sushiHOUSE - A Treasury Management Proposal

sushiHOUSE Treasury Management

sushiHOUSE

A DAO House by YAM

Summary

Treasury Management Solution for Sushi

Successful companies invest and effectively deploy capital from the corporate treasury. Likewise, community run Decentralized Autonomous Organizations (DAO’s) share a similar imperative. DAO House by YAM combines various elements into a customizable solution that can bring significant operational stability to any DAO.

Abstract

SushiHOUSE is a fully-customizable treasury management solution built by the Yam Finance team. This proposal would allow the Sushi DAO to migrate part of the sushi treasury into a diversified basket of ETH, BTC, stablecoin and other DeFi allocations as a Bear Market Protection Portfolio. sushiHOUSE will have an active portfolio manager to rebalance portfolio according to risk profiles.

For further divestment in addition to funds allocated to sushiHOUSE a purchase into the Defi Pulse Index (DPI) as a purely buy and hold strategy for the Sushi treasury.

Preferences of the Sushi core team:

  1. Portfolio Goal: Bear Market Protection Portfolio
  2. Portfolio Risk Target and Strategy: 1 or 2; out of a scale of 1 (conservative) to 5 (aggressive)
  3. Portfolio Starting Funds: $5 to $10 million in $SUSHI
  4. Portfolio Manager: @Krugman an experienced crypto portfolio manager and currently managing yamHOUSE for yam.finance and an active Sushi community member
  5. Buy and Hold Defi Pulse Index (DPI): $2.5 to $5 million in $DPI

These are preferences by the core team, but ultimately it is up to the community to decide.

Part two of this proposal is to participate in a DAO Treasury token swap as a collaborative project to support the entire DeFi ecosystem. Sushi will pledge a small portion of sushi towards this DAO Divestment initiative. Additional details will be in a new proposal when DAO token swap candidates are obtained.

Motivation and Challenges

Sushi Treasury currently holds approximately $250 million entirely in $SUSHI. This exposes the operational stability of the DAO to significant crypto market risks.

Treasury Management Challenges sushiHOUSE Treasury Solutions
Risk Would a single event trigger severe instability or collapse of the treasury? Customized risk assessment and risk profiling assures sustainability and success
Strategy What strategy and metrics are best to maintain growth and minimize risk? Strategy team explores how to best use treasury for meeting investment goals
Security Can the treasury be managed securely while maintaining custody of assets? DAO House is built on TokenSets smart contracts and dependable infrastructure
Agility Is DAO governance agile enough to respond quickly to risk events? Dedicated active manager operates with guardrails that the DAO establishes
Transparency Are investment decisions, changes and results easily tracked by the community The DAO House/TokenSets public UI provides real-time investment performance and details

RISK / STRATEGY: Bear market protection portfolio

The investment objective of sushiHOUSE is to protect against an extended bear market by diversifying into lower volatility assets such as stablecoins, BTC, ETH and hedges to protect Sushi’s Ecosystem. This process allows for a more dynamic allocation of assets with better risk handling and analysis without loss of decentralization.

End-to-End Risk Management

Portfolio Risk Analysis To manage risk, DAO House investment will be determined by an investment strategy on a scale from 1 to 5 (from conservative to aggressive) that targets risk and diversification goals set by the dao.
Beta and Correlation Portfolio rebalancing is based on BETA and Correlation analysis.
Smart Contract Guardrails Execution is done by a portfolio manager which can be appointed by the DAO. Smart contract guardrails ensure capabilities of the portfolio manager are secure and in the best interest of the DAO.

Portfolio Risk Targets

Krugman has developed a portfolio risk target: This table provides a sample of how DAO House helps each DAO establish the right risk tolerances based on Beta and Correlation. However, each DAO House treasury solution is customized to the unique goals and situation – which can and will change as goals and market conditions change.

Risk/Exposure Level Beta Target (vs ETH) Correlation Target (vs ETH)
1 - Very Low 0.25 0.2
2 - Low 0.5 0.4
3 - Medium 0.70 0.6
4- High 1 0.8
5 - Very High 1.5 0.9

Portfolio Allocations

Based on an allocation starting at $5 million, the larger the portfolio the higher the liquidity requirements of the underlying assets. This was specifically developed for Sushi’s situation where a small amount of the total treasury would be divested into sushiHOUSE while a bulk of the remaining assets would continue to be $SUSHI.

To make an effective bear market protection portfolio, a minimum of 33% of treasury assets should be divested out of the protocol token. Based on building with this end in mind, @krugman has created a general long term portfolio allocation for sushiHOUSE, which can be customized to Sushi’s needs and community feedback.

Risk/Exposure Level ETH Alloc. WBTC Alloc. Stablecoin Alloc. DeFi (Large Cap) Alloc. DeFi (Mid/Small Cap) Alloc.
1 - Very Low 15% 15% 65% 2.5% 2.5%
2 - Low 25% 25% 45% 2.5% 2.5%
3 - Medium 55% 20% 20% 2.5% 2.5%
4 - High 70% 20% 5% 2.5% 2.5%
5 - Very High* 120% 0% 0% 2.5% 2.5%

To be clear: 33% of assets does not need to be allocated to sushiHOUSE but can be done via a variety of products.

Treasury Asset Divestment Options

There are multiple options to divest $SUSHI token to minimize impact on $SUSHI. At yam.finance we have explored each of these opportunities and are able to offer it to sushiHOUSE. Our team will create a process that is approved by the core team to ensure that market impact is minimized.

  1. Portfolio manager lead diversification: Smart contract guard rails can be placed on the amount per time period that a portfolio manager can divest. Also instructional restrictions can be put on portfolio managers.

  2. DAO Treasury token swaps: A whitelisted set of participating DAOs who would also like to divest their treasury, where a OTC swap can be done without affecting price. Agreements can include a vesting period so it will be mutually beneficial. This requires coordination from multiple DAOs and their communities, so it is planned as a phase 2 for sushiHOUSE.

  3. OTC trades: There are a range of options for OTC trades. At Yam.finance we routinely use OTC desks for larger positions to protect from market manipulation.

SECURITY / AGILITY – Built on Set Protocol

Set Protocol is audited by OpenZeppelin and ABDK consulting. Set Protocol contracts repo has 100% line and branch coverage over the span of over 840+ unit, integration and simulation tests. Set protocol allows a portfolio manager who is assigned by the DAO to operate within guardrails that are held to strict controls and performance reviews. At no time is the portfolio manager in custody of assets and investment options are set by sushi DAO. Set Protocol has built multiple indexed products including DeFi Pulse Index DPI which has over $100 million AUM / TVL.

Portfolio Manager Roles and Restrictions

Perform actions in accordance with DAO control structures and investment strategy
Execute trades via the dedicated (TokenSets based) customized Trader UI
Execute trades to keep portfolio within beta and correlation targets established by the DAO
Any additional assets must be whitelisted and approved by the DAO in order to add into the set.
Trades can be restricted by time and volume.
sushiHOUSE tokens are in custody of the treasury, portfolio manager has no direct access to assets.

TRANSPARENCY - Simple Portfolio Monitoring

sushiHOUSE will be listed on the TokenSets website (by Set Protocol) to showcase asset performance, as well as smart contracts, on-chain transactions and historical movement of tokens. At Yam Finance we’ve tested full implementation of a DAO House with the first house: yamHOUSE.

Active Manager Trade UI and Public Dashboard

The private and secure Trader User Interface (left), and the publicly available TokenSets website (right).

sushiHOUSE Costs

Yam <> Sushi have been mutually supporting each other since their beginnings and we would be happy to support in building sushiHOUSE. We ask in return a 3%+ investment into $YAM token to be hodl’ed inside the sushiHOUSE. Yam Treasury and yamHOUSE currently hodl over $1.5 million in $SUSHI tokens.

Polls

Overarching Proposal Poll

Portfolio Risk Target and Strategy:
  • Create sushiHOUSE w/ additional DPI Purchase
  • Create sushiHOUSE without DPI Purchase
  • Only DPI Purchase
  • Do not do anything

0 voters

Portfolio Risk Target and Strategy:

Risk/Exposure Level Beta Target (vs ETH) Correlation Target (vs ETH)
1 - Very Low 0.25 0.2
2 - Low 0.5 0.4
3 - Medium 0.70 0.6
4- High 1 0.8
5 - Very High 1.5 0.9
Risk/Exposure Level ETH Alloc. WBTC Alloc. Stablecoin Alloc. DeFi (Large Cap) Alloc. DeFi (Mid/Small Cap) Alloc.
1 - Very Low 15% 15% 65% 2.5% 2.5%
2 - Low 25% 25% 45% 2.5% 2.5%
3 - Medium 55% 20% 20% 2.5% 2.5%
4 - High 70% 20% 5% 2.5% 2.5%
5 - Very High* 120% 0% 0% 2.5% 2.5%

Team Preference 1-2

Portfolio Risk Target and Strategy:
  • Risk Level 1
  • Risk Level 2
  • Risk Level 3
  • Risk Level 4
  • Risk Level 5

0 voters

Portfolio Starting Funds:

Team preference $10 Million

Portfolio Starting Funds:
  • $0
  • $5 Million in $SUSHI
  • $10 Million in $SUSHI

0 voters

Re-evaulate after 3 months.

Portfolio Manager:

Team Preference @Krugman

Portfolio Manager:
  • @Krugman
  • Another Portfolio Manager TBD

0 voters

Addendum - Purchase $2.5-5m DPI

Summary

Divest the treasury a further $2.5-5m into the Defi Pulse Index (DPI) as a purely buy and hold strategy to diversify the Sushi treasury. This is a separate investment to SushiHOUSE but is being put forward in the same proposal.

Abstract

DPI is a basket of the top DeFi tokens built on Set Protocol V2 contracts. The methodology was designed and is managed by the team at DeFi Pulse aka Pulse inc. Tokens in the index are rebalanced based on relative market cap each month, full details of the methodology including what constitutes an inclusion and how projects are assessed can be found here.

The index is now managed jointly between Pulse inc and the community at Index Coop where we look to market, integrate and improve productivity of the index. Part of that role is to communicate the benefits of holding the index compared to the individual tokens and look to share the benefits with both individual and organisational level investors.

During the most recent rebalance, Sushiswap as a project passed 6 months since launch and became eligible for inclusion into DPI. The rebalance has now taken place and the Sushi token makes up just over 8% of the Index.

Motivation

The motivation to hold DPI essentially comes down to improving risk-adjusted returns vs holding just Sushi but maintaining exposure to the DeFi sector. For the most recent breakdown of DPI performance we publish a monthly update, and there is a deep dive on performance against competitors and BTC/ETH here.

The highlights of both these articles are that:

  • DPI performance in February, over 3 months and since inception are all positive at 18%, 257% and 198% respectively. As you can see in the table below, DPI has outperformed ETH and BTC since inception, at the cost of only a 1-2% increase in volatility depending on the benchmark.

  • DPI is starting to represent a viable portfolio addition over and above BTC or ETH as the DeFi space continues to grow and mature. For example, during January BTC saw a 30% drawdown across the month while DPI captured 85% of BTC’s upside, but only 18% of that downside.

  • Measured against similar products DPI has a lower annualised volatility

Specification

Carrying out the trade has to be done carefully and over time. Recommend the process is managed by the SushiHOUSE portfolio manager using the upcoming Exchange Issuance function to be launched by Index Coop.

Exchange Issuance has been designed as a one click solution in cases where reducing slippage is more important than the gas cost associated with purchasing multiple tokens, i.e very large trades. The function will swap the input token (ETH recommended) for all of the underlying in the correct proportion and subsequently issue DPI tokens using the best prices from either Uniswap and Sushiswap.

Poll

To purchase DPI:

Purchase DPI:
  • $0
  • $2.5 Million in $SUSHI
  • $5 Million in $SUSHI

0 voters

A special thanks to @0xMaki @dangerousfood and @magicturtle for the guidance on crafting this proposal.

Yam Team

9 Likes

Thank you @Feddas for putting this proposal together! Just wanted to note here that we will be discussing the updated proposal and @Feddas will be answering questions from the community tomorrow(monday) on The Sushi Forum at 9PM UTC(See here for most recent sushi forum https://youtu.be/B80UIu_2zUY). Definitely in favor of treasury management, I encourage anyone with questions to come out!

6 Likes

Would it be possible to change the poll options a little bit? I think optimal portfolio management should be considered holistically and poll options are currently all independently voted on. For example, if I’m in favor of a higher risk target and strategy, I would prefer to set initial starting funds to $5 million in $SUSHI as opposed to $10 million.

Good suggestion, after speaking to some core members, our first focus is on a more secure growth / risk adverse proposal vs something more aggressive due to the fact that the entire portfolio is allocated in sushi (very high systemic risk). After some of the treasury has been re-allocated, I would be in favor of creating a higher risk target and strategy. That being said, ultimately if more people mirror your thoughts we could def adjust the polls.

Feddas

2 Likes

I love how detailed the proposal is. Big props. :+1:
What are the costs of employing such strategy & manager? 2/20?

I thought we’d go with yearn vaults, though. Could safely draw 1/10th worth of sushi & deploy it in vaults to generate 2.5M+ yield/year.

We should calculate the bare minimum needed to cover treasury expenses/year and move from that.

However, exceeding 33% at this stage of a generally perceived early days of defi or sushi cycle might be a big of a sacrifice of potential upside for the cause of safety.

1 Like

Hey all, just dropping a note as the rep from Index Coop in case there are any questions about the DPI section.

Great to see the Sushiswap community is one of the first DAOs to start thinking about treasury management like this, keen to see how it evolves from here!

2 Likes

sushiHOUSE there is no costs except for a 3% to 5% investment into $YAM token inside sushiHOUSE.
Active management by @Krugman is 1% with no performance fee. Community can select/change their own manager at any time.
Yearn vaults can be included the sushiHOUSE as part of the entire strategy. Depending on the vault an adapter needs to be programmed (easy but it needs to interface set protocol to vault).

Sacrifice of potential upside for the cause of safety is probably the biggest issue right now for a 250+ million treasury but fortunately we are able to retain some potential upside while reducing risk with this proposal.

3 Likes

I’m reading this as this as, Krugman will manage the allocations within Set Protocol, and the set will include 3-5% allocation of $YAM in the Portfolio.

Then the streaming fee from Set to Krugman will be 1%?

Is that correct?

That is correct.

Streaming fee of 1% to Krugman will be split 70% Krug / 30% Yam Treasury. This is initially just for sushiHOUSE and any future houses might be different.

2 Likes

Follow up to the SushiForum: Very relevant question what’s so great about $YAM that it should be in the sushiHOUSE. Short community update presentation can be found here.

TL;DR: YAM DAO is as vibrant as never before with 17 contributors (and growing) + $7m in the treasury. We are building 3 different products at the cutting-edge of DeFi, all of which have a path to revenues. DAO House (Treasury Mgmt as a Service), degenerative.finance (Synthetic tokens built on UMA such as uGAS, uSTONKS, uVOL-BTC & -ETH) and Umbrella (permissionless insurance protocol).

Most important catalysts are a) Leveraging synergies for our product development , b) Path to revenues, c) Complete transition from Rebase token to Governance token.

We are also doing a ton of things on the marketing/communications side to get the word out and make everyone understand where YAM is going. $40m market cap is not a level that represents what we are building.

4 Likes

Just to add onto that, this is the recording of the Sushi Forum discussing the sushi HOUSE in-case anyone missed it. The Sushi Forum Episode 21 - YouTube

2 Likes

Following up on what @Graine mentioned

If we’re concerned about our current treasury position and are wanting to diversify does diversifying into other projects imply that we’re less bullish on Sushi than those other projects?

I think it does to some extent.

Further, if the purpose of our treasury is to ensure that Sushi can weather upcoming bear markets, and provide runway for continued development, would a better strategy just be to set a fixed % of treasury to deposit into the Yearn DAI Vault (Earning ~20% now)

Maybe if we felt like we wanted to put the treasury even more to work we could use some of it to LP on Sushi/DAI or Sushi/WETH (We’d expose ourselves to IL, but it could be worth it as we’d be creating deep liquidity for Sushi on Sushiswap.)

I think it comes down to what we want the treasury to be for.

Is it a safety net for Sushi to provide runway and security?

or

Is it something that we want to pay someone else to put to work for us?

I do think it may be prudent to do something to ensure the treasury has some kind of a floor in the event that the price of Sushi were to tank. Even if that means we miss out of some of the amazing gains that Sushi is primed for, an emergency fund of X # of months to ensure Sushi can continue to operate isn’t a terrible idea.

1 Like

From one point of view it could be viewed that way, but let’s consider this from a wealth management point of view, it’s primarily a question about risk management. Bullish or Bearish, it’s prudent for the long term success of any treasury to diversify. Companies have been known to diversify into their competitors because the space as a whole is growing. In this case, is it unwise to invest in a competitor? Maybe there could be other reasons for doing so?

In addition, if we ask 100 people in sushi what their point of view is on a specific investment, you might get a significant number of differing points of view. How do you manage this? Well the best way to do this is to go with a goal based risk management diversification strategy that uses analytics vs emotions.

I agree, this is a possible strategy that we will likely utilize in the sushiHOUSE. The fixed % of the treasury might not be the best in certain situations. Would it not make more sense to keep it flexible and part of an overall strategy to manage risk?

Here lies the beauty of sushiHOUSE, it can be both and all of the above (in my post). You’ve got choices and options, you can choose your own portfolio manager, you can choose your own future allocation and risk appetite. To start tho, I do recommend what the core Sushi team has recommended.

Thanks for the questions.

2 Likes

We seem to have some pretty good support. Would we be able to get this up for a snapshot by the core team?
@0xMaki @dangerousfood

Thank you.

Feddas

1 Like

Approved for Snapshot will be opening up today.

4 Likes

Hello, if the purpose of SushiHOUSE is for treasury protection during the bear market, then it seems the safest choice is the best one, with highest allocation in stablecoins and zero allocation in DPI.

That is my 2 cents :smiley:

2 Likes