Temperature Check - Should we be Managing Systemic Risk in Uniswap's Community Treasury using KPI Options

Feddas · May 29, 2021, 12:13am

Managing Systemic Risk in Uniswap’s Community Treasury using KPI Options

Author: Feddas@Yam.Finance

Summary

Problem

Uniswap’s governance treasury will retain 43% of $UNI supply vested over 4 years, currently allocated 113 million in $UNI. Current value ~ ****$2.724 Billion USD. Max drawdown starting on May 3 2021, in 20 days $UNI lost 71% of it’s value, a loss of ~ $3.616 Billion USD.
We need to manage this systemic risk and volatility for the long term success of the community treasury.

Solution

Partial divestment of Uniswap governance treasury by using UMA Synthetic KPI Options to create a win for the treasury, a win for the protocol and a win for the stakeholders. Long term goal would be to put together an actively managed portfolio for the treasury aka uniHOUSE.

TLDR:

Background

Yam.Finance

Yam.finance has been leading the charge on treasury management for DAOs via our project DAO House: https://yamfinance.medium.com/yam-finance-presents-dao-house-86625f9bae5a

We’ve realized that there are significant systemic risks for DAO’s treasuries. During the bear market of 2017 multiple projects were forced to sell their treasury at historically low values, which ultimately caused many of them to disband and shutter.

Treasury management is mission critical for DAOs, yet the challenges and complexities are formidable. Sushi realized this systemic issue and collaborated with Yam.Finance to build a custom treasury management solution called sushiHOUSE: https://forum.sushi.com/t/sushihouse-a-treasury-management-proposal/3106

The most difficult part of a treasury management solution for a DAO as large as UNI, is the first part, the treasury protocol token divestment. I present a novel solution that will benefit the treasury, the long term success of the protocol and also all stakeholders.

UMA Synthetics

A quick primer on UMA: https://docs.umaproject.org/getting-started/how-uma-works

By using UMA’s platform, we are able to use battle tested UMA financial contracts to create KPI options. Here are some examples of current KPI options that are already deployed and distributed.

https://medium.com/uma-project/uma-kpi-options-and-airdrop-bae86be16ce4

https://medium.com/uma-project/badgerdaos-rebase-mining-kicks-off-now-using-uma-s-kpi-options-cd75f71dc1fa

KPI Options

How do KPI Options work?

KPI options can be created by using UMA’s battle tested UMA financial contracts.

Determine KPI metric for the synthetic. For example, KPI metric is Total Value Locked (TVL), currently ~$1.5b. KPI Metric could be many different things like volume, total fees generated over 30 days ect.
Determine target for KPI, value and expiry date. For example, we want to target 2x TVL start, $3b and want the option to expire end of 2021.
Mint KPI option by depositing collateral to be used at settlement. For example, collateralize 1 $UNI token for 1 KPI option.
For our example above:
1. TVL option starts at a value of .5 $UNI because current TVL is $1.5b
2. If TVL > $3b before the end of 2021, the TVL option can be settled for 1 $UNI after it expires at the end of 2021.
3. If TVL < $3b at expiry it will be worth a fraction of 1 $UNI. For example at expiry TVL is $2b, the value of the synth expires to 2/3 $UNI = .667 $UNI.
4. Synth is unliquidatable and fully collateralized.

How do KPI Options divest UNI’s community treasury?

From example above, KPI Option is created by:

Collateralizing 1 $UNI token
KPI metric tracked is TVL, starting at $1.5b
Target is $3b TVL by the end of the year. If it reaches $3b TVL anytime before expiry

UNI’s community treasury is able to utilize its treasury full of UNI tokens to create these KPI options.

KPI Options would be minted by treasury and sold for stable coins via a gnosis auction or by various other means. Implied value of the option is .5 UNI (current TVL is $1.5b with target of $3b).
The sale would fund the treasury with stablecoins which could then be used to create a secondary market for the KPI Options by using Uniswap’s AMM pools.
At expiry all KPI options could be settled and stablecoins withdrawn from LP positions.
Treasury now has stable coins = WIN!
UNI stake holders have incentives to increase TVL = WIN!
Stablecoins are the cornerstone of long term success for UNI protocol = WIN!

Win - Win - Win

Additional Details

Yam.finance has extensive knowledge on building synthetics on UMA’s platform via our development of degenerative.finance, V2 of site to be launched soon. Combined with our experience in DAO treasury management, it allows us to have a unique perspective to create this proposal.

Link to snapshot, starts on May 31st 21:00 UTC for 2 days Snapshot

Link to any additional reading:
https://claim.umaproject.org/

https://medium.com/uma-project/the-uma-kpi-options-airdrop-is-now-claimable-and-the-super-uman-campaign-is-live-7e9baa5c1669

https://medium.com/uma-project/badgerdaos-rebase-mining-kicks-off-now-using-uma-s-kpi-options-cd75f71dc1fa

https://forum.sushi.com/t/build-kpi-options-with-uma-to-speed-kashi-adoption/3940

https://etherscan.io/token/0x1f9840a85d5aF5bf1D1762F925BDADdC4201F984?a=0x1a9c8182c09f50c8318d769245bea52c32be35bc

Gonzo · May 30, 2021, 2:04am

i like it
KPI options seem like a mutual win for all involved

william_eth · May 30, 2021, 8:46am

Happy to see this proposal come to light.

KPI options can be a powerful tool and this is could be a good opportunity to protect Uniswap’s treasury for the long-term.

As a member of both Uniswap and Yam Finance communities I’d love to see this happen.

Feddas · June 1, 2021, 2:41pm

Snapshot is starting soon!

https://snapshot.org/#/uniswap/proposal/Qme9MASbuzrX2W6o7e4CCKqQiLGS5yuBLmX8wkeM5awcio

Would love some feedback to gauge interest.

tomicacesar · June 1, 2021, 4:19pm

This sounds awesome! I have been following UMA and Yam and what they are creating are direct incetives for the community/token holders to act on increasing the value of Uniswap and in turn help create wealth for themselves as well as Uniswap.

I don’t see a reason why not go forward with this.

poopster · June 1, 2021, 11:46pm

As someone who has been working on helping to increase awareness of UMA’s KPI options contracts as well as Yam’s treasury management options i would be really excited to see these implemented at Uniswap. I think treasury management is desperately needed here and am happy to see someone posting potential solutions. I think this is a win win win for all three protocols and will be happy to vote

pennblockchain · June 2, 2021, 6:09pm

While the idea of KPI options is good in principle, we are not sure if we agree with the implementation as outlined in the post. While TVL is a good metric to compare different protocols, Uni v3 is focused more on capital efficiency, which we can see via their implementation of concentrated liquidity, rather than TVL. TVL is highly dependent on token price, which is subject to extreme volatility, and does not directly incentivize more trading on Uni. The whole purpose of KPI options is to incentivize behavior aligned with the protocol. Therefore, a better KPI could be average market share over some predefined period of time rather than TVL. The goal is to establish Uniswap as the dominant leader in DEXs, which we believe connects better with average market share rather than TVL. More clarification on implementation details would be extremely helpful in evaluating this proposal in-depth.

Additionally, could you explain how you will avoid conflicts of interest given you are carrying out treasury management for SushiSwap, a direct competitor to Uniswap.

Also, there has been a $100k grant given to a group to explore treasury management options for Uniswap’s treasury, do you have any plans to work with them?

Feddas · June 3, 2021, 6:01pm

@pennblockchain Thanks for the feedback.
There are various KPIs we could target, like you suggested. TVL is just the simplest and easiest to understand for most. I was thinking the next phase after temperature check was that we could explore the different possible KPIs that would create a better win-win situation.

For sushiHOUSE we’ve transferred control of the set to sushi and are no longer directly actively managing their treasury. They wanted to take control of it, which is an option of what we do. I do not see any conflicts of interest here. We want to help all DAOs protect their treasuries.

Yes, I’ve spoken with the group that received the grant. We both have the same goals but maybe a different route. KPI options in my opinion allow for a much better win-win situations vs other divestment options.

I’d love to hear your thoughts. Thanks.

Feddas

Feddas · June 4, 2021, 2:01pm

The temperature check was in favor of moving to consensus but did not pass quorum. I will try another snapshot on Monday.

poopster · June 8, 2021, 3:38pm

Thanks for sharing fren, i love hearing different ideas about how we can implement these KPI options and agree that TVL may not always be the best indicator to use. if you’re not already in the discord server it would be cool to continue this discussion there. We need more community members like you to help brainstorm, again, thanks for sharing your ideas here ser

avimeyers · June 8, 2021, 9:04pm

Love this idea in principle - but the proposal’s focus on TVL in light of V3’s concentrated liquidity (good call out @pennblockchain) may have muted excitement around the snapshot and led to it not passing quorum.

Might suggest offering additional use cases for KPI options in the Uni ecosystem - to rally support before another snapshot vote.

Feddas · June 8, 2021, 10:20pm

I agree, different metrics might fit better. I wanted to work on the metrics and potential amounts during the consensus phase. Since UMA’s contracts are flexible we could do plethora of different metrics. I would recommend sticking with the tried and true metrics that are simple and easy to understand.

I will be reposting the temperature check snapshot on Monday 6/14/2021. I’ve had a lot of great conversations with supporters of this proposal that were not able to vote the first time around.

Thank you for the feedback @avimeyers