GIP-20: Karpatkey DAO Treasury Management

GIP-20: Karpatkey DAO Treasury Management

  • Let’s do this!
  • Make no changes

0 voters

GIP: 20
title: Karpatkey DAO Treasury Management 
author: @Karpatkey
status: Phase 2
type: Meta
created: 2021-11-22

# Simple Summary

Karpatkey is a DAO incubated through Gnosis Ltd. which has been tasked to use Gnosis Ltd.’s funds in DeFi transactions to grow Gnosis Ltd.’s treasury. Following the asset transfer from Gnosis Ltd. to the GnosisDAO, Karpatkey DAO offers to provide the GnosisDAO with similar services to maximize the growth of its new treasury by applying a management system which includes recurrent liquidity mining optimisation strategies.

GnosisDAO would partner with Karpatkey DAO, and entrust them with guiding the treasury management. Authorisation from other trusted GnosisDAO community members would still always be required each time transactions are executed, at all times. GnosisDAO Multisig Wallet Signers would together continue to be able to control the funds without Karpatkey DAO’s collaboration.

# Abstract

To get the most out of the boom of governance-tokens yield farming peak in June 2020, Gnosis Ltd. shifted its treasury management strategies, taking low risk liquidity mining positions in a controlled environment for most of its ETH and stablecoin holdings.

By May 2021, a team formed by Gnosis Ltd. and Karpatkey DAO current members had been tasked by Gnosis Ltd. to take responsibility for the research, execution and reporting of the treasury management activities. In November 2020 Gnosis Ltd. announced that it would transfer certain assets to the newly created GnosisDAO. Following legal legacy system corporate and DAO structuring, this asset transfer is taking place right now.

The transition of Gnosis from a traditional for profit organisation to a DAO has created all sorts of coordination issues from a treasury management perspective that we wish to address.

As we migrate to implementing autonomous open source tooling developed by the Gnosis Safe and Zodiac teams, GnosisDAO needs to find solutions to efficiently manage its assets. Karpatkey DAO would adopt best practices from world-class organisations and create tailored procedures in new areas.

# Motivation

The size and composition of the treasury (+150K ETH) puts it in a good spot to profit from controlled DeFi opportunities.

The treasury goals are to fund the development of GnosisDAO products, new ventures and boost GNO’s value proposition.

Karpatkey DAO will support the efficient achievement of these objectives by providing GnosisDAO with a selection of market opportunities which may be analysed and executed by GnosisDAO. The role sharing leads to a workload relief of the GnosisDAO because it does not have to extensively focus on the market dynamics.

Karpatkey DAO’s goals are the following:

  • Design and implement an efficient and robust treasury management system
  • Identify the best economic opportunities for the treasury tokens without modifying the GnosisDAO portfolio of investments (the GnosisDAO would have to define its portfolio and allocation to new ventures)
  • Design mechanisms for GNO token economics
  • Coordinate and negotiate cross-DAO efforts, joint ventures, mergers and acquisitions

To align with GnosisDAO’s vision and ethos, and increase transparency with GNO token holders, we propose that information about how investments are managed is made available to the GnosisDAO community. Treasury management would be handled in a completely transparent way, positively impacting GnosisDAO’s reputation and trustworthiness.

## Past Performance

The inception of Karpatkey DAO as Gnosis’ treasury management consultant has resulted in a consistent revenue stream for Gnosis, increasing its treasury size by circa $1.5 M a week (YTD tracked since May 2021 includes but is not limited to: 71K GNO, 350K BAL & 20K FLX).

Karpatkey DAO has continuously increased the treasury holdings and the amount and complexity of positions while significantly reducing their size and associated risk.

This is illustrated in the chart below:

The number of positions was increased more than 3X, significantly reducing their size and associated risk. The improvement in capital management efficiency has entailed a substantial workload increase.

History of transactions for the main DEFI multisig wallet for the last year where a substantial increase in transaction volume can be seen as of May 2021.

Reporting

Karpatkey has produced weekly reports since May 2021. This is a sample from week 42 of 2021.




## GNO buybacks

On May 24th 2021, Gnosis Ltd. approved a decision to use a fraction of the non-strategic farming rewards to buy back GNO. 71115 GNO have been bought back since then. The fundamental reason behind this decision was that the valuation of GnosisDAO’s holdings and investments have made GNO a good fit for the treasury.

Some other previous actions include:

  • Acting as GNO market makers in different DeFi protocols and networks
  • Interacting with other protocols for partnerships and DAO swaps like Element and Balancer
  • Acting as a delegee for the governance tokens in other DAO’s proposals, in the best interest of Gnosis Ltd.
  • Pushing for bug-free integrations of Safe into DeFi protocols like Alchemix, Cream, Barnbridge and Instadapp; and laid the groundwork for future Safe users on DeFi Apps.

# Specification

Karpatkey DAO has currently 8 full-time and 2 part-time contributors (and currently hiring 3 additional full-time) who have been dedicated to Gnosis Ltd. (and would hopefully with this proposal passing be dedicated to the GnosisDAO), organised in the following teams:

Research and Strategy: Software developers and finance professionals responsible for the technical and financial analysis of investment opportunities, their associated risk, and prospective new protocols on a regular basis. They are responsible for the development of infrastructure, the strategy proposal (updated at least once a week), Emergency Plan, Risk Analysis Report and a Treasury Vision Document.

Execution: Interdisciplinary team that supports the execution of the transactions to be implemented as a result of the weekly strategic proposals. That includes financial strategies, specific trading plans for buybacks and acquisitions, OTC deals, etc.

Tracking and Reporting: Finance professionals who track and report on loans, yields, buybacks, relative market price evolution, balance sheets, accounting, etc.

# Rationale

The way in which Karpatkey DAO works adheres to industry best practices at a competitive cost for Gnosis Ltd. and now hopefully for GnosisDAO, fostering a mutually beneficial long term growth and strengthening of GnosisDAO’s position in the market. This not only refers to the size of its treasury, but also to the GnosisDAO brand perception in the community.

On one hand, the increase of the GnosisDAO treasury size due to Karpatkey DAO’s treasury management guidance unlocks new investment opportunities, expanding the reach and breadth of GnosisDAO’s capabilities in a virtuous circle. On the other hand, the adherence to industry best practices in terms of transparency and reporting will convey to the market players that GnosisDAO is trustworthy and aligned with the DeFi ethos.

Karpatkey DAO revises its internal processes and performance every month, as part of its continuous improvement efforts, necessary to remain competitive and harness the fast-paced crypto markets.

# Terms of the Agreement

## 1. Karpatkey DAO’s Duties and Responsibilities

  1. Research, analysis, risk management and execution-support regarding yield optimised DeFi strategies on a daily basis
  2. Development of infrastructure
  3. Periodic reporting
  4. Recruitment of additional professionals
  5. Design of mechanisms for GNO token economics
  6. Networking with other DAOs to reach mutually beneficial agreements
  7. Karpatkey DAO shall at all times comply with the terms of the GnosisDAO Participation Agreement.
  8. Send funds to the GnosisDAO main wallet for any requirement whenever needed within 7 days of it being informed

## 2. GnosisDAO Duties and Responsibilities

  1. GnosisDAO invests $1MM at a $50MM valuation and a 20% early investor discount (2.5% ownership of Karpatkey DAO)
  2. The Zodiac team will dedicate resources to improve the infrastructure used by Karpatkey

## 3. Fees

Karpatkey DAO will charge GnosisDAO exclusively in GNO tokens and then hold them to align both parties’ financial interests and because Karpatkey believes in the long term sustainable growth of GnosisDAO

  • A 3% fee (inclusive VAT or other fees payable by Karpatkey DAO) on the yield farming profits will be charged by Karpatkey DAO, calculated in the weekly balancer report, auditable by GnosisDAO. Each weekly report shows rewards in different tokens. We would measure the value of each token (LDO, CRV, COMP, etc or native tokens for interest and trading fees) converted to GNO, and collect a percentage fee of all the earnings acquired. Everything will be measured at the opening price of Mondays from Coingecko
  • The fee will be sent to the Karpatkey DAO Multisig and locked up for a minimum of 6 months, used for GBC validators, added to a 80/20 GNO/WETH Balancer or similar pools and held there for a minimum of 6 months
  • Once an accounting team delivers GnosisDAO reports, we’ll calculate the fee based on the monthly Balance sheets. Yield farming fee = (Weekly liquidity mining rewards + arbitrages - trades slippage - deposit/withdrawal fees - impermanent loss - gas fees) * percentage fee, converted to GNO
  • Fees will be paid in GNO by the 5th day of each month to the Karpatkey DAO multisignature wallet
  • Karpatkey DAO will be liable for their own tax obligations arising from or in connection with their services under this proposal to the GnosisDAO.

## 4. Rate Adjustments and Renegotiations

Both parties commit to negotiate the fees by way of the GnosisDAO governance mechanism in force at the time.

## 5. Termination

This agreement has a fixed duration since it is approved by the GnosisDAO governance mechanism.

Any GnosisDAO community member may terminate Karpatkey DAO’s engagement under this agreement for any reason by way of Governance Mechanism. Kapatkey DAO may terminate this agreement upon four week’s’ notice posted as a new discussion thread in the GnosisDAO forum. In case the termination is requested by GnosisDAO, Karpatkey DAO will be granted an exit fee equal to the fees collected during the last 2 months, which will be paid in DAI. Regular fees will be collected until the day of termination.

## 6. Reporting

Karpatkey DAO will provide the reports detailed below and support in identifying data elements upon request from the GnosisDAO’s community. Also, Karpatkey DAO would review data reported and assist in performing analytics and quality reviews to confirm the accuracy of the data.

7. Custody of Funds

Karpatkey DAO is not a custodian of funds. The funds will be in possession of the GnosisDAO at all times.

KarpatkeyDAO will sign transactions using the following addresses:
0x65E5017A384B2774374812DC766fC4E026BB23e5
0x5DcDBdfabd084d704B5abA39863eB5f6a50Ff8a2

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 GnosisDAO or Karpatkey DAO.

The plans outlined in this Phase 1 proposal are subject to discussion by the GnosisDAO and may need to be (re)structured to take account of 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.

Edits made on Phase 2: Added fee and $1MM investment on Karpatkey
Edits made on Phase 3: Modified 1 Karpatkey’s signing address

This proposal is in phase 3, please vote on Snapshot!
https://snapshot.org/#/gnosis.eth/proposal/0x86cb89a974a075451f8bfae1892d08136fae8c4321ada07025ff8b2b5edddadc

15 Likes

Thank you for the proposal! I think it would make sense, especially given that it’s a continuation of what Karpatkey DAO has done for Gnosis Ltd before the asset transfer.

There are a number of details I would like to discuss:

  • The setup. The yield farming activity should not happen from the DAO Safe, instead, there should be a daughter Safe. I will make a proposal hereto in a bit. This Safe should have Gnosis DAO as its owner and as a module. The Safe should have a 3/m threshold. Karpatkey DAO should have two signers max. Further signers should be trusted Gnosis community members, ensuring that Karpatkey DAO does not have custody. When the scope guard module is sufficiently sophisticated to cover this, it should be deployed and have a whitelist of actions that Karpatkey DAO can undertake without a Gnosis DAO signer.
  • If the vast majority of assets are being yield farmed on, there needs to be a commitment from Karpatkey that assets can be made liquid in a timely fashion and dispensed when needed.
  • Ideally, there should be a third party that audits the treasury periodically. Once a month maybe? I know Llama DAO offers these services, but I am sure there are alternatives. Ideally, this service provider would also benchmark Karpatkey’s returns against competitors.
  • I understand from the proposal that Karpatkey does not intend to do accounting in-DAO. Why is this? What is the level of reporting done by Karpatkey?
  • What percentage fee for management was Karpatkey DAO targeting? For reference, Gnosis Ltd. paid 3% of profits. I would suggest the same, unless something has materially changed?
  • “Any GnosisDAO community member may terminate Karpatkey DAO’s engagement under this agreement for any reason by way of Governance Mechanism” --> is what you mean by this any community member can trigger a vote on ending the engagement? If so, this is a given anyway. Should this maybe be deleted or amended to “GnosisDAO can terminate Karpatkey DAO’s engagement by way of its Governance Mechanism”?
  • Should there be an OpSec requirement? Karpatkey signers may not live in the same house, must use a safely stored hardware wallet with its seed phrase in a bank vault ONLY, and notify Gnosis DAO the moment that they suspect someone unauthorized has gotten a hold of one of the keys or similar?
3 Likes

Thank you for your comments! We’ll add our replies inline below to address each of the items you brought up.

  1. The setup. The yield farming activity should not happen from the DAO Safe, instead, there should be a daughter Safe. I will make a proposal hereto in a bit. This Safe should have Gnosis DAO as its owner and as a module. The Safe should have a 3/m threshold. Karpatkey DAO should have two signers max. Further signers should be trusted Gnosis community members, ensuring that Karpatkey DAO does not have custody. When the scope guard module is sufficiently sophisticated to cover this, it should be deployed and have a whitelist of actions that Karpatkey DAO can undertake without a Gnosis DAO signer.
  • We agree, Karpatkey should have 2 signatures and never hold custody of the assets.
  1. If the vast majority of assets are being yield farmed on, there needs to be a commitment from Karpatkey that assets can be made liquid in a timely fashion and dispensed when needed.
  • Yes, the process would be the same that we applied with Gnosis Ltd. Karpatkey would commit to make assets liquid in a timely fashion and transferred upon request.
  1. Ideally, there should be a third party that audits the treasury periodically. Once a month maybe? I know Llama DAO offers these services, but I am sure there are alternatives. Ideally, this service provider would also benchmark Karpatkey’s returns against competitors.
  • We are all for transparency! We will look for auditors specialized in our industry.
  1. I understand from the proposal that Karpatkey does not intend to do accounting in-DAO. Why is this? What is the level of reporting done by Karpatkey?
  • So far we have applied several improvements to our weekly reporting. We are currently looking for a new experienced team member to take our accounting to the next level. This is a key element of our continuous improvement plan.
  1. What percentage fee for management was Karpatkey DAO targeting? For reference, Gnosis Ltd. paid 3% of profits. I would suggest the same, unless something has materially changed?

The fee should be in accordance with the scope of service provided and the market fee. We still need to evaluate the hiring needs based on the scope.

  1. Any GnosisDAO community member may terminate Karpatkey DAO’s engagement under this agreement for any reason by way of Governance Mechanism” --> is what you mean by this any community member can trigger a vote on ending the engagement? If so, this is a given anyway. Should this maybe be deleted or amended to “GnosisDAO can terminate Karpatkey DAO’s engagement by way of its Governance Mechanism”?
  • Yes, we will amend this point.
  1. Should there be an OpSec requirement? Karpatkey signers may not live in the same house, must use a safely stored hardware wallet with its seed phrase in a bank vault ONLY, and notify Gnosis DAO the moment that they suspect someone unauthorized has gotten a hold of one of the keys or similar?
  • Yes, security is our top priority. We will write down the protocol that we follow.
4 Likes

Thank you for your replies! Can you follow up with more information on:

  1. Potential auditors

  2. There should definitely be a concrete fee proposal.

  3. Can you post your security protocol? There are several areas that should be included: General setup (Active Treasury Safe setup, threshold, signers), signing procedure (where do signers coordinate? Is everyone under the obligation to understand and question each tx? What’s the background of the signers?), and signer op sec (hardware wallet? Where is the seed phrase? Can signers ever be in the same place?)

The way that I see the security framework in the mid-term is by way of the scope guard. The treasury management DAO should have permission to undertake whitelisted actions out of the treasury management Safe without a Gnosis DAO signatory. The scope guard list would need to be updated periodically. @auryn_macmillan, what’s the state on the scope guard right now, how far are we from this atm?

Until that time, Gnosis DAO needs to co-sign or have a designated trusted community member co-sign all actions. This is inherently higher-latency, so should just be a stop-gap measure in order to not forgo the 50% difference between active and passive treasury management for the Gnosis treasury.

2 Likes

It’s audit ready. As soon as has been audited we’ll be ready to deploy and start using it.
That said, it’s unlikely that it makes it into this audit cycle (the GP token contracts have been prioritized over the roles module) and the next audit window doesn’t start until Jan 10th, 2022. So we may not be able to start phase three of the Gnosis DAO proposal process until the week of January 17th.

1 Like

Thanks! Mid to late Jan seems super reasonable!

1 Like

Hi @ernst,
Here’s the security protocol Karpatkey would follow:

  1. All members of the execution team will use hardware wallets to store their private keys to use the Gnosis Safe (which will require at least one signature from Karpatkey and at least one signature from the client)
  2. Hardware wallets will be stored in a lockable drawer or safe in their place of residence, and will only be taken out to execute transactions.
  3. Transactions will never be carried out in public places
  4. The owner of each hardware wallet will create a password of at least 6 digits to unlock it which won’t be shared with anyone. If a backup of that password is made, it will be written down by hand and stored in a safe
  5. Recovery Seed phrases will be written down by hand, and won’t be photographed or stored online. They will be stored in multiple different physical locations.
  6. All transactions will be carried out during a videoconference where all members’ faces will be clearly visible. Before executing each transaction, each team member will say it out loud, to ensure that the wallet is in possession of its owner
  7. If a hardware wallet is lost or stolen, the owner will notify the rest of the team immediately and all permissions will be revoked ASAP in the Gnosis Safe
  8. If a team member looks uncomfortable or doesn’t act normally, the transaction will be aborted by other team members and the call will be terminated
  9. If a team member is being coerced into executing a transaction, a panic phrase will be mentioned casually, and the other team members will abort the transaction and terminate the call
  10. Before signing a transaction, the underlying smart contract must be checked in Etherscan by the signers
  11. Batch revoke all protocol approvals once a month -once the feature becomes available- (to reduce exposure to smart contract hacks)
  12. Third parties cannot be informed about the identity of the signers by any means
  13. When 2 or more signers are physically in the same venue (i.e. the team meets at a conference, retreats etc.), the number of hardware wallets in their possession should be signing threshold - 1
  14. The Emergency Protocol execution can only be triggered by the execution leads. The execution team members will go online immediately and follow the protocol.
    This protocol is a file detailing the steps that must be followed to minimize the impact in case of a hack or a significant price drop. It will be periodically updated by the execution team to ensure that the data held in it is correct and up-to-date.
4 Likes

The treasury management should be delegated

2 Likes

The snapshot vote is live! Please vote here: Snapshot

4 Likes

Friendly reminder: There are 2 days left to vote for GIP-20 on Snapshot

https://snapshot.org/#/gnosis.eth/proposal/0x86cb89a974a075451f8bfae1892d08136fae8c4321ada07025ff8b2b5edddadc

6 Likes

Apparently voting is not allowed to GNO holders holding on Gnosis Chain…? I moved recently my bag from mainnet to Gnosis Chain. I could vote in december but have no vote power now. It looks strange to me…Any comments please, thanks.

3 Likes

Unfortunately, Snapshot is currently configured in a way that only GNO on mainnet counts. As the Snapshot configuration is controlled by the DAO itself it requires a DAO proposal to change that.

But 100% agree. We should make GNO on GC including GNO locked in the deposit contract for validators eligible for voting.

1 Like

IF Snapshot voting is to be used in the future it needs to be configured to accept GNO on Gnosis Chain. Almost everyone from xDAI probably still holds their GNO there and are being left out of governance. Please make sure it includes LP as well as validator holdings.

BTW: I have not proposed this YET for Maker as it the proposals are still in comment period with private parties but one thing to think about GNO paired with other assets (particularly stablecoins) in LP to provide a market is actually MORE valuable to a DAO than their TOKEN. In the loosest sense GNO paired with wxDAI is worth at least 2x GNO value because it isn’t just making a market it is putting GNO up with cash for price change exposure.

I see the treasury and the DAO appears to prefer GNO-ETH LP - My own LP return datasets suggest TOKEN-STABLES give significantly better return to LP holders than TOKEN-ETH due to the lack of price correlation.

I am quite amazed at how well the Gnosis Treasury is doing return wise. One thing I wonder how will the DAO be affected should there be a market wide price decline event (or a full out long term bear market).

3 Likes

Yes, we need to move voting with LPs and GC asap!

The main reasons we used GNO-ETH LPin the past are asset availability (we own lots of ETH) and low impermanent loss due to GNO-ETH high correlation.

1 Like

Adding another voice that GNO on Gnosis Chain needs to count for these votes!

2 Likes

Please see my forum response in another thread that touches on this and echos that GNO on Gnosis Chain needs to count in any ballots under same weight and rules as any other chain.

Thanks.

1 Like