dYdX Treasury SubDAO Proposal: Steakhouse Financial

[Steakhouse]

Following our initial post and discussions, the chefs at Steakhouse would like to tender a formal proposal to establish a Treasury SubDAO.

We appreciate the variety of perspectives provided by the community - including members from the Foundation, validators, token holders and other core contributors - and are excited to contribute to enhancing the sustainability of the dYdX community treasury and financial planning.

Proposed Terms of Engagement

A) Core Mandate

The funding will support the execution of the highlighted Treasury SubDAO priorities including:

• Establishment of a Cayman Foundation and Treasury multisig to achieve greater tax and legal certainty for the dYdX community
• Development of a staking program to stake a portion of the DYDX community treasury to dYdX Chain validators
  • Scope for the staking ratio in the community treasury to increase from the current 20% (19.5M DYDX) to up to 50% (50.5M DYDX) for additional income
  • Final details will be published after a comprehensive APY and income review and ratified in the community treasury spending proposal (as discussed in the Next Steps section)
• Oversee diversification of DYDX from the community treasury into stablecoins
• Earn yield on the DYDX diversified out of the community treasury
  • Due diligence opportunities
  • Provide allocation options and recommendations to the community
  • Develop transparent treasury reporting to provide visibility to performance
  • Monitor allocations and partner with the community to make adjustments as needed
• Partner with the dYdX Foundation, dYdX Ecosystem Program, Operations SubDAO, and broader DAO to support financial planning activities, funding, and operational support

B) Team

The Treasury SubDAO will benefit from the whole Steakhouse kitchen brigade, including, but not limited to, the following core contributors.

Aes (founding Chef)

• BS in Finance & Management from Northeastern University
• Passed all three levels of the CFA exam
• 10+ years of finance, consulting, and operations experience
• Engagement lead at MakerDAO and contributing to Morpho, previous experience including Thermo Fisher Scientific (NYSE: TMO), and Deloitte Consulting LLP

Roo (Chef)

• BS in Finance from Duke University
• Previously an analyst and trader at Hildene Capital, a structured credit hedge fund
• Worked for Citigroup’s Structuring and Syndicate team, bringing new issue CLOs to market and prior to that, worked on Citigroup’s institutional Investment Grade Credit team

Sergi (Data Chef)

• Master’s in Blockchain Technologies from Universitat Politècnica de Catalunya and MBA from ESADE Business School
• 20+ years software engineering and data analytics experience
• 5+ years blockchain engineering experience
• Global BI and IT leader in varying roles for Danone and Air Products prior to joining the crypto industry full-time

Adcv (founding Chef)

• MSc Industrial Engineering, BSc Electrical Engineering from EPFL
• MBA from INSEAD and CFA charterholder
• 10+ years of finance, consulting, and operations experience
• Currently contributing to Lido DAO, MakerDAO and Morpho. Previous experience including M&A advisory and investment banking, turnaround manager for a small business and various corporate finance roles

Equanimiti (Chef)

• MFin from MIT Sloan School of Management, BS in Math from New York University
• Passed all three levels of the CFA exam
• 10 years in public equity investment management
• Currently contributing to Lido DAO and Morpho

C) Proposed Compensation

We are requesting $62.5K in DYDX per month, $750K annualized (calculated as the 30-day TWAP as of the final day of the month) of funding from the dYdX Chain community treasury. The funding supports a 12-month engagement period, subject to the dYdX community’s satisfaction with performance.

• Steakhouse partners with projects and communities that we believe in. As such, we prefer payment in project tokens over stablecoins to ensure alignment.
• The $750k annualized budget will support the execution of the responsibilities outlined in the Core Mandate section
• The proposed amount excludes funds required to create a Cayman Foundation in the first year, which we estimate will not exceed $50K.
• Industry practice for treasury management has evolved to follow a % fee charging model (e.g. 1-2% of AUM/size of the treasury managed). Our belief is that this is a suboptimal model, as it encourages treasury growth through surplus accumulation, over for instance, investment in other growth initiatives or future token holder value accrual (i.e. room for misaligned incentives with stakeholders in the ecosystem).

If the community is not satisfied for any reason, they may end the engagement through a vote and we will forfeit any unvested DYDX tokens (note - forfeited tokens will be calculated assuming all tokens are vested, so in the event of a mid-month offboarding a pro-rata distribution of DYDX tokens would be made).

D) Next Steps

Following community feedback and a successful vote of the proposal, we will initiate a text proposal seeking dYdX community approval to establish a Cayman Foundation. Upon successful formation of the Cayman Foundation, we will launch a separate community treasury spending proposal. This proposal will seek to:

1. Transfer vested DYDX from the dYdX Chain Treasury to the Treasury subDAO multisig wallet.
2. Launch the community staking program.
3. Execute additional components of the core mandate as outlined.

[AutoStake]

@Steakhouse

Development of a staking program to stake a portion of the DYDX community treasury to dYdX Chain validators

• Scope for the staking ratio in the community treasury to increase from the current 20% (19.5M DYDX) to up to 50% (50.5M DYDX) for additional income
• Final details will be published after a comprehensive APY and income review and ratified in the community treasury spending proposal (as discussed in the Next Steps section)

Will the selection process be exactly the same as before? and will it be publish ahead of time so that validators have time to prepare and present all the various value adds we bring to the table?

[AutoStake]

@Steakhouse

Earn yield on the DYDX diversified out of the community treasury

• Due diligence opportunities
• Provide allocation options and recommendations to the community
• Develop transparent treasury reporting to provide visibility to performance
• Monitor allocations and partner with the community to make adjustments as needed

Would it not be most beneficial to deploy the USDC yield into dYdX upcoming MegaVault

This way it earns a yield whilst providing liquidity into the dYdX orderbooks, increasing dYdX potential

Deep Dive: MegaVault

[Ertemann]

Hey all,

Thank you for the clear proposal. For now I just have 1 concise question?

Why do you need specifically 62.5k USD (in dYdX) a month to safely stake and manage these potential 50m dYdX?

That brings me to 625 working hours a month at $100 an hour or 3.9 FTE equivalent.

best,
Ertemann
Lavender.Five Nodes

[Steakhouse]

We really appreciate all of the responses so far! There’s a lot to cover so we will try and capture comments in other threads in one place here.

Tagging @Nascor @Govmos @cryptoplaza @valentin @Phoenix @0xAN @charles @eguegu @autostake to bring attention to the discussion here, apologies for the bother or if we missed anyone.

References

• Protocol Economics Overview
• Steakhouse Proposal

Summary

• Capital allocation is upstream of everything else
  • In our view, our proposal is an answer to a fundamental question: “Should the dydx community engage a Treasury subDAO to help the community think about and operationalize capital allocation decisions that can help grow the dydx protocol?”
• How should the Treasury subDAO think about allocations of a stablecoin endowment?
  • Minimal and low-cost
• Structure of our economic proposal
  • Incentive alignment, fixed and predictable, no additional costs for new ‘scopes’ or engagements
• Community engagement
  • Favor public communications to level the playing field with all token holders

Capital allocation is upstream of everything else

@Steakhouse

The house view at Steakhouse Financial is that ‘treasury management’ is a subset of the finance function whose purpose is to collaborate with the operations team in order to achieve an organization’s business objectives. Such activities typically include financial planning & analysis (FP&A), financial reporting, and capital allocation in partnership with the leadership team (internal and external). Treasury management falls in the latter capital allocation category (external) and its strategies should be simple, and serve to support the operations of the organization.

In our view, our proposal is an answer to a fundamental question:

“Should the dydx community engage a Treasury subDAO to help the community think about and operationalize capital allocation decisions that can help grow the dydx protocol?”

We want to help the community establish a framework for overall capital allocation, which can help guide future decisions. This requires input from token holders, users, liquidity providers (LPs), and validators to ensure the right balance of capital allocation to grow the protocol, attract users, and create sustainable tokenomics that the market values.

Our expertise lies in this area. We see “Treasury Management” as a secondary step that follows a broader strategy. In other words, deciding “How to manage a treasury to ensure enough funding” is a simpler decision once the community has a solid framework for capital allocation in place.

Specific examples:

• MakerDAO (now Sky) is a stablecoin first and foremost. What is often called “Treasury Management”, in the context of Sky, is really about “How to structure the protocol to maximize growth while managing liquidity and solvency.” We have written extensively and actively engaged in helping MakerDAO navigate this complex issue to guide token holders toward good decisions.
• Lido DAO is a decentralized staking router protocol first and foremost. The key question for Lido is, “How should the DAO manage its surplus to protect the stability of stETH and maintain protocol strength?” We proposed the Lido DAO Treasury Management Principles to provide a clear framework for token holders to make straightforward decisions regarding the DAO’s surplus while staying focused on its main goal

Application to dydx

At the outset, our proposal aims to provide strategic guidance and implement decisions on two key questions, while remaining flexible to engage in other relevant areas at no extra cost to the DAO:

1. Can dYdX create a smaller, tactical endowment to cover 2-3 years of operating expenses?
   • We will explore how dYdX can set aside a portion of its funds to ensure financial stability for the next few years. This would provide a buffer that allows the protocol to operate smoothly, regardless of market conditions.
2. How should dYdX structure its tokenomics to drive growth?
   • We will offer recommendations on how to align dYdX’s token distribution and incentives to attract more users, enhance engagement, and support long-term growth.

By focusing on these areas, we aim to build a solid financial foundation for sustainable development and success for dYdX.

@Govmos

We propose two paths to foster the new treasury while maintaining a sustainable level of security budgeting. The first path would involve raising the minimum validator fee to 6% as we proportionally reduce the security budget by 20%. The second path could explore a progressive approach tied to revenue growth, allowing for a gradual reduction in security allocations while keeping validator and staker revenues stable.

@0xAN

Gradual transition to new reward models: Changing validator rewards too quickly could lead to participant churn and short-term unprofitability. We recommend a phased approach to transitioning from token emissions to revenue-based rewards, allowing the network and its participants time to adjust. This will help prevent validator loss and maintain network security during the transition.

@Phoenix

A) Trader rewards programs “growth” would be much better if USDC was used as reward token instead of DYDX token. Don’t see an issue with reducing validator rewards if it means halting all emissions of DYDX token for “growth.” Growth is worth investing in. And so far using DYDX as reward token has achieved net effect of diluting long term holders (validators) to reward short term holders (traders who sell their rewards asap). Not good.

The below in particular is an excellent idea that we would definitely analyse and consider

@AutoStake

Would it not be most beneficial to deploy the USDC yield into dYdX upcoming MegaVault

This way it earns a yield whilst providing liquidity into the dYdX orderbooks, increasing dYdX potential

Deep Dive: MegaVault

These kinds of considerations are highly relevant and exactly what the community should prioritize thinking about. In our view, the primary role of the Treasury subDAO should be to research such strategic issues and guide the community in developing a sustainable capital allocation framework.

While creating an endowment to fund USDC grants is also important, it should come as a secondary step, building on the foundation of a well-thought-out capital allocation strategy.

How should the Treasury subDAO think about allocations of a stablecoin endowment?

@cryptoplaza

• Operational liquidity: It is crucial to maximize the available liquidity to cover short-term financial commitments without resorting to costly financing. A high liquidity ratio (current ratio or quick ratio) indicates that the company has sufficient resources to meet its obligations, ensuring operational continuity and reducing the need for external financing.

• Return on cash reserves: Maximizing the returns on idle cash reserves is essential to generate additional revenue. Strategies like short-term investments or interest-bearing accounts can enhance the profitability of cash holdings.

• Debt coverage ratio: Ensuring that the company can comfortably cover its debt obligations is key. Maximizing this ratio through strong cash flow management can reduce the risk of default and maintain a good credit standing.

These KPIs are well-chosen, as @cryptoplaza highlighted in another thread. However, if we step back and just consider the narrow purpose of creating a ‘cash reserve’ to secure grants for the DAO, the Treasury subDAO’s goal should simply be to find the lowest-cost option with the least risk that still meets a basic return benchmark.

If we focus just on the narrow aspect of ‘cash management’, in traditional finance fees for cash alternative ETFs have significantly dropped due to competition in the market:

• BlackRock Core Global Bond ETF has a total expense ratio of 10bps
• BlackRock 0-1yr Short Duration ETF has a total expense ratio of 7bps
• Although not directly comparable, still notable to see BNY Mellon US Large Cap Core Equity ETF has a total expense ratio of 0 (!)

From an operational standpoint, consider how Luca Maestri, Apple’s former CFO, managed $100 billion in offshore cash with just a five-person team back in 2019. This shows that managing cash reserves, or “Treasury Management” in crypto terms, even on-chain, is essentially a commoditised task and does not require extensive community effort.

Plainly, the community probably should only consider a proposal with a wider, holistic, approach that helps the DAO reach sustainability and growth, in which the role of allocating its short-term cash-like investments to extend the runway is somewhat secondary. As we showed in our analysis, it is highly unlikely that a small $30 million endowment can independently sustain comprehensive grant disbursements at any reasonable rate of return. For this narrow purpose, the focus should simply be on extending the runway by as many months as possible at current rates, particularly when allocating to stablecoins outside of the community staking program.

What we believe the community ought to consider is a Treasury subDAO that is dedicated to top-level capital allocation, fundamental research and that can also find the lowest cost cash-reserve solution for securing some runway.

Structure of our economic proposal

To recap,

• $750k annualized, flat
  • This is a flat fee for the described engagement with Steakhouse as an ecosystem partner on the community’s broader capital allocation matters, not just on the narrow management and oversight of the cash reserves.
• Payment in native token
  • We choose to prioritize receiving dydx tokens to bring our incentives in line with the protocol, as opposed to requesting USDC which does not
• No minimum commitment on time or notice periods
  • As dydx is a decentralized community, enforcing such commitments isn’t practical. If the community is unhappy with our performance, it can simply vote to remove us.
• [WAIVED] Excluding funds required to create a Cayman Foundation in the first year
  • Normally, the costs to establish a Cayman Foundation in the first year would be excluded. However, to show our commitment, we are willing to waive this exclusion.
  • There are valid reasons for this exclusion—when setup costs are included in a supplier’s costs of goods sold (COGS), there is an incentive to cut corners rather than focus on achieving the best outcome
  • However, we have extensive experience setting up these structures for DAOs and strong relationships with all key providers in the Cayman Islands. We are confident we can achieve the best result for the dydx community even if we absorb the cost

---

Community engagement

We’d like to invite community engagement in public settings, with open mic AMAs to answer any outstanding questions:

Thursday 19th September at 16h00 CET / 10h00 ET / 22h00 SGT

Link to Twitter Space

[Ertemann]

@Steakhouse

Payment in native token

• We choose to prioritize receiving dydx tokens to bring our incentives in line with the protocol, as opposed to requesting USDC which does not

I just want to correct that receiving funds in the native token does not at all “align incentives” however, quoting in that respective currency would!

Your quote is in USD, meaning you are not affected by the price of dYdX as upon receipt you can sell for the required amount of USD.

[ttt_vn]

Is it reasonable to require $62k dYdX per month and $750k per year to transparently manage 50,000,000 dYdX tokens? Why not base it on a percentage of the total fund’s generated income?

• Before 50,000,000 dYdX tokens were staked:
  • 236,614,851 dYdX tokens were locked, and the trading fees collected were approximately 1,521,798 USDC.
• After 50,000,000 dYdX tokens were staked:
  • 286,614,851 dYdX tokens were locked, and the trading fees remained around 1,521,798 USDC (assuming trading volume remains unchanged).
    → This suggests that holding 50,000,000 dYdX in the treasury only generates approximately 265,477 USDC per month. So, is it reasonable to pay the treasury management firm “Steakhouse” when their fee accounts for about 23.3% of the total revenue generated by locking 50,000,000 dYdX?

The following scenarios could occur:

• If trading volume on the DEX remains unchanged: the management fee for the “Steakhouse” team will be 23.3% of the total monthly revenue generated.
• If trading volume on the DEX doubles: the management fee for the “Steakhouse” team will be 11.6% of the total monthly revenue generated.
• If trading volume on the DEX drops by 50%: the management fee for the “Steakhouse” team will be 46.7% of the total monthly revenue generated.

Note:

• Assumed validator fees are based on an average fee of 7.71% across 60 validators.
• The trading volume on the dYdX DEX is calculated from August 20 to September 19, 2024 (approximately $9,078,312,681 over one month). This period represents the lowest trading volume for the dYdX DEX.

Discussion:

Is this reasonable? If the proposal is passed, will the Steakhouse team open their own validator, or will they stake with the 60 existing validators? Will the allocation of these 50 million dYdX tokens be given to team associates, or will there be a competitive process to encourage contributions from the 60 active validators, driving competition and growth? Will inactive teams from outside the current active set also have the opportunity to participate? As validators, we need detailed information to ensure we can vote accurately and impartially, and to provide the community with the most accurate information.

As a validator from the community, we have to purchase dYdX tokens from Binance to lock them in. If you allow teams that haven’t spent a penny buying dYdX to receive millions of dYdX tokens outside the top 60, is that fair to us, when our community has spent several million US dollars to buy dYdX on the open market?

A strong dYdX app-chain ecosystem needs competition between validators, where they compete to grow and attract more small and retail traders, and of course, the more institutions trading here, the better.

I have detailed revenue figures for the 60 validators in the current active set, and I will attach the detailed data here

[Steakhouse]

@ttt_vn

Is this reasonable? If the proposal is passed, will the Steakhouse team open their own validator, or will they stake with the 60 existing validators? Will the allocation of these 50 million dYdX tokens be given to team associates, or will there be a competitive process to encourage contributions from the 60 active validators, driving competition and growth? Will inactive teams from outside the current active set also have the opportunity to participate? As validators, we need detailed information to ensure we can vote accurately and impartially, and to provide the community with the most accurate information.

The question of how to select validators is pivotal. We are not in the habit of exploiting conflicts of interest (of which there are none with dydx and we are not nor will be running validators for dydx) or making black box, backroom decisions.

Our team has over two years of experience as the finance workstream for Lido DAO. Our research into validator economics and decentralization gives us unique background which will help us put together a proposal for dydx to optimize for chain security and a diverse allocation of stake. This exprience has allowed us a new perspective into Ethereum monetary policy discussions or explore different ways of measuring validator decentralization.

Our approach to a framework for allocating the stake across validators will be to focus on transparent and cooperative processes, in full community view. It is a multi-variate problem with many factors to take into account. The objective should be to seek the maximum amount security possible subject to constraints around decentralization and performance. How that materializes in practice will be affected by other scoring factors that can help support smaller validators.

As long-standing contributors to Lido DAO, we are very receptive to the use incentives that emerge from market design to deliver desirable outcomes around validator diversification. A framework for dydx should be simple, easy to understand and foment healthy competition for the subDAO’s stake, in a way that is supportive of the protocol as a whole.

[dYdX_Ops_subDAO]

Assuming there are no significant changes to the proposal above, the Ops subDAO is planning to launch two text proposals for the dYdX community to consent to the formation of the Treasury subDAO on Monday, September 23rd.

A successful text proposal will enable the proposer to formally establish the Treasury subDAO as a Cayman Foundation. Once the Treasury subDAO Cayman Foundation is formed, a separate community treasury spend proposal will be launched for the dYdX community to consent to the Cayman Foundation formation documents, the mandate of the Treasury subDAO, and the funding of the Treasury subDAO multisig with x number of DYDX from the dYdX Chain community treasury.

Unfortunately, the dYdX Chain does not support multi-choice voting, so we will launch two separate text proposals simultaneously.

Important Note on Vote Results:
If both proposals pass, the proposal with the highest percentage of “Yes” votes will be considered successful.

Please let us know if you have any questions or concerns.

[Ertemann]

Can i still expect an answer to my question on the expected hours?

Edit:
If the proposal would include more of the following it would be easier for us to judge this proposal positively.

1. Clear cost description (legal, entity, man hours to claim/stake)

2. a constant management fee not based on dYdX staking yield

3. an explainer on their margin/markup

4. a concise plan for usage of USDC rewards to generate extra yield

5. A performance fee on the USDC managed portion

6. Underperformance clause

We seek more transparency and Measurable costs/Kpis.

[Steakhouse]

Ah apologies, missed this. We addressed similar questions on our Twitter Spaces

@Ertemann

Why do you need specifically 62.5k USD (in dYdX) a month to safely stake and manage these potential 50m dYdX?

This is only one component of a much broader proposal as described in the Core Mandate section - provided below for brevity.

Nonetheless, we do anticipate a significant time investment into developing a community staking program in partnership with dYdX validators and community members. Pardon the pun, but there is a lot at stake to get this right in order to maximize dYdX’s long term growth and sustainability. We know many stakeholders have devoted significant time and capital to participating in the ecosystem, and need to ensure we find consensus on how dYdX moves forward given the many financial and non-financial variables at play.

@Steakhouse

• Establishment of a Cayman Foundation and Treasury multisig to achieve greater tax and legal certainty for the dYdX community
• Development of a staking program to stake a portion of the DYDX community treasury to dYdX Chain validators
• Scope for the staking ratio in the community treasury to increase from the current 20% (19.5M DYDX) to up to 50% (50.5M DYDX) for additional income
• Final details will be published after a comprehensive APY and income review and ratified in the community treasury spending proposal (as discussed in the Next Steps section)
• Oversee diversification of DYDX from the community treasury into stablecoins
• Earn yield on the DYDX diversified out of the community treasury
• Due diligence opportunities
• Provide allocation options and recommendations to the community
• Develop transparent treasury reporting to provide visibility to performance
• Monitor allocations and partner with the community to make adjustments as needed
• Partner with the dYdX Foundation, dYdX Ecosystem Program, Operations SubDAO, and broader DAO to support financial planning activities, funding, and operational support

On your remaining questions:

@Ertemann

1. Clear cost description (legal, entity, man hours to claim/stake)
2. a constant management fee not based on dYdX staking yield
3. an explainer on their margin/markup
4. a concise plan for usage of USDC rewards to generate extra yield
5. A performance fee on the USDC managed portion
6. Underperformance clause

1. Our pricing is based on the mandate proposed by the community and the value we drive. We have driven 8-figures of incremental annualized revenues for Sky (FKA MakerDAO) and facilitated reducing 9-figures of LDO expenses with LidoDAO. We believe similar opportunities exist for dYdX and there are multiple levers to pull to drive both top and bottom line results. We will allocate as many resources as needed to provide actionable and insightful recommendations, and drive value to the dYdX community. this includes resources from the team as listed as well as additional resources where needed, for e.g. to index the dydx chain for data, etc.

   This type of work is often quoted with a management fee of 1-2% and at times, an additional performance component. the current value of the treasury is about ~$97mm and there are an additional $124mm+ dYdX tokens that will vest over the next two or so years. the proposed renumeration is below the low end of that spectrum and we believe will provide significantly more value than a traditional treasury management proposal.

2. Our proposal is exactly as you describe, has no relation to dYdX staking yield which, as you point out, is a misaligned incentive.

3. See 1)

4. TBD - dYdX is a DAO and we will collaborate with the community on an allocation model with community consensus and support. We generally prefer the lowest cost, highest risk-adjusted yield relative to the Federal Funds rate, so will evaluate yield opportunities from that perspective.

5. We do not believe performance fees are appropriate for treasury management, as it creates an incentive for the treasury manager to build AUM, take excessive risk, and not reinvest capital back into the core product and organization. The traditional ‘endowment’ asset management model is simply not appropriate for the vast majority of organizations, in our view.

6. The proposed terms enables dYdX DAO to remove Steakhouse if the community is not satisfied for any reason and we will forfeit any unvested DYDX tokens (note - forfeited tokens will be calculated assuming all tokens are vested, so in the event of a mid-month offboarding a pro-rata distribution of DYDX tokens would be made). To wit, our proposal does not offer a minimum-term period for this purpose

EDIT: On legal costs for setting up a Foundation:

@Steakhouse

[WAIVED] Excluding funds required to create a Cayman Foundation in the first year

• Normally, the costs to establish a Cayman Foundation in the first year would be excluded. However, to show our commitment, we are willing to waive this exclusion.
• There are valid reasons for this exclusion—when setup costs are included in a supplier’s costs of goods sold (COGS), there is an incentive to cut corners rather than focus on achieving the best outcome
• However, we have extensive experience setting up these structures for DAOs and strong relationships with all key providers in the Cayman Islands. We are confident we can achieve the best result for the dydx community even if we absorb the cost

We have done this many times over and have in-house legal resources to facilitate. We estimate a maximum of $50k to set up.

[dYdX_Ops_subDAO]

The Ops subDAO has published a comparison with the Karpatkey proposal, and the two on-chain proposals have been published as well.

[eguegu]

Hi, @Steakhouse

Can I ask 2 questions? ( These are the questions I also asked Karpatkey. )

• How does staking Community Pool funds by the treasury subDAO, which lowers APR for delegators and may reduce the token’s value, actually enhance the long-term value of the dYdX token?

• How can we increase protocol revenue by at least 17% using the Treasury SubDAO revenue?

dYdX Treasury SubDAO Proposal

The staking of Community Pool funds by the treasury subDAO will further reduce the APR for existing delegators. A decline in APR directly correlates with a decrease in the token’s value. It is necessary to clearly explain how diverting profits, which would otherwise go to delegators, to the Treasury subDAO and Validator serves to enhance the long-term value of the dYdX token. From the perspective of a Validator who benefits from receiving delegations, this is advantageous; however, this is no…

dYdX Treasury SubDAO Proposal

Thank you for the detailed discussion, @ttt_vn, and for presenting specific numbers. I have clarified the key points based on the same assumptions(correct me if the number is wrong ). If we assume that protocol revenue remains constant and delegations are evenly distributed among validators, delegators will incur a loss of around 15%, and Big Validators will see little to no benefit. On the other hand: Small validators will experience a revenue increase of over 40%. Medium vali…

[Steakhouse]

• before we execute any plan to stake these tokens we need to evaluate the impact on overall APR and we commit to only staking what can drive accretive value to all stakeholders. We also need a transparent decision matrix for delegation. It’s much more important to evaluate the protocol as a whole from a capital management perspective
• The short answer is we can’t, the treasury subdao by itself is not going to drive incremental revenue. We repeatedly stress that, by itself, cash reserve management is not a value driving activity. An endowment that could increase protocol revenue by 17% from today would have to be absolutely gargantuan. This is not the right model for most protocols, including dydx. However, we agree that revenue growth is the most important lever to drive sustainability. The second most important lever is to make sure those revenues (new capital) is being allocated well to ensure growth. We can help the community navigate both revenue growth and capital allocation, which is the advantage of our proposal

The next best alternative to our proposal is likely something like a 0 cost BORG like structure that simply stakes the community treasury and lets the Foundation sweep the USDC rewards. No management or performance fees are necessary for just this activity.

[Avantgarde]

Hi all,

Avantgarde is a crypto native asset management, advisory and research firm, specialising in asset liability management, R&D, special situations, risk monitoring and on-chain diversification strategies. We have conducted work for leading protocols including Uniswap, The Graph, Arbitrum, Nexus Mutual, Paraswap, Enzyme and others.

We appreciate the proposals made by Steakhouse Financial and Karpatkey and wanted to offer our thoughts. They are both well thought out and can add value to the ecosystem and contribute towards the foundation’s proposed objectives. However, as a service provider in this space ourselves, we find the fees proposed by both parties to be very high relative to the scope, and the lack of details surrounding the implementation of the plan feels rushed.

If for some reason the current proposals do not pass, we will be presenting a proposal that:

• Better aligns interest across validators and other stakeholders
• Is much more competitive on fees

If you’d like to meet with us in the meantime, please get in touch with us at info@avantgarde.finance.

EDIT: see our proposal here dYdX Treasury subDAO Proposal: Avantgarde Finance

Thank you!

[Cosmic_Validator]

What do you think about this draft for a community staking program?:

Before any start of any selection process clearly announce in advance the requirements so that all validators can review and prepare accordingly. This is to improve the processes of the dYdX Foundation, because they update their criteria without validators knowing in advance and they are only informed once the selection has been already done without any possibility to adjust to meet the updated requirements

• Support early validators who joined at genesis or shortly after rather than newer validators

• Focus on validators with the best uptime, governance participation and good MEV score

• Avoid validators already too large, too centralized or belonging to VCs, funds, etc. and focus on smaller validator to increase the decentralization

• Support to long term contributing validators in several areas that deserve more delegations but that for certain reasons are not part of the dYdX foundation delegation program yet or Stride set

• Focus on validators that vote yes and support your proposal

• Focus on validators spending a lot of resources on top bare metal servers based on Japan with the highest bandwidth costs and avoid validators running cheap cloud infra in cheap and popular locations

[Steakhouse]

In general we don’t want to be rash and preempt anything. We have spent a lot of time analyzing the protocol but it would be wise to spend a bit of time iterating on a suitable framework for allocating the Community Staking Program, rather than commit to something off the cuff during a vote.

This program is one of the smaller components, from our perspective, of our proposal overall. On the basis of our analysis we strongly believe that the protocol would do well to structure and systematize explicit and implicit capital allocations and aim for topline growth, both of which we are uniquely positioned to help with.

If it were just to run a Community Staking Program and manage a $30m stablecoin reserve and nothing else, frankly speaking the community would likely be better served spinning up an offchain Foundation, appointing a corporate service provider on island and running it all for very little cost. Neither our proposal, with our fixed fee, nor our esteemed competing proposers, with a fee that could range up to $1m or more, would be suitable in our view.

Lido on Ethereum has one of the most robust and decentralized node operator sets in the industry and can provide some instructive examples. We were not involved with the drafting of these rules, but as the Finance Workstream for Lido DAO since 2022, have since become quite familiar with it and similar open source guidelines for node operators, such as DUCK.

Core Principles

Lido operator set strategies should adhere to the following core principles:

• Lido’s operator set should increase the robustness, security, reliability, and decentralization of the underlying protocol (when compared to the most likely alternative that would be created by market forces);
• Lido’s operator set should be maximally decentralized and distributed given current network and market constraints;
• Lido’s operator set should include considerations to mitigate the possibility of one or a select-few parties operating or controlling an inordinate amount of stake in any protocol through Lido stake;
• Lido’s operator set should take into account ecosystem participation and stewardship, and support smaller organizations which vitally contribute to validating and staking;
• Lido’s operator set should select for distribution and decentralization in combination with optimal performance and profitability (the former should not be sacrificed for the latter).

In addition to the Core Principles, Ethereum has an additional focus on client diversity; Lido should be a force for better client diversity.

• Lido’s operator set should improve overall client diversity on Ethereum
• No one node operator should have > 1% of total ETH staked via Lido
• Node operators should run execution layer and consensus layer nodes specifically for the validators that they operate for Lido
• Node operators should be distributed jurisdictionally
• Validators should be distributed geographically
• Validators should be distributed in terms of infrastructure:
  • No overreliance on cloud providers;
  • No overreliance specific data center providers.
• Operators should be using best practices for securing their execution layer and consensus layer nodes, as well as their validator clients
• Operators should be using best practices for key management and security of keys
• Until withdrawals and a robust permissionless node operator registry is possible, a curated set of professional node operators, consisting of both established multi-chain operators as well as new entrants and operators who focus specifically on Ethereum, is the best way to safeguard user deposits, keys, and the exit+withdrawal process
• Operators in the curated set should not be running white-label nodes (i.e. using another operator behind the scenes)
  • Following the possibility for triggerable exits and withdrawals, there should be a stake (re)-balancing mechanism put in place that:
  • Rewards (gives more stake to) operators who promote the above objectives;
  • Derisks (removes stake from) operators who are reaching the theoretical limit, and/or are not performing optimally, and/or whose participation negatively affects Lido’s overall effectiveness with regards to the above objectives;
  • Allows newer and smaller operators to join the set and work their way up.

Lido has been extremely successful with this strategy in pursuing client diversity and achieving decentralization of the Ethereum validator set overall.

We are not listing this here as an example to copy verbatim, but to illustrate how a DAO, guided by its mission and setting simple principles, can create a set of validator scoring criteria that produce desirable outcomes. Those principles and desired outcomes for dYdX will be different, and need careful analysis.

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To give some quick thoughts on the below criteria, though:

@Cosmic_Validator

Before any start of any selection process clearly announce in advance the requirements so that all validators can review and prepare accordingly.

This is generally quite good practice and gives validators time to prepare or comment.

@Cosmic_Validator

Support early validators who joined at genesis or shortly after rather than newer validators

There’s a good case to supporting early contributors. However, if decentralization is a desired goal, there is also a case to be made for making it easier for newer validators to enter the space. The community would have to weigh the tradeoffs of more centralization of the validator set to reward contribution to the security of the protocol over more geographic or entity decentralization.

@Cosmic_Validator

Focus on validators with the best uptime, governance participation and good MEV score

These seem reasonable, though there may be additional quantitative variables to consider. The community would have to weigh in on its preference.

@Cosmic_Validator

Avoid validators already too large, too centralized or belonging to VCs, funds, etc. and focus on smaller validator to increase the decentralization

If the community desires to derate these types of validators, we believe that rather than being prescriptive, it would be better to make a more general rule (e.g. entity ownership concentration for the sake of the example) that produces that outcome. We would weigh tradeoffs around network health whenever making opinionated rules such as this, which may be positive or not for the network.

@Cosmic_Validator

Support to long term contributing validators in several areas that deserve more delegations but that for certain reasons are not part of the dYdX foundation delegation program yet or Stride set

We would consider this in the same league of tradeoffs as the earlier point on early contributions.

@Cosmic_Validator

Focus on validators that vote yes and support your proposal

This would be deeply inappropriate and we would never suggest it. We would consider any proposals that suggest as much for the purpose of winning votes to be highly misaligned.

@Cosmic_Validator

Focus on validators spending a lot of resources on top bare metal servers based on Japan with the highest bandwidth costs and avoid validators running cheap cloud infra in cheap and popular locations

Similar to the earlier prescriptive comment, we would prefer clear and simple rules that produce desired outcomes, rather than be specific on geographies or operating costs.

Thank you for your comments and for taking the time to review our proposal.

[Ertemann]

I want to make people aware that i have been dmd by 2 people associated with Lido to promote us voting for the Steakhouse proposal.

I condemn this behaviour and wish the team would have reached out to us themselves.

Best,
Ertemann
Lavender.Five Nodes

[Steakhouse]

We understood from your public comments and your voting pattern that you have a preference for a low-cost alternative with a narrow scope, which is a reasonable position that we repeatedly allude to in our proposal. Therefore, we are guilty of not having made an effort to reach out directly to Lavender yet.

So we do not actually know who could have reached out to you on our behalf and have not asked anyone to. We will try and reach out to you now to clarify.

As we are not directly in touch with many of the node operators in dydx, including lavender, we have been plumbing our network to try and reach out to as many node operators as possible. This has also included through the dYdX Foundation, who is presumably in touch with more node operator teams than us.

We have not asked anyone to lobby on our behalf, if people do this during the process of introducing the teams, it is of their own volition.

In instances where we are able to reach out to teams to ask for feedback, we also ask for this feedback to be in the public forums where possible.

Would finally also like to stress that regarding the validator selection criteria for the Community Staking Program, we have been adamant that we do not have a firm guideline in mind. Under no circumstances would we condition validator selection by the direction in which they vote. This is toxic and highly misaligned.

[Ertemann]

Thank you for the respone.

We do not mind that you haven’t reached out, the forum is always the best place. Just would have preffered a direct DM over one from an adjacent team, that is what i tried to say.

I am not worried that our voting behaviour has any impact on the eventual stake dispersion, you are known good actors and I don’t see any reason to think otherwise.

The dYdX foundation did indeed reach out, they do this for every proposal and its well appreciated.

Best,
Ertemann
Lavender.Five Nodes