#9 - Proposal: Diversification of ETHFI DAO Treasury through Investment in Real-World Assets

[ether.fi]

Summary

This proposal, following the passing of the ether.fi protocol revenue distribution to staked ETHFI holders, seeks approval to diversify the ETHFI DAO treasury by investing in a mix of real-world assets such as tokenized treasury notes, along with ETH and BTC to support the ether.fi ecosystem. The investment capital will be worth up to 18 million ETHFI tokens and will be deployed over three tranches. The goal is to strengthen the treasury by acquiring stable and secure assets, thereby mitigating risk, enhancing stability, generating rewards and providing flexibility for future initiatives.

Motivation

The current treasury is heavily weighted in ETHFI tokens, exposing the DAO to significant volatility and risk. By diversifying the treasury with real-world assets, we can:

1. Reduce exposure to market fluctuations.
2. Increase financial stability and generate stable yield, which can be distributed back to governance participants.
3. Support liquidity and market dynamics of the ether.fi markets
4. Ensure the availability of funds for future projects and operational costs.
5. Leverage the stability and security of traditional financial instruments.

Capital Cycle Explanation

Understanding the capital cycle is crucial for ensuring that the funds raised are managed efficiently and effectively. This cycle helps the DAO make informed decisions about how to deploy, manage, and distribute capital in a way that aligns with its strategic goals and maximizes value for the community. Here’s an explanation of the capital cycle and its importance:

Strategic Allocation: Deploy capital based on thorough market analysis, risk assessment, and alignment with the DAO’s vision and goals. This involves selecting assets that not only stabilize the treasury but also have the potential for growth and yield generation.

Portfolio Management for Diversification and Risk: Once investments are in place, the DAO should manage its portfolio to maximize returns while diversifying risk. This management aligns with the DAO’s risk tolerance and strategic goals. For example, investing in tokenized treasury notes provides stable returns while reducing exposure to cryptocurrency market volatility.

Value Coordination: The interconnected nature of DeFi means DAOs should not operate in isolation. Collaborating with other protocols, participating in joint governance activities, or entering into strategic partnerships can amplify value. These collaborations help leverage synergies and enhance the overall impact of the DAO’s investments.

Value Distribution: Ultimately, the accrued value should benefit the DAO’s community. This can be achieved through various mechanisms such as token buybacks, revenue distributions to staked ETHFI holders, or reinvestment into the ecosystem. Ensuring that the community benefits fosters trust and promotes long-term growth and engagement.

Specification

Investment Details

Transparency and Reporting:

• Regular Updates: The foundation will provide updates to the community on the progress of each tranche investment. This includes detailed reports on the timing, amount utilized, and the assets acquired.
• Transparency Measures: The foundation will publish comprehensive reports including treasury allocation and performance status.

Investment Allocation

The investment strategy will involve acquiring tokenized treasury notes, ETH, BTC and other real-world assets over a specified period. The investment details are as follows:

• Tranch 1: Initial Investment
  • Source of Funds: 6 Million ETHFI
  • Target Completion Date: January 31, 2025
  • Types of Assets and protocols: ETH and BTC to support ether.fi ecosystem, tokenized treasury notes and other real-world assets
• Tranch 2: Secondary Investment
  • Source of Funds: 6 Million ETHFI
  • Target Completion Date: February 28, 2025
  • Types of Assets and protocols: ETH and BTC to support ether.fi ecosystem, tokenized treasury notes and other real-world assets
• Tranch 3: Third Investment
  • Source of Funds: 6 Million ETHFI
  • Target Completion Date: March 31, 2025
  • Types of Assets and protocols: Strategic partners in the DeFi ecosystem

Execution Method

1. Selling: Over-the-Counter (OTC) Transactions: Utilize OTC desks for larger transactions targeting a minimum lockup of 1 year to minimize market impact and secure favorable prices. This approach helps in avoiding significant slippage that could arise from large sales on public exchanges. We will conduct in-depth market analysis to find suitable long term holders, aligned with the ether.fi ecosystem, and to determine the optimal timing for each ETHFI sale for the investments.
2. Buying: Tokenized Real-World Assets: Utilize platforms that offer tokenized treasury notes and other real-world assets. This approach ensures that investments are secure and backed by traditional financial instruments.

Benefits

• Risk Mitigation: Diversifying the treasury with real-world assets reduces the risk associated with holding a single asset class.
• Stability: Acquiring tokenized treasury notes and other stable/blue chip DeFi assets provides a buffer against market volatility.
• Flexibility: A diversified treasury offers more options for funding future initiatives and operations.
• Growth Potential: Strategic investments can enhance the overall value of the treasury by generating stable yield over time, which can accrue back to governance participants.

Risks and Mitigations

• Market Risk: The value of acquired assets could fluctuate. Mitigation: Careful selection of assets and timing of purchases.
• Liquidity Risk: Investing in real-world assets might impact liquidity. Mitigation: Utilize platforms that offer highly liquid tokenized versions of these assets to maintain liquidity.
• Operational Risk: Execution risks related to asset acquisition. Mitigation: Engage with experienced digital assets trading platforms for market execution.

Conclusion

Diversifying the ETHFI DAO treasury through investment in real-world assets, along with ETH and BTC to support the ether.fi ecosystem, is a strategic move to ensure long-term stability and growth. By approving this proposal, the DAO will be better positioned to navigate market volatility and capitalize on future opportunities.

Next steps

Voting duration: The voting window will be open for 4 days

Voting to be done through snapshot: https://snapshot.box/#/s:etherfi-dao.eth/proposal/0xae430909dc1fb6d57a692de3004c331aa5c52541b5bff3bece4b92d77bde1356

• For: Approve Diversification of ETHFI DAO Treasury through Investment in Real-World Assets
• Against: Do not approve the proposal

Thank you for your continued support.

[TheMarcus]

Excellent idea and worthy of support.

Could also consider diversification into the tokens of RWA focused projects such as Centrifuge, Ondo, Goldfinch, Maple Finance, etc.

[Kairos_Res]

We are supportive of this proposal.

While EtherFi continues to grow its TVL across a suite of different products, it’s also important to build a robust, diversified treasury to further strengthen the protocol.

As for ensuring a robust, diversified treasury, its important to point out that ETHFI and ETH are more correlated than ETHFI and BTC. This makes sense as the core business lines are mostly denominated in ETH.

For this reason, we suggest the foundation implements a heavier weighted allocation to BTC over ETH. To strengthen an existing partnership, EtherFi should explore holding a portion of their BTC in Lombard’s LBTC / eBTC.

To maximize utility of EtherFi’s treasury exposure, we suggest exploring an allocation to owns own flagship product, weETH. With this, there is also consideration of what to do with the LRT^2 it receives.

Lastly, when allocating to tokenized treasury notes, its important to be cognizant of opportunity cost. For example, in the current environment where rate cuts are expected to continue through 2025, with a median expectation of -50bps, this should theoretically lead to a decline in shorter term treasury note yields. In turn, there should also be an uptick in alternative yields, “further along the risk curve”.

This could mean that stablecoin supply rates on Aave could out pace tokenized treasury yields. However, we assume the foundation will implement best practices when allocating across RWAs.

We look forward to working alongside the DAO, the foundation, and other community members to ensure best practices for EtherFi’s treasury management strategies.

[LLj24]

To be sure I understand correctly:

With this vote, the DAO members put the foundation in charge of executing this diversification of the DAO treasury?

I think the proposal makes a lot of sense.

A few more questions:

• Can you please remind us 18m ETHFI is what % of the DAO reserves? (To be diversified in 3 months)
• Can we put this in relation to the (weekly?) volume on DEXes/CEXes?

@Kairos_Res raises some good points.

My 2 cents:

• let’s keep ETH and BTC at equal weights
• let’s avoid taking too much smart contract exposure and focus on resilience first (ie no LBTC or weETH)
• ok for yield bearing stables. But most RWA assets are supported by some off-chain agreements, etc. I’d be in favor of more native yield bearing assets like USDT/C in lending protocols.

Finally, besides OTC deals, should the selling of call options be considered in parallel?
Afaik the Myso protocol has had quite some success with foundations for this approach.