hey @kadmil, great napkin math, this is really important and helpful for us to think through. I do agree that securing a 18 - 24month runway is critical, though it doesn’t have to be all in one day. In reviewing the Lido Treasury, I could be wrong but it doesn’t look like anyone has been getting paid yet on payroll from the treasury, so my assumption is the off-chain funding is still funding that - but the concern here is that it is running low and soon we will have to switch over to the Lido Treasury for funding all operational expenses.
There’s a few considerations when thinking about your runway (which you have already begun to articulate), one of which is ‘can the cashflow from the protocol cover our expenses and be cash flow neutral or positive’. Since the revenues are in ETH and liabilities in stable coins - even though the protocol / DAO may be cash flow positive when ETH is above $1,800 - you have pointed out the risks and exposures from this asset - liability mismatch.
First - the DAO / team should establish some basic policies for working capital. As an example, at WeWork (where I was the global treasury manager for 6 years previous to web3) we would hold at least 90 days of expected expenses (not including revenues) and Capex on hand at all times (denominated in the various currencies our liabilities were denominated in). We would then hold at least another 180days projected cash burn in ‘safe investments’, denominated in USD (so some currency risk), to earn yield on those, and then every month or when necessary pull funds from the yielding strategies to working capital. Something like this is a good starting point for Lido - ie selling at least 9months worth of ETH (5 - 6k ETH) into stables TODAY, and deploying half or 65% of it into what the DAO is comfortable as conservative stablecoin yields (which should be proposed into a whitelist of allowable investments and part of the official policies).
Additionally there may be an opportunity to utilize cash flows to negate the need to immediately sell the entire 2 years runway, but it will not be an overnight setup and may involve an expert(s).
In a typical treasury world - we would use forward contracts with set expiration dates, typically a laddered & rolling 90 day strategy would work (can detail that for those interested) selling ETH forward every 90 days for USDC. One option would be to contact someone like GSR about this at a big desk. Perpetuals don’t really work the same without a set expiration date that matches an expected cash flow - because we would want to physically settle these forward contracts reducing our exposure, not adding additional leveraged exposure. This is an awesome opportunity because as you mention, the ETH is locked up! So unlike most companies / protocols we can establish projected earnings very confidently, which is a huge advantage (most corps will only hedge like 50 - 60% of expected revenues because of how unpredictable the fp&a projections often are, but Lido is very unique, could likely hedge out even up to 90%) That may take time to setup though - but again could be investigated by the team (or likely Karpatkey has an intro there, and having worked with them a bit would feel confident in their ability to help manage a forwards program).
I’d be happy to help / advise (no compensation) the team out with some of these policies, and on possibilities of setting up a forwards hedging program.
are you offended that i shine a light on a long list of economic screw ups that no one else shines a light on?
mind you i saved this project from absording 650,000 LDO tokens in one year from now, simply by pointing out an economic screw up.
i know no one on the team cares mr kras bc they are all up 100x
if they did care, it is hard to imagine how they are so bad at managing economics unless they are incompetent which they are obviously not.
“Show me the incentive and I will show you the outcome”
This is a mission critical project to the outcome of crypto against the global financial system. I find it to be wanton disregard for such a project to raise $70 million and keep it in the most speculative assets without securing a multi year run way.
So yes, I have millions of USD in LDO tokens on the line. I think its reasonable to point out these flaws when no one else is and know who is responsible for such a screw up so that this stops happening.
Just in case, most of the addresses can be checked against Deployed Contracts | Lido Docs list & forum posts on LEGO & Referral committees — addresses of committee multisigs are there
If swapping ETH for a stablecoin is being considered to fund development over the next few years, why wouldn’t the first course of action be to use that ETH to purchase stETH to drive up the ETH/stETH ratio back towards the 1:1 peg? This immediately makes stETH more valuable and would allow for it to be used as collateral for borrowing ETH on Aave. The borrowed ETH can then be sold into stablecoins and used for funding development.
Seems like a pretty easy way to knock out two birds with one stone. The current ongoing depegging seems to be a permanent problem in the bear market that isn’t resolving itself.
That would only help the peg temporarily and expose the DAO’s treasury to significant liquidation risks. Since the existence of the position would be known by the public, actors may seek to trigger the liquidation ; the position may also be caught in a liquidation cascade. A liquidation would damage the peg and hurt the treasury even more because only a portion of the asset’s value is extracted to stablecoin prior to the loss of the assets.
Buying stETH would not put us at the risk of liquidation (it’s not leveraged) but it won’t remove the price risk of ETH either. Also, it won’t really change the price situation, 20k ETH is a drop in a bucket.
I support that a part of(20~30%) teams’ salary should be paid by $LDO at a fixed price. Let’s set it at $1, which I think is almost it’s ATL and also close to the a16z round price. Better with a 3 month cliff.
This will make any of the team members really bound their interests close with the whole project’s future.
On the issue of how to handle the $ETH in the treasury, there is another option. We can use these $ETH to buy $stETH on Curve when a specific discount appears(6~8%). That will make treasury a potential higher return based on the $ETH. That will also show our faith in our future.
@Aes and I should have some of the dashboards ready in the next few days. Pricing data has been a cluster so it took a bit longer to aggregate.
My view on the whole situation is one of diversification. Diversification of approaches to be specific. Yes, we likely should liquidate a bit, but we should also consider using some as collateral to secure credit to fund operations. There is certainly room for other creative ideas as well.
How much of each strategy to implement is really what we collectively we need to iron out. There may be as much art as science involved here with the price action in the market being unknowable for the immediate future.
I think this point is important to consider. Yes, swapping 20k ETH for stETH on the curve pool would only move the peg up by ~0.5%, but doing so would show the Lido team’s confidence in stETH. Long term, it also actually grants the treasury a net profit of ~600 ETH (at current ratios) once ETH can be unstaked.
The Lido treasury purchasing more stETH vs. liquidating ETH for stablecoins sends drastically different messages to the broader Ethereum community. That message shouldn’t be overlooked.
@kadmil
Hey Kadmil, my name is Yimang and I’m the product manager of Solv Protocol.
Our team just submitted a specific proposal ( Propose $10M Bond Issuance for Lido) to raise enough funds to support Lido’s operations through a bond issue.
We had another crash a few hours ago (ETH dropped from 1750 to 1520).
At this point in time, it would be more appropriate to issue a bond than to raise funds by selling 10,000 ETH directly.
Please consider our proposal and we look forward to your discussion!
May have missed the boat on the sale, but question here, how quickly could the sale of some ETH actually be effectuated? I assume this would likely have to go through the normal voting process, so like a week on Snapshot and then 3 days on Aragon, if it passes, and then execution, so we are talking about 10 days minimum for any actions to take place?
How much runway is left in the off-chain bank accounts for dev expenses? I do think its still critical to ensure we have at least 6 months runway in combined off-chain and on-chain funding. Is there appetite for DAO expenses to get paid in ETH instead of stable coins, but pegged at like a pre-set ETH price, reset monthly or quarterly (so that we manage some of the risk and duration exposure?).
Also - for LDO tokens paid, I would agree that a vesting cliff is a solid idea, I’ve done some work there with Hedgey Finance, where DAOs like Shapeshift are paying their contributors in 1year cliff vested tokens (but those vested tokens are an NFT - so ppl can get secondary liquidity without unlocking the tokens)… could be something worth looking into to prevent additional sell pressure on LDO specifically.
Strongly agreed. Before last week, it didn’t seem to have been seriously considered, and now with worse market conditions it seems too late. That makes it a pretty small window for “just right” .
It would be valuable to have a plan agreed to by the DAO for a both continued price decline, as well as price increases. This way, sales become much more procedural.
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