[ARFC] Treasury Management - Convert DAO awETH Holdings to Liquid Staking Tokens

Governance
1

Title: [ARFC] Treasury Management - Convert DAO awETH Holdings to Liquid Staking Tokens
Author: @marczeller - Aave Chan Initiative
Date: 2023-05-12

Summary

This ARFC proposes to convert part of the DAO’s current wETH holdings into liquid staking tokens (LSTs), specifically stETH and rETH, to improve yield. The DAO’s current holdings are 1561 wETH, earning a yield of 2%. This proposal aims to convert 50% of these holdings to astETH (currently earning 6.8%) and 30% to arETH (currently earning 5.75%). This change can be implemented directly, slippage-free, and on-chain via an AIP.

Motivation

The motivation behind this proposal is to increase the annual yield for the DAO. Currently, the DAO earns a yield of 2% on their awETH. By converting a portion of these holdings to astETH and arETH, the yield could be significantly improved.

The following table compares the current annual yield in ETH with the projected yield following the implementation of this proposal:

wETH (2% Yield) stETH (6.8% Yield) rETH (5.75% Yield) Total Yield Net Gain
Current (100% wETH) 31.22 ETH 0 ETH 0 ETH 31.22 ETH 0 ETH
Proposed (20% wETH, 50% stETH, 30% rETH) 6.244 ETH 53.074 ETH 26.92725 ETH 86.24525 ETH 55.02525 ETH

As per the table above, implementing this proposal could result in a net gain of 55.02525 ETH for the DAO.

Please note that this is an estimation for information purposes. Yield can vary with market conditions, and actual revenue may differ.

20% wETH Retention

The proposal suggests retaining 20% of the DAO’s holdings as wETH. This strategy allows for the onboarding of other decentralized LSTs in the future, offering further potential for diversification and yield optimization.

Exclusion of cbETH

This proposal does not consider converting any portion of the DAO’s holdings into cbETH. As a centralized asset, cbETH does not align with the DAO’s commitment to decentralized solutions.

Disclaimer

The author of this proposal owns stETH & rETH, but no LDO and small holdings of RPL intended to be used to deploy mini-pools. The author has no links with and did not receive any payment from Lido, Rocket Pool, or any other third party to publish this ARFC.

Next Steps

  1. Gather community feedback and reach a consensus.
  2. Publish snapshot vote.
  3. If the snapshot vote outcome is YAE, publish AIP.

Conclusion

By converting a portion of the DAO’s awETH holdings into astETH and arETH, the DAO improves the DAO’s annual yield. This proposal outlines a strategy that not only increases yield in the short term but also allows for future diversification and yield optimization opportunities.

Copyright

This work is licensed under the Creative Commons CC0 1.0 Universal License.

10 Likes
2

Hello,

absolutely in favour of letting the treasury work. After the Shapella Upgrade we all know withdrawals work and staking is fine and stable. So the risk associated are minimal, but the potential gains for the DAO are huge.
Let’s get this done, and i am happy to see more LST strategies in the future.

2 Likes
3

Hi @MarcZeller

We shared this ARFC some time back now which includes allocating wETH to LSTs.

We are currently developing, with @bgdlabs support, the functionality for Aave to acquire assets such as B-80BAL-20WETH and LSTs on spot markets. The same methodology/approach can be used to acquire the LSTs.

Do note both proposals are acquiring the same assets and Llama is well advance in bringing a wider Ethereum network solution using Cowswap. To avoid overlap, we suggest this thread be closed and comments moved to the earlier discussion which provided more holistic allocation strategy for Aave’s Ethereum Collector Contract.

Something to note, this proposal overlooks the wETH or awETH allocation already committed to acquiring the B-80BAL-20WETH. This highlights the benefits of a holistic approach. We welcome community feedback on forum post linked above.

4

With the ACI we suggest that if u guys were unable to deliver on something proposed in early March to sit back on the bench and watch efficient DAO service providers deliver the work.

The thread stays.

Have a great day.

2 Likes
5

We support the outlined diversification.

1 Like
6

It is important that the Aave DAOs treasury assets are not underutilized at any point in time; this proposal is a step in the right direction towards an important treasury management culture which we must uphold here at Aave.

1 Like
7

Hi @MarcZeller,

We are currently close to delivering a solution for Aave to gain the ability to acquire assets safely, that has been rigorous tested and peer review by both @bgdlabs and Cowswap teams. This has been the accumulations of several months work. The path to this point has been complex and time consuming, however we are nearing completion of this work.

Hopefully ACI shows support for a very similar strategy on Snapshot next week.

Given the schedule of the above work nearing completion, we are intending to move three governance proposals through Snapshot with voting starting Monday. Our AIP target is late next week pending successful Snapshot vote.

  • Consolidation of Collector Contract assets with the goal of securing Service Provider runway capacity
  • Migrate funds from v2 to v3 and acquire wstETH & rETH (Allocation 1 through 6 in the portfolio)
  • Acquire BB-A-USD split across depositing directly into Balancer’s gauge and Aura’s contract (Allocation 7 and 8 in the portfolio)

image

8

Hello everyone,

The proposal seems reasonable in my opinion. 20% in one native token and 80% split in two LSTs. Since there is enough confidence in staking mechanisms on Ethereum, it is justified to seek yield in this way. I’m satisfied by the avoidance of RPL, cbETH, LDO tokens in the basket of to-be-acquired yield-bearing assets.

I am tempted to advocate for the inclusion of a third liquid staking token (e.g.: stETH2). But such an idea is not conditional to my support of this ARFC. I hope that the proposal gathers enough consensus and gets executed as soon as possible.

9

Hello @Llamaxyz, we take notice that you guys decided to rush your plan after taking two months to come up with something technically not really complex.

We also take notice that you didn’t follow governance guidelines and respected 24h hold period before opening votes on snapshot and that your plan doesn’t consider keeping part of the treasury in aWETH to allow for more diversification down the line.

Lastly, we take notice that you guys tried to swap wETH for LSTs using secondary liquidity when depositing in staking pools is slippage free and seamless, resulting in possible wasted DAO money.

On this last point, the ACI is dedicated to AaveDAO treasury efficiency, so here’s how to do it:
(withdrawing from V2 & depositing in V3 is implied because I hope interacting with Aave needs no explanation)

image
image5176×1486 247 KB

And here’s a table of relevant contracts:

Contract Name Contract Address Method to Call Obtained Token
Rocket Deposit Pool 0xDD3f50F8A6CafbE9b31a427582963f465E745AF8 deposit() rETH
stETH 0xae7ab96520DE3A18E5e111B5EaAb095312D7fE84 submit() stETH
wSTETH 0x7f39C581F595B53c5cb19bD0b3f8dA6c935E2Ca0 wrap() wstETH

It took us less than 10min looking at both contracts to figure this out, and we’re pretty surprised that a large team with 1.4m$ of DAO funding wasn’t able to realize this.

As you decided to “force” your implementation, the ACI will put this one on hold and vote for yours on the condition of having a revised LST acquisition method that makes sense.

3 Likes
10

Index Cooperative is encouraged to see the discussion of ETH staking diversification for the Aave DAO Treasury. As voters and users within the Aave protocol, INDEX holders agree that diversifying and utilizing treasury assets are important long-term considerations. Using multiple providers levels out inconsistencies in potential staking returns and also lowers risk. With that in mind, we are in alignment with the goals of this proposal, but also believe we can assist to more effectively deploy the ETH. Index Coop would like to propose that a percentage of Aave’s ETH Treasury be used to purchase the Diversified Stake ETH Index dsETH.

What Index Coop aims to do with this proposal is help Aave DAO evaluate and automate a percentage of the diversification efforts through Index Coop’s dsETH. The methodology favors decentralized liquid staking protocols as measured by the number of node operators as well as the distribution of stake across node operators. This methodology results in the following weights

Rocket Pool rETH 44.1%
Lido wstETH 29.8%
StakeWise sETH2 26.3%

If Aave is serious about the long term management of these assets, a framework should be created to evaluate the yield and risk of liquid staking tokens. This is something dsETH does particularly well in an automated fashion.

@MarcZeller and ACI mention inclusion criteria based on decentralization values. With dsETH, the Coop created a data-driven methodology that weights and ranks staking protocols so Aave can continue to safely gain ETH staking yield without any maintenance. While it is relatively low cost to stake ETH, the positions need to be monitored and over time will need to be reweighted or reallocated to new tokens. An automated product with low time commitment and a low fee (25bps) like dsETH provides Aave DAO with a long-term solution to facilitate a portion of the treasury.

The full methodology and inclusion calculations for dsETH can be found here Diversified Staked Ethereum Index and has also been evaluated by third-party Rated Network here https://www.rated.network/dseth?network=mainnet&timeWindow=1d

Index Cooperative has been operating ETH products since 2021 beginning with ETH 2XFLI then icETH built on top of Aave and most recently dsETH. Our DAO believes that long-term focused entities including DAOs like Aave have the opportunity to maintain protocols forever and must have long-term outlooks in order to grow a treasury and protocol in perpetuity.

When it comes to execution, going directly into staking pools is slippage free but with the trade size considered there is significant liquidity available for Aave to flashmint into dsETH from the underlying tokens with low price impact. For the size Aave is considering it may make sense to buy some of the ETH off of secondary liquidity AND go directly to staking pools keeping in mind any potential rETH capacity constraints. Long-term, options that lower time and maintenance costs should be considered.

As a stakeholder within many parts of Aave DAO, Index Coop is excited about any ways we can assist the DAO. With this proposal, we are hoping to spark some discussion around the Diversified Staked ETH Index and possibly move to a more detailed proposal and vote if the Aave DAO is interested. We are also happy to help in ways that don’t include our products even If it is limited to helping Aave DAO with general risk management frameworks. Long-term treasury and liquidity management within a DAO is a difficult journey that we understand intimately. From Aave V3 to GHO to treasury management there are multiple areas in which we will be building with one another and Index Coop is excited to facilitate when we can provide value to AAVE holders and in turn DPI holders.

3 Likes
11

Given the incredibly low yields on LSTs on Aave (<0.01% presently on the Ethereum v3 Market) and the popularity of those tokens. I would propose the DAO NOT hold the aToken varients (arETH & awSTETH) to 1) have treasury assets that aren’t exposed to Aave Market thus leaving the DAO assets in case of catastrophic event on its own contracts 2) leave supply cap space for users who will be actively using their aTokens as collateral for borrowing activies that drive actual DAO revenue, such as borrowing ETH or stables, which the DAO will earn revenue from via the RF.

Proposed new route would be aWETH (withdraw) → WETH → deposit() / submit() / flashmint() [depending on the desired ending asset of rETH, stETH, or dsETH]

1 Like
12

A bit surprised by this line here.

While the DAO has shown leadership in decentralization, a willingness to exclude this seems to limit greater diversification efforts and is a clear side-eye to the products CB and others are building.

Users have signaled an appetite for cbETH inV3 - with 3x deposits and almost 2x borrows as rETH.

Why would the DAO take a differing opinion from its users?

It is our belief that is valuable to align the community with a myriad of assets and products - not just decentralized ones.

I’d encourage the ACI and the community to revisit this stance, even if a smaller allocation.

13

I have long been an advocate for Aave to stake its treasury holdings - glad to see such a proposal taking shape. 2 things to add:

  1. I would be keen to see greater diversification, for example, adding StakeWise alongside Rocket Pool and Lido, as other DAOs have done across the ecosystem (or just straight investing into dsETH from Index Coop). Agree with narrative of avoiding non-decentralised staking solution (both in terms of nodes and protocol governance).

  2. StakeWise V3 would open up some unique opportunities for Aave, especially if the DAO is looking to run nodes (I assume so given the plan to spin up RPL mini-pools). Aave is a leader in decentralisation and so it would be great for Aave to set a precedent for DAOs staking on their own decentralised infra. StakeWise V3 would allow Aave DAO to liquid stake on its own nodes (whilst streamlining the entire staking workflow) and save significant costs vs alternatives. V3 would also allow Aave to receive delegations and stake on behalf of others, leveraging the V3 architecture as a white-label liquid staking solution and adding an extra revenue stream for the DAO (I would personally like to see the revenues going towards Aave grants/public goods funding).

1 Like
14

We at TokenLogic are supportive of Aave DAO passively holding both LSTs. In our opinion, the additional yield of aethwstETH and aethrETH relative to the underlying is not sufficient to warrant the additional risk.

Holding funds in the Collector Contract (Treasury), or separate address, can be thought of as holding the funds in an isolated account independent of the main liquidity pools and any potential bad debt. To be clear, we see Aave as low risk and recommend to other communities to deposit there treasury into Aave v3 where there is sufficient yield, ie: stable coins.

If the LSTs were combined with a stable coin deposit to be used as collateral for the purpose of minting GHO, then perhaps this additional utility is worthy justification for depositing the LSTs in Aave v3. There may also be sizing considerations for the GHO debt position and other more correlated assets could be more than sufficient. We would welcome revisiting protocol owned GHO liquidity closer to the launch of GHO.

If LSTs were deposited into Balancer, then a portion of the LST yield is transferred to Balancer/Hidden Hand with this yield being offset by BAL and/or AURA rewards. Given the relativeness of yields, holding the underlying assets in isolation feels like the right path forward. Holding the LSTs passively, skews the risk profile heavily towards just the staking protocol itself with minimal additional smart contract risk.

Regarding cbETH, we are directionally aligned with @MarcZeller. To @fig’s point, we believe cbETH has traded at a discount to its true price and users may be arbitraging the price difference as potential yield source. Teams like Sommelier have built strategies around this concept and they are definitely worth exploring for users seeking extra yield. There is also the consideration of the relative risk profiles of users v Aave DAO, although this is somewhat subjective and the DAO hosts a range of risk profiles.

To @funkmasterflex, dsETH is a solid product. With a strong oracle, I think we should be discussing onboarding dsETH as collateral. Similar to cbETH, there is the spot price v true value which can be arbitraged using Aave liquidity… With Aave DAO’s treasury in mind, holding the underlying assets offers additional utility and reduced smart contract risk surface area. Having the flexibility has benefits, benefits which dsETH can offer if onboarded to Aave v3 and granted the ability to mint GHO.

Something to consider, Aave is continually generating wETH revenue. As the wETH accumulates, Aave DAO can begin building positions in other LSTs. The two discussed here should not be viewed as the only options, just the best option at the time of writing and something the DAO can continually review.

2 Likes
15

Hi @MarcZeller

We can confirm that Llama will be acquiring wstETH and rETH in the most economical manner, via deposit(), submit() and wrap() functions.

Our initial proposal included acquiring BB-A-USD, which requires the methodology outlined in our prior comment. Initially our intent was to acquire the LST and BB-A-USD in the same AIP submission. However, we have pivoted from this approach and are now pursuing three independent governance submission. The Snapshot for each of the three parts are currently live for voting.

We hope the above text provides greater context and eliminates any confusion relating to the method being used to acquire each asset. As always, our DMs are open and we are always happy to discuss our proposal / ideas with the community.

1 Like
16

thanks @Llamaxyz for your answer.

considering this, we will now consider the ARFC of this topic closed and the ACI will support llama AIP.

we are supportive of more diversity but considering the relatively important awETH revenue of the Aave DAO, regular “treasury management” ARFC can be done in the future that can help rebalance Aave Dao exposure.

Have a nice weekend.

@oneski22 while your answer make perfect sense, at the ACI we’re Aave-maxi, and we believe in the safety of the product and reliability of Safety Module, the Aave DAO not using it’s own protocol would tacitlly send a weird message to the overall community, I’m definitely in favor of Aave using Aave.

Again, your position makes sense, and as a protocol, we’re here to provide option and diversity. That’s why we’re supportive of stablecoins, L2 support & LSTs diversity.

However, as a DeFI native DAO, we think we should “put our money where our mouth is” and favor when it’s possible the most decentralized options.

Finally, @funkmasterflex & @Jstar on the topic of diversity, the original ARFC plan was to keep part of the DAO holdings in aWETH to allow future diversification.
seems like the initial strategy won’t take that path, but as DAO’s aWETH revenue comes in, I fully expect we re-do, likely quarterly this kind of ARFC allowing the onboarding of more diversification.

4 Likes