CIP-19: Karpatkey DAO Proposal to Create a Core Treasury Team

Governance Closed Proposals
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Karpatkey Proposal: Create a Core Treasury Team

Simple Summary

This is a proposal to have KarpatkeyDAO create, train, support, and audit a Core Treasury Team within CoW DAO that would work jointly with KarpatkeyDAO to develop CoW DAO’s treasury, allowing CowSwap to efficiently provide its own liquidity, fund its operations, development, and evolution while optimising yield for idle funds.

Motivation

Adequately managing a DAO’s treasury is time-consuming, requiring several hours a day of research to ensure that tokens are utilised in the best possible way. An idle treasury has a significant cost of opportunity. Therefore, delegating the administration of the treasury to a professional non-custodial treasury management DAO such as Karpatkey would optimise its growth with a carefully curated strategy with controlled risk.

Even though we can’t promise results, we can show our past performance as advisors for Gnosis DAO’s treasury when our goal was to obtain a sustainable growth of funds with low exposure to risk (before shifting to maximising the growth of the Gnosis Chain). As the chart illustrates, the yield obtained by Karpatkey’s strategies was greater than that of the 65 largest DAOs in the ecosystem.

We achieved those results while looking after the runway, taking care of providing enough liquidity to face all of Gnosis’ obligations, covering all operating expenses and funding every single approved Gnosis Improvement Proposal:

Karpatkey Participation Chart
Karpatkey Participation Chart1622×852 126 KB

Source: Autonolas independent research (link to original report here)

The following chart displays Karpatkey’s 2022 YTD performance.

Performance 2022
Performance 20221293×396 72.7 KB

Specification

We will create, train, support and audit a Core Treasury Team that will work jointly with us to carry out several treasury-related tasks. Its initial goal will be to provide enough liquidity to secure Cow DAO’s runway.

In order to be able to fund Cow DAO’s operation adequately, an initial analysis will be carried out to determine the organisation’s expenditure needs, including the following:

  • Solver execution costs
  • CoW Grants Program
  • Monthly payments to contributors

Payments will be forecasted in a timeline which will be used as input for the liquidity needs analysis. Once the necessary liquidity has been secured, the rest of the funds will be grown following our yield strategy.

Regarding the tasks, CoW DAO will set up a new Safe multi-signature wallet with a 3 out of X setup, where Karpatkey will only have 2 signatures (insufficient to execute any transactions) and CoW DAO’s Core Treasury Team members will have at least 3 signatures. Therefore, the funds will be accessible to CoW DAO at all times, without any need for KarpatkeyDAO’s intervention.
Karpatkey will assist CoW DAO in bootstrapping its liquidity and optimising the yield for its idle funds by suggesting a series of strategies tailored to suit CoW DAO’s needs and risk profile.

Execution meetings will be held with the participation of KarpatkeyDAO and CoW DAO’s trusted signers from the Core Treasury Team, where the strategy drafted periodically by Karpatkey’s Financial Engineering team will be carried out. A tight security protocol provided by Karpatkey will be observed during those meetings.

KarpatkeyDAO’s goals are the following:

  • Design and implement an efficient and robust treasury management system
  • Identify the best economic opportunities for the treasury tokens
  • Facilitate COW liquidity

    To align with CowSwap’s vision and ethos and increase transparency with COW token holders, we propose making information about investments available to the CoW DAO community. The treasury would be handled in a completely transparent way, positively impacting CoW DAO’s reputation and trustworthiness.

Reporting

KarpatkeyDAO will provide a weekly report and support in identifying data elements upon request from CoW DAO’s community. Also, KarpatkeyDAO would review the data reported and assist in performing analytics and quality reviews to confirm the accuracy of the data.

Karpatkey’s Organisation Structure

Karpatkey is organised into different teams, as shown in the following org chart.

Karpatkey Org Chart 2023
Karpatkey Org Chart 20234473×2291 690 KB

Defi Ops & Research

Research & Strategy

They constantly monitor the market, comprehensively analysing existing and emerging protocols for financial viability and security. After the conclusion of each analysis, the team drafts the execution strategy and submits it to the execution team.

Operations

This team carries out the execution strategy during periodically held videoconferences, abiding by a strict security protocol audited by Cipherblade. They ensure that the underlying reasons behind each transaction are met before execution, checking that price impact, impermanent loss, liquidity, yield and other parameters are within range. At least one trusted signer from the client must participate in each meeting to approve every transaction.

Financial Engineering

They put together periodic reports to show the state of the treasury and the performance of all positions so that its health and growth can be constantly monitored. Also, they check existing positions where tokens have been allocated on a daily basis, to determine if they are still the best ones to suit the strategy, tailored to the client’s goals and risk profile.

Technology

DevOps

This team is responsible for the setup and maintenance of infrastructure, nodes, routers, bridges and keepers.

Development

They create and improve the code of the dApps and modules that we use to sustainably scale our operations, increasing capital efficiency and security through audited automations which are comprehensively tested before deployment.

Support & Staff

Legal & Compliance

This team continuously monitors the regulations that apply to every activity in which KarpatkeyDAO takes part, ensuring compliance. They also follow the legislative trends to be proactively prepared to abide by potential future regulations.

HR

They encompass HR planning, recruiting, compensation and benefits, training and development.

Rationale

KarpatkeyDAO will design an efficient strategy to get the most out of the treasury, protecting it and making it readily accessible to CoW DAO to fund its operations and growth. We will analyse the instruments available in the market to obtain a yield from the tokens held in the treasury.
Liquidity and Risk Management: The fundamental goal is not to lose principal. No token allocation should be so risky that CoW DAO cannot recover the initial investment. This is particularly important in short-term scenarios where token liquidity is essential to cover OPEX and tokens are allocated for a short time to gain income.

Planned/Unplanned Funding Needs: It should be easy to convert positions where tokens are allocated into cash on little notice. Enough positions need to satisfy a short-term operational need for funding, even if it was not planned/forecasted. This combines the liquidity analysis of each position with the consideration of potential secondary markets for illiquid positions and the creation of a predefined strategy that determines the order in which positions should be liquidated in the event of an emerging funding need.
This strategy would complement an emergency withdrawal strategy to derisk/liquidate/swap all positions in the event of a market crash, hack or any fortuitous event that requires to stop loss.

Earn a return: Once enough runway to face a contingency and a bear market has been secured, Karpatkey will seek to optimise the return on token allocation.

Fees

KarpatkeyDAO will charge the following fees:

Management fee

A yearly management fee (in monthly instalments) of 0.5% of the NAUM (non-custodial assets under management) will be charged to finance the services detailed above. This fee will be due in arrears, payable in the first week following each month’s close.

Management fee = Weekly portfolio balance * 0.5% / 52

Performance fee

A monthly performance fee of 10% of the yield obtained during the last month will be collected 100% in COW tokens.

Performance fee = (Weekly liquidity mining rewards - trades slippage - deposit/withdrawal fees) * 10%

Termination

CoW DAO may terminate KarpatkeyDAO’s engagement under this agreement for any reason by way of the Governance Mechanism. KapatkeyDAO may terminate this agreement upon four weeks’ notice posted as a new discussion thread in the CoW DAO forum. In case the termination is requested by Cow DAO without at least a four-week notice, KarpatkeyDAO will be granted an exit fee equal to the fees collected during the last two months, which will be paid in DAI or USDC. Regular fees will be collected until the day of termination.

Custody of Funds

KarpatkeyDAO is not a custodian of funds. CoW DAO will never transfer any funds to KarpatkeyDAO wallets, except for fees. The funds will be in possession of CoW DAO at all times. The positions can be disassembled by CoW DAO at any time.

KarpatkeyDAO will sign transactions using two addresses.

Likewise, KarpatkeyDAO 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 Cow DAO or KarpatkeyDAO.

The plans outlined in this proposal are subject to discussion by CowDAO and may need to be (re)structured to account for 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.

Implementation

It is proposed the new Gnosis Safe deployed at 0x616dE58c011F8736fa20c7Ae5352F7f6FB9F0669 as a Treasury Management Safe with the following setup:
Signature threshold: 3 out of 6
Signers:
2x Karpatkey DAO

  • 0x1E4AA69007611DeFc0Ed784e917895e050568bf4
  • 0x53D2C6dd3A3282CF63972Ccb668A97D100bd086a

2x CoW Treasury management team (core team)

  • 0xbF0E648E4e1E73ab067D10bc73D029519a26a952
  • 0x927CBc6A90080068cF839d27000E13355870c825

2x Backup signers from CoW DAO existing Safe

  • 0xf10Fe968d1856131FC6835ed7d7126eaF8b5a6b6
  • 0x04ce1ccF81AE660e23ca0c0823911df709B0E7Fc

Funds proposed to be transferred and managed by the Treasury Safe:

  • DAI: 803k (GC)
  • GNO: 536 (GC) + 13,265 (Mainnet)
  • ETH: 187 (Mainnet)
  • USDC: 2.2M (Mainnet)
  • COW: 8M (Mainnet)

Safe Transaction Data

The payload is included in the following tenderly simulations:
Tenderly 1
Tenderly 2
Tenderly 3

The proposed transaction should:

  • Send all funds from CoW DAO mainnet to new Treasury management Safe
  • Send dedicated amount of USDC from KYC sub-safe to Treasury management Safe
  • On Gnosis Chain: bridge relevant funds to mainnet Treasury management Safe

Snapshot

https://snapshot.org/#/cow.eth/proposal/0xc4e9c0a28f12b28aedfc8c3802522a9ac9dd1c7d5045dca94abf555ca2d8cd31

3 Likes
2

In general, I’m in favour of treasury management, however I’m not in favour of perpetual agreements. In order to ensure incentive alignment, and adequate performance of KarpatkeyDAO, there should be a time limit to the agreement, otherwise the termination conditions seem overly onerous to CowDAO.

3

I think prudent treasury management will help CoW DAO to optimize it’s balance sheet and generate decent additional income.
It is important to keep tight risk management to make sure CoW DAO is not exposed to catastrophic loss. I think this is well reflected in the proposal.

I think four week notice is reasonable.
Can you offer alternative termination conditions that you feel are fair?

Keep in mind that CoW DAO is in full custody of the funds and can pull capital out of the Treasury Management Safe at any point in time if there’s an urgent reason to do so.

2 Likes
4

The problem I have is not necessarily with notice periods, but the fact that it is a perpetual agreement (no timeframe) meaning that in all cases (providing KarpatkeyDAO remain solvent / operational), termination fees will be payable.

Given that Cow LDA, and the CowDAO Grants Program all operate with a fixed term agreement, it only seems reasonable that there should be a term limit, at which time KarpatkeyDAO are welcome to apply to have their agreement renewed.

I’d suggest a fixed-term agreement of 12 months.

5

The termination fee is payable only if less than four week notice was provided.

But yeah, I think that 12 month fixed agreement term is also a decent option to consider.

6

Hi @mfw78,
Thanks for your comment. This agreement would last until either party informs the other they’d like to terminate it. The reason why we don’t create proposals with an end date is that we believe in building long-term relationships with the DAOs we partner with.
To align incentives, we have decided to charge our performance fee in COW tokens.
Regarding termination cost, it would be free of charge for CowDAO if KarpatkeyDAO is notified at least 4 weeks in advance.

7

My apologies, I misread the logic around the four-week notice period.

Overall this seems reasonable. From a CowDAO Governance perspective, what methods will be put in place to review the performance of this arrangement?

1 Like
8

At least for the first year, then we can review performance and increase terms if warranted.

1 Like
9

Wondering if there is a possibility to do a deeper integration / strategic partnership between Karpatky and Cow Protocol beyond the treasury management.

A few q’s in mind

  • What trading protocol is Karpatky using right now?
  • Would it make sense to use Cow protocol?
  • Are there features that can be developed between the Safe treasury and Cow protocol that could help Karpatky’s products?
10

Hi @mfw78,
We’d provide you with weekly performance reports and assist you and/or any other community members who request clarification or assistance to review the data accuracy.

11

Hi @Eylon, thanks for your message!

We don’t discard any possibility in the future! We’re big fans of CowDAO and have used CowSwap since day 1 .
Regarding your questions:

  • We don’t use a single trading protocol
  • Yes, we do use CoW protocol a lot
  • I’m sure we can come up with a few and provide your development team with some insight in the future

We’d like to start helping you with the treasury and then we can explore how else we can collaborate.

12

Are you able to integrate the data instead into a Dune Analytics dashboard? That way performance can be viewed by the community anytime, and it should alleviate some of your reporting duties. This way a once a month report regarding the state of treasury could be appropriate.

2 Likes
13

Hi, it’s in our roadmap, yes.

1 Like
14

Thank you for your proposal. I think treasury management is crucial for CoW Protocol’s success. I would like to raise a few concerns I have about this proposal.

  1. Given the size of the grants and the introduction of volume-based bounties that we currently handle through the GrantsDAO, I propose that any transactions handled by the GrantsDAO be excluded from the proposed NAUM. This would ensure that the GrantsDAO can continue effectively managing and distributing funds to our contributors.

  2. I believe this is included in your proposal but for clarity:
    Although your proposal states that the DAO will be in full custody of the funds it is not clear from the wallet structure how the funds can be recovered in the event of a dispute if we cant agree on 3 signatures.
    To secure the funds of the DAO, it is necessary to implement a multi-sig with four signers, one of the signers being the DAO itself. The DAO would have complete control over the funds. A standard transaction would only need 3 out of 4 signatures (2x Karpatkey and one from the Treasury team). This setup would mitigate the risk of the funds becoming inaccessible due to a disagreement amongst the signers. I would like to hear some feedback from the community about this idea.

  3. For complete safety CoW protocol must have an independent set of community members to approve any transactions proposed by Karpatkey. For simplicity, the GrantsDAO committee can initially take this role and become the 1/4 signer on the treasury wallet, with a 5/7 majority necessary to sign a transaction. The other three signers being 2x Karpatkey and the DAO.

  4. In the event of an exit, it is best to take an average of the last 12 months and use that to calculate the exit fee, this is to mitigate any large transactions present in the past 2 months which could skew the fee.

  5. While I understand that an exit fee is standard practice, I propose reducing it to one month’s worth of fees after a 12-month cooling-off period has passed. This would allow both parties to re-evaluate the arrangement and ensure mutual satisfaction with the terms of the agreement.

  6. Since the inception of KarpatkeyDAO have you suffered any loss of DAO funds that CoW Protocol should be aware of?

2 Likes
15

Hey Kubesqrt! I hope you’re well. Thanks for sharing these bullet points. I’ll add feedback for each one:

  1. I agree. The plan should consider this ‘any transactions handled by the GrantsDAO be excluded from the proposed NAUM.’
  2. OK. This wallet needs to set 3 out of 5 signatures. We’re using this configuration currently. For instance, it is posted on GIP-20 (Gnosis forum) in bullet 7 if you need a reference. But we suggested using more than 3 signers from Cowswap. It’s better for emergency cases. We discussed this point during the last meeting with the team.
  3. I didn’t understand your point.
  4. I think the avg should be similar.
  5. OK, we can consider it.
  6. We didn’t suffer any loss. I’m considering hacks or significant losses for this answer. But there are some small losses like an as impermanent loss. For instance, we’re preparing a summary about impermanent loss. By the way, this loss is impermanent (the proposal mentioned it).
2 Likes
16

Thank you for your reply @elbagococina.

I appreciate your providing some context for the points I made. Following some consideration the argument I made in bullet point 5 is impractical due to the nature of the transactions. This would not be an effective way to manage CoW Protocols treasury given the security measures you have proposed are sufficient.

I am excited about the potential collaboration between CoW Protocol and Karpatkey DAO.

3 Likes
17

Karpatkey would use the following wallets as signers:
0x53D2C6dd3A3282CF63972Ccb668A97D100bd086a
0x1E4AA69007611DeFc0Ed784e917895e050568bf4

18

Interesting proposal.

I am not sure if I understand the two figures correctly. The first one seems to say something about your strategy of investing into yield farming assets. The second one seems to be about the revenue of Karpatkey itself. Is this correct?

I would also be interested in information on how the value of treasuries managed by Karpatkey developed over the year. Maybe in comparison to how the market developed during that time.

1 Like
19

Hi felixhenneke,

Thanks for your interest.

I’ll answer inline below.

Could you please specify which figures you’re referring to?

This one’s tricky for two reasons: the treasuries we’ve worked with were used to cover OPEX and we haven’t been chasing yield, so it’s hard to compare apples against apples. For example, in GnosisDAO’s case, a significant part of the treasury was destined to developing the Gnosis Chain, which became a priority for the DAO. The size of the treasury was reduced when the funds were transferred to achieve that purpose, but that was uncorrelated to Karpatkey DAO’s performance, which you can check in our reports (here’s a link to some of them).

20

Are weeks 37 to 52 missing from this 2022 YTD performance chart? The crypto winter was getting colder around this time. I’m sure people would like to see how Karpatkey handled the crypto meltdown.

Karpatkey’s technology and business development teams are a bunch of PFP’s. Why not use pictures of real people who manage those various teams? How many people work for Karpatkey? Anons?

Can you explain how the management (0.5%) and performance (10%) fees are charged?

I think the 10% performance fee should be paid in ETH not COW tokens.

1 Like