[SEP 24] karpatkey - SAFE DAO Treasury Management Core Unit

Title: [Draft] karpatkey - SAFE DAO Treasury Management Core Unit

Authors: @karpatkey

Created: 2024-03-25

Abstract

With the SafeDAO having achieved all milestones laid out in SEP #3 and approaching its token transferability, we propose for karpatkey to become the treasury manager to SafeDAO and, as part of the mandate, delegate treasury management of the joint SafeDAO <> GnosisDAO treasury to karpatkey.

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SEP: Constitutional Proposals
SEP: Governance Proposals
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Proposal details

Purpose and Background

Having accomplished the objectives outlined in SEP #3, including the creation of a constitution, a governance framework, a system for resource distribution, and the definition of token utility, SafeDAO has completed all the necessary steps for its token transferability.

With the foundational elements of SafeDAO in place, the focus naturally shifts to the efficient and strategic management of the DAO’s assets. karpatkey with its expertise in managing DAO treasuries is well-positioned to undertake this role, supporting SafeDAO in treasury management, risk management, governance, and driving research and investment suggestions to grow the SafeDAO ecosystem.

Alongside the token transferability, the unlocking of the joint treasury between GnosisDAO and SafeDAO will take place. We propose delegating the joint treasury management to karpatkey as part of the mandate. Any future treasury management of SafeDAO treasury assets will go through a further vote.

Effects and Impact Analysis

We propose for karpatkey to become a service provider to SafeDAO, contributing to the following:

  • Treasury management
  • Protocol integrations for $SAFE
  • Risk management
  • Research

karpatkey will build a dedicated treasury team that will contribute to SafeDAO. This will also work on establishing a path and framework for the future treasury management of SafeDAO and management of the joint treasury alongside ongoing research, governance, and risk management support.

karpatkey’s expertise in risk management is crucial for active treasury management. Risk management plays a crucial role in strategy. Our risk team evaluates the security, reliability, and performance history of each protocol we use. We also continuously monitor the protocols we have funds deployed with for any emerging threats or vulnerabilities. Moreover, karpatkey has built risk management infrastructure on top of Safe / Zodiac, including our Execution App (AxA) and Guardians. The AxA allows treasury managers to instantly withdraw from positions when risk is detected, while Guardians are autonomous risk monitors that withdraw positions when certain activities such as exploits or depegs are detected.

Today, karpatkey is an active governance participant in leading DAOs, such as GnosisDAO, Aave, Arbitrum, Lido, and Uniswap. Our experience in governance allows us to contribute and be a proactive governance member in SafeDAO.

karpatkey will also advise on investments aimed at strategically allocating SafeDAO’s resources to foster innovation, support community projects, and invest in opportunities that align with SafeDAO’s mission and objectives.

Alternative Solutions

The joint treasury is currently a 2-of-2 Safe with SafeDAO and GnosisDAO as signers. Without a delegated treasury manager acting upon the treasury would require finding agreement among both DAOs to undertake any actions on the treasury, likely with governance proposals required to take any actions. This would have the consequence of significant governance overhead and make it impractical to actively deploy the treasury.

The SafeDAO may choose to explore alternative service providers and processes for entrusting the management of the collective treasury. The SafeDAO may also choose not to have a managed treasury and leave assets idle.

Implementation

Own implementation possible
Own implementation but with funding (how much % to implementation)
Request for technical support through Safe matter experts

According to GIP-29, 5% of the SAFE tokens are allocated to a shared treasury by SafeDAO and GnosisDAO intended to fund rewards beneficial to both the Safe and Gnosis communities.

We propose that SafeDAO entrust the management of this collective treasury to karpatkey, which is already managing GnosisDAO’s treasury as per GIP-58. This positions karpatkey optimally to manage the joint treasury efficiently and align the interests of both communities.

The joint treasury will be used to create liquid Safe markets with up to 2.5M $SAFE used for incentivising $SAFE DEX liquidity on the Gnosis Chain.

Additionally, the joint treasury will be used to provide liquidity for Safe on Ethereum and Gnosis Chain as well as support the Safe price. Upon potential diversification of the treasury in the future, karpatkey shall also use these assets for staking (ETH / GNO), LPing or other means to gather yield on the assets. Given the initial 100% treasury composition of native tokens (SAFE), karpatkey will provide a more detailed strategy as these become feasible.

The joint treasury will be included on our reports page, allowing the community to monitor positions and actions taken with the treasury holdings.

To implement active treasury management and make the delegation effective the current signers, Safe Foundation and Gnosis DAO, will amend the existing joint treasury safe to a 3/6 MS with 2 karpatkey signers, 4 signers to be appointed by the current signers, and a Module Safe controlled by SafeDAO and GnosisDAO which itself will always have full control over the joint treasury.

A corresponding Safe will also be deployed on Gnosis to expand the joint treasury’s presence to the chain.

Fees

2% annual fee on assets under management, paid in monthly instalments in either ETH, stablecoins or Safe token at the discretion of karpatkey and what is feasible based on the treasury composition.

Fees are calculated as jointTreasury * 0.02 / 12 at 23:59 UTC on the last day of each month and will be paid from the joint treasury.

Duration & Termination

This agreement has an indeterminate time duration since it is approved by way of the SafeDAO governance mechanism unless any renegotiation and/or termination of this agreement occurs, always through the governance mechanisms of SafeDAO.

The SafeDAO may terminate karpatkey DAO’s engagement under this agreement for any reason by way of Governance Mechanism.

karpatkey DAO may terminate this agreement upon four weeks’ notice posted as a new discussion thread in the SafeDAO forum.

Regular fees will be collected until the day of termination independently of which party made the decision.

Either SafeDAO or karpatkey DAO may at any time terminate this engagement with immediate effect, without previous notification, in any of the following circumstances:

a. If the other party incurs a material breach of any of their obligations under this proposal

b. If the other party commits any act of fraud or dishonesty, or acts in a manner which brings or is likely to bring the other party into disrepute or materially affect its interests

c. If the other party becomes unable to pay its debts, admits its inability to pay its debts, enters into administration, becomes insolvent, or enters into a similar arrangement

d. A competent regulator considers the services rendered under this agreement in breach of the law.

karpatkey DAO will be entitled to terminate this agreement, without previous notification, if the joint treasury fails to make payments for more than 3 consecutive months.

Custody of Funds

karpatkey DAO is not a custodian of funds. The funds will be in possession of the joint treasury at all times.

Likewise, karpatkey DAO is not responsible for loss of funds caused by the existence, identification and/or exploitation of vulnerabilities through hacks, mining attacks (including double-spend attacks, majority mining power attacks and “selfish-mining” attacks), sophisticated cyber-attacks, distributed denials of service or other security breaches, attacks or deficiencies with smart contracts or protocols which are not owned by SafeDAO or karpatkey DAO.

karpatkey DAO assumes the risks associated with contractors.

Both parties have to take their own security measures for the addresses used to make the DeFi transactions to avoid a loss of access.

Entire Agreement

a. This Agreement constitutes the entire and exclusive agreement between the Parties regarding its subject matter and supersedes and replaces any previous or contemporaneous written or oral contract, promises, assurances, warranty, representation or understanding regarding its subject matter, whether written, coded or oral.

b. Each Party acknowledges that in entering into this Agreement they do not rely on, and shall have no remedy in respect of, any statement, representation, assurance or warranty (whether made innocently or negligently) that is not set out in this Agreement.

The plans outlined in this proposal are subject to discussion by the SafeDAO and may need to be (re)structured to take into account legal, regulatory, or technical developments as well as governance considerations. This document should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in any transactions.

About karpatkey

karpatkey is a DeFi-native organisation specialising in professional DAO finance through industry-leading research and tooling since 2020. We’ve been working with GnosisDAO, Balancer, ENS, CoW Protocol, Lido and AAVE on financial planning, operations, and strategy, diversifying their treasuries into sustainable portfolios of DeFi investments designed to support DAOs in executing their missions. Our tech stack is built on top of Safe, using Zodiac modules to allow for non-custodial, trust-minimised treasury execution. Check out our values to understand more about our guiding and decision-making principles.

As DAO treasury developers, we contributed to some of the most reputable DeFi protocols in our industry. We supported the deployment of sDAI that boosted chain TVL and consolidated a stablecoin hub with integrations like Angle and Spark. Our extensive experience provided us with advanced practical knowledge of DeFi primitives like stable swap and concentrated liquidity AMMs, liquidity, and voting incentives, veTokenomics, leverage and lending platforms, and integrations with top protocols.

Open Questions

None at the time of posting.

Copyright

Copyright and related rights waived via CC0.

10 Likes

Thanks for submitting this proposal @karpatkey!

Having worked with Karpatkey in the past during my team at BalancerDAO, I’m confident they are the right group to steward the SafeDAO <> GnosisDAO treasury.

8 Likes

that’is a good idea!

2 Likes

what you mean “assets under management”?

Assume that DAO own 300 million safe, then the annual fee is 3 * 1e8 * 0.02 = 6 million safe, maybe worth 10 million dollars(assume safe price $20), isn’t it ? if so, It seems a bit exaggerated and unacceptable.

3 Likes

Thanks for your question, to clarify the AUM fee is on the SafeDAO <> Gnosis DAO Joint Treasury which holds 50M Safe.

1 Like

Thanks for the proposal @karpatkey I fully support you all managing these funds, however i’d like to request certain modifications.

My general concern here is that this becomes a net cost for the DAO in certain market conditions. Is it possible to charge a performance fee instead?

This is a slippery slope. While today Karpatkey maybe run by capable talent, transitioning yourself to a DAO has its own challanges. I’d request amending this to a 12 month engagement.

5 Likes

Sharing the question from the OBRA season 2 sprint 2 call today, it’d be great to include a section in the proposal that outlines how treasury management would work without having Karpatkey.

  • What are the benefits and consequences of continuing treasury management without a treasury manager like Karpatkey?
  • Who would manage the roles and responsibilities?
  • etc.
1 Like

Thanks for the discussion on the call to follow up - I believe this proposal needs more clarity related to the 2% AUM fee is paid in-kind SAFE or stablecoin at the time in which that is feasible.

Additionally, looking for clarity that Karpatkey would not seek to raise fees for the first XX months. (It would be great if the 2% AUM started at 1% for a period and then ratcheted up as management became more needed - I do understand there are fixed costs to building up a team to focus on this).

Also my point of view is the indefinite term is ideal, as it would require continued governance to approve an annual deal; where as the termination clause and fee guarantee should sufficiently cover SafeDao and any governance delays. However it could make sense to set an expectation of evaluating the fee in say 18 months in order to evaluate if the time is right to add performance and reduce fixed AUM fee.

Thanks!

3 Likes

5 * 1e7 * 0.02 = 1 million safe, maybe worth 20 million dollars per year(assume safe price $20), that’s huge too for a model that is not yet profitable!

This may put huge financial pressure on safeDAO.

My point of view is still based on value distribution based on contribution.

If you can increase the financial value of the DAO, then you can get 2% of the increased value, but not 2% of the management assets.

If you directly obtain 2% fee of the management assets, it will be almost risk-free for the manager, but it will be a huge financial burden for safeDAO.

If there is no contribution, then a new fund manager should be voted

4 Likes

This is for the joint Gnosis Dao / Safe Dao treasury. The treasury management here is expensive to start but my understanding is there is significant work in order to begin the set up process of the treasury; additionally - we will retain the ability to terminate the relationship via DAO vote at anytime. Given the unique aspect of the join dao treasury here - there is additional complexity and opportunity to work to seek yield and growth. Generally I would expect this fee to evolve from a % aum to a much smaller % aum + performance. We have to keep in mind the single asset nature of the treasury creates more challenges earlier on.

2 Likes

We’d like to thank everyone for the engagement and great questions, we’ve added clarifications in regards to the fee being payable in either Safe token or stablecoins to the proposal as well as more details to the alternative / consequences of not opting for delegating the treasury to a treasury manager.

Due to the nature and composition of the joint treasury we believe the performance fee is more adequate in this specific scenario, part of the joint treasury’s goals is to use the Safe for rewards in the mutual interests of the Safe and Gnosis and support the vision of SafeDAO, rather than purely generating fees or behaving like a hedge fund.

Creating a core unit requires us to hire a dedicated team to work for SafeDAO and the indefinite mandate allows us to plan long-term which is why we usually work on indefinite mandates. 12 month engagements would add governance overhead, our suggested proposal would allow SafeDAO to terminate the agreement through governance at anytime if unsatisfied.

The joint treasury is currently a 2-of-2 Safe with SafeDAO and GnosisDAO as signers. Without a delegated treasury manager acting upon the treasury would require finding agreement among both DAOs to undertake any actions on the treasury, likely with governance proposals required to take any actions. This would have the consequence of significant governance overhead and make it impractical to actively deploy the treasury.
The benefits of having karpatkey as a service provider to SafeDAO and delegating the joint treasury to karpatkey is much more agile execution and management of it.

Adjusted in the proposal. Additionally, we’d like to add that any changes to fee structure would have to be approved by SafeDAO through a governance proposal. karpatkey does not have unilateral power to increase fees, nor do we intend to do so.

We understand the concern but would note that at this point it would be speculative to project AUM fee in dollar terms based on predictions of the Safe price.

2 Likes

Thanks for the clarification.

I am a Safe Guardian with sufficient voting power and I believe this proposal is ready to move to a vote.

2 Likes

I am a Safe Guardian with sufficient voting power , and I believe this proposal is ready to move to a vote.

1 Like

From what I understand, karpatkey is currently in the process of spinning out of GnosisDAO and, pending a successful vote, will launch its own non-transferable token. 15% of the total supply is allocated towards airdrops, with 1/3 of that going to GnosisDAO.

Would SafeDAO also be eligible for an airdrop if we choose karpatkey as the treasury manager? If not, why?

1 Like

As a delegate with sufficient voting power , I consider this proposal ready to move to a vote.

1 Like

I am Safe Guardian with voting power and I support karpatkey - SAFE DAO treasury management proposal. Lets move forward to next phase

Proof of voting power Boardroom

1 Like

I am a Safe Guardian with sufficient voting power, and I believe this proposal is ready to move to a vote.

2 Likes

The eligibility for the current airdrop is determined by past partnerships and collaborations, meaning SafeDAO wouldn’t be included in the immediate distribution at launch since the allocations are already set based on prior engagements. However, the whole airdrop allocation won’t be distributed at token launch, thereby SafeDAO would become eligible for a future allocation by working with karpatkey.

The reason GnosisDAO is allocated a 5% airdrop is due to karpatkey’s origins as a spin-off from GnosisDAO, with GnosisDAO being karpatkey’s initial investor and key collaborator over the last two years.

3 Likes

We appreciate @karpatkey taking the time to put this proposal forward and agree that treasury management requires a community-aligned strategy.

We would like to make the following recommendations with respect to the assessment of that strategy, and for how a service provider agreement should be structured, assuming that is the desired path.

  • Comprehensive evaluation of treasury management options: Align on Treasury Management as a current priority and run an RFP. This would allow the community to evaluate the potential options holistically rather than feeling the need to respond to a specific proposal without data points around other potential solutions.

    • We should put out a call for proposals to service providers across the space.
    • Explore feasibility and options for in-house management, including evaluation of resource requirements against existing resources and cost comparison.
      • E.g. setting up a GNO:SAFE LP + liquid staking approach is fairly straight-forward and can easily be coordinated by the DAO itself. It is more cost-effective to start with these simple approaches in-house and then re-evaluate the need for more complex portfolio allocations over time.
  • Definition of services and KPIs: Starting with first principles, we recommend defining the scope of work: what are the deliverables and proposed approach for treasury management? This would provide a basis from which to evaluate and assess service provider proposals.

    • Additionally, proposals should include clear KPIs to provide a framework for the successful delivery of treasury management services and ensure the proper alignment of incentives.
  • Cost:

    1. Tiered pricing structure: If an AUM-cost model is used, it should follow a tiered pricing structure where the fee percentage decreases as the total AUM increases, as is the norm in traditional wealth management. It may also be worth considering a cap.
    2. Performance-based fees: The fees would normally be charged based on the successful performance of the services and support of the Safe DAO.
    3. Payment token: Payment of fees in stablecoin puts continual downward pressure on the DAO’s token and treasury. Payment in the $SAFE token would also best align the treasury manager with the DAO’s interests, and we recommend exploring vesting / unlock periods for this, particularly in relation to performance fees.
    4. AUM-based fee: Objectively, 2% is a high starting point. The average expense ratio for actively managed funds has been trending downward, often cited around 0.5% to 1.0% for equity funds. 2% wrap fee + 20% performance is the model used by hedge funds, but this is usually justified by very sophisticated strategies and incentive alignment around performance. As a DAO, we should strongly consider erosion of returns due to a high base fee rate and the relationship of a fee to the strategies being performed. It is also difficult to assess what is an appropriate base fee without understanding strategy and KPIs.
  • Counterparty Assessment: When delegating to a third party, especially in the context of treasury management, the DAO should thoroughly due diligence the team of the service provider. Understanding who the key members in charge of the relationship are, their relevant asset management licenses, prior work experience, and any other pertinent factors is vital for security and risk management purposes.

  • Length of engagement: Karpatkey has proposed an indeterminate time duration for the contract. Indeterminate duration, in combination with the lack of KPIs, risks creating a golden handcuff situation. We strongly recommend time-bound engagements for service providers with regular reviews and clear KPIs with associated deliverables.

  • Termination clauses: This proposal includes several termination clauses with no notice terms. We strongly recommend that, in any event, notice between the parties and an orderly winding down be required. In addition, at least one trigger includes a subjective judgment call too. It’s best to have these be objective to avoid potential confusion or meta-arguments about whether it was a valid termination.

This is a timely topic and kudos to karpatkey for being proactive regarding their potential service provision, and for kicking off these discussions. It’s important that we get this right, given the implications, and hence our recommendations as outlined above.

7 Likes

As a delegate with sufficient voting power sufficient voting power, I believe this proposal ready to move to a vote.