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.
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.
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).
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:
- Addresses that are permissioned to manage the assets inside a vault
- DeFi protocols and assets that those managers are allowed to invest or interact with
- Maximum slippage tolerance allowed. A vault can be configured to prevent trading entirely if a custom cumulative slippage threshold is breached. In other words, if a vault manager does enough bad trades, the Vault locks them out for a period of time.
- Address (1 or more) that is allowed to deposit into the vault (i.e. whitelisting)
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.
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.
|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.
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:
|$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.
- 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)
- 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.
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.