KIP-23: Establish a Discretionary Investment Limit

KIP-23: Establish a Discretionary Investment Limit

kip: 23
title: Establish a Discretionary Investment Limit
author: DaddyMatty <matt@rook.fi>
status: adopted
tags: none
created: 2022-4-25
replaced-by: none
replaces: none
dependency: KIP-12, KIP-21

Proposal

Empower Rook Labs to be able to make investments up to the lesser of $5M or 5% of the treasury’s notional value every 360 days.

Background

While DAO input and buy-in are imperative to the long-term success and sustainability of our financial position, certain opportunities present themselves that must be capitalized on quickly and in a non-public fashion. To ensure these opportunities are not lost due to poor execution or front running, Rook Labs must have some discretion to utilize funds without going through the governance process.

More specifically, this KIP proposes that Rook Labs be empowered to make investments up to the lesser of $5M or 5% of the treasury’s notional value every 360 days. Note: the limits around discretionary investments are cumulative in that the ROOK team would not be able to execute five separate $1M transactions to avoid going through governance.

To ensure proper due care and diligence was performed, the ROOK team must present their rationale to the DAO within 48 hours of executing the transaction(s). Furthermore, Rook Labs must present that the investment was approved by the CEO and CTO.

Potential Applications:

There are numerous reasons that having a discretionary investment limit could be highly accretive for the DAO and allow us to maximize our investment performance over the near and long term. The following items below represent the most likely applications of this limit:

  • Merger and Acquisitions: In most, if not all, M&A transactions there is often a high level of confidentiality that must be maintained by both sides in order to ensure that the due diligence and negotiation process is fair and effective. If the other party in a M&A opportunity knows that Rook DAO cannot maintain a high level of confidentiality, we may be excluded from certain opportunities. Even if we are not excluded on the front end from these opportunities, our ability to execute upon them may be limited due to external forces frontrunning our investment or creating a bidding war. It is therefore imperative that we signal to other interested parties that we have the ability to have discussions without these risks.

  • Securing Optimal Investment Prices: Because governance is transparent and relatively slow moving, both internal and external parties have the benefit of knowing the DAO’s intentions before actions can be taken. This creates a situation where the DAO can get front run on potential investment opportunities or lose out on the opportunities all together. By allowing the DAO to take advantage of these opportunities without signalling our intent to the rest of the ecosystem, we can capture value in a nimble way while optimizing our investment basis.

  • Black Swan Rebalancing: In the event of unexpected major black-swan events, the DAO’s treasury must have the ability to be nimble in rebalancing its holdings to protect from significant declines. By having the ability to reposition our assets into more stable or liquid assets, we can not only protect the value that we have created, but also take advantage of lower market prices when there may be a better buying opportunity.

Recourse

In the event that the community comes to consensus that a discretionary investment made was inappropriate, they could take any of the following actions:

  • Unwind the action through a formal KIP
  • Ability to call an “all hands on deck” community call with Rook Labs team and individuals involved in the investment decision to discuss next steps.
  • Remove applicable team members from their positions

Specification

Empower Rook Labs to be able to make investments up to the lesser of $5M or 5% of the treasury’s notional value every 360 days.

6 Likes

Agree, def a good idea and something that was needed for quite some time. :slight_smile:

I’m on board with this.

I wonder how we should handle the edge case scenarios where there’s a secret investment/M&A followed by a black swan. Do we just eat the black swan? Or should we consider a separate discretionary limit for specifically black swans? In the event of the black swan, we’re only rescuing at max $5mm worth of assets anyways, so I guess we’re still eating millions of dollars of swans at that point :smiley: But the treasury should be diversified enough such that we can eat a swan once and a while without suffering too bad. We’ll just need something to help us wash down the feathers.

1 Like

Hey JZ - thanks for the comments and great questions.

Yes, unfortunately, having those two events back-to-back would just be bad timing and something we would likely have to just wash down with governance being structured the way it is. I will say that I think we are and should continue to be very diversified with a heavy emphasis on non-directional assets comprising most of our liquid assets.

Perhaps, if this proposal goes through we could also implement some form of emergency governance process where there could be a quick snapshot taken and if some very high percentage of voters agree in a short period of time we could rebalance. I think this would likely need to be another KIP that has it’s own discussion as it opens up the door to a lot of considerations.

Would recommend modifying the discretionary limit to

“greater of $2.5M or 2.5% of the treasury notional value every 180 days”

or potentially

“greater of $5M or 5% of the treasury notional value every 360 days”

So, essentially, to cut the discretionary spending limit in half. This more conservative limit will protect the DAO from over-use of this facility until we get a feel for it. If we find it is better to increase it or modify it, we can do so later.

1 Like

Thanks for your input. I went ahead and changed the proposal to state:

“greater of $5M or 5% of the treasury notional value every 360 days”

I’m fine with going more conservative as we can always create another KIP to “refill the tank” if the community supports this

1 Like

The sophons have one more request for revision - they’d like to see the limit specified as the lesser of 5% or 5M rather than the greater.

I have changed the language to reflect these suggestions. Thank you

A note of clarification: the language in the Snapshot proposal included some inconsistent references to the timeframe over which the discretionary investment powers can be used. The correct timeframe – as specified above, on Github and in the “Specification” section of the Snapshot proposal – for KIP-23 is every 360 days.