Following our recent AMA, we wanted to provide written answers to the questions raised by the community:
1. How does karpatkey’s experience managing other DAO treasuries align with dYdX’s unique goals and challenges?
karpatkey currently manages over $1B in non-custodial AUM, and the total value of our partner treasuries exceeds $2.1B. Our DeFi treasury network includes GnosisDAO, Balancer, ENS, CoW Protocol, Aave, SAFE, Arbitrum, Uniswap, and Lido, among others. While each DAO faces unique challenges, we see many common themes that align with the goals and challenges of dYdX. Those include securing financial sustainability, managing risk, and supporting growth initiatives.
To give one example, we have managed the Gnosis DAO treasury from 2020. During that time, treasury assets have grown consistently with yields peaking above $1.5M a week, with no security incidents. In addition to asset management, karpatkey supports a number of strategic initiatives for Gnosis DAO. We are highly experienced in the technical, economic and risk management aspects of staking programs. We manage 8260 validators on Gnosis Chain (although with dYdX, we will not run our own validators); we periodically assess staking as a diversification alternative, considering not only economic performance but also governance, tech and market risks that could affect validation.
At Gnosis we also design and execute incentive programs, raise capital, build partnerships, and bring greater liquidity to Gnosis Chain. It’s this holistic view of treasury management - not just focusing on traditional asset management - that differentiates karpatkey. And as our network of treasury partners has grown, so has our ability to find synergies across all of those partners. We will take the same approach at dYdX.
2. The staking program will reduce APR for existing delegators. How does diverting staking rewards to the Treasury SubDAO enhance the value of DYDX compared to the benefits of directly rewarding delegators and validators?
As we consider dYdx’s long-term financial sustainability, the staking program is a key first step to diversifying and replenishing the Community Treasury.
Our program is expected to contribute a net amount of 4.8M USDC per year to the treasury (considering current metrics). This is a solid foundation for the project’s long-term health and stability.
Having designed several incentive campaigns, we are cognizant of the APR/net income sensitivity of validators due to the magnitude of their investments in running their operations and holding high standards. With this program, we believe the net APR impact will be minimal, and in some cases, existing validators could potentially see an increase in total rewards, depending on allocation.
3. How will the selection process of validators in the staking program work?
We’ve already begun collecting feedback from validators and other key stakeholders to design a program that rewards “good validators”. The key principles guiding our selection process include:
- Positive contributions to the ecosystem
- Transparent selection criteria
- Clear validator performance metrics
We will build upon the Foundation’s work, including their “Good Practices for Validators” and “Stake Delegation Principles”, to ensure we create a robust staking program that benefits the entire dYdX ecosystem, long-term.
4. Any insight on how staking DYDX from a treasury subDAO will impact stakers, validators, and security of the dYdX Chain in terms of total network stakeweight?
To drive ecosystem growth, the 40M DYDX tokens in the Community Treasury will be staked with external staking providers (validators).
The staking program is expected to increase the amount of staked DYDX by ~16%, reducing network yield. On the other hand, validators’s revenues will be positively impacted by these tokens being delegated to them.
Additionally, the treasury is estimated to see a net contribution of 4.8M USDC per year from the staking program (based on current metrics). This will not only enhance the project’s financial stability but also support the expansion of the broader ecosystem.
Security is a top priority in the design of this program. By diversifying the delegation across multiple “good” validators, we aim to improve the dYdX ecosystem while maintaining the current structure and dynamics.
5. Why is the creation of a Treasury Management SubDAO preferable to a fully automated treasury management process?
With the current state of DeFi, we believe active treasury management combined with autonomous tooling is superior to more autonomous strategies. Active management provides greater flexibility, helps to discover growth opportunities (e.g. synergies across DAOs), and improves security.
Automation definitely has its place. We have automated much of the monthly reporting we provide to our DAOs, and we also have invested heavily in automated emergency response infrastructure to keep our DAOs safe.
6. How will the community be involved in decision-making regarding changes in the Treasury SubDAO’s strategy or risk management?
We value DAO collaboration, so we regularly engage with the project stakeholders and want them to hold us accountable.
Treasury strategies are pre-approved by the communities we serve. We operate within those predefined boundaries through the non-custodial infrastructure we have developed over many years. karpatkey would be responsible for each financial decision made within our mandate, observing our strict risk management guidelines.
7. How will you ensure transparency and accountability in the operations of the Treasury SubDAO?
karpatkey is dedicated to being transparent with the communities we serve. We will apply our thorough reporting and accountability practices to dYdX and customize them to address the community’s specific needs, ensuring complete visibility into treasury management activities.
8. If your proposal is successful, do you see any synergies with other projects that you are working with?
We are always looking for synergies across the projects we work with, even when not directly in scope. Our ecosystem development expertise has provided substantial value to other DAOs, and we look forward to bringing that same value to dYdX.
We see multiple potential synergies with other projects we’re currently managing. For example, with Nexus Mutual there is potential to offer insurance solutions across various projects. A MegaVault depositor might be interested in securing insurance against liquidation risks caused by price feed errors, which would refund users in the event of an unexpected disruption.
Additionally, as we expand our presence across the Cosmos ecosystem, MegaVault could play a key role in offering risk-adjusted returns. As the MegaVault matures, we may explore opportunities to stake assets we manage for other protocols in the vault, particularly if it proves to offer attractive returns while maintaining security.
9. What criteria will determine whether USDC yield is deployed into dYdX products like the upcoming MegaVault versus other yield-generating strategies?
We will evaluate the deployment of USDC into the MegaVault carefully. However, we’ll need to consider whether deploying too much capital too early could suppress yields for others and limit the vault’s ability to attract new users. Based on scale and demand, we’ll take a cautious approach.
10. How will the buyback initiative for DYDX tokens impact the overall tokenomics, liquidity, and price stability of the project?
The buyback initiative is an optional component that will be evaluated if there is sufficient community interest. While buybacks typically have a positive impact on market sentiment, they must be balanced with our goal of diversification. We’ll proceed carefully in terms of scale and timing.
11. Can you elaborate on the choice of proposing a 5% fee structure? How does it ensure value for the dYdX community, especially considering existing alternatives?
Currently, karpatkey will request $300k per year (our break-even point). And, this will remain at the minimum until substantial growth for the dYdX ecosystem is achieved (at which point, we will switch to a 5% fee).
Our 5% fee structure aligns our incentives with dYdX’s long-term goals. We are motivated to build a long-term relationship with dYdX and drive value, similar to how we support all of our partners.
We have never prioritised short-term benefits over our partners’ long-term sustainability and security. That’s why we maintain multi-year relationships with all of our partners. For example, our asset management yield strategies involve only battle-tested protocols, as greater yield is not worth the added risk. We often divert liquidity from short-term yield strategies to support longer-term strategic growth initiatives, even when it reduces our potential fees.
We believe in dYdX, and our approach naturally contributes to the expansion of the ecosystem. In line with this, our engagement with dYdX has built-in KPIs and grows in profitability with the growth of dYdX.
This structure enables us to benefit only from high profits if we contribute to the substantial growth of the ecosystem rather than setting an elevated flat fee straight from the beginning.
12. What fee will you charge if a separate proposal is launched to generate yield on USDC or to enact a buy-back and stake program?
Our fee will depend on the effort required. If USDC is simply allocated to the MegaVault, there will be no additional fees. However, for more complex strategies that outperform MegaVault, fees would be tied to that outperformance.
- Stakecito question: What are the main differences between karpatkey’s proposal and other options?
karpatkey’s proposal is focused on specifically addressing the immediate needs of the dYdX community, as expressed by the dYdX Foundation in their call to action. We believe this is a key first step towards dYdX’s growth and long-term financial sustainability.
In the immediate term, we would be implementing a staking program that simultaneously benefits the community (delegating approx. 40M DYDX from the Community Treasury to validators) and grows + diversifies the Treasury. Based on current metrics, we estimate a net contribution of 4.8M USDC per year to the Treasury.
We have a multi-year track record of managing complex DAO treasuries without any hacks or lost funds. We focus on long-term financial sustainability and are confident we can effectively help dYdX navigate volatile markets while continuing to grow.
Additionally, thanks to our comprehensive in-house expertise, we can adapt quickly to dYdX’s evolving needs. Suggestions on possible future extensions of the Treasury SubDAO’s scope are already included in the proposal. Namely, leveraging the accumulated USDC to generate additional yield and executing DYDX buybacks to positively energise the token market.
Finally, one of karpatkey’s core strengths is our focus on ecosystem development and finding synergies across our partner network. We always look for ways to support our partners that go well beyond asset management. By selecting karpatkey, dYdX would enter our network of well-known leaders in the DeFi space and benefit from synergic opportunities.
All of this comes at a cost of $300k per year, and only increases with the substantial growth of the dYdX ecosystem (switching to a 5% fee). We believe this aligns incentives with dYdX, as opposed to setting an elevated flat fee from the beginning.
