Overview
This proposal builds upon the work of two previous Compound proposals that utilized Aera to operationalize its treasury. Between both the Compound Reserves Vault and the Compound Vendor Payment Program, Aera has aided Compound in swapping out of long-tail reserve assets, minimizing the slippage of vendor’s COMP payments, and generating yield off of idle protocols assets.
There is currently an excess of USDC and DAI reserves in Compound V2, which could be deployed in lending markets to generate yield for the treasury. We additionally recommend utilizing the excess USDC and a portion of the ETH in the Compound treasury via the same vault.
This continuation of the existing programs will enable the DAO to drive a new yield source for the DAO treasury to fund ongoing expenses and future initiatives. This proposal has an expected impact of $30M~ in additional Compound V3 TVL and $1M+ in additional treasury revenue via yield generation.
Aera and Compound
Aera is a non-custodial, treasury management solution designed for DAOs and currently has no fees. All of Compound’s Aera vaults are fully owned by the Compound Governor Timelock and none of the assets in the Aera vaults can be used for governance delegation.
The Compound DAO has been using Aera for treasury management for almost a year. Two different proposals, the Aera Pilot Program and the Aera Vendor Payment Program, deployed two Aera vaults, which currently hold about $9.1M in aggregate as of September 24, 2024. The Gauntlet renewal ultimately leveraged the Vendor Payment Program vault as well.
Compound Reserves Vault
Aera submitted its first proposal to the Compound DAO in October 2023 to deploy a vault to help the DAO reallocate several long-tail reserve assets into USDC/ETH and generate yield via Compound USDC V3 markets.
Since creating this vault, the treasury has successfully reallocated the original assets into USDC and ETH using Aera. These assets were then deployed into Compound USDC V3 markets and wstETH for yield generation resulting in a yield of 4%~ on an annualized basis.
Compound Vendor Payment Vault
In May 2024, the DAO approved a follow-up, joint proposal with OpenZeppelin to deploy a vault to reallocate COMP into USDC for purposes of maintaining stable assets for operational expenses (like payments). This helped mitigate the price impact of service providers swapping out COMP tokens to fund operational expenses.
In the 4~ months since this vault has been live, it has successfully reallocated more than $4M USD worth of COMP to reserve against payment liabilities, with no observable impact on price stability.
Additional Background
Compound V2 Reserves
As the DAO evaluates opportunities to continue driving growth, it should better utilize its Compound V2 Reserve Assets for yield generation. There are currently about $59M of reserve tokens within the Compound V2 protocol.
USDC and DAI liquidity pools exhibit reserve ratios of 59% and 122% respectively. The reserve ratio reflects the pool’s ability to cover its liabilities with its current reserves. Higher reserve ratios indicate a higher buffer relative to outstanding debts, suggesting that the pool can better withstand potential insolvencies within the pool.
According to Gauntlet’s dashboard simulations and reserve ratio analysis, the Compound V2 protocol maintains a significant reserve buffer for outstanding borrows within the USDC and DAI liquidity pools relative to the estimated Value at Risk (currently $0 for all of Comp V2 markets).
Reserve Ratio - Current
Post-Aera withdrawal; the USDC and DAI liquidity pools will have reserve ratios of 28% and 43.97%, respectively. In the unlikely event that insolvencies exceed current reserves, Compound DAO, as the owner, could withdraw reserves from the Aera vault and reallocate them back into the liquidity pools.
Reserve Ratio - Aera Withdraws
It is important to emphasize that any reserves allocated to Aera vaults are still programmatically controlled by the Compound Governance Timelock, allowing them to still be utilized by the protocol as reserves. This is differentiated from other proposals which may either lock the reserves or spend them on incentives.
The DAO can deploy a total of $25M of DAI and USDC to generate yield with minimal risks for Compound’s V2 markets. If the DAO can generate a 4%~ yield on $25M, it would create an additional $1M of annual revenue for the treasury.
Proposal Details
This proposal will:
- Deploy a portion of Compound V2 Reserves and the Compound Treasury into the existing Compound Reserves vault on Aera.
- Treasury Assets ($5,893,006 as of Sept 24, 2024)
- 2,000 ETH ($2,630 as of Sept 24, 2024; $5,260,000 total)
- 633,006 USDC
- Compound V2 Reserve Assets ($25,000,000 as of Sept 24, 2024)
- 15M DAI
- 10M USDC
- Treasury Assets ($5,893,006 as of Sept 24, 2024)
- The vault’s objective function will be updated from targeted volatility to yield generation.
- This ensures the stablecoin reserves do not get allocated into volatile assets.
- The existing assets in the Reserves Vault will no longer be rebalanced based on market volatility.
- The vault will continue to allocate into Compound V3 lending markets to generate yield on the underlying assets.
Projected Benefits to the DAO
- The vault will deploy the tokens into Compound lending markets, adding an estimated $30M+ to protocol TVL and $1M+ in treasury revenue via yield generation.
FAQs
- What assets will remain in the Compound Treasury and V2 Reserves contracts?
- Assuming this proposal passes, both the main Compound Treasury and Compound V2 Reserves will maintain a significant amount of assets within the core contracts. About 7% of the Treasury and 42% of Compound V2 Reserves will be managed via Aera; utilizing token prices as of Sept 24, 2024.
- Compound Treasury ($69,801,496 as of Sept 24, 2024)
- 1,189,746 COMP ($49.22 as of Sept 24, 2024; $58,559,298 total)
- 4,274.6 ETH ($2,630 as of Sept 24, 2024; $11,242,198 total)
- Compound V2 Reserves ($27,008,123~ as of Sept 24, 2024)
- 8,295,984 DAI
- 9,091,217 USDC
- 19.1 WBTC ($63,081 as of Sept 24, 2024; $1,204,847 total)
- 4,561,158 USDT
- 829.2 ETH ($2,630 as of Sept 24, 2024; $2,180,796 total)
- 72,718.4 UNI ($6.96 as of Sept 24, 2024; $506,120 total)
- 2,989,483 BAT ($0.19 as of Sept 24, 2024; $568,001 total)
- $600K~ of long-tail assets (TUSD, LINK, COMP, AAVE, ZRX, USDP, SUSHI, MKR, FYI) (as of Sept 24, 2024)
- Are any of the proposed assets currently accruing yield or otherwise being utilized?
- None of the proposed treasury or reserve assets are currently generating yield or being utilized by the Compound DAO. This proposal will enable the Compound DAO to generate yield for the DAO treasury without putting the Compound V2 markets at risk or removing custody control of the assets from the Compound DAO governance contract.
- How would this interact with a potential Compound Staking Program?
- This proposal does not prevent a Compound Staking Program from occurring. There is still a meaningful amount of tokens in both the Compound V2 Reserves and Compound Treasury to fund the Staking Programs in discussion. Additionally, given Aera’s flexibility and non-custodial nature, the Compound DAO could still opt to utilize any of the assets allocated to Aera. This proposal would simply allow for the tokens to be utilized while the Compound DAO decides what is the best path forward for a potential Staking Program.
- What does this cost?
- Free during pilot phase (no fees paid to Aera Vault Guardians). It is programmatically impossible to turn on a fee, without a Compound governance vote approving it.
- Are there any execution costs incurred by rebalancing?
- Yes, the vault will incur execution costs as part of ongoing rebalancing activities. These execution costs will be minimized as much as possible by using the best on-chain liquidity sources.
- What is an Aera Guardian?
- Aera Guardians are experienced risk analysts and can be institutions or individuals. Guardians are able to submit suggestions to the vault for rebalancing, which the Aera vault will accept or reject based on the vault parameters. This vault utilizes Gauntlet as the Guardian.
- Are there docs and an app?
- Yes, see docs.aera.finance
Next Steps
We would like to gather feedback from the community to gauge interest in this proposal.