Start discussion for Treasury Diversification

[MC_MARK]

Although I have been forward facing in the community for quite a while, exciting to have my governance debut, ha-ha. I have been chatting with several community members around this subject already in DMs, but would love the opinion of the wider audience.

Summary

This discussion topic seeks opinions from the DAO community around various methods in which Merit Circle DAO can diversify the risks of its treasury. The current treasury is made up roughly of the following assets;

• $42M USD in cash, of which the vast majority is USDC
• $7M in relatively liquid assets, such as BTC, ETH and XAUT
• $47M venture investments and NFTs

With each asset carrying their own risk, it’s important to thoroughly analyze the current set-up of the treasury and where there are ways for the DAO to improve.

Specification

The recent depegging of USDC in between March 10-13th due to the banking crisis in the US exposed additional risks of holding concentrated positions even in the most reliable of stablecoins. I do believe that diversification of cash and cash equivalent positions is necessary, in order to reduce the risk of being exposed to one asset.

The current cash position of the Merit Circle DAO is held in stablecoins, primarily in USDC.

Yields on major stablecoins have been falling relative to previous years, in some cases providing less return than the asset that is broadly recognized as the benchmark for the “risk-free rate” - US Treasury bills. This raises questions around the liquid and cash equivalent components within our treasury and the variety of assets that can be used to improve our risk-return profile.

Potential risk diversifiers

I would love to present some potential routes for diversification of the current MC DAO Treasury. The instruments presented below are merely suggestions and this discussion thread is created to provide everyone with the opportunity to propose alternatives:

1. US Treasury bills, notes, and bonds (off-chain or with on-chain components).
2. Bond exchange traded funds (ETFs) or money market funds (off-chain or with on-chain components).
3. Gold, silver, or other commodity backed ETFs or crypto commodity derivatives.
4. EUR, GBP, CHF, JPY, CAD and CNY equivalent products to USD based government bonds.
5. Other USD stablecoins, such as DAI and USDT.

With each of the above options carrying their own risk, it’s important to thoroughly assess each allocation, taking into account our shared vision for the DAO and commitment to a healthy treasury. Criteria proposed for evaluation of various instruments can for instance include the following:

• The degree of bankruptcy remoteness in the underlying structure should be considered. This means that in case of a bankruptcy of the custodian or any other middleman, the investment is not exposed to credit risk (outside of the government credit risk of the product itself - default risk).
• The degree to which the counterparties are regulated.
• The degree to which the issuer of assets has a transparent overview of their products and the risks.
• The total direct and indirect costs associated with the product.

Motivation

With a healthy treasury being the driving force for the entire Merit Circle DAO, it’s important to handle this carefully. There are dozens of bright minded souls within the community that each have their own stance on risk appetite, treasury/portfolio composition and available alternatives.

The author therefore deems it beneficial to discuss with the community the various options available to improve the composition and risk/return profile of the MC DAO Treasury. Any input is welcomed, so that the DAO can come to the best plan of action.

Those that wish to respond to this proposal are encouraged to do so answering the following questions;

1. What do you currently consider the biggest risk to the treasury?
2. What assets would you like to see the DAO include in its treasury?
3. How would you diversify the treasury’s cash holdings?
4. What is your stance on treasury bills, or any more-so considered ‘traditional’ financial instruments?
5. Anything else you would like to share?

[SadCatCapital]

Meow,

Thank you Mark for the discussion post, and congratulations on it being your first solo governance post! We appreciate the effort for diversifying risk, and can appreciate why a level of diversification could be helpful.

In terms of stablecoins, while we believe that all stablecoins have a level of risk associated with them, if the DAO wanted to diversify between stablecoins then we believe USDT, USDC and USDP could be potential options worth considering.

We agree that T-bills represent quite a low-risk option for gaining yield on the DAO’s USD holdings. However, we question if locking up the DAO’s USD liquidity for weeks or months at a time for ~5% annualized yield is aligned with the DAO’s objective of being a high-beta investment fund.

At some point in the future, opportunities for the DAO to purchase assets such as Bitcoin or Ethereum could come, and while those assets would carry significantly more risk than T-bills, gold or other government bonds, we believe they could be better aligned with the DAO’s treasury objectives.

Disclaimer: None of what we’ve said is financial advice, and we are keen to see what the community thinks!

Signed with left paw,

Purrito
Sad Cat Capital

[tyghh]

Thanks for the First Governance post

I agree that it woud be good to have this dicussion but also think that through it all USDC held up pretty well…even through a rough period. BTC / ETH carry volatility that doesnt align well with the DAO mission and so do the T Bills and other derivatives.

My preferred solution, if possible, would be a mix of stables and good old fiat dollars euros and some others. that way the DAO can move as fast as needed with the least amount of risk…just my two (fiat) cents

[SirDutchie]

Thanks for bringing this up Mark.

I think, like @SadCatCapital mentioned, minimal diversification of stablecoins could be explored/considered.

Secondly, I do like the ‘free money’ associated with T-bills (preferably off-chain). The challenge with T-bills though is the fact you’ll lock-up liquidity to gain a few percentages. It requires carefull planning as you want to be flexible enough to keep doing what we are doing: invest. But hey, every million USDC sitting there for a month not doing anything for the DAO’s treasury could be earning atleast some interest through T-bills, practically risk-free.

Last, no more DeFi for the treasury. You didn’t mention it, but wanted to get that of my chest. DeFi can be a great oppertunity for people using their private funds, but not for a DAO Treasury (we got away with it a few times, don’t wanna keep testing our luck!).

Truly last, I’m up for potentially more future exposure towards ETH/BTC as @SadCatCapital stated (when the time is right).

Sir Dutchie

[deepu256]

My 2 cents,
A simpler diversification from 100% USDC to 25% each of USDC , USDT , BTC , ETH in roughly equal amounts will be simple enough and give us enough diversification. With 25% ETH (roughly 10m) staked , we can even generate roughly 4-5% yield ($500k in current ETH prices) which is similar to what treasury gives us.

Although the above plan means trusting ETH / BTC have almost bottomed out. I feel If we DCA into ETH / BTC over next 4-5 months we will have a good avg buying price.

This is just a thought to get others opinion. NFA nor a concrete final suggestion.

[JonnyFitz]

Wanting to have some exposure to something like T-Bills is understandable, but quite simply please don’t become a tradfi etf. Stick to your roots. Much better to pick a value point for the market leading crypto kings: ETH and BTC.

At the end of the day once they start to move so does everything else that aligns with the DAO’s other verticals. Sitting on that much cash is tough though, I get it.

[timour]

Thanks a lot for starting this thread - good time to make some decisions on cash part of treasury.
I mostly second the opinion of @deepu256.

1. We need to diversify stablecoins - for well known reasons. Basically that means USDC & USDT (I don’t know much about DAI/USDP/TUSD).
2. I believe it is good to have significant amount of crypto blue chips - BTC & ETH. It looks like we are somewhere near the beginning of next bull cycle. Even if not and we see the new bottom - I don’t think anybody believes that current levels (~$28K for BTC and $1.9K for ETH) are the maximums we will see in the coming years, so the risks are very low (and well, if BTC dies we will not survive as well - in any case).
3. I don’t like the idea to use any off-chain instruments. As it will make our treasury more exposed to off-chain regulatory risks.
4. No DeFi, no low liquidity instruments.

So - I also vote for USDT/USDC/BTC/ETH portfolio. The question is only how to balance it. I would propose something like 30%-100% for stables part and 0-70% for crypto as a general rule. Like jumping into 60-70% BTC&ETH now and decreasing all the way up (can be some simple math function of previous ATH and balancing done monthly).

[saisback]

Nice first gov post Mark and also a good point to discuss
I am reading some great thoughts here on the forum, but I feel like I can share the opinon of @SadCatCapital the most here.

So in a nutshell lets hold a larger mix of stables instead of just mainly usdc and lets also look into holding/having a bigger bag of ETH/BTC.

[drcomot]

Henlo Mark

Diversification is good, but I don’t really think there are any other stablecoins that are better than USDC. So if I were to vote, I would vote to maintain it as is; or possibly allocate just a minor percentage (let’s say max 30%) in USDT.

When it comes to diversifying to ETH/BTC, my worry is that we got to keep a close eye on things, let say some bad news comes out and the prices start going down, someone need to act fast and make the right moves. Plus, there’s also the risk of making or losing money on those trades.

I don’t really know how to read chart lol so I’m not sure what the future holds for BTC/ETH.

Just my 21.5cent (current MC price)

Ciao!