KIP-5: Acquire CVX position

KIPs Final
#1

KIP: Acquire CVX position

kip: TBD
title: Acquire CVX position
co-authors: Destroyr, 10delta, Curmudgeon, AlCappuccino, Yung Peso, Apeseason, Akin Sawyerr, Shahar, 2x, Cryptomessiah, DaddyMatty, Doge♜♜♜, spcxta, lapras, Pai-Sho, anon intern, pen, thereal
status: Draft
created: 2020-10-28

Preface

Proposal

Use a maximum of $40,000,000 of treasury funds to acquire a floor of one million Convex.

Use CVX stake for high Curve v2 Pool yield (when available).

Use CVX for yield, bribes, and potential coordination with other DAOs.

Definitions

Curve v2 Pool refers to Curve 2 ROOK/Tricrypto (or ROOK/ETH, depending on the available base pair) pool, with gauged emissions.

Abstract

Curve v1 is the most liquid stablecoin to stablecoin exchange in cryptocurrency. Their upcoming offerings related to Curve v2 (stable/BTC/ETH or ETH v2 Pools) offer a very enticing opportunity for ROOK to gain substantial liquidity, as these could form the basis of composite pools (e.g. ROOK/Tricrypto) in the same manner that the 3pool (USDC/USDT/DAI) forms the basis of composite pools with other stables (e.g. 3pool/MIM).

Furthermore, owning a substantial portion of voting weight within the protocol can not only drive very profitable emissions to the KeeperDAO protocol but also allow KeeperDAO to earn additional revenue through receiving substantial bribes from other protocols, which seek the same influence over the Curve protocol.

Convex offers an optimization that would allow KeeperDAO to aggressively gain more significant influence over the Curve protocol. This is because each vote-locked CVX token currently controls more than 7 vote-locked CRV tokens.

KeeperDAO has grown its treasury to over $100 million (non-ROOK NAV) - this would be a novel and profitable way to exercise its power.

In this proposal, we put forth the option of purchasing a significant stake in Convex through the acquisition of at least 1,000,000, and no more than 2,000,000 CVX tokens. We strive to accomplish this within the year. This purchase would not only allow the treasury to earn a significant yield on its position but would also let KeeperDAO function as a “Meta DAO” through exchanging its newly acquired votes for positions in other desired protocols governance tokens.

Motivation

Yield

  • Bribe yield (acceptance of bribes)
  • Inflationary yield (of CVX and CVXCRV)
  • High yield (With bribes ~44%)
  • Distribute bribes into the treasury

ROOK pool

  1. Create a Curve v2 Pool
  2. Vote to ensure the pool has a significant gauge that is eligible for CRV rewards using our CRV voting power
  3. Ensure an appropriate level of CRV emissions are directed to this gauge through voting power
  4. Now people want to LP ROOK in the well-incentivized pool

Inter-DAO coordination

  • Using our voting power to help fellow DAOs to unlock shared value

Implementation

A maximum of $40,000,000 from the DAO treasury will be used to acquire a CVX position, using a combination of USDC, DAI, ETH, and wETH, with a target minimum of 1,000,000 and a target maximum of 2,000,000 CVX, or a maximum average price of $40 per CVX.

The precise execution strategy is left opaque to minimize the risk of market speculation, front-running, et cetera. Upon completion, an update will be announced on Discord and Twitter with the full transaction details.

When roughly $25 million of CVX has been acquired, this will be communicated with the DAO and we will collectively decide if we would like to proceed. The same action will be taken, if and once the next benchmark of ~$32.5 million of CVX has been acquired.

Asset Usage

The acquired CVX will be vote locked with Convex Finance for vlCVX. vlCVX will yield CVXCRV. This CVXCRV will be swapped for more CVX, which will be locked for vlCVX.

This initial strategy is subject to change at the discretion of the KeeperDAO core team with community involvement.

This position comes with no predetermined time horizon, but there is a 16-week lockup upon vote locking.

Initially, management of the position, including voting and token decisions, will be at the collaborative discretion of the KeeperDAO core team and the community, with execution being performed by the core team. This allows for agile response and risk management while leaving open the option for the future structure.

By default, bribe yield will be deposited to the KeeperDAO treasury but may be put to use if an applicable staking mechanism applies. Collaborative discretion of the KeeperDAO core team and the community can amend this.

Risks

  • This involves substantial use of DAO treasury funds, gaining exposure to a volatile and risky asset.
  • Convex and Curve smart contracts have been audited, but still carry smart contract risk (see below).
  • CVX price could move outside of our parameters before the acquisition is completed. In addition, this position incurs opportunity costs that may limit other potential uses of those funds or alternative strategies.

Security reviews

Appendix

Notion Appendix

Specification

  1. Purchase between 1 and 2 million CVX before the end of 2021
  2. Establish a system to accept bribes for CVX vote
  3. Establish Curve v2 Pool
  4. Use 1,000 ROOK (from the DAO treasury) as bribes for voters for the gauge
10 Likes
#2

Great use for the treasury. Full send!

4 Likes
#3

Great KIP! Like Julian said, brilliant use of the treasury :grinning:

4 Likes
#4

can we add in that we will start accumulating even if it appears that we will not achieve the full 1m CVX due to the $50 max average, that way a subsequent KIP can finish the purchase?

1 Like
#5

Could you please clarify what you mean.

From the proposal:

  • CVX price could move outside of our parameters before the acquisition is completed. In addition, this position incurs opportunity costs that may limit other potential uses of those funds or alternative strategies.

This is why there is some baked in discretion.

3 Likes
#6

Nobody is worried about locking up our liquidity for such a long time?
And what about our exposure to CVX price risk? Curve is valued at 290x revenues (source: Token Terminal | Fundamentals for crypto.). It is for sure not a given that the value of CVX will hold longer term (especially after the 4-year vesting for early holders expires). Look at other exchanges being valued at 15-30x, so that means there is a lot of downside here.
Why put such a large part of our treasury in this? Only to get voting power to give more incentives to our own pools? How sustainable is that longer term…
Putting 40% of our wealth in this?.. Or do I miss something here?

1 Like
#7

This proposal is problematic for me.

Why $40m? What does $40m achieve that $5m does not? $40m is a massive over bet and threatens the stability of the treasury.

Bribes? Really? Imagining a metaverse using a governance-by-bribe model is irritating. Are bribes already a thing? How much are people currently paying for bribes? I think we need more details to better understand the value of the bribes.

I’m skeptical of this KIP. Could the authors please disclose how much CVX they own or any other conflicts of interest?

3 Likes
#8

Thank you for your thoughts.

Are bribes already a thing? How much are people currently paying for bribes?

It is already commonplace, and amounts for millions of revenue in “bribes” (I hate that term) each month. I encourage you to read the appendix, which has a thorough breakdown of the “bribe” system.

I personally really dislike the term bribe - a different way to view it is, we support their protocol (and they get financial benefit) with some of our vote weight, so in turn they give us some financial benefit.

They get benefits, and pay us for that benefit. In the open.

Perhaps a (slightly over simple) example will be useful.

Badger Finance has deep interest in driving BTC use to DeFi, so they are pushing for ibBTC gauge weight emissions, which will increase the demand of BTC onto Eth chain. The byproduct of this is they get (synthetic) BTC on chain, and are willing to pay for that benefit (It's Badger Bribe Season). Everyone wins. There’s nothing malicious about it. Again, I hate this nomenclature of bribes as it has negative connotations. I ask you to move past the term, and look at the math.

Next, I personally own no CVX (or CRV or CVXCRV). Messi has disclosed he owns CVXCRV but no CVX. I cannot speak for the other authors. I am excited about this KIP because of the input we will we have with some of the largest protocols in the space, as well as giving us diversification in our treasury with key governance tokens. CRV has the highest TVL in DeFi and is the most liquid stable exchange. It’s primed to be super liquid for it’s v2 pools as well; this liquidity is something ROOK will benefit majorly from. This liquidity, tied with high CRV emissions, will create strong demand for ROOK. This major increase in ROOK demand will drive price up, which will make our own emissions extremely rewarding, meaning we can aggressively cut our own emissions.

Next, there is no guarantee $40m is used. After $25m, which can be done patiently, we’ll discuss as a DAO if we want to proceed.

I’ll again encourage you to check out the appendix, which came from over a dozen community members working through the same questions you seem to be wondering. We also held two town halls on the subject as we talked through much of this. Hope this helps. Cheers!

1 Like
#9

Hi! Thank you for voicing your concerns @ldoos ! I think there is some confusion which I hope to clear up. There is no 4-year hold or vesting (that is for CRV). This is part of why this proposals strives to accumulate CVX, 16 week lock (and critically, there is a bi-weekly week gauge weight vote).

We can stagger our locks over the 16 weeks so we always have a viable amount unlockable if we wanted to liquidate part of our position. I look forward to the community forming a group to manage this.

There is downside risk (and upside potential) with initial capital, but we also are looking at extremely high emissions for us from the protocols we choose to work with on this (meaning APY isn’t strictly tied to CVX price), which will potentially soften the downside risk. In addition to that, CVX has huge APY LPing on Sushi (>80%). We cannot prevent a major downside risk because this is crypto and who knows when the bull market will end - but there is some flexibility to cut the position if need be. There is also really impressive yield, influence, and notably the very direct way to drive ROOK price up (with high gauge weight, creating very high demand for ROOK). This new source of demand for ROOK will likely partially pay for itself in terms of market cap and treasury value, also making emissions extremely competitive, driving volume through the protocol (which directly leads to revenue).

To distill that concisely:

Gauge weight → high CRV emissions → high ROOK demand → higher ROOK price → high value ROOK emissions → more volume in our own ecosystem → Revenue flywheel.

I hope this clears some of this up a little bit. Happy to dive deeper.

2 Likes
#10

More CVX gives us higher CRV rewards for our pools so $40m is better than $5m. I like to see what we decide at $25m. Voting yes

2 Likes
#11

Very thorough, thank you for this. I didnt realize this is how MIM found it’s way onto curve. I especially like how there is a very specific amount CVX needed to achieve KD’s governance goals.

I’m in favor this. It is a big bet, but I now believe the outcomes are asymmetric to the upside.

1 Like
#12

I have some catching up to do it seems, as i dont fully understand most of what you are saying about the upside. Let me do some more reading on that!
In the meantime, can you address the downside risk in the CRV price? 80% annual yield sounds great, but is not enough if the price can easily half within that year. And CRV seems much more overvalued than that.

#13

There is no doubt any crypto can cut its USD value in half. I won’t pretend we can avoid the risks of any position (same is true even for ROOK), although I think the baked in discretion will allow us to quickly act if we, collectively, want to derisk. Similarly, I think once we have a base position, we can talk through - via town hall or another forum, if we want to proceed. We can scale in risk and scale out risk, however the community decides.

Convex’s supply does taper off aggressively, which can be seen in the Appendix IIRC, which does mean it should hold value better than Curve.

Fundamentally, Curve is the most liquid stable to stable exchange in crypto and as it generalizes its platform, it is likely to be the central hub for all things liquidity. Liquidity is the heart of DeFi, so even though Curve has had a modest run lately, I still see it’s value prop (and transitively Convex) as something very intriguing - for DeFi as a whole, and in time in many ways for KD.

#14

I see this as a bit of governance arbitrage. If KD successfully brings liquidity to ROOK, then every other project will also want to own a large CVX position (or rent ours). You could probably start InfluenceDao™ on this idea alone.

#15

I agree that all crypto carries risk. But not all crypto carries the same risk as other crypto. It is all, as always in investing, about finding the right balance between upside and downside. CRV is valued much higher than competition, so I argue that the downside is much bigger here than in other crypto. This is roughly how my thinking goes:

CVX is packaged CRV, so we need to start there. CRV is relatively stable around 2-3 USD over the last year, although it went up to 4 USD recently. CRV earns cashflow from the curve protocol. You get CRV by providing liquidity on Curve. Trading fees on curve are (only) 0.04% and half of that goes to the CRV holders. So as an LP you make limited money on curve (only 0.02%). In Uniswap and Sushi, LP’s get higher base fees (because the protocol takes less). Protocol revenues (for CRV holders) are also not super high, though. And the valuation of CRV is much higher (290x) versus Sushi (30x) and the likes of PanCake, TraderJoe etc… (15x).

Two questions come up:

  • Why are people not moving liquidity away from Curve to higher earning platforms?
  • Why is CRV trading so much higher? How is the CRV price inflated versus other decentralized exchanges?

CRV is handed out for providing liquidity as an incentive. And because CRV is valued so high (@290x the actual earnings) these CRV incentives actually make up the lion-share of the yield for LP’s on curve. On Curve.fi you can see that base APY’s are around 1-5% and rewards APY’s are 2-20%. CRV rewards (and sometimes extra rewards) are typically a multiple of base rewards. That’s why LP’ing on curve still makes sense. That answers the first question, and makes the second even more important.

Why is CRV trading at such a high valuation compared to others?

If you stake your CRV you get a share of the admin fee (which is half of the 0.04% trading fee), which is paid out regularly in 3CRV, which is basically curve’s USD stablecoin. Why is CRV trading at 290x these relatively low fees? There is no fundamental reason to believe that curve will grow faster than the uniswap and sushis of this world (at least not 10x as much), so what is going on?

This is where I think Curve’s boosting comes in: curve gives huge incentives to lock up your CRV. When you lock your CRV for a full 4 years (!), you get 2,5x boost to your rewards. So that means you get 2,5x the amount of CRV for your liquidity stake. So many, many people decided to lock up their CRV for 4 years. Because so many people lock up their CRV, not many can sell their CRV; so they just have to sit out their 4 years. Only once they can unlock will there be significant selling pressure on CRV. So may this be the reason why CRV is valued at 290x versus competition at 30x? You never know for sure, but may be.

From 290x to 30x is a long way down. You need 4 years of 100% APY just to break-even on that risk. And this is relative valuation: it is on top of the general risk of crypto going up and down.

CVX is essentially a derivative of CRV. So as a CVX holder you have (at least) the same downside as CRV holder. And again, essentially the curve protocol is not very profitable. They just have a fantastic staking & boosting model that has worked very well for people so far. And it may work quite well for a while still, but how will it end? I always compare this type of investing to taking one-dollar bills from the road just in front of a steam-roller. As long everything goes well you are fine, until you are run over.

#16

This is a big bet on an unrelated token - feels potentially reckless. Has there been analysis undertaken to justify a the price limits that are being set as this is a very big investment? If the goal, which it appears to be, is to create a liquidity pool, why not just use the $40m to create one on any DEX and keep control of the capital/not enter the competitive world of CRV gauge voting and dont take price risk in an unrelated token. My concern is ROOK has no edge in this trade or strategy. If the treasury has so much money it can undertake actions which appear to be so unrelated to ROOk imo a better strategy to consider is to return the capital, or accelerate buybacks, or fund ROOK staking etc etc

1 Like
#17

The Curve ecosystem is not unrelated. Curve is the most liquid stable to stable exchange. It will do the same with v2 for other projects.

Has there been analysis undertaken to justify a the price limits that are being set as this is a very big investment?

Yes, please read the appendix. Over a dozen people assessed the numbers and arose at a range of $25m of $40m, or 1-2m CVX tokens. This would give us bandwidth for our own gauge pool, accepting bribes from other protocols, and leeway to have liquid unlocked assets (likely LPd) if the market went in a way in which we wanted to derisk (eg if CVX went to $100 or we felt we were in a bear market).

If the goal, which it appears to be, is to create a liquidity pool, why not just use the $40m to create one on any DEX and keep control of the capital/

We are undergoing initiatives (see Visor and Ohm) to add liquidity. Curve pools are unique in the amount of emissions we would be able to drive to ours, which would create a large new source of demand for ROOK.

I think this needs to be elaborated on.

The demand for rook, with the gauge and solid tricrypto emissions would undoubtedly create new levels for the ROOK price (every other gauged project has seen this effect, multiple xs). This is super critical for us - the flywheel ROOK had in Feb-May is a result of high ROOK price leading to high emissions which leads to volume and makes us the place to trade. If our emissions are valuable, our volume grows, which drives revenue.

Right now, with kip-4 having passed, that revenue creates a further exponentiated flywheel as it leads to buy backs, raising price more, which creates more revenue, which creates more dramatic incentives.

If this passed, I believe the Volume → revenue → buyback → high value incentives → volume flywheel would be much stronger than we saw in Feb-May, and just in time for the Coordination Game and instant fills + market orders. This, in my humble opinion, will be ridicolously beneficial for not only our users and market makers, but also keepers. Every stakeholder wins when we foster this new high demand for ROOK, because it makes our tokenomics & reward incentives extremely enticing. Again, I believe this is a win-win-win for holders (higher price), traders (higher rewards), and Keepers (more volume).

And that is all agnostic of the bribe APY and protocol relationships.

My concern is ROOK has no edge in this trade or strategy.

If this KIP passes, we would be the largest CVX-holding DAO. Tetranode would have more. We certainly would have edge, and I can tell you firsthand many DAOs have reached out to our team since this KIP has gained traction.

If the treasury has so much money it can undertake actions which appear to be so unrelated to ROOk imo a better strategy to consider is to return the capital, or accelerate buybacks, or fund ROOK staking

This is not unrelated to ROOK, as clarified above. I view this as a failure of communication (on my part) that this directly supports ROOKs own ecosystem. Buy backs and value accrual are functions of ROOK demand, so this actually effectively does exactly what you say, in a more elegant and substantial way than directly buying or emitting ROOK.

1 Like
#18

Thank you for this elaborate write up.

I encourage you to look into the emissions curves for CVX. CVX is set to gain relative voting control aggressively, meaning CVX will have a larger relative value to CRV in time.

As far as CRV trading at a high valuation relative to Uni or Sushi, I think that can come down to what you outline regarding boosts & locked up CRV (we could exit our position long before unlocks), as well as the dominance in stable liquidity, as well as the steps CRV is taking towards cross-chain, etc.

Uniswap (In disclosure, I do hold an amount of UNI I received for being an early user; again, I do not hold CRV or CVX; I hold a lot of ROOK, which is my incentive here) does not grant fees to its holders, while CRV’s system is proven to drive revenue and value to its holders (and transitively CVX).

There was a lot of reasoning why we would pursue CVX over CRV, notably, the flexibility to exit the position quicker (no multi-year lock up), the preferably emissions model, and the demand from other protocols.

#19

With this move, Rook becomes a king maker
It can massively incentivise its own liquidity pools on curve using CRV emissions. The demand will create a loop making ROOK the force its meant to be.

If you need evidence of this - take a look at how $spell leveraged CRV to become the king it is now. Given CVX holds 50% of the CRV vote power, if you hold large positions of CVX you become a literal DeFi god

1 Like
#20

To be clear upfront, we own CVX so i dont need convincing of its merits - its more why it makes sense for ROOK to spend so much of its capital on acquiring it. I dont see what is predominantly a stable coin swap platform as related to ROOK. Re the tri pool and the rerating you speak of, whats the best example? The appendix is great but its a factual, albeit, very helpful document. As said we own CVX so dont need convincing re value but think it would be great in these types of proposals if there is more focus on value not just dynamics - why is each CVX worth $40. But thats just us. @lapras your responsiveness here is incredible so thanks for it and dont get our intentions wrong we just trying to test this is the best way to invest what is a lot of money. Ultimately in our opinion ROOK is too cheap so its better value to spend money on buying it or reinvesting in the platform as aggressively as possible than external projects.

3 Likes