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.