ARC - Consolidate Aave V1, V2 & AMM Reserve Factors, Purchase CVX and Deploy to Earn Yield

Thanks to Llama community for this thoughtful proposal. By way of introduction, I’m leading the governance team at Avantgarde Finance; we’re the lead maintainers of Enzyme. We generally agree with the direction you’ve taken here and think Aave’s treasury would benefit from more active management, as we’ve written before. The plan you propose here creates a virtuous flywheel for the treasury and for Aave’s users; it increases liquidity for aTokens, it increases aToken supply, and it increases Aave’s inter-protocol governance stature, all while earning a fairly safe return. So at a high level, we agree with the allocations as designed in this post. We do, however, have a couple of concerns.

  1. As @eboado points out, there is a heavy concentration around Convex. This is not necessarily a bad thing in the short to medium term, but it does commit Aave to one protocol out of many that are working to monetize Curve’s governance power. Just gaming things out, it it conceivable that the yield from staking Curve LP tokens into Convex pools erodes over the course of the next year to the point where better options are available. The treasury would still be holding a significant position in the CVX underlying, and the unwind of that would be both very slow and very public (imagine a temperature check called ”Should the treasury sell its position in CVX”) . The nature of asset management for protocol DAOs such as Aave at the moment means that there will be large trades that are telegraphed well in advance; execution and performance will suffer as the market front-runs any planned rebalances. With all of that said, we don’t take issue with the allocation to Convex, but rather just want to raise the question of how to manage it on a medium to longer time horizon.
  2. The operational aspects of this proposal are… daunting. Do you have a process mapped out at the transaction level, along with noting which of those transactions require governance votes?
  3. As it stands, the governance rights that will accrue to the treasury (primarily in CVX) are to be delegated to Llama Community. In general, delegation makes sense. In our opinion inter-protocol governance actions should not be the subject of protocol-wide votes and should be handled by a smaller committee or an individual actor incentivized to vote with the protocol’s interest in mind. However, we’d like to see some more structure around this delegation. Some things to consider here include term limits, reporting requirements, compensation, et cetera.

An Enzyme vault is a simple solution to these concerns. At a high level, the steps would be as follows:

  • The RF is aggregated to one address.
  • Aave governance deploys an Enzyme vault into which only the RF could deposit.
  • Using Enzyme’s policy suite, we configure risk management controls that only allow the manager of the vault to interact with a pre-defined set of external protocols, hold a pre-defined set of assets, and accrue a pre-defined amount of trade slippage. These controls will be clearly visible to stakeholders and are enforced at the smart contract level.
  • The RF seeds the vault, and Llama are appointed vault manager.

This solves the first concern by giving Llama the flexibility to manage the portfolio without telegraphing every move to the wider crypto community and the second by granting permission for Llama to do the set of things it’s proposing to do here without going through the DAO voting process for each transaction

The third concern is a little more involved, and likely still involves building out some framework around the vault’s management. E.g. after a certain term, an election is held in Aave governance to re-elect Llama as the vault’s manager, or to transfer manager responsibilities to a new candidate.

Again, we are directionally supportive of this proposal, and think that its investment themes strike a responsible balance while also providing non-financial benefits to the Aave community. We’re excited to continue this conversation.

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