Since 2021, Lido holds about 20k ETH in treasury following one of the treasury diversification rounds. Furthermore, all of this ETH is unstaked. Since 2022, Lido further holds about ~20m DAI from a second diversification round. As discussed on prior threads, the DAO is seeking clear signals from token holders regarding treasury management choices for its existing resources and surplus.
Our goal is to develop clear guidance from token holders in order to maintain a safe and healthy treasury, and avoid last-minute rushes during periods of market volatility in either direction.
Based on the discussions from the forum threads, linked below, we are organizing a campaign of Snapshot votes in the following sequence on separate weeks:
Phase 1: Should LidoDAO stake its treasury ETH, and what should its stablecoin policy be?
2. Should LidoDAO diversify its stablecoin holdings?
2a. How should LidoDAO allocate its USD-tracking stablecoins?
% allocation to preference, top single preference and any other preferences ā„30% selected
DAI
USDC
LUSD
USDT
agEUR
2b. Should LidoDAO allocate anything to RAI?
Ranked choice (rank all options in order of preference)
5%
1%
0%
Phase 2:
Should LidoDAO sell treasury ETH?
Ranked choice (rank all options in order of preference)
Do not sell or collateralize any ETH (or stETH depending on the outcome of Should LidoDAO stake treasury ETH?)
Collateralize ETH (or stETH depending on the outcome of Should LidoDAO stake treasury ETH?, into the stablecoin allocation decided in Should LidoDAO diversify its stablecoin holdings?)
Sell 20k ETH (into the stablecoin allocation decided in Should LidoDAO diversify its stablecoin holdings?)
Sell 10k ETH (into the stablecoin allocation decided in Should LidoDAO diversify its stablecoin holdings?)
Phase 3:
Should LidoDAO sell protocol surplus stETH to finance operating expenses?
Basic voting (For, Against, Abstain)
Forāsell necessary stETH to cover monthly expenses
Againstādo not sell stETH
Abstain
Please let us know any last thoughts and comments before we move to Snapshot. Looking forward to token holder participation on the upcoming votes.
Thank you for the proposal! It sums up different motions and potential next steps around Lido DAO Treasury, focusing on securing both short-term expenses funding & long-term treasury stability.
Thanks for this proposal. I would like to make an alternative proposal.
Instead of voting on so many individual decisions, could we instead let the DAO vote on how level policies a la āhow many years of runway should Lido have at all times?ā and then push the complexity of implementing these policies to a core unit or committee?
For the most ādomainsā requiring many-many decisions and actions Lido DAO employs committees ā LEGO, NOM, reWARDS to name a few.
Regarding Treasury motions ā long-term I think the Lido DAO would want to have a separate committee for lower-level decision making here. Not sure of the urgency and as to how fast could we actually move towards it. Second big thing / blocker in that particular case would be a legal one, I think.
One policy that is not clear an probably makes sense to vote on is whether the DAO should finance its operations with āprotocol surplusā or with the treasury.
What does that mean? All Lido revenue goes into the treasury initially. Surplus is what remains after removing expenses and TBCI (token-based compensation and incentives)
Hm I agree actually. Formulated more accurately itās more specifically asking what currency to use first to fund operating expenses, in the example of ETH and stETH both being held. Though I think this could be simplified considerably and potentially delegated to a treasury committee. On a second viewing it seems much too micromanagerial for token holders to weigh in on.
Send us a DM @marcbcs if youāre interested in forming part of this committee.
DAO expenses are entirely denominated in USD (or stablecoins) and LDO, no?
If thatās the case, then mentally we must be accounting in USD, and acknowledge the risk/reward of holding ETH or stETH against that.
I feel like question 2 in particularly, which stables to hold, is very out of order here. The questions we need to answer are roughly in this order:
What currency do we want to denominate / account in, given our expeneditures?
Are we required to earn a yield on our assets in order to fund the runway, or not?
2a. If yes, how do we intend to earn this yield?
It seems impossible to decide if we should be holding DAI, USDC or USDT before knowing what the tokens will actually be used for. For example, if we intend to then buy treasuries via Backed, well, we must use USDC there, and so thereās no point discussing how much USDT or DAI to hold, if we intend to use a majority of stables to buy treasuries.
To me, the rebalancing of stables is the very last question we need to ask, once every other component is fixed and we know what weāre left with, with only a single goal remaining of reducing currency risk.
A possible outcome to my questions about could be that we denominate in USD (fiat) and that earning a yield is critical because runway is small (purely hypothetical). So, we decide that because the yield on stETH is roughly treasury yield, and because we denominate in fiat, we need to dump all the ETH and stake the resulting stables to buy 0-3 year US treasuries. Hypothetical example. Which makes the stETH and stables diversification discussions kind of mute.
Maybe Iāve missed these conversations, or they happened before, but I havenāt seen them and would appreciate a link if they exist. Thanks!
They are, but in our view, the base token of the protocol is ETH or stETH (interchangeably), full stop.
USD would only be a presentation currency of convenience, on par with any arbitrary unit of account (EUR, CHF, DAI, DOGE, etc). We can hopefully open this discussion soon. That is, although our expenses are mostly in USD, we should treat the protocol as a native ETH product where what experiences the risk are the expenses rather than the treasury.
Donāt strictly agree this is the case, as any hypothetical USD yield generating allocation would be outside of any stablecoin allocationāwe draw a distinction between a cash equivalent allocation and an investment. The choice for token holders was framed more around policies for the cash equivalent portion specifically.
Though really like the solve-backwards approach you present and believe it is the right general structure for approaching questions like these.
I agree that the denomination of Lido, the protocol, should be in ETH as thatās what the smart contracts require. But I donāt see why that needs to translate to the operation of the DAO. While the incoming assets would be in ETH or stETH (5% of yield earned goes to the DAO AFAIK), all of the expenses are denominated in USD or equivalents. So, when we think about runway, which is the most important component of the DAO accounting, we would be looking at USD outlay per year, divided by USD owned by the DAO.
I think itās actually very important that the accounting denomination be set correctly, because it governs so much. For example, ETH and stETH should both be seen as investments. I donāt think you can see ETH as a currency for the DAO, when none of the expenses are denominated in ETH. The only reason to hold it is because you hope that the price will go up in dollar terms, such that you can pay for a longer runway, in dollar terms.
That seems pretty clearly the case, when one of the proposals is āshould LidoDAO sell its treasury ETH?ā.
The above all presumes that the treasury today exists to further the goals of the protocol by paying grants, contracts, contributions etc (all denominated in LDO and stables), and should NOT be utilized for any other reason.
Let me give an example so that itās more clear what Iām trying to express.
Currently we have $20.1m of stables. If we only intend to hold stables and NOT to invest them into yield generating opportunities, maybe a reasonable split would be something like:
$15m DAI
$5m USDC
This is based on having a $60m treasury, so $15m DAI would be 25% of the treasury and maybe thatās a reasonable maximum for how much of the DAO Treasury a single token should make up (just hypotheticalā¦ roll with the example!)
Now, letās say that we decided that 50% of the $20.1m is going to be invested into treasuries. Now, we only have $10.05m of stablecoins to split up. In which case, you might argue that you can hold 100% of the $10.05m in DAI, because itās well under the $15m (25%) limit that you come up with previously.
Hopefully this shows how the utilization of currency makes a meaningful difference to how to diversify. Primarily because diversification is not necessary, or ideal, when the raw amount becomes smaller.
FWIW, generally my opinion here is that if the
Expenses is $18m / yr (based on numbers from here)
Income is $20.3m / yr
The DAO is already profitable, but getting to a position where the yield / interest on assets can pay for expenses would be powerful. This is critical because we currently face basis risk whereby expenses are in USD and income is in ETH, meaning that we could face deficits and hence have a limited runway of operations due to ETH price movements.
To get to a point where our asset yield covers these expenses, we would need about 400 million in assets. So, itās not going to happen in the short or medium-term. But, moving there as fast as possible (by growing the treasury in $ terms) will reduce the impacts of ETH price volatility by minimizing the % impact of reduced USD income from Lido fees, compared to fixed expenses.
With $60m in assets, you can likely earn around 4.5% / yr on active capital. That would generate $2.7m / yr, which is more than the excess profit that the DAO is currently operating on ($2.3m). So, deploying the assets would double our yearly surplus. With the power of compound interest, that will allow us to grow our runway far more than 2x as fast as without investing the assets.
Worth quickly touching on why basis risk matters:
If ETH price drops 50%, which could happen, that would take us down to a price weāve already seen in the last 6-months. All the income is denominated in ETH, and so our USD income is cut in half.
So rather than having $18m in expenses and $20.3m in revenue, meaning a $2.3m surplus, we would only have $10.15m in revenue, meaning a ~$8m deficit. That 50% price drop would bring our treasury down to ~$40m, meaning that weād have a 5-year runway before the DAO has to halt operations, under a 50% price drop scenario.
Even if we look at a horrible 80% price drop (maybe itās not exactly 80%, but imagine large slashing event causes Lido outflows, combined with ETH price drop, creates some sort of scenario where numbers below look ballpark for the event):
Income goes to $4m, expenses at $18m, treasury is worth $28m now, deficit would be $14m per year. That still gives us a 2-year runway, even under this horrible 80% ETH price drop scenario.
Look, this is all napkin math, I havenāt actually modelled this out, but itās fairly obvious that unless something goes horribly horribly wrong, the treasury is going to be able to continue to operate as is for at least a couple of years. If it can make some efforts to cut expenses during down periods, even better.
So, I donāt think we need to be uber cautious here. We donāt need to start selling ETH to DAI. But, we really should start utilizing these assets to generate yield. If we do see sustained ETH price drops, taking us into a deficit, then we will of course need to either start cutting expenses or selling assets to fund expenses. The first of which to be sold should be ETH / stETH, to reduce basis risk.
For a more immediate structure with the existing assets Iād propose the following:
Stake (or buy) $30m of stETH and earn 4.4%+.
We now hold $20.1m DAI, $39.2m stETH.
Buy $5m of OUSG (Ondo) using DAI, earning ~4.5% APY
Buy $10m of 0-5 yr treasuries (Backed Finance GMBH) using DAI, earning 3-4.5% APY
We now hold $5m DAI for short-term cash, $39.2m stETH, $15m treasuries/bonds
Then, all the income coming to the DAO due to the 5% fee in Lido should be automatically sold to DAI and be used to pay expenses. All excess at the end of the month, beyond a minimum $5m in petty cash, can be re-allocated to purchase treasuries / bonds. Such that, our exposure to ETH / stETH will reduce overtime (as a %), giving us less volatility and more security.
Final comment here is that after conversations with people involved with this, I think itās super important that we codify and are explicitly that the DAO Treasury is to be used for runway, grants etc. It should NOT be used as a 2nd insurance fund in the case of slashing, it should not be made to make users whole in the case of some loss event. The size of the treasury is so small compared to any potential large event that it will make little difference to recovering losses, yet will wipe out the treasury entirely. Itās critical that the treasury can plan going forward, which means that it must be ring-fenced and used only for explicit use cases.
If the community is concerned about slashing losses, buy an insurance policy or vote to direct more funds to the insurance fund. The treasury should not be accessed for these cases, otherwise you risk the entire protocol itself.
Really appreciate the thoughtful comments! In many respects I think we are somehow circling many common positions, with a few key differences.
Operating expenses are mostly in USD itās true
We should certainly solve for a runway in USD terms also (hence the request to set a principle for runway length in the āsell ETH for dollarsā
However, disagree that ETH and stETH are āinvestmentsā seen from this perspective
The surplus is part of the protocol, which is not ādecidingā to hold anything. It is just a feature of the software that it accumulates stETH over time as a balancing incentive thatās a core part of the protocol.
At the same time, the protocol needs to develop, so within that constraint we need to find suitable principles that will ensure sufficient runway for development in USD terms.
Generally agree with the need to make policies explicit versus implicit in advance, to avoid confusion and conflict. We may disagree perhaps on the specific position but thatās fine ofc.
On the above was just suggesting that the proposal was asking what proportion should the DAO target for stablecoin holdings rather than as a % of the total treasury value.
On the remainder of your allocation comments I think there are generally perfectly reasonable ideas in there. Weād like to find a process to make sure that we can get to a place where we set policies either through delegated approval by token holders or set policies that are specifically selected by token holders.
If a committee/core unit is going to be formed, isnāt it a better idea for the DAO to vote on the committee creation, allow them to work on a proposal? Thereās enough runaway for this decision to be taken in a few months, instead of now, with a well thought proposal and multi year framework on runaway and how to use the treasury.
