The 12th Rune Treasury Formation Policy Document
This document outlines the current efforts within the TEC to develop a Treasury Management protocol operated by the Sampo Working Group. Within this document, we will attempt to define the current tools, obstacles, and options for developing a system of treasury management. We will define the purpose and principles for the development of a Treasury, as well as look into different investment mechanisms and what they offer us in the current economic climate.
**Statement of Purpose**
The 12th Rune Group is responsible for stewarding the development of the Commons financial layer through investment strategies and treasury operations that strike a healthy balance between risk and return enabling the development of long-term growth of the assets under management by the TEC token-holders.
**The Vision**
The ability for the TEC to manage a treasury is an important governance function that will provide the Commons with financial resiliency during uncertain economic conditions. The responsible management of financial assets within a TEC treasury can provide the Commons with supplemental funding for operational costs, risk management mechanisms during periods of volatility, and ultimately serve as a complimentary source of funding that will enable sustainable financial growth.
Within the Sampo Working Group, the 12th Rune Group will be responsible for facilitating the management of a collective pool of assets that will be dedicated to generating supplemental funding for the Commons through a series of well defined investment strategies.
In addition to the investment strategies proposed, the 12th Rune Group will establish the infrastructure for how these funds will be managed into the future as well as the processes needed to sustain this management through a decentralized governance structure. The core vision of the 12th Rune Group is to pioneer the manner in which DAOs coordinate around treasury management and to collectively develop a resilient and impactful economic layer within the TEC.
**Treasury Overview**
Financial Outlook
The TEC economy is still in its infancy, and will need time to develop as the Common Pool funding is currently dependent upon transaction volume within the Augmented Bonding Curve (ABC). The Common Pool holds 668,567 wxDai with an additional 18,720 wxDai waiting to be allocated from proposals in the Gardens. As the Sampo WG continues to develop utility for the TEC token to increase this transaction volume, the amount of inflows into the Common Pool will remain limited.
Since the initiation of the ABC (7 months), there has been a total of 246,474.14 wxDai raised from the Entry and Exit tributes. However, upon closer examination and omitting the 3 months which contained significant single transactions, the tributes in the ABC have generated approximately an average of 1,443.25 wxDai/month. The outflows in the TEC have far outweighed the inflows, and has caused us to revisit the financial strategies we currently have in place, and is the justification for why the 12th Rune Group is being formed.
**12th Rune Group - Treasury Management Principles**
Security
The 12th Rune Group will focus on developing security around the management of TEC assets, and will never enter into investment strategies or operations with treasury assets without a clear definition of risks and how to mitigate them.
All investment strategies made within the TEC treasury will be subject to risk-analysis, and contain detailed descriptions on all possible risks associated with each investment. There are two levels of risk that will be evaluated – asset risk, and smart-contract risk.
Asset Risk - Each asset in custody must meet minimum requirements for liquidity, volatility, governance, and design. In addition to these risks, each asset must be evaluated from a regulatory and counterparty risk perspective.
Smart-Contract Risk - In addition to evaluating the asset risk of each investment strategy, we will also evaluate the wide range of smart-contract risks associated with each investment. Audits will be a prerequisite for any smart-contract we wish to interact with and should have a proven track record of use within DeFi.
Consent
Where possible, the 12th Rune Group will always favor collective-decision making over individual discretion regarding the decisions on how to manage TEC assets.
All investment strategies enacted by the 12th Rune Group must be approved by the community of TEC holders prior to initiation. This can either be done through Snapshot (Off-Chain), or through our Gardens.
Each investment strategy will include a range of possible operations based decision-making scenarios for individual Fund-Managers that will provide guidance on using their discretion. While not all decisions can be realistically presented to the community, each Fund-Manager will commit to act according to the intent of the approved strategy.
Diversification
A fundamental principle to developing a healthy treasury is ensuring that we hold a diverse set of assets that allow for responsible growth. The TEC treasury should never hold more than 30% of any single asset. In addition to asset diversity, the diversification among the use of smart-contracts should be prioritized to minimize risk.
Cost Minimization
The cost of managing the assets within the TEC treasury should be minimized to avoid costly decisions. In cases where smart-contract interactions are known and predictable, the 12th Rune Group will help develop methods to project the costs for entering and exiting an investment strategy and learn how to minimize the operational costs associated with funds management.
Values-Centric
The 12th Rune Group is not asset agnostic. Our investments, where possible, should involve assets that are aligned with the values and mission of the TEC. We will refrain from investing in assets that act in contradiction to the values of our community and we will strive to continuously evaluate the ethics involved within our investment strategies.
Transparency
The 12th Rune Group will provide transparency in all activities associated with the management of TEC assets and develop the tools which will allow for more effective monitoring of treasury movements. We will adhere to periodic public reviews of investment strategies, fund-manager decisions, and treasury goals with the TEC Community.
Growth
All activities within the 12th Rune Group will hold the intention of growing the TEC treasury with all previous principles prioritized. We will strive to grow the value of assets under our management responsibly and sustainably.
Access
The 12th Rune Group will provide access to TEC Treasury funds at any time for any reason dictated by TEC Token-Holders through TAO Voting. Ensuring that the TEC has access to these funds is fundamental for building trust, and allowing the community to decide how their assets are managed. With that stated, the 12th Rune Group will stress the importance of continuing to grow the amount of assets under our control so that we may maximize our returns over longer time horizons. We will honor any formal on-chain vote that requests funds from the TEC Treasury.
**Investments Overview**
Overview of DeFi Investment Mechanisms
In this section we will evaluate some of the different investment mechanisms available in the decentralized finance ecosystem, and what the best platforms to use are. While there are many more investment mechanisms being pioneered within DeFi, we will focus on the following:
Staking
In DeFi, staking refers to the process of locking your crypto assets into a smart-contract in exchange for rewards and passive income. Tokens will often offer this service as a method of reducing sell-pressure and minimizing volatility associated with the tokenomics of that particular asset. Not all staking is equal, and investment strategies associated with staking should include a long-term belief in the success of the asset as well as understanding the dynamics of the assets token-supply.
DeFi Applications: Staking is usually asset dependent, although major DeFi platforms such as yield aggregators, DEX’s, and Borrow/Loan platforms can offer single-sided staking for predictable returns. (Yearn, Aave, Balancer, Lido)
Index Tokens
Index Funds are a collection of crypto-assets that often (not always) reflect a sub-sector of the asset class. Each Index Fund provides exposure to all relevant assets dedicated to proliferating that specific area of the asset class. Depending on the provider of the fund, this investment strategy can provide a low-risk, low-yield opportunity for treasuries that speculate on the advancement of a particular sector.
DeFi Applications: Index Funds are very diverse and while some offer concrete exposure to industry sectors, some simply follow custom-made funds. Exposure to index funds in DeFi are represented by an Index Token that will follow the volatility of the entire basket of funds. Since one asset can bring down the value of the index token, it is important that you use reliable Index Fund providers. (Index CoOp, PieDAO)
Governance Swaps
The use of Governance swaps provides DAOs a diversification strategy which is mutually beneficial to multiple organizations with similar missions and goals. The purpose of a Governance swap is to divest from your own token by swapping with another organization in order to mutually expose each other to your collective successes. This also ensures that the governance rights associated with those tokens are in the hands of another organization that will promote the long-term goals of your organization.
Liquidity Mining
Decentralized Exchanges (DEXs) offer an opportunity for asset holders to pair two or more assets as a source of liquidity for decentralized swaps. In order to incentivize the accumulation of liquidity on a specific DEX, an exchange will offer a yield on those assets based upon the demand for those tokens. This yield comes from the platform fees associated with the use of the exchange and the distribution of newly minted tokens. Issues such as Impermanent Loss (IL) are often associated with providing liquidity to these exchanges and should be fully understood before incorporating it within an investment strategy.
DeFi Applications: There are many DEXs that offer great returns for providing liquidity, but there is also a lot of smart-contract risks associated with liquidity provision. Use of major DEX’s are advisable, and understanding Impermanent Loss should be a priority for any strategy. (Uniswap, Sushiswap, Balancer, Curve, CowSwap, HoneySwap).
NFTs
The investment in Non-Fungible tokens have been a growing trend within large treasuries as of late as they serve as a solid long-term store of value, and provide risk diversity within an investment portfolio. The use of NFT’s in new DeFi mechanics is also growing in popularity, but they do require a lot of attention as they are largely illiquid assets and have significant volatility associated with their value.
Options Trading*
Crypto-Options are derivatives contracts whose value is dependent on that of the underlying asset. Options can be placed for a small fee and allow for leveraged trading which bets on whether or not an asset will increase or decrease in price over a certain time horizon. This investment strategy allows for a greater risk/reward profile than other strategies. Options can be a good way for an investment strategy to hedge against losses or to smooth out their returns. Due to the complexity and monitoring required, options trading should have a clearly defined purpose and proper evaluations before execution.
DeFi Applications: (Opyn, Ribbon Finance, StakeDAO, Hegic)
Perpetual Contracts*
The use of perpetual contracts is a new economic primitive that extends the functionality of typical options derivatives. With Perpetual Contracts, users provide an underlying asset and establish the amount of leverage they wish to expose to those assets by buying a bundle of long or short positions without an established time horizon. The ability to execute extreme leverage for a high risk/reward profile gives Perpetual Contracts an exciting yet dangerous form of derivative that allows for more granular adjustments to positions based upon the volatility of the asset. This form of investment strategy requires constant monitoring, and therefore is a risky proposition for organizations.
DeFi Applications: (Perpetual Protocol)
Tokenized Derivatives*
There are two types of synthetic assets that come in the form of tokenized derivatives: traditional, and crypto.
Traditional Tokenized Derivatives - These are also known as tokenized stocks, and are simply tokens that reflect traditional assets and their associated price movements. These derivatives require on-chain oracles and smart-contract risks, but do offer a hedge to a crypto-native portfolio.
Crypto Tokenized Derivatives - There are several new DeFi primitives that have been developed within the past year. These come in the form of tokenized derivatives, and can include automated complex DeFi investment strategies that are reflected within a single token.
Index CoOp’s icEth is a primary example of such a token derivative that uses stEth (another tokenized derivative) as the underlying asset. This token allows its holders to utilize the stEth asset (interest bearing Eth) as a form of collateral within the Aave protocol, which then borrows Eth against that collateral, and is swapped for more stEth, providing additional leverage and exposure to the Eth price and offering magnified returns. The staking, borrowing, and swapping are all automated processes reflected in the icEth token. It also works in reverse allowing for deleveraging in times of downward volatility. Since the tokenized derivative allows for monitoring and management to be abstracted away with limits placed on risk, holders can enjoy additional leverage without the fear of liquidation.
There are many new forms of tokenized derivatives that are being developed, and each one requires a deep understanding of risks and constraints embedded within the token. These are extremely promising investment strategies that provide good return and limited exposure to liability.
*The execution for derivatives trading is often dependent upon On-Chain oracles. Not all oracles are created equally, and investors must pay close attention to how those oracles operate.
**Operational Considerations**
Acknowledging the Economic Setting
The TEC operates on the Gnosis-Chain, a small but growing blockchain ecosystem that allows for cheap transaction costs and reliable security. While there are prominent DeFi projects on the Gnosis-Chain (1Hive, Agave, etc.) that are capable of providing investment options for the TEC, these projects are still in their infancy and have a history of development risks associated with their operations.
While we support these projects and the further development of DeFi applications on the Gnosis-Chain, the 12th Rune Group acknowledges the reality of needing to explore the entire landscape of DeFi options provided on other chains. Due to the financial restrictions within the TEC, we intend to focus on utilizing DeFi applications that have a long history of reliability and a low-risk profile.
In order to use these applications, we may be required to move our economic setting to other blockchains and organize our management structure to adapt to the needs of our treasury assets. Each economic setting for these assets will contain a dedicated investment strategy, management processes, reporting requirements, and risk profiles.
Multi-Sig/Agent Problem
The Multi-Sig/Agent problem describes an issue of trust associated with the distribution of large sums of money that require active (time-dependent) management. While DeFi applications, and Multi-Sig functionality are expanding in their capabilities, some investment strategies will require consistent monitoring and quick decision-making.
The ability to distribute discretionary authority of TEC treasury assets to individuals may be necessary to mitigate risks associated with DeFi applications and/or sudden volatility of market conditions. In order to establish trust that a specific agent will not run-away with or misappropriate funds that are trusted to their management, the 12th Rune Group will develop a system of cultural and technical accountability methods that deter such behavior and properly align the incentives of agents towards responsible stewardship of those assets.
Any investment strategy that requires the authority of funds to be charged to a single individual will contain a strict vetting process, a contractual agreement, and fully articulated sanctions that will be enacted if such agreements are violated. Each agent must be approved by the TEC community through Snapshot, and will need to satisfy a confidence vote by the signatories of the multi-sig from which the assets were derived.
Additional tooling such as Staking/Slashing contracts will be explored as complementary methods toward solving the Multi-Sig/Agent problem that further embed confidence within a system of treasury management as defined by the 12th Rune Group.
Fund Manager Conflict-of-Interest
In addition to assurances provided by the measures of solving the Multi-Sig/Agent problem, the 12th Rune Group will encourage agents to provide voluntary disclosures of their current investment assets. This information will be aggregated into a single 12th Rune Group - Conflict of Interest document that provides transparency and a source of information for community dialogue surrounding investment decisions.
Management Structure
The management of DAO treasuries is a difficult task. Most organizations have elected to distribute the management of these functions to small groups of individuals who have restricted access to decision-making and are compensated internally. The TEC will dedicate themselves to developing a governance structure that allows for a large group of participants to collectively participate in the management of a treasury.
The evolution of this management structure will allow for progressive decentralization to be achieved by developing tools that establish the processes and requirements necessary for open participation. Early developments will include:
- Utilizing collective decision-making tools.
- Establishing the parameters for Multi-Sig management.
- Developing protocols for bridging funds from one chain to another.
- Establishing boundaries and constraints for Investment Strategies.
- Developing rules for active Agents and Monitors.
- Incorporating new technologies that provide real-time communication and transparency around wallet activity.
Decision-Making Parameters
Agents within the 12th Rune Group will be required to establish Decision-Making parameters for each investment strategy proposal that include stop-loss parameters, when to hedge investments, when to take profit, and how and when to re-invest.
The Decision-Making documents are designed to be a source of guidance and establish boundaries around when to abandon poorly designed strategies, mitigate issues around protocol risk, and how to expand successful strategies to maximize gains. These decision-making protocols will eventually be expanded to allow for more perspectives and community participation.
Transparency & Financial Reporting
Transparency is the ultimate tool for building trust within the Sampo WG and the 12th Rune Group. The Transparency and Financial Reporting documents will be provided monthly, and include commentary on currently implemented strategies, future strategies, gains, losses, and expectations for growth.
The 12th Rune Group will develop a live dashboard within the TEC Dune Analytics page that will allow for community monitoring and provide all commentary in public channels such as Discord and the Forum. Additionally, we will host public critique meetings on a monthly basis and invite community members, token-holders, and interested parties to join us in the evaluation of treasury management policies and practices.
Governance Obligations
Some assets we hold in the TEC may be Governance tokens within another DAO or project, and in these scenarios we will strive to become responsible token-holders. Where possible, the 12th Rune Group will attempt to develop Voting infrastructure for long-term governance assets that are managed within the TEC Treasury and extend that voice to the TEC community.
**Treasury Development Roadmap**
The development of a roadmap is of critical importance to gaining trust within the community and executing on our vision for the 12th Rune Group. This roadmap will consist of three separate phases that provide a method for progressive development of both managerial capacities and treasury growth.
Phase 1 - Economic Security
In the first phase of our roadmap we will be focusing on developing the infrastructure and organizing the human capital necessary to develop a comprehensive management process for the TEC Treasury. Once this roadmap has been completed, we will be able to enter into the second phase of our development.
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Introduce Policy Framework
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Introduce 1st Investment Strategy
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Create 1st Funding Proposal
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Agent Onboarding
- Develop Onboarding Requirements
- Create Collective Agreements & Pledging
- Create an Investment Disclosures Document
- Create a List of Agent Obligations
- Define the process for Agent Offboarding
- Establish Sanctions for violations of collective agreements.
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Investment Wallets Established
- Establish Multi-Sig Parameters for every investment wallet.
- Create Wallets on Gnosis Chain, Ethereum Mainnet, and Polygon.
- Assign Agent Wallet - Assign Monitor
- Set-up HAL for Discord Communications of multi-sig activity.
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Request Funds from our Initial Proposal
- Execute Proposal as stated.
- Execute Investment Strategy as stated.
- Evaluate Process and submit to forum for Community Feedback
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Reporting & Transparency
- Execute and Report on monthly rebalancing
- Determine Reporting Requirements
- Hold Monthly Critique sessions
Phase 2 - Economic Momentum
In the second phase of our roadmap we will attempt to iterate on the procedures established during phase 1, and to develop a significant treasury proposal that will establish the foundation for future growth. During this phase we will attempt our first Governance Swap, test out our agent/monitor system, and perform our first instances of re-investments within the treasury. This phase will see an expansion of both members and assets under the obligations of the 12th Rune Group. The goal of this phase will be to generate enough funds to invest in TEC token utility initiatives as determined by the Sampo WG and the TEC community.
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Introduce 2nd Investment Strategy
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Create 2nd Funding Proposal
- Evaluate the impact on Common Pool and Conviction Voting
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Fund Management
- Set Rebalancing Parameters
- Provide Constraints to strategy
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Reporting & Transparency
- Revise Reporting Requirements
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Projections
- Develop 3, 6, and 12 month projections for the current portfolio.
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Governance Swap
- Execute 1st Governance Swap
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Agent/Monitor Testing
- Provide Small amount of Funding to Agent/Monitor for aggressive investment.
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Governance Evaluation
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Revenue Distribution
- ABC Purchases
- Common Pool Allocation
- Re-Investment
Phase 3 - Economic Prosperity
In Phase 3 we will continue to maximize the capacity of the 12th Rune Group to expand the growth of assets under our management.
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Strategies Evaluation
- Revise Strategies
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Propose new economic settings.
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Execute 2nd Governance Swap
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Expand to multiple Portfolios
**Next Steps** -
Introduce first Investment Strategy on the Forum
- This will be a simple proof-of-concept implementation that will seek to move funds from the L.A.S.E.R.T.A.G multisig wallet and place them within a low-risk yield opportunity managed by the 12th Rune Group.
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Introduce the first Investment Proposal on the Forum
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Validate this document through Snapshot
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Submit the first Investment Proposal within TAO Voting
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Implement Phase 1 in the Treasury Roadmap