[AIP-45] Strategic Fund for Acquiring Illiquid Assets

0xzert

TL;DR

Set a treasury of $500k via multisig controlled by the core team to be able to buy strategic illiquid assets to avoid front-running by third parties. Once a purchase is done, a snapshot vote is set up to determine if the newly acquired funds should be kept or sold. If funds are kept, the strategic acquisition fund is refilled.

Proposal

A common problem in a DAO, which are decentralized and transparent, is front-running when deciding to buy a shadowed asset with not much liquidity. The problem arises as a third party can front-run the DAO to acquire a strategic asset due to the long-term deliberation that a DAO has to decide. The DAO needs some time to discuss, prepare a proposal and pass a vote.

Some DAOs have overcome this issue by using devs funds to temporarily buy such assets in the hopes the community will approve it (e.g., Silo Finance acquiring CVX using devs funds). Another example was done by the core team of Alchemix that acquired StakeDAO using internal funds. However, this process does not follow the ethos of decentralization and transparency.

This proposal seeks to overcome this by delaying the approval of the community after the funds have been secured by the core team.

Please, notice that the core-team needs to have an agreement between them to be able to purchase the assets as there is a multisig. So, it is a collective decision of the core team, that is later ratified by the DAO.

Conditions

Allow the core team & governance team to market buy up $500k of an illiquid asset that they consider beneficial for the DAO.
An illiquid asset is determined at the discretion of the core team based on whatever an asset has not deep enough liquidity. If there was enough liquidity, the standard approach should be pursued (i.e., ask the community for approval, then purchase the asset).
Additionally, OTC swaps should be pursued with other DAOs before considering the market the use of these strategic funds.
After each purchase, the core team/governance team will update the community on the actions taken. Then, a vote will take place to determine if the funds are kept or market sold.
If the vote is kept the treasury funds for the Strategic Fund for Acquiring Assets should be increased to the maximum quantity (i.e., refill the fund).
The approval to market buy assets will remain valid until a governance vote changes this.
The Strategic fund is not a vehicle for speculation. The purpose of these acquisitions is not to engage in active or swing trading.
This strategic fund for acquiring illiquid assets is a virtual wallet to minimize idle funds (i.e., $500k will be the max available, however, these balances can be distributed in multiple wallets)

Relevant contract addresses

Alchemix treasury: 0x8392F6669292fA56123F71949B52d883aE57e225
Alchemix dev multisig: 0x9e2b6378ee8ad2A4A95Fe481d63CAba8FB0EBBF9

Risks

The main risk identified for this proposal is that the acquisition purchase is done to increase the price of an asset that benefits the team responsible for the purchase, that is not aligned with Alchemix.

This risk is mitigated by the following points:

The decision is done by multiple wallets from the core-dev
The objective of the acquisition should be for acquiring assets with not much deep liquidity, so there are fewer assets available
The downside is limited to the treasury in this wallet. Furthermore, the assets can be sold at market price

Vote

Allow the core team/governance team to autonomously deploy capital when they see an opportunity in the market to buy strategic assets.

Please let us know your thoughts on this proposal. If the community is receptive to this set-up we will move to an official AIP with a simple yes/no vote.

IMIMIM

An illiquid asset is determined at the discretion of the core team based on whatever an asset has not deep enough liquidity.

Can you please clarify what is meant by this? Do you mean that the criteria for determining illiquidity will be up to the core team? Or do mean that identifying the asset for potential purchase to begin with will be up to the core team?

Thanks

0xzert

Thanks for the question!

IMIMIM Yes, I meant that the criteria for determining illiquidity is done by core team. Then, once the acquisition is done, The community would will assess it via discussion and voting.

A discussion before the acquisition is not possible as it will raise awareness by third party to front-run if they consider it to be worth it for them. However, this funds are limited in quantity as well, so the downside is controlled.

I hope it makes more sense now.

ov3rkoalafied

IMIMIM Both are up to the core team with input from the bizgov subdao.

SnapCrackle

Can you give an example of an illiquid asset?

0xzert

SnapCrackle Absolutely, StakeDAO https://coinmarketcap.com/currencies/stake-dao/
The objective of this proposal is to have a mechanism to be able to buy such assets that have not much liquidity. If there was enough liquidity that the purchase cannot be front-run or an OTC swap is possible between DAOs, then this mechanism is not needed.

Juul

So 500k is the max treasery balance of fund and when neywly acquired funds are kept, the strategic acquisition fund is refilled. But is there a refill cap for the strategic acquisition fund?

0xzert

Juul Correct. There is no cap to the amount of refills for the strategic acquisition fund. However, if the vote does not pass, then the fund is not refilled, which would invalidate this mechanism. Hence, the multisig is incentivize to properly use this funds in order to have this mechanism in place.

Juul

Great, thanks for clarifying!

yuntamoto

I appreciate the creativity of this approach.

Can you please elaborate on what will happen to the asset and treasury fund if the community does not approve the purchase?

Could this still lead to some kind of front running, knowing a large position will be dumped on the market?

Also assuming devs are significant holders, does the community have a chance of outvoting the devs if there is a difference of opinion between devs and community?

0xzert

yuntamoto Can you please elaborate on what will happen to the asset and treasury fund if the community does not approve the purchase?

Once the use of this fund is done to acquire assets a community vote should be created with two options

Keep it --> Funds are refilled
Sell it --> Funds are not refilled --> DAO must discuss what to do using discord, this forum and a new AIP should emerge

yuntamoto Could this still lead to some kind of front running, knowing a large position will be dumped on the market?

Yes, option (2) selling them at market price would likely lead to a possible front-running, and possible lost of funds in $ terms. However, the incentives for this to occur are not much as the core team lose a useful acquisition mechanism as the funds are not refilled
The alternative would be to be front-run when buying instead of when selling if the acquisition is considered a bad one for the community

yuntamoto Also assuming devs are significant holders, does the community have a chance of outvoting the devs if there is a difference of opinion between devs and community?

This is a fair issue, but it is a common issue across all DAOs. However, the decision is done based on what option has the most votes (I've seen some ppl propose quadratic voting to reduce the power of whales, but it can e bypassed by having multiple accounts). To my knowledge, Alchemix core team is already funding other sub-team, and they are diluting themselves.

ov3rkoalafied

yuntamoto re: your last question, no - I believe devs have majority. And given they have poured their heart and soul into this project and understand it better than anyone, this is a feature not a bug. It doesn't particularly matter anyway, as ultimately governance is just signaling for what we wish multisig to act upon, and there is discretion there too. An example of this is the BEAN AIP - the proposal was taken down and the multisig did not execute it, despite the vote being on its way to passing (though core team also could have come in heavy with some no votes if we were on chain). Alchemix, and most other growing defi protocols, are not ready for on chain governance with full decentralization yet. It's a long and slow process but one we are moving toward.

yuntamoto

Thanks for the answers and work on this AIP @0xzert & @ov3rkoalafied

My main reasons for asking these questions was simply to ensure the transparency and clarify as we go in for the vote. Regardless of the outcome of this idea, I like the creativity being applied to Treasury and DAO management.