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Proposal to grant TWG allowance for the purchase of emission-controlling tokens

Executed
#070 - mills ERA

Created Oct 14th, 2022 - Executed Oct 19th, 2022

Details

CryptoHarry

Proposal to grant TWG allowance for the purchase of emission-controlling tokens

Forum Post: https://forum.inverse.finance/t/proposal-to-grant-twg-allowance-for-the-purchase-of-emission-controlling-tokens/161

Proposal

This proposal requests the DAO grant an allowance of 275,000 DOLA to the TWG meant to be used over a subsequent 2-4 month period for investing and building long-term positions in emission-controlling tokens, such as yCRV, CVX, sdCRV, sdBAL, SDT, AURA, and VELO. At the discretion of the TWG, an amount less than the approved allowance may be used depending on market conditions.

Background

Since April, the TWG (in collaboration with RWG) has been leading various liquidity strategies for the DAO in order to support and strengthen DOLA. This initiative began with entering the curve wars, forming a partnership with Yearn to launch the Yearn Fed (currently the main supplier of DOLA liquidity), and has since progressed with the recent launching of the FraxBP Fed, and migration of INV-DOLA liquidity to Balancer. Building on our efforts to expand liquidity for DOLA, the TWG will soon put forward proposals to authorize the launch of a Velo Fed (Velodrome Finance) and an Aura Fed (Aura Finance).

Motivation

Emission-controlling tokens such as CRV, CVX, AURA and VELO can be locked into vote escrow, which grants voting power for controlling which LP emissions on their platform are sent. vlCVX represents veCRV voting power, which is used to control where CRV emissions are sent weekly on the Curve platform, providing yields on Convex. vlAURA represents veBAL voting power, which controls BAL emissions on Balancer, creating yield on AURA. veVELO controls where VELO emissions are directed on the Velodrome protocol on Optimism.

Directing emissions towards DOLA pools on these platforms creates yield opportunities, which in turn creates demand for DOLA. As the DAO does not hold sizeable positions in any of the tokens, the TWG has had to "bribe" 3rd party holders with INV tokens in order for them to vote for DOLA pools and create yield opportunities. This means that INV token price remains very sensitive, potentially being a single point of failure if the price plummets and bribes of the necessary size can no longer be placed using it. The DAO acquiring the emission-controlling tokens helps mitigate this risk by reducing dependency on the INV token.

As the DAO builds positions in yCRV, CVX, AURA and VELO, these tokens can be used to direct rewards to DOLA pools meaning that the reliance on INV emissions to support DOLA reduces. In the long term, 0 INV emissions will be required for supporting DOLA; and DAO operations will once again be sustainable for the first time post-April 2nd exploit. In this scenario, a large portion of the downward sell pressure on INV will be removed, meaning more value can accrue to current INV holders.

Why is deep DOLA liquidity needed?

There are 2 main reasons as to why the DAO should keep and maintain deep DOLA liquidity.

Firstly, as Nour has hinted on various social platforms, we can expect a new lending market never seen before in DeFi to be launched before the end of 2022. In order to deal with and facilitate large amounts of borrowing on this new platform whilst maintaining a safe DOLA peg, deep liquidity is required to absorb the sell pressure allowing for efficient stableswaps.

Secondly, as a result of the exploits on now depreciated lending markets earlier this year, it is essential for there to be deep liquidity along with high circulation in order for the impact and risk to DOLA holders to be minimized. Currently, there is around $9.5MM DOLA bad debt in the ecosystem, an amount that is slowly being reduced on a weekly basis thanks to the TWG-led bad debt repayments. While the DAO is now making use of novel ways to further reduce bad debt in conjunction with standard repayments, the most likely scenario is that this initiative will be a multi-year effort. In the meanwhile, these DOLAs won’t be contractible by Feds in the eventuality that DOLA demand is reduced.

Future Revenue

Please note, this section is speculative!

As a stablecoin issuer and lender, Inverse Finance DAO is in a position to profit significantly from owning emission-controlling tokens. We are currently enduring a “crypto bear market”, with the majority of tokens, especially DeFi tokens, being down significantly from previous highs. The future revenues to the DAO should we enter a new “crypto bull market”, having accumulated high-quality emission-controlling tokens during the “bear”, will be of notable size.

Simplifying the process - if the reward tokens (CRV/CVX/BAL etc) market price increases by a multiple of 5x during the next “bull market”, then the amount of TVL liquidity that previously bought tokens will also roughly increase by 5x. At the same time, assuming Defi borrow rates increase as borrowing demand significantly increases, a trend of the past bull market, Inverse Finance DAO as a stablecoin issuer and lender stands to gain hugely.

Based on the current environment/market, a $275k investment is expected to allow Inverse DAO to incentivize a further $8.5m in additional TVL across DOLA liquidity. At 52.5% DOLA balance, this is an additional $4.46MM in DOLA demand. If earning a return of 7% per DOLA, averaged from fixed-rate lending interest and Market Fed revenue (yearn fed/frax fed/aura fed), this brings in annual revenue of ~$310k. Having over a 100% return for the year is phenomenal; after the initial payment is clawed back, all further revenue from the asset (which in theory should continue in perpetuity, until Inverse DAO decides to exit the ecosystem) is profit.

It’s important to note that these holdings expose the DAO to market price fluctuations downwards as well as upwards, and the previous examples were purely for demonstrational purposes.

Why $275k? Current DAO Runway

Currently, the DAO targets to maintain at least 12 months of operational expenses available as liquid assets. This means that even if the DAO generates negative cashflows during periods of poor markets, the operations of the DAO can continue for a long time before needing to raise additional capital (If revenues are at $0, then operations can continue for 12 months. If revenues are at 50% of operation expenses, then operations can continue for 24 months, etc). Currently, due to an already strong treasury, further strengthened by OTC deals with partners such as the $283k transaction with Concave, the Inverse DAO treasury has funds far above 12 months of operational expenses. The 12 months of operational expense runway requirement is subject to be changed in the future if deemed necessary (for example, weak market conditions may require an increase). If operational expenses increase in the future, then excess spending will be decreases to ensure at least 12 months runway can be maintained.

Breakdown:

Working GroupMonthly ExpenseYearly Expense
Dev$37,667$452,000
GWG$16,227$194,724
RWG$15,000$180,000
CWG$12,000$144,000
AWG$11,623$139,480
TWG$10,000$120,000
Total$102,517$1,230,204

Liquid Treasury Value:

BlockchainAssetValue
ETHDOLA$534,866
ETHDAI$372,158
ETHUSDC$202,105
ETHDOLA-FraxBP$700,036
Total$1,809,165

Runway:

Cash Available$558,9612
Months Runway17.65

The TWG believes that optimizing excess cash above 12-month operational costs is the most effective use of capital for the DAO at this stage, with long-term sustainable growth in mind.

Exit Options

The majority of these tokens are liquid wrappers with shorter lock durations than the underlying assets; this means that the DAO likely has the opportunity to exit positions if the desire exists. Also, if DAO operations start eating into the 12-month runway, then should stablecoins be deemed as more valuable to the DAO at that point then positions can be exited. The lock times for the suggested tokens are:

vlCVX = 16-week rolling lock, meaning that there’ll likely be batches of CVX unlocking every 2 weeks

vlAura = 16-week rolling lock, meaning that there’ll likely be batches of Aura unlocking every 2 weeks

yCRV = no lock, can exit via the market at any point as long as there is liquidity

sdCRV = no lock, can exit via the market at any point as long as there is liquidity

sdBAL = no lock, can exit via the market at any point as long as there is liquidity

veVELO = 4 year lock, very long time so unrealistic that it’ll be possible to exit

veSDT = 4 year lock, a very long time so unrealistic that it’ll be possible to exit; this token is considered a “cost” in order to get voting power bonuses for sdCRV and sdBAL

On-Chain Actions

  • Add 275,000 DOLA allowance to the current TWG DOLA allowance of 740,000. This means setting TWG DOLA allowance to 1,015,000.

Actions

Action 1
«
Set Treasury Working Group's

DOLA

Allowance to

1,015,000

»
DOLA
.approve(
Treasury Working Group,

1015000000000000000000000

)

Proof of Reviews

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PatB

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CryptoHarry

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