[1RC] Earn Conservative Yields on USDC in Treasury

Simple Summary

Proposal to implement a conservative active asset management program to earn yield on idle USDC funds sitting in the DAO treasury while maintaining security, transparency and trustlessness. We also propose to integrate 1inch protocol into Enzyme thus making liquidity available to its users.

Abstract

The proposal fleshes out how 1inch can use an Enzyme vault in order to effectively manage the USDC treasury and why the proposed technical solution allows 1inch DAO to achieve the best combination of security, transparency, control and operational agility. The proposal also includes a paragraph related to integrating 1inch into Enzyme.

Motivation
1inch protocol accrues fees that are collected into the treasury and denominated in $USDC. The reserves can earn steady yields through conservative strategies in order to a) keep pace with rising USD inflation environment, b) compensate users in the event of a loss due to mispricings in the protocol or c) to pay for protocol maintenance. This proposal aims to preserve and grow the balance of the treasury and hence its usefulness as a tool to protect 1inch’s users and grow the protocol. The architecture of the Enzyme smart contracts allows for operational agility without sacrificing trustlessness and control i.e. maintaining the setup Gnosis + Snapshot + SafeSnap on Ethereum mainnet (which we assume to be your current setup from reading the other posts on this forum).

Specification
Current balances of the top assets in the treasury are reported here and rounded to the nearest big figure is $12m USDC at the time of writing this proposal.

The 1inch community should have full visibility into the assets held by the treasury and transactions involving those assets should adhere to the expectations the community lays out in this conversation. We believe that the best way to do this is to use an Enzyme vault.

Enzyme is the DeFi Operating System that enables users to plug and play with dozens of protocols and hundreds of tokens. Enzyme vault smart contracts are highly configurable; among other things, vault owners can specify:

The effective utilisation of these specific configurations would entail that 1inch owns the vault via Gnosis multi-sig and can decide on the delegation + specific risk policies via Snapshot/Safesnap, while also allowing for rapid strategy implementation, easy exit from positions and full transparency on trade activity. Real time NAV on the vault and historical performance against the chosen benchmark is available via the app dashboard

All transactions that occur within a vault (e.g. depositing USDC into a Curve pool and staking the resulting LP tokens) are visible on-chain and via the Enzyme app, meaning that stakeholders and DAO constituents have simple, instant and perpetual visibility into the actions of a vault manager and their resulting profit and loss.

Among notable projects that have decided to use Enzyme, we can reference Celsius, Unslashed Finance, FWB DAO, HumanDAO and the proposal recently posted by Nexus Mutual.

We propose that the 1inch DAO creates an Enzyme vault into which it can be the only depositor. Periodically, the relevant balances from the treasury shall be deposited into the vault, where they can then be deployed into conservative yield-bearing strategies.

We assume a low risk-appetite here and will steer away from lower-quality stable coins as determined by our risk assessment frameworks.

Strategy Expected return Methodologies
Low Risk Stablecoins 5-8% APY Using protocols like AAVE,Compound, Curve, Convex, Maple, Notional* with coins like USDC or DAI and actively managing positions as rewards are collected and compounded and as yields change.

*Note that yields are on the lower end of their 12-24mth range and we expect them to rise

Though these strategies are not subject to change by the day, it would be useful to be able to adjust them to changing market conditions without making a proposal to governance. When the vault is configured, smart contract policies could be enabled to allow one wallet to manage the funds with very specific guardrails. In this way, the vault could be managed by a delegated third-party in a controlled and yet flexible way.

This proposal does not require development work or resources from the DAO. The Enzyme smart contracts have been live on mainnet since February 2019, and subject to continual development from various teams coordinated by the Enzyme Council DAO. The most recent audits are available here.

Enzyme’s vault contracts ship with real-time financial reporting capabilities and full transparency into the transactions a vault has conducted. This means that given a set of KPIs, it will be easy to measure success or failure. In general we believe that in the current environment, a 5% annual return target encourages prudent risk management and represents a fairly meaningful increase in the utility of the funds within the treasury.

Rationale
We propose that Avantgarde Finance is appointed as the delegated third-party manager for the Enzyme vault managing the Safety Module’s funds. By way of background, Avantgarde Finance has been heavily involved in the core research and development of Enzyme since the protocol’s governance was decentralised and the first version of its contracts were deployed to mainnet. The team is a mix of engineers and finance professionals with a deep understanding of DeFi market structure and its risks and opportunities.

We propose charging the following fees:

AUM Fees Services
$0-5m 1.75% management fee (or) 25% performance fee Monitoring & management, monthly newsletter access
$5-10m 1.25% management fee (or 20% performance fee) Monitoring & management, dedicated account manager, quarterly consultation, monthly newsletter access
$10m+ 0.75% management fee (or 10% performance fee) Monitoring & management, live chat room with dedicated account manager, monthly consultation, monthly newsletter access
Any AUM level 0.25% protocol fee accrued to the Enzyme protocol

It is important to note that all fees are payable in shares of the vault and enforced by the Enzyme fee contracts. Management fees will allow Avantgarde to cover the expenses required to manage the vault while protocol fees are designed to accrue value for MLN holders.

It’s equally important to underline that as the Vault owner, the 1inch DAO will always be fully in control of the addresses to which it delegates trading privileges and the fees it pays in the form of Vault shares to those addresses. If it is the case that Avantgarde Finance is not living up to our end of the bargain, those permissions and fees can be easily terminated.

The alternative to this approach (i.e. management service) is that 1inch manages the Enzyme vault directly, which eliminates management fees but increases the complexity and the switching costs. We believe that our core expertise managing Enzyme vaults can provide the best net benefit for the 1inch DAO.

Enzyme vaults are highly configurable. Below is a list of the relevant parameter settings that we believe will create a vault suitable for this use case. Following that is a high-level overview of the steps to deploy and seed it with funds.

Parameters

  • Denomination Asset: USDC
  • Management Fee: depending on AUM level
  • Performance Fee: depending on the above choice
  • Permissioned protocols: Uniswap, Curve, Convex, Maple, Compound, Aave, 1Inch (soon tm)
  • Cumulative slippage tolerance: 5%
  • Delegated Trader Permissions: avantgardefi.eth
  • Cadence for sweeping funds from treasury to Enzyme Vault: Quarterly
  • Target vault exposures: 100% stablecoin

Steps to Deploy and Seed Vault

  • Configure vault owned by 1inch multisig with appropriate policies as discussed and voted by 1inch DAO
  • Deposit denomination asset balance into vault (USDC)

Managing Vault

  • Delegated manager (avantgardefi.eth) to optimise for yield opportunities within parameterized constraints and maintain target asset exposures
  • Coordinate with the DAO for proposal of strategy changes that are subject to DAO approval/vote.

Consideration #1 - Security

  • Top Tier Audits: Enzyme’s contracts have been audited formally by PWC, Open Zeppelin and Chain Security and audits are available publicly here.

  • Security-oriented Governance: Any upgrade or change to the Enzyme protocol is implemented by the Enzyme Council DAO, which is composed of technical experts.

  • Bug Bounty Program: We run one of the larger bounty programs in the space ($400,000) and have recently teamed up with Immunefi to give it more visibility.

  • Asset Management: When evaluating whether to allocate to a certain protocol, or to hold a certain stablecoin, Avantgarde’s Asset Management team will typically assess metrics such as technical security, team reputation, liquidity, collateralisation metrics, deposit & redemption mechanics, collateral custody and much more.

  • Contract Upgradability: In terms of upgradability, there are no admin keys or backdoors. Vaults are version-specific and can only be upgraded from one version of the protocol to the next if Vault Managers opt in and signal an upgrade. Depositors will be notified if this occurs and they have a 7-day window to opt out if they do not like the new upgrade parameters being signalled.

  • Insurance: In order to add extra peace of mind, there are at least 2 options to insure the vault from smart contract risks, with Unslashed Finance or Nexus Mutual. On both options, Enzyme is among the lowest coverage premia, thus implying that the protocol is deemed top-notch security.

Consideration #2 - About Avantgarde Finance

Avantgarde Finance builds asset management products and services in the decentralised finance space leveraging its unique position of being one of the first development teams in DeFi. The team boasts an aggregate of over 60 years experience in Traditional Finance and nearly 6 years in DeFi having founded and built the first ever on-chain asset management infrastructure. Our experience spans across DeFi smart-contract and web3 development, asset management, understanding and structuring financial products, portfolio construction, technical and financial risk assessment and financial reporting. We are proud to service some of the leading industry players today and assist them with our Treasury Management services.

Consideration #3 Enzyme/1inch Integration

Enzyme does not currently have an adapter to allow its users to access 1inch’s liquidity. Upon the successful execution of this proposal, Avantgarde will prioritise its development roadmap to build such an adapter in order to generate a powerful D2D alignment where hopefully Enzyme acts as an additional liquidity channel bringing more fees to 1inch.

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Thanks for the detailed proposal @0x7751, however I personally favour trying an in-house solution as proposed here rather than outsourcing and get charged avoidable fees.

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Happy to oblige! Just posted a potential way to work together in your thread here. Think enzyme can alleviate a bunch of operational headaches that you’ll encounter running your proposal out of gnosis safes. We elaborate a bit on why in the linked post but I’m happy to go deeper if you’re interested.

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hey, i really believe we should earn some yield on the USDC which we have, but need to dig a little deeper to understand the benefits of using something like this rather than going directly to Aave or comp.

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Hi all,

Luca from the Avantgarde team made it to the community call earlier this week and came away with three major concerns regarding our proposal here; fees, security, and insurance. Some quick notes below on each:

  1. Fees

Management fees would only apply in case 1inch DAO decided to delegate active treasury management to Avantgarde Finance. As we pointed out in our recent comments here, the asset management layer Avantgarde proposed (and associated fees) is not necessary if 1inch DAO has the capacity to manage its own treasury. In that case, we are happy to provide initial guidance on vault setup and operational best practices at no charge.

  1. Security and general concern about third-party trust assumptions

Enzyme’s most recent Open Zeppelin audit refers to privileged roles within the protocol generally and within an individual vault. At the vault level, the Asset Manager role allows for an address that is not the vault’s owner to allocate the vault’s assets across various DeFi protocols. Left unchecked, this may present the opportunity for a malicious manager to take advantage of a vault’s depositors (though it is never possible for the manager to withdraw funds directly). However, Enzyme vaults can be configured with specific risk policy contracts that restrict the scope of the activities the manager can engage in. These policies limit the trust required between the depositor and the Vault’s manager by using smart contracts to control the actions a manager can and cannot do with respect to the funds in an Enzyme vault. For this case we have suggested:

  • to set a maximum slippage % policy,
  • to limit the DeFi integrations (i.e. protocols) with which the treasury vault can interact,
  • to prohibit the removal of tracked assets with values greater than dust.

A full discussion of known risks and mitigations can be found here.

  1. Insurance Capacity

We are in close contact with both the Unslashed and Nexus Mutual teams regarding coverage of the Enzyme smart contracts. The Unslashed policy is scheduled to roll soon and capacity will expand immediately. On the Nexus side we have been assured that they have capacity for $8-15m of coverage; we are happy to coordinate this transaction as and when it’s necessary.

Modified recommendation

Our recommendation stays largely unchanged, except that the 1Inch Treasury Enzyme vault should be managed by members of the 1Inch DAO rather than Avantgarde Finance. There are various ways to execute this operationally and ultimately it is up to the 1inch community. Our suggestion would be:

  • Choose a small group of interested/qualified community members to form a Treasury Management Committee.

  • Treasury Management Committee Multisig creates & owns the Enzyme Vault.

  • DAO Multisig becomes the sole depositor in the Enzyme vault and owns 100% of the shares, which it can redeem anytime.

  • Treasury Mgmt Committee members are added individually as delegated managers under a set of predetermined rules.

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Hey guys, I’m positively surprised as I went through all the docs you provided. And I believe there should be strategies for the DAO to earn income on its assets. You guys have addressed the concerns regarding risks and fees which came across in the community call and added the mitigation strategies too.

Here is my retort to the entire Proposal and your response to the community call.

The fee structure and the implementation are innovative, as they will be collected in the vault and only be paid out if the fund manager has completed the proposed KPI. I understand that the fees only come into question if the DAO doesn’t want to manage the assets actively but could be handled by a professional manager.

We currently don’t have a treasury guild or a working group which could handle these things. But I’m proposing to form a treasury Guild which could do these things in the future. Anyways, IDK if my Proposal could ensure the DAO can provide the contributors who could handle these immediately.
So your original Proposal is the best approach for now.

  1. Insurance

I would appreciate it if the original Proposal addressed the insurance and provided coverage rather than giving an overall view of the available insurance.

My recommendation before moving for a temp check.

This Proposal gives an overall structure of Enzyme and the role Avantgarde Finance would play if it goes through. But this Proposal is not addressing.

  • The amount which the treasury has to allocate for the vault.
    I understand from the Proposal that it is up to the DAO to come up with those figures, but since ‘we’ are the DAO, it is hard to get them. (I’m personally happy with 2-4% of the treasury to degen. ) the best practice in the DAO verse is for the proposal writer to come up with those numbers or run an unofficial poll to understand how the DAO stands as a whole.

  • Insurance
    I would appreciate it if you could specify that a deal will be closed if the Proposal passes and factor the insurance premium with the Ask.

  • integration with 1inch
    I would ask you to make it a different proposal rather than having it in the Proposal for treasury management since the voters will be voting for two entirely different aspects with little to no correlation. There could be people who might not want 1inch to be integrated but find ok to have Enzyme vault; thus, vote ‘no’.

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Thanks @0xBaer , we appreciate your feedback. We’ve responded below, but first want to make it clear that an allocation to an Enzyme vault that is managed by Avantgarde is the opposite of degen. The engagement would be well-defined in terms of the goals for the DAO’s funds and its risk tolerance, as well as contract-level permissioning and compliance policies that will govern Avantgarde as the asset manager.

Moving forward, we want to help the DAO on its journey towards full decentralisation. To that end, we are happy to charge no fee for our Asset Management services with the understanding that those responsibilities will eventually be transitioned to a Treasury Guild. We would love to help with the process of forming that Guild and believe that we can add value. We’ve thought long and hard about the operational aspects involved, both from the perspective of the DAO and the perspective of potential Guild members.

To directly address your concerns:

The amount which the treasury has to allocate for the vault

We understand the challenge of coming up with a concrete figure so we propose to allocate 8M USDC into a dedicated Enzyme vault with the understanding that full control of that vault will eventually be passed to the Treasury Guild. To date, that would represent around 50% of the USDC treasury. It is important to note that whilst Avantgarde managed the vault, we would run a conservative yield strategy and maintain 100% stablecoin exposure. We would only allocate capital to highly vetted and secure top-tier protocols. A certain portion of the vault may be subject to lockup from time to time in yield-generating protocols (e.g. Maple or Notional). Our aim however is to keep the treasury as liquid as possible. In case you want to have no / limited time constraints we will agree on either excluding illiquid strategies or having a max predetermined % allocated to them.

Insurance

Insurance on assets deposited to an Enzyme vault will cost between 1.2% and 2.6% on an annual basis. The purchase of insurance is a separate transaction from the deposit of assets in an Enzyme vault and the transaction will need to be executed directly between the 1Inch DAO and the insurance provider’s smart contracts, whether it’s Unslashed or Nexus Mutual. We are happy to help facilitate that transaction.

1Inch Integration into Enzyme

There’s nothing really for the 1Inch DAO to vote on here, It’s more a gesture of goodwill from the Avantgarde team. The integration would entail an adapter contract that allows Enzyme vault managers to route trade orders through 1Inch. We would be happy to prioritise this development work to further build the relationship between the DAO and our organisation. It doesn’t need a vote from the 1Inch DAO.

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