[RFC] Treasury Tranching

Proposal Discussion
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Preface

This Request for Comments (RFC) is initiated to spark a discourse on refining the treasury management of ShapeShift DAO. While this document serves as a starting point, it is by no means a conclusive or definitive proposal ready for formal DAO governance. The intention is to propose a novel approach to treasury management, inviting robust debate, feedback, and alternative suggestions to enhance the governance and operational framework of the DAO. The initial parameters and structures suggested herein are preliminary; therefore, community engagement in discussing, critiquing, and augmenting these ideas is highly encouraged. The core aim is to facilitate a comprehensive discussion on treasury management, ultimately leading to a cohesive and DAO-aligned proposal that significantly advances the DAO’s treasury strategy.

Summary

This proposal aims to overhaul the ShapeShift DAO’s Treasury Ecosystem, introducing a structured and strategic reallocation of treasury assets into three distinct tranches. Each tranche, interlinked via smart contracts, serves a specific purpose, ensuring financial stability, enabling strategic asset allocation, and fostering innovation and community engagement through new product mechanics on the ShapeShift platform.

Abstract

The ShapeShift DAO, amidst the evolving DeFi landscape, has maintained a steadfast focus on product improvement and user acquisition. However, the DAO’s treasury management has not been subjected to a similar level of strategic evolution. This proposal seeks to introduce a sophisticated treasury management system that segregates the treasury into three distinct tranches. Each tranche is meticulously designed to address specific operational, strategic, and innovative needs of the DAO, thereby enhancing financial control, security, and promoting a decentralization ethos through automated smart contract governance.

Motivation

The motivation for this proposal stems from a need to:

  • Enhance financial security and operational stability by establishing a precautionary tranche.
  • Strategically allocate assets for growth and community engagement through targeted tranches.
  • Foster transparency, accountability, and decentralization in treasury management.
  • Mitigate risks associated with asset concentration and enhance the DAO’s adaptability to participate in diverse DeFi activities.

Specification

Upon approval, this proposal will gradually phase-in the following treasury structure:

  1. Precautionary Tranche (Tranche 1): This tranche represents an 18-month operational runway for the DAO, approximating a monthly expenditure of $150k. It will be entirely composed of stablecoins held outside of platforms (on wallet).
  2. TMDC Allocation Tranche (Tranche 2): This tranche will encompass the 180M FOX allocation for TMDC, and include any assets accrued by TMDC actions that are beyond the scope of the precautionary tranche. This tranche serves as a strategic reserve for growth-oriented initiatives and asset appreciation.
  3. Innovation and Incentivization Tranche (Tranche 3): Dedicated to fostering innovation and community engagement on the ShapeShift platform, this tranche will finance new product mechanics, gamification, and incentivization schemes, as ratified by DAO governance.

Until Tranche 1 is filled, all TMDC actions (TWAPS, limit orders, etc) would result in additions to Tranch 1. Tranch 3 will remain empty. TMDC would have management responsibility of all grant and non-fox incoming transactions to the DAO wallet.

Once Tranche 1 is filled, TMDC would retain its 180M fox allocation, but any resulting TMDC actions would result in additions to Tranch 3.

If TMDC actions result in a deterioration of the 180M fox allocation, then TMDC will go to governance to top-up their allocation.

The interlinkage of these tranches through smart contracts ensures a seamless and automated governance mechanism, promoting transparency, efficiency, and strategic cascading of assets based on pre-defined rules and community governance decisions.

Benefits

  • Enhanced Security and Financial Control: Multiple wallets with distinct asset allocations mitigate risks and enhance the granularity of financial tracking and control.
  • Strategic Asset Allocation: Tailored tranches allow for focused asset management, aligning with the DAO’s (1) operational needs, (2) strategic growth initiatives, and (3) community-driven innovation, in that order.
  • Decentralization and Automated Governance: Smart contracts facilitate decentralized and automated treasury management, aligning with the ethos of DeFi and minimizing manual intervention.

Drawbacks

  • Increased Smart Contract Risk: The reliance on smart contracts introduces potential vulnerabilities and necessitates rigorous auditing and security measures.
  • Reduced Maneuverability: The structured nature of tranches, especially the precautionary tranche, may limit the DAO’s flexibility in reallocating assets swiftly in response to market dynamics or emergent opportunities.

Vote

Voting “For” this proposal signifies support for the gradual restructuring of the ShapeShift DAO Treasury Ecosystem as outlined, recognizing the potential benefits in terms of security, financial control, and strategic asset allocation.

Voting “Against” indicates opposition to the proposed restructuring, preferring the current treasury management framework or suggesting alternative approaches for consideration.

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wordage item. tranche? is just a number on a spreadsheet?
or you talking of setting up a seperate safe? or subsafe etc?

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Interesting and ambitious idea, thanks for positing it.

For the practical part, I think a proposal like this would benefit from designating the people who would lead the efforts to setup everything (one or more owners), sometimes we assume that the author of the proposal will be this person, if it’s the case I think it’s a good practice to mention it (and which Workstreams would need to be involved).

For the technical part, there isn’t much details on how the smart contracts would be created: who would develop them, how their development would be financed, how long that process would take. Are there existing contracts/solutions used by other DAOs that we could use and would already be audited/proven?

Currently, overall these tranches are de facto maintained by multiple humans based on the TMDC allocation (by governance) and the realities of the monthly expenditures of the DAO. As @Giantkin suggests it happens in spreadsheets and through discussions/votes, sums are earmarked but remain mostly intermingled in the same account(s) always under control of the DAO Signers. So I second his question regarding the way the balancing would effectively happen on-chain and would also like to know what would be the impact for the DAO Signers in terms of workload if this balancing of the tranches was automated?

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So i am still struggling a bit to understand the impact and purpose behind this proposal. It seems to add unnecessary complexity and even risk (with additional smart contract wallets etc) to manage, so as it currently stands I don’t understand the benefits enough to support this.

On a few specific points:

In general, separating out “tranches” of the overall treasury into different wallets only makes sense if there is some benefit to this (because it comes via the downside of additional wallets and complexity to manage). Im not seeing that benefit really described anywhere in this proposal in a way that makes sense to me.

It seems to me that much of this tranching is already done in how the DAO, TMDC, and community at large account for aspects of the treasury with various spreadsheets etc, separating them out into their own wallets doesn’t seem to give any real additional benefits here. Much of what is described in this proposal I think is better to simply keep on the accounting side rather than introducing additional wallets and complexity.

Specifically on the various tranches described…

Wouldn’t this tranche just be fulfilled by holding stables in the current treasury that aren’t deployed anywhere? Effectively this is already being done and has been done since the DAO’s genesis. I don’t see a benefit here to putting these stables into a different wallet than what the treasury already uses (and its easy to track stables in the wallet not deployed as their own tranche without an additional wallet unless I am missing something).

Similarly, this tranche effectively already exists and has been maintained and accounted for by the TMDC since it’s genesis, why does this need to be a different wallet?

Couldn’t this just be tracked as a component of the current treasury wallet? Again I am struggling to see why a new wallet is needed for this.

This seems like something that should be in the TMDC/DFC’s new mandate update proposal, be clear that this is the priority for the committee if this is the intention, but again this can all be done with the accounting the TMDC already does and I don’t see any need for different wallets here.

In general I think it makes sense for the DAO to maintain the Treasury wallet as the single “top level” wallet. If there are needs for sub wallets to contain risk (such as maybe a wallet the TMDC/DFC wants to use specifically to do DefI deployment) then that can always be setup as a sub wallet that is filled by the treasury as needed for various purposes, but for the most part I think we should only be setting up additional sub wallets when the need is really there because every additional wallet is additional complexity and potential risk (and the more wallets you have with the same signers the more likely the signers can confuse something and make a mistake from one wallet that was supposed to be from another etc).

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GM everyone,

Big thanks for jumping into the discussion on the “Treasury Tranching” idea I threw out there. It’s been great seeing all the different angles and concerns you’ve all raised. Let me try to break down my thoughts and responses to some of the points you’ve brought up.

To @Giantkin - About the whole ‘tranche’ terminology, I hear ya. It does sound a bit like finance jargon, right? Basically, I’m suggesting we might want to set up different “pots” or “buckets” (if that’s less jargon-y?) for specific purposes. Not just numbers on a spreadsheet, but actually separate them out in a way that makes managing our treasury a bit more organized and purpose-driven. Think of it as creating different savings accounts for specific goals.

@Fireb0mb1 - Appreciate the dive into the nitty-gritty. Spot on about needing someone (or a group) to lead this effort. I’m totally open to being part of that, but definitely think it’s a team sport. We’d need to rope in some tech-savvy folks for the smart contract setup and maybe get some insights from other workstreams on how best to implement this. And yeah, how we finance and develop these smart contracts is something we need to flesh out more. I’m all for looking into what other DAOs have done to maybe not reinvent the wheel here.

As for the impact on DAO Signers and the overall workload, that’s a super valid point. Automating stuff sounds great on paper, but we’ve got to be mindful of what it means in practice, especially for those who’d have to manage it all.

  • I’m curious about your take on the execution risk associated with introducing multiple wallets through smart contracts. How do you weigh this against the commonly advised crypto practice of not keeping all assets in a single wallet? Do you think the added security and organizational benefit justify the potential risks?
  • Could you delve a bit more into your perspective on automating the treasury via smart contracts? Considering the balance between transparency, efficiency, and risk, how might we quantify these risks in terms of their likelihood and severity to make an informed decision on pursuing this strategy?

@jonisjon - You’re hitting some crucial points about the complexity and risk. The last thing I want is to make things more complicated for the sake of it. The idea here was to try and bring a bit more order and focus to how we manage our treasury, especially as we grow and diversify what we’re doing. But if it’s adding more headaches than benefits, then it’s worth a rethink.

  • Reflecting on your concerns about the complexity and risk of additional smart contract wallets, how do you evaluate the importance of not having all of our assets in one place against the potential risks of smart contract vulnerabilities? Is there a scenario where the benefits of segmentation outweigh the execution risks for you?
  • Given the proposal’s aim to clearly delineate fund management responsibilities and create a more structured approach to treasury management, could you share more on how you see these goals being achieved within the current framework? Are there specific adjustments or enhancements you believe could better serve these objectives without the need for separate wallets?

Diving a bit deeper into our discussion, I wanted to touch on a crucial aspect of the tranching proposal that aligns with some of your concerns. Specifically, the idea is not just about segmenting the treasury for operational ease but also about democratizing DAO-wide financial decisions, giving more power back to the token holders.

  • Enhanced Token Holder Involvement: By implementing tranching, we can enable token holders to directly influence key financial strategies through rank order choice voting. This could include decisions on how many months of operational costs should be covered by the first tranche or determining what portion of the treasury (be it from existing funds or as a percentage of future revenues) should be allocated to each tranche.

This structure aims to make strategic financial planning more transparent and inclusive, ensuring that the decisions reflect the community’s consensus. It’s about creating a system where token holders aren’t just passive observers but active participants in shaping the DAO’s financial health and strategic direction.

  • Reflecting on @jonisjon’s concerns, the proposal’s intent to move certain decision-making aspects to a more automated and token holder-driven process could help address issues of complexity and risk you highlighted. By involving token holders in these critical decisions, we’re not only aiming to diversify our risk management strategies but also to ensure that these strategies are directly aligned with the community’s preferences and risk tolerance.
  • Questions for Further Clarification:
    • Given this perspective, how do you view the potential for token holder-driven decision-making to mitigate your concerns about complexity and added risk?
    • Do you think involving token holders in this way could provide a compelling enough benefit to outweigh the potential downsides of implementing additional smart contract wallets and tranches?

By focusing on operational sustainability and giving token holders a significant say in how the treasury is structured and utilized, we aim to build a framework that’s not only robust and secure but also deeply aligned with our community’s values and long-term vision.

Looking forward to hearing your thoughts on this and any further insights you might have on making this proposal as effective and community-focused as possible.

My takeaways from what I read of @jonisjon’s response:

Your take on tracking these “tranches” through existing accounting practices rather than creating new wallets for each makes a lot of sense. It’s definitely simpler and probably keeps things flexible enough to adapt without overcomplicating our structure.

So, reflecting on all your feedback, it feels like the main takeaways are:

  • Keep it simple and avoid unnecessary complexity.
  • Be clear about who’s leading the charge and how we’re executing (especially the tech side of things).
  • Consider the benefits of separating funds into different wallets versus the potential risks and added workload.

A Central Point for Further Discussion:

The core idea behind this tranching proposal isn’t just to create targets for fund usage on paper but to establish a clear, automated system for directing where funds go, under what conditions, and who is responsible for managing them. This includes a precise delineation of responsibilities and the flexibility (or lack thereof) within each tranche.

The aim is to ensure the DAO’s sustainability is always the top priority, automating different “modes” that activate based on the treasury’s condition. For instance, if our treasury holdings of stables (or combined assets) fall below a certain multiple of our monthly costs, the DAO would focus solely on replenishing the precautionary tranche. Subsequently, any additional funds would go towards the TMDC/DFC’s typical responsibilities, like managing LP positions. Then, funds would go towards a separate fund managed by the DFC (or a new committee) focused on strategic growth and innovation, similar to the vFOX mechanism? This could further specialize the management of our assets in line with our strategic goals. Then, funds would be available for all other DAO-approved actions.

Speaking of vFOX: do you @Jonisjon have any update on it? I’m curious to see how its performance or structure might inform our approach to this tranching proposal.

I’m glad to see and want to keep this convo going and refine the idea with all your input. Maybe there’s a middle ground where we can achieve some of the transparency, accountability, and strategic allocation goals without overengineering our treasury management. I’m open to what that looks like. Guidance % votes that I put out there as non-binding amounts? But this leaves things open to human interpretation, error, and political in-fighting. Seems like things we may be able to manage our way out of by deciding what is necessary for sustainability right now.

Thanks a ton for engaging and sharing your thoughts. Let’s figure out how to make this work for all of us.