KIP-38: Replenish Discretionary Investment Limit Funds

kip: 38
title: Replenish Discretionary Investment Limit Funds
category: delegation of powers
author: @DaddyMatty (matt@rook.fi)
status: Sophon review
created: 2022-10-17
replaces: none
dependencies: KIP-23 

References:

[1] KIP-23: Discretionary Investment Limit
[2] Transfer of ROOK from seller to DAO Treasury
[3] Transfer of renBTC from DAO Treasury to seller
[4] OTC Trade announcement on Discord
[5] Rook DAO Treasury dashboard
[6] Discretionary Funds Tracker

Proposal

Replenish funding available for discretionary investments to applicable limits as outlined in KIP-23 [1] through September of 2023.

Background

In June 2022, the DAO unanimously approved KIP 23, which empowered Rook Labs to make investments up to the lesser of $5M or 5% of the treasury’s notional value every 360 days. The intent of this KIP was to enable the DAO to take advantage of certain opportunities that must be capitalized on quickly or in a non-public fashion.

In September 2022, Rook Labs utilized the discretionary powers KIP-23 enabled for the first time to acquire ROOK from a large token holder. More specifically, Rook Labs repurchased 51,091 ROOK for the Rook DAO Treasury, using 96.6 renBTC from DAO Treasury assets. The trade, which was approved by Rook’s CEO and CTO, was executed OTC at a fixed price of 0.001891 renBTC per ROOK [2,3]. In keeping with the requirements of KIP-23, the trade was approved by Rook’s CEO and CTO and announced to the community the following day [4]. The seller was a retail investor, not a team member or VC. Due to macro market conditions, they were looking to raise cash, and when they made a decision to de-risk, they reached out rather than selling on a secondary market.

Although offers of this kind are typically not entertained, Labs acted on the opportunity one for a variety of reasons.

  • The block was significant, approximately 4% of the total supply of ROOK.
  • The total outlay for the purchase fell within the limits of KIP-23 [1], which allowed the purchase to occur swiftly while preserving the seller’s anonymity.
  • We believe strongly in the future of the project, and can envision many uses for these tokens in the future, including M&A, strategic partnerships, contributor grants, and other special incentive programs.

Analysis, Rationale and Term of Delegation

The rationale for assigning discretion over a portion of the portfolio to the Treasury team remains as established (and ratified) in KIP-23 [1]. However, the recent renBTC trade has depleted the funds available for this discretion.

At the time of transfer, the renBTC consideration sent to the ROOK seller was valued at approximately $1.95M [3]. During this time, the Treasury maintained approximately $54.16M [5] in total assets, and therefore, 5% of the Treasury would equate to a $2.71M discretionary limit. This means that there are approximately $759k in remaining funds available for discretionary purposes until September 2023. Ongoing monitoring of the remaining discretionary balance can be found on our tracker [6]. While these funds would allow for action to be taken for relatively small opportunities, it would severely limit the DAO’s ability to take advantage of other larger, strategic opportunities that may arise.

This document therefore proposes to return the discretionary funds to the mandated cap of the lesser of $5M or 5% of the treasury’s notional value for the remainder of the 360-day period since the renBTC investment.

Specification

Replenish funding available for discretionary investments to applicable limits as outlined in KIP-23 [1] until September 2023.

2 Likes

The example trade is a ROOK purchase which is clearly a win for the protocol given ROOK is trading below the value of its treasury holdings (Value of ROOK not held by treasury: $29m, value of treasury bar ROOK: $41m i.e. 41% immediate ROI). There’s been instances in the past where the treasury requested an allowance for buybacks that was granted (KIP-13), I see no reason why something similar would not work here. Any reason to keep this current proposal broad such that it includes a much wider range of treasury operations? Is there reason to believe the treasury can make profitable investments outside of ROOK buybacks that can yield higher than 41%?

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Hi and thanks for the feedback. While I agree having a buyback KIP is a good option as an alternative to this type of KIP, it is quite limiting for a couple of factors:

  1. We have seen firsthand how much we can get front-run on a ROOK buyback if we disclose it publicly.
  2. By signaling those moves publicly we create an expectation by other parties that creates undue pressures on all parties
  3. That type of KIP would only be limited to ROOK buybacks vs the many other situations that may pop up

Unpacking point #3 above, the intent of this KIP is to get us much more coverage than buybacks. More specifically, the following are identified as examples (in KIP-23) of opportunities we would like to be ready for:

  • 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.

Touching on opportunity cost, I think you raise a great point. I see many situations where the ROI could be much higher than the % you have determined; especially as it relates to M&A. In a bear market such as this with compressed valuations and cash-poor teams with valuable IP, we have a lot of opportunity to acquire cash flows and core technology that could take our protocol to the next level both near and long term.

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Agree with this but need to make sure there is sufficient Treasury funds to keep progress on ROOK products, i.e. enough to pay salaries for 5 years. 40% immediate return sounds good.

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I agree with you, to answer @DaddyMatty:

  1. You can buyback the token on a horizontal period big such as a Year
  2. Please define who should be these other parties that should be under pressure
  3. Please describe many other situations that may pop up

I completely disagree with:

  • Securing Optimal Investment Prices: this is not MetaCartel Venture DAO
  • Black Swan Rebalancing: that’s why we have stablecoins in the treasury

Appreciate the response on this. To address your points above which i believe are all addressed to me:

  1. This is true, but because of the level of transparency there is due to on-chain data, people would have the ability to see the movement of our funds and the placement of the orders within our app. To be more specific, to buy back ROOK the first step would be to send funds to our execution wallet that can interact with our app, and at this point everyone would have visibility into that move and they may be quick to place orders ahead of us. Sure, we could hold funds in that account for a longer period of time, but that introduces other risks and fragments are liquidity. I do not recommend this.
  2. Regarding pressures, this is more of a regulatory issue. As you may know, one of the tests for being classified as a security is an expectation of profit. We have seen in the past that tokenholders expect this must occur and therefore an expectation of token appreciation could be created
  3. I’m not sure what point you’re referring to here so I won’t make any assumptions

Regarding
-Securing optimal prices: I agree. I have no intentions of running a hedge fund; however, at times we will no doubt be required to acquire assets with liquid markets. Whether that is part of M&A or strategic partnerships, we have seen market forces react much faster than our governance ever could.
-Black swan: Sure stables will be our foundation to survive but we could then be severely limited for years but not acting quickly. I think only relying on stables and not showing a nimbleness to market forces is playing too defensive and not being dynamic enough. In the end, this would likely only be a swap out of ETH into more stables.

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