FiRM to borrow DOLA, and sell or add to liquidity (if using a DOLA LP collateral), effectively creating a short position

Constraints

• No new net shorting while FiRM incidents are active

Rationale: This policy is counter-cyclical on dips (supports the peg) and light-touch, opportunistic near peg (never large enough to create sell pressure). It lets the DAO internalize some spread PnL while remaining peg-positive.

---

Hedging Example (crvUSD)

• The DAO currently has material crvUSD exposure via FiRM debt and treasury. On yield-basis launch (new code), RWG requested temporary exposure reduction.
• Action pattern: open a crvUSD short via long sDOLA funded with crvUSD debt (Curve Lend) or equivalent stable-vs-stable venue.
• Payoff: if crvUSD wobbles (or suffers an incident) while FiRM takes losses, the short profits help offset protocol-side losses. If crvUSD is fine, carry cost is bounded and the hedge can be scaled down.
• Should the TWG realize profit from a short position while experiencing losses elsewhere, said profit shall be allocated to cover losses in the following prioritized order: Treasury losses, DOLA backing losses, and junior tranche losses. Any remaining profit thereafter will be deposited into the treasury.

---

Reporting & Transparency

• Isolated Multsig: In order to make tracking positions easier to follow and account for, an isolated multisig will be used for levered positions, at the address: 0x6dB248100cF4908429AB671F33D105311ED7fEF8
• Quarterly report: PnL will be included in the stable reserve line item of the soon-to-be-live quarterly DAO financial reports produced by the TWG
• PnL treatment:
  • Realized yield net of borrow, fees, and incentives.
  • Unrealized mark-to-market by pricing providers (UIs, oracles, Coingecko, debank).
  • Points/airdrops: valued at 0 until liquid; disclosed separately.
• Incidents: immediate post-mortem.

---

On-Chain Actions

The TWG multisig requires higher token allowances to the DAO Treasury to execute routine capital allocations (deposits/withdrawals) efficiently. These approvals do not authorize discretionary spending; they simply permit repeated transfers of the same token without resetting allowances. For example, moving 250,000 DOLA out and back four times requires a 1,000,000 allowance. The current TWG DOLA allowance is 739,090; this proposal increases it to 2,000,000 to support ongoing treasury management, such as what has been discussed in the above proposal.