Background:
Compound DAO currently lacks a dedicated service provider to actively manage token deals and capitalize on market opportunities.This gap has left potential profits and strategic advantages untapped. This team will take on the responsibility of stewardship of token liquidity deals on behalf of the DAO Treasury and will be responsible for crafting and implementing bespoke DeFi strategies. By doing so, we intend to drive revenue, further diversify the DAO treasury, and enable DAO assets to help facilitate growth and optimization.
Through analysis, data-driven investments, and active management strategies, the DeFi Operations division will curate strategies with the mandate to grow the value of the DAO Treasury, diversify the Treasury’s holdings, and expand token utility for stakeholders.
- DAO Treasury Active management & investment strategies make the DAO treasury more diversified, leading to a higher total carry as well as less selling pressure of COMP token.
- Token Utility: DeFi partners list COMP, creating more yield opportunities for token holders.
- Compound Protocol strengthens partnerships and enables easier onboarding to scale the markets, TVL, and overall TAM.
The Opportunity
The Compound DAO Treasury currently holds a substantial amount of COMP tokens that are not actively managed, resulting in what we term as "dead capital”(inactive funds that are not earning yield or contributing to market activity). This inactivity misses out on potential yields from low-risk, high-reward DeFi strategies that would additionally support the liquidity profile and velocity of the COMP token. This results in a missed opportunity for substantial returns and enhanced token utility, market share, and total addressable market (TAM).
Currently the Compound DAO treasury currently has 1,087,778 COMP which is worth approximately $91M, stashed under its mattress.
We believe that there are 7 primitives that generate utility & treasury in crypto:
- Staking (Staked COMP)
- CDPs (Liquity v2 forks)
- Money Market Listing (Inverse, Fluid, Morpho)
- Dexes
- Perps
- Bridges
- Interest Rate Swaps
This division will evaluate each listing and deal as follows:
- Propose strategies for capital deployment
- Vet strategies and perform risk assessment and due diligence
- Analyze the efficacy of the opportunity
- Simulate the strategies in a closed environment
- Execute chosen strategies
- Perform needed maintenance on open positions
- Conservatively manage global risk profile
- Transparently report results
By implementing low-risk strategies and making them into accessible vaults and partner protocols, we can turn inactive funds into active revenue streams. Additionally this will provide additional yield opportunities to COMP token holders. The cost of engaging these services is dwarfed by the potential returns from investments. The opportunity cost of not acting is much higher than the all in cost. This initiative will not only grow and diversify the treasury but also increase the utility and distribution of COMP.
The Primary goal of DeFi Operations is to make each of these primitives a sustainable and fiscally responsible partnership for the DAO. Either through Grants, Incentives, Liquidity Deals, Tokenswaps or Fiscal Mechanism Design DeFi Operations can sustain the DAO thru bull and bear.
The secondary goal of DeFi Ops is to provide COMP holders with more options for the token:
- Reasons to use COMP rather than sell
- Extend operations runway
- Partnerships opportunities facilitated through deal flow.
- Growth of Compound protocol market efficiency.
- Lower Borrow APRs on over-utilized markets.
- Increase Depth of DEX Liquidity on Layer 2s.
- Access and market penetration in burgeoning markets.
Past Portfolio Experiment:
In Q4, this a strategy (COMP - DOLA LP) was conducted at a smaller scale than what would be performed by DeFi Operations for the Compound DAO treasury.
As illustrated in this analytical report the Growth Program was able to grow its overall Portfolio Value (in USD terms) while also decreasing its reliance on COMP. Employment of this strategy yielded a large return and diversified the Treasury funds from COMP and DOLA to include VELO, AERO, RAM, DBR, and ICHI. This demonstrates a case study of what is possible through the deployment of COMP tokens. (Make them work for you. No dead capital.)
Breakdown:
- Initial position: 4,736 COMP ($235,710)
- End position: 2,701 COMP ($312,775)
- Fulfilled primary goals that DeFi Ops will strategize towards:
- Reduction in nominal COMP token position
- Lessening COMP exposure for the Treasury
- Drove value to the COMP token
- Increased utility and token velocity
- Expanded distribution across different blockchains.
- Appreciated overall value of the Compound DAO treasury
- Reduction in nominal COMP token position
- Results of Low-Risk Trial Pool Strategy:
- In the trial 3 month period, AlphaGrowth earned over $100,000 in capital gain as well as acquired $49,000 more of DOLA. In the 3.5 month period the position was earning a return, the LP on Velodrome attracted $252,973 in volume, culminating in 10,473 transactions conducted by 1,658 wallets.
The emissions captured, the Growth Program was able to help Compound to diversify its Treasury by acquiring AERO and VELO from its LP rewards.
DeFi OPs will build treasury positive Protocol Owned Liquidity(POL) Strategies for COMP LP on the following L2 networks: Arbitrum, Base, Mantle, Optimism, Linea, Unichain, Sonic and Ronin.
Other than pooling strategies, the Growth Program has proposed multiple strategies to help grow token utility and drive treasury growth.
New Strategies:
AI StableCoin Vault:
An Ecosystem fund has expressed interest to grant 6 figures in development and incentives to build a stablecoin yield vault. This vault will be wrapped in an A.I. agent token that will communicate with users and rebalance stablecoin yields. An AI agent will increase user interaction, visibility and increase yield optimization for the compound community. The expected outcome is 25-50MM in stablecoin TVL and new AI token owned by the Compound DAO.
COMP Yield Vaults
This strategy allows users to earn COMP rewards by using COMP as collateral and reinvesting yield. We call it “COMP on COMP”, and it is a form of earning staking yield on COMP, but instead of staking, the COMP is deposited as collateral.
In this case, we are discussing COMP being listed on the AERO market on Base.
Here’s the Strategy:
- Deposit COMP as Collateral
- Borrow AERO [Market Utilization is currently 29%]
- Sell Half, and Farm AERO-USDC LP.
- Sell AERO Yield for more COMP.
- Deposit COMP as Collateral.
We can build a vault strategy that transmutes AERO emissions into COMP Yield, while increasing utilization on an under-utilized market.
Once built, it seems reasonable that this strategy would attract TVL until market utilization drove the cost to Borrow AERO to parity with the APR earned from the farm.
Delta Neutral LPs:
Compound DAO at this time does not have any plans for COMP liquidity on Ethereum Layer 2s. We have experimental partnerships with Inverse Finance, which constitute most of the COMP liquidity pools on Base and Optimism, but there is not enough depth of liquidity to facilitate a substantial increase in trading volume.
One low-risk strategy that could be implemented is as follows:
- Deploy a DOLA market on Base.
- List COMP as collateral on the DOLA market.
- Deposit COMP as collateral on the DOLA Market, and borrow DOLA.
- Deposit COMP-DOLA LP on Aerodrome and farm AERO emissions.
- Supply AERO into the AERO market on Base, and earn Lending APR.
The yield from this strategy can significantly increase liquidity and yield for idle token:
- Increases partnership with Inverse Finance by increasing their Lending Yield, and deepening COMP - DOLA LP.
- Inverse Finance is one of the highest holders of veAERO, and they could vote to direct AERO emissions to this pool, effectively helping Compound bootstrap our position on Aerodrome.
- Compound DAO can earn Fed Points on the DOLA base compound market. These points can be used to deepen liquidity, incentives or increase DAO treasury.
It’s worth noting that neither Compound nor Inverse Finance had to purchase any additional assets to make this strategy viable.
Other similar strategies and pools can be created on Uni-chain with and Uniswap LP as Collateral: [Nextosi] Contracts that enable Uniswap LP tokens as Collateral on Compound
COMP Everywhere:
DeFi Ops will continue to provide detailed insights into COMP’s performance and provide parameter recommendations that prioritize spreading COMP Everywhere while furthering the health of the COMP token.
Strategic focus will be placed on leveraging COMP to spur on new lending activity while expanding distribution of the token to new markets, where it can form an insurance layer to protect investors against some of the sell-side pressure on the token.
Cross-Chain Stabilization Vault
After COMP Everywhere the DeFi operations team can create a Cross-Chain Interest Rate Arbitrage vault, meant to bring market Utilization into Equilibrium. Compound Markets are not efficient, and it’s largely because people don’t seem to care enough about them to take advantage of their inefficiencies.
In December, we had people leaving the ETH mainnet markets, because utilization was too high, which drove up borrowing costs. Yet, on L2s, we had utilization rates which were much lower.
Here’s the Strategy:
- Deposit COMP as Collateral on ETH markets for Arbitrum, Optimism, Base, Scroll, Mantle.
- Borrow ETH on markets that have a low borrow rate.
- Bridge that ETH to a market that has a high utilization, and therefore a high Lending APR.
- Lend the ETH until the Arbitrage Opportunity Closes.
- Bridge the yield back to the original chains.
Woof has a Position Migrator which can be adapted to do this, and the strategy described above can be automated into a vault. The consequence of running a vault like this would be an equilibrium force across markets. We would be able to drive up utilization on under-utilized markets, which would further incentivize Compound to deploy to more new chains.
We would also benefit from executing the arbitrage.
Previous post: Stabilization Vaults
Protocol Partnerships:
DeFi operations team will actively pursue and find a partnership for the following Primitives Bridges, CDP’s, Money Markets, Interest Rate Swaps, Perpetuals the goal that each deal will help generate treasury growth thru fees generated on protocol transactions.
The DeFi Ops team will collaborate closely with other service providers to create any other tailormade solutions that benefit the Compound Protocol as a whole and target the DAO’s business development goals.
Budget
11,900 COMP service fee and 30% of fees and incentives earned through these strategies, for a dedicated team to run this business unit on Compound’s behalf.
Market Leaders
DeFi Operations is one of our more innovative, and interesting areas of experimentation, but DeFi moves at incredible speeds. Our biggest competitors are making similar moves:
This is a Snapshot from Aave’s own version of DeFi Ops – a vote, which passed on 12/22:
https://snapshot.box/#/s:aave.eth/proposal/0xd1fdca5d69b03ed57848180d62a812ab1a1ff72f85d671c417b5ff8fb2bd0a7c
The DeFi Operations Business Unit is ready to innovate on behalf of Compound.
Questions?
This document is intended to educate community members on the value generated by and general activities of a DeFi Operations business unit. If there are additional questions you’d like to know please ask them below, we’re happy to answer, though some answers may be during office hours to protect strategies that are more valuable if they cannot be easily copied by our competitors.