Aera for Compound - Extension

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:

  1. Deploy a portion of Compound V2 Reserves and the Compound Treasury into the existing Compound Reserves vault on Aera.
    1. 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
    2. Compound V2 Reserve Assets ($25,000,000 as of Sept 24, 2024)
      • 15M DAI
      • 10M USDC
  2. The vault’s objective function will be updated from targeted volatility to yield generation.
    1. This ensures the stablecoin reserves do not get allocated into volatile assets.
    2. The existing assets in the Reserves Vault will no longer be rebalanced based on market volatility.
  3. The vault will continue to allocate into Compound V3 lending markets to generate yield on the underlying assets.

Projected Benefits to the DAO

  1. 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?

Next Steps

We would like to gather feedback from the community to gauge interest in this proposal.

4 Likes

We’re in favor of this way to let Compound DAO maximize the efficiency of its treasury management through Aera’s vaults. By continuing the existing programs and deploying excess USDC and ETH reserves, the DAO can generate meaningful yield, with an expected additional $1M in annual revenue for the treasury, the $30m or so of additional TVL is also an untrivial amount.

A few things to note are that with about half of the non-comp supply left to compound, there shouldn’t be any liquidity issues and they’re also charging no fees. Don’t see any big reasons as to why this shouldn’t be tried. Maybe if this goes well, in the future, the Gauntlet service fee can be reduced, and funding come directly from the fees and revenue generated here.

3 Likes

(The following opinion is that of Christian and Jordan from the Event Horizon core team. The Event Horizon community will come to their own consensus and independently dictate the voting behavior of the Event Horizon delegation.)

We’re broadly supportive of this proposal. Expanding treasury management and diversification efforts are important for the protocol’s robustness in drawn out periods of weak price action, but are also helpful to minimize the effects of COMP sell pressure from distributions to various payment partners.

3 Likes

We are in favor of this proposal. With yield generation as the new objective function, the new Aera vault for stablecoins is promising, especially since it doesn’t require any lockup, remains liquid, and is fully controlled by the DAO. Previous rounds of the Aera program have successfully managed asset diversification in a permissionless manner with a customized objective function.

Our main concern naturally is the fact that these assets are being pulled from the reserve fund. This should never fall below an amount that leaves the protocol with an excess of liabilities. But the VaR simulations seem to display quite a strong cushion. We just request that the team actively monitors and continually simulates the risk here. As soon as a certain reserve ratio is hit, for example, the dao should top up the reserve fund as a precautionary measure. So, with the downside reasonably protected, we can look at the upside. Since the reserves are being made more capital-efficient without incurring management or performance fees, the upside here is a nice bonus that the dao hasn’t yet explored. The potential $1M in yield can help fund future DAO programs. If other delegates have additional risks in mind with this proposal, we’d appreciate them being voiced prior to the vote going onchain.

3 Likes

Thank you @PGov, @EventHorizonDAO, and @AranaDigital for your support. We value our collaboration in the previous Aera partnerships and beyond. A few quick notes to further clarify:

  • This proposal does not deplete Compound V2 of any reserves. The proposal deposits reserves into Aera, and Compound governance can withdraw the funds from Aera at any time.
  • Compound governance may choose to withdraw the funds for any reason, including to pay operational expenses, fund other initiatives, or provide a backstop if there are excess liabilities. While market risk is never absolute zero, the likelihood of excess liabilities is low - Gauntlet’s simulations show Compound V2’s Value at Risk (a measure of potential insolvencies during a tail event) as currently $0. Gauntlet, the Guardian of this proposal, also has the mandate of continuously monitoring market risk for Compound.
  • This proposal utilizes reserves from Compound V2 rather than reserves from the newer Compound V3 comets. These reserves will then be allocated into Compound V3 lending markets to generate yield.
1 Like

OpenZeppelin has gained a stronger understanding of Aera since conducting our audit in support of the Vendor Payment Program and then becoming the first vendor to adopt it during our last renewal proposal.

Overall, we’ve been very impressed with the design and security guarantees of the Aera vault system. It strikes a good balance between treasury management capabilities while still limiting custodial control to the Governor.

From a personal perspective, I’m very supportive of this proposal to use Aera for further management of Compound’s Treasury to generate yield and improve the DAO’s financial position.

3 Likes

We like the approach of utilizing existing sources of capital available to extend Aera’s engagement with the DAO in this capacity.

We are in favor of this proposal and look forward to seeing this additional yield. By targeting the $1M mark with the yield generating objective function, we’ll be able to measure @Gauntlet’s performance openly and have an easy indicator of whether or not to continue expansion in the future. Based off their prior performance we expect this to be a success and look forward to seeing the results of this should it get voted in.

We’re also big fans of the Compound Vendor Payments vault and appreciate any attention paid to increasing its security and efficiency.

1 Like

We thank everyone for their continued support of Aera. The on-chain proposal has been published. One minor difference is that it does not include the 633K USDC allocation from the Treasury - in order to avoid exceeding Governor Bravo’s limitation of 10 actions per proposal. This USDC allocation is a minor aspect of the proposal overall but we are happy to add in the future if the community desires this additional allocation.

We value everybody’s participation in the upcoming vote.

Hi all, after discussing with OpenZeppelin we have decided to cancel this proposal. One of the oracles used for the Compound comet position was deployed using a bugged version of solc and the via-ir compilation flag, which prevented the contract from being verified on Etherscan. You can see more about this bug in this twitter post and solc changelog. Out of an abundance of caution, we are cancelling this proposal and will redeploy it this weekend. We thank OpenZeppelin for their review and appreciate the community’s patience.

2 Likes

Hi all - we have published the on-chain proposal. Quick note - due to Compound’s 10-action limit we have amended the on-chain proposal and split it up into two proposals. Today, we have posted the first governance vote to move funds into the vault, and in the follow-up proposal, we will add more hooks and assets to enable the strategies the vault can run.For transparency, this proposal conducts the following actions. Gauntlet will also remain as the Guardian of the vault.

  1. Add DAI as an asset to the vault
  2. Accept ownership of a new hooks module at address 0x8A216F2C84a3fE5a51Bf57B685864A065D14C53a. We need to deploy a new hooks module and have the Governor Bravo timelock accept ownership of it to work around a limitation in Governor Bravo that only 10 actions can be called in a single proposal. Without this workaround, adding the following function sighashes would put this proposal over that limit. This new hooks module already has all the existing hooks, plus the following new sighashes: cWETHv3 supply & withdraw, and DAI approve (needed to trade it for USDC)
  3. Remove current cUSDCv3 C3PO from the asset registry. In the subsequent proposal, we will be adding this back in. We are removing it due to a bug in solc and via-ir flag being able to verify the existing contract on-chain (the contract has been successfully used for over 1 year, but cannot be verified on etherscan due to this bug)
  4. Wrap a portion of the ETH currently in the timelock into WETH
  5. _reduceReserves on both DAI and USDC V2 reserves
  6. Approve WETH, DAI, and USDC to be deposited into the Aera vault
  7. Deposit the assets into the Aera vault

We thank the community for their patience and collaboration on this next phase of Compound’s partnership with Aera.

1 Like

OpenZeppelin’s review of Proposal #353 may be found here:

2 Likes

Proposal 1 of 2 has been passed and executed. We thank the community for their continued partnership and are excited to extend Aera’s involvement with the Compound community.

Proposal 2 of 2 has been published on-chain to implement the operational steps required to start yield generation.

Proposal 2 of 2 has been passed and executed. We are excited to begin the yield generation process and will keep the community updated.