dYdX Treasury SubDAO Proposal: Steakhouse Financial

[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

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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