Extension of the COMP Yield Strategy Pilot

Proposals
1

Extension of the COMP Yield Strategy Pilot

Back in May this year, Avantgarde initiated a strategic pilot on behalf of the DAO to start earning yield on a portion of the idle COMP sitting in the treasury (see proposal thread and latest proposal version).

This strategy utilized the MYSO protocol to deliver 16.22% and 15.07% annualized yield on two tranches of 17,600 COMP, generating a total premium of $53,058 USDC (net of fees) subsequently deposited into Compound V3 markets (see this link).

These tranches expired as of the 11th of August and have not yet been rolled over as we await the outcome of this proposal, and the full COMP amount has been returned to the Avatar safe.

With OpenZeppelin recently highlighting the infrastructure setup used to execute this strategy as a recommended new standard for trust-minimized fund management for the DAO, we believe this pilot has, in more than one way, been a great success.

We believe extending the pilot of the COMP yield strategy makes a lot of sense at this stage as the DAO rallies behind the new Compound Foundation to “Make Compound Great Again”. This is an exciting time for all of us involved as new investments are being made towards growth, with hopefully plenty more to come—which at the end of the day will all require funding.

Reliable Revenue to Support Financially Sustainable Growth

The COMP yield strategy will help improve capital efficiency on treasury assets and strengthen the DAO’s financial sustainability by providing a reliable source of revenue. The strategy’s use of idle COMP complements the USDC-denominated reserve management of Gauntlet extremely well; not only asset-denomination wise but also by providing upfront premium income that can be used to cover a significant share of the ongoing operational costs if deployed in meaningful size.

This would help reduce gradual depletion of the treasury as growth-initiatives and costs are potentially ramped up, and allow the reserves to remain as reserves for the foreseeable future—ensuring the DAO has ample funds to support growth for many years to come.

This proposal suggests adding another $7.4M worth of COMP to the pilot’s existing ≈$1.6M capital to bring the total amount to $9M, which at a targeted 15% yield would generate $1,350,000M a year for the DAO.

Funds will be split into multiple tranches and in a staggered manner continuously rolled over targeting overall 15% APY within a +/-5% range in the short term as we aim to keep the probability of COMP to USDC conversion as low as possible. USDC premiums will be deposited into Compound’s USDC market until the DAO wishes to spend it or says otherwise.

If the strike is hit on any of the tranches and COMP were to get converted into USDC, these will similarly be deployed into MYSO to buy back the COMP while also earning upfront premium. Once bought back, the COMP will again be cycled back into MYSO to generate yield.

Implementation, Execution, and Fee Remains the Same

As an extension of the initial pilot, the full program would continue to be managed through the same operational setup as outlined in the pilot proposal and detailed in OpenZeppelin’s article Trust-Minimized Treasury Management, using the same Avatar Safe and managed by the same Manager Safe.

As explained in the article by OZ,

Avantgarde’s trust-minimized solution demonstrates substantial benefits for the Compound DAO by significantly reducing risks associated with third-party operational activities … [as] it prevents funds from moving beyond DAO visibility, improving transparency and accounting … [while] the DAO retains recourse to reclaim allocated funds.

As a reminder, execution of the strategy will be done through the MYSO v3 protocol, and the entire process is decentralized, trustless, and transparent, avoiding counterparty risk while retaining full asset control.

MYSO is a DeFi protocol specializing in onchain structured products for high-net-worth individuals, treasuries and asset managers, and enables users to earn yield on idle tokens through bespoke covered call and cash secured put strategies. MYSO is actively working with leading treasuries like Aave, Across, Gitcoin, and Obol, to name a few, to provide seamless access to onchain structured products, sourcing the best quotes from multiple OTC desks and settling fully onchain without handing over custody to trading firms.

The protocol contracts are publicly available in the official MYSO V3 repository and have been thoroughly audited (see Omniscia Audit Report + public repo).

The fee also remains the same as a flat 15% fee on the earned premiums and will be distributed automatically by the MYSO protocol.

Once the program is live, we’ll report back to the DAO every quarter with details on the executed tranches and achieved yield. If the DAO would like more frequent updates, that can obviously be delivered as well.

Next steps:

  1. Minimum 1 week on the forum for feedback, depending on the discussion

  2. Tally vote to move funds to the Avatar Safe

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2

Reviewing the first trial proposal’s data, we think the results are pretty commendable and the returns seem to be sustainable in larger quantities. We would be in favor of increasing the existing ~$1.6M of COMP to $9M (5.6x increase).

Our concerns and comments were largely answered during the trial period, and with these as promised results, our focus shifts to:

  • At what scale is this strategy scalable; is ~$9M where the sweet spot is for now? Will yields fall off after this amount right now?
  • Will all $9M be able to be deployed at once? Or does it have to be slowly eased into over a few weeks/months?
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3

I think this proposal to extend the COMP Yield Strategy is a great move for Compound. It also gave me an idea for a possible future campaign, what if some of this yield could eventually be used for a buyback program?

With the new Compound Foundation getting to work and the push to “Make Compound Great Again,” part of building belief in a protocol is showing that the DAO itself invests in its own token. For Example Aave recently started a buyback program a few months back to strengthen their treasury and support long-term growth (not to pump the price, but to build a stronger foundation going forward.)

And to be clear, this is not to pump bags or invest enough to push the token up. Or suggesting to at the level Aave did. But if this yield strategy expansion performs as expected, it could be worth exploring a smaller, steady buyback in the future. It could help grow COMP reserves, get the community rallied up, and show long-term commitment to the protocol.

1 Like
4

The pilot results look commendable. But we should be careful not to over-index on headline yield; yield is always proportional to risk, and the DAO needs a clear view of potential downside before scaling up this strategy from ~$1.6M.

  • What is the max drawdown if COMP is converted to USDC?
  • How liquid is COMP if the DAO needs to repurchase in size?

We think risk-adjusted considerations are as important as total premiums earned.

@PGov also rightly highlighted scalability questions. $1.6M can move easily but will OTC desks absorb a much larger quantity of COMP without compressing yields? It’s probably prudent to stagger deployment and observe tranche-by-tranche results and yields. FranklinDAO supports a phased approach to rollout to give the DAO better data on market depth.

5

Thank you @PGov @Jorstack @pennblockchain for your supportive comments and feedback!

We believe $9m is a sweet spot yes, at least for now, and have validated this capacity. It is not so much about yields falling off after a certain amount, but more so about capacity given existing volumes etc.

As suggested by @pennblockchain, funds would not be deployed all at once but in multiple staggered tranches for sake of diversification and spread strikes while keeping probability of conversion on the low end, which would help limit the amount if any conversions were to occur despite the intention to avoid it.

Theoretically speaking, the maximum drawdown should be framed as unlimited opportunity cost, not a fixed percentage loss of the initial capital: The higher the price of COMP goes above the set strike(s), the larger the opportunity cost. The main way the strategy mitigates this risk is by setting strike prices at levels that are unlikely to be hit, meaning if they do, conversions would only materialise at significantly higher prices.

Regarding COMP liquidity, high level the notional of any cash-secured put would be similar order of magnitude (1-2 x notional of covered call depending on strike) as the covered calls for which we have already validated liquidity. Moreover, there’s also tranching being used in practice to allow also to service larger notionals that might not be absorbable in one go.

Hope that answers your questions!

1 Like
6

Gauntlet supports extending COMP yield strategies to improve DAO capital efficiency. The pilot demonstrated end-to-end execution with two OTM covered-call tranches. If the target is ~$9M capacity at ~15% APY, we recommend a phased approach and tranche-level reporting so the community can review performance. We request clarification on the following:

  1. Planned tranche sizes, observed demand for calls, and whether additional supply affects implied volatility/pricing as size increases.
  2. Premiums collected, net APY after costs/slippage; any exercises and how/when COMP was repurchased (method, timing, indicative costs) plus a brief backtest/simulated range for OTM vs. ITM outcomes. Please note any counterparty/settlement assumptions via MYSO and any smart-contract/operational exceptions, if applicable.
  3. Where to view live positions/metrics, plus defined pause/unwind triggers, size limits, and expected timelines to act.

If the community is comfortable with these clarifications, we support extending the program.

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7

Thank you for taking the time to review this and putting your support behind the prop @Gauntlet - we look forward to continue the conversation on how we can optimize the DAO’s treasury together.

To touch briefly on your points, we will be looking to deploy multiple tranches between $1.5-3m, and have validated the proposed total size with trading firms with margin.

As each tranche is deployed, we will indeed provide the DAO with the information mentioned under point 2 and 3 - thanks for pointing these out.

In the interest of time (based on recent feedback from the Foundation) and given the broad support observed for both the pilot as well as this extension, we will look to push the proposal straight to Tally this week.

Thanks again!

8

Proposal has been published to Tally!

Voting starts Monday Sep 8, 10:32 am CET and ends Thursday Sep 11, 04:14 am CET.

Thanks again to all of you that’ve provided feedback and supported the proposal so far!

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