RIP-000-014: Community Ecosystem Fund Yield Farming

Ren Improvement Proposals | RIP
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Name: Community Ecosystem Fund Yield Farming
Author: @MaxRoszko
Contributors: @Renfield, @OneofTenThousand, @preston, @Liberty / Various community participants (Discord)
Category: Treasury
Status: Proposed
Scope: Institute an approved list of activities that the Yield Ops group can pursue to grow the Community Ecosystem Fund

Overview

The ability to withdraw funds from the Community Ecosystem Fund (CEF) that sits within RenVM itself is about to be released on mainnet. This will enable the nascent Ren DAO to begin utilizing and managing the CEF properly, such as paying out ecosystem grants, and growing the funds through yield farming while the funds are idle. The focus of this proposal is regarding the growth of the CEF while the funds are idle.

We propose to institute a community-approved whitelist of DeFi platforms and strategies that the Yield Ops Multisig can pursue and leverage to grow the CEF. By the community deciding upon a whitelist, rather than approving individual transactions and temporary strategies to pursue, the Yield Ops group can pursue the best yield opportunities within that whitelist over a longer period of time without having to make a proposal each time we want to move funds from opportunity to opportunity, potentially even back and forth between the same opportunities if that is the best strategy.

Maintaining a whitelist reduces governance load, as the community can approve multiple platforms and strategies at once, and doesn’t have to get involved when it becomes fitting to pursue a strategy that has already been approved and pursued successfully before. It also improves the potential growth of the CEF as funds can be rotated much quicker between the already approved platforms and strategies, since proposal-making and voting for each new action would take at minimum a week to complete from start to finish.

Each time the community or Yield Ops group discovers a new type of opportunity or platform that is viable, it would have to be proposed and approved by the community before the Yield Ops group can utilize it. Likewise, any strategy/platform in the whitelist can be removed through a proposal and vote.

We are also proposing to move all of the current funds in the CEF to the Yield Ops Multisig for the time being, to grow it, until the community proposes to use some of the funds for other treasury-related activities such as Funding Rounds and DAO buildout. Note that we are not proposing how the CEF is used for Funding Rounds or which goals (marketing, integrator dev salary, working group budgets etc.) the CEF would best be spent on. This proposal only relates to how the Yield Ops group will deploy idle funds in the CEF, and to which platforms, for the purpose of returning a yield on the assets in the CEF, given that they would otherwise be dormant.

Background

For background, please refer to:

Details

The overall decision the community has to make is firstly whether we should go ahead with yield farming with the CEF and if so how, and secondly which platforms to approve for the whitelist if any. Both of these parts need to be treated separately. For the first part, we need to establish the overall strategy that the Yield Ops Multisig group has to abide by, as many yield opportunities require us to have exposure to some additional asset that we are not holding at the moment, or expose us to impermanent loss. Initial community input on this is crucial to make sure the community is comfortable with how the CEF is actively managed.

Overall strategy

For the overall strategy, the main question is regarding what assets we are exposed to. Most of our exposure is to $BTC at the moment, but we also have about $20k worth of LUNA, and a smaller portion in $DOGE, $ZEC, $FIL, $DGB and $BCH.

The practical question is if we should swap all of the assets into a few main ones which we farm with or not. For example this could be swapping everything to $BTC, or together with some combination of $USD and $ETH as well. Or if we want to get boosted rewards, we might have to swap some part of the CEF into some altcoin like $BADGER or $SOLID, which could be swapped back at a later time, or kept for future use. We’ve attempted to boil down most variations to the following options:

A. Yield farm with our current CEF assets (no swapping of assets)
B. Swap tokens into a split between BTC + USD and yield farm with that
C. Swap tokens into a split between BTC + USD + altcoins and yield farm with that
D. Yield Ops group to determine the split for growing the CEF
E. Do not yield farm with the CEF

These options capture most of the variations we could think of, even if there are many more details that could be considered, and should perhaps be discussed in future proposals.

In the first option, the strategy says no to swapping any of the assets, only to pursue yield farming with the assets that we have. This means the Yield Ops group would not be allowed to deposit CEF assets into liquidity pools with impermanent loss, as impermanent loss is a result of automated swapping of assets in a liquidity pool.

Option B, C and D lets the Yield Ops group swap assets around to get the best yield. Purposefully these do not include fixed percentage splits per asset, as some flexibility for the Yield Ops group can make sure we get the best yield here (for example it is hard to predict if a 50 / 50 split is better than 75 / 25 in advance). These options also naturally imply that we should be able to deposit assets into liquidity pools with impermanent loss, as impermanent loss and swapping are two sides of the same coin.

If you are not supportive of any of those overall strategies, or not supportive of yield farming with the CEF at all, you should vote for option E.

The Treasury Yield group is confident that we can determine a suitable asset allocation strategy using our best judgment and in consultation with our partners and the Ren community, to earn a better risk-adjusted yield for the purpose of growing the CEF (option B, C, or D), than going with a conservative approach where no assets are swapped (option A). But ultimately that decision will go to the community.

The Whitelist

For the second part of the proposal, we need to vote on which platforms to be accepted into the whitelist, if any. It’s important to emphasise that whatever we vote on this proposal, it does not set anything in stone that can’t be changed in the future. And the actual structure of the whitelist will have to be developed and refined over time. While we will only be voting on specific platforms to add to the whitelist in this proposal, the whitelist could include specific yield strategies that are approved by the DAO as well. It could also include specific assets/tokens that should and should not be utilized, and whether any specific class of assets like algo-stablecoins, securities, DeFi governance tokens etc. should be disallowed or not. And the whitelist could include meta-strategies that the Yield Ops group have to abide by, such as asset allocation strategies, whether to prefer providing liquidity within the Ren ecosystem above all else, whether any type of investments or trades can be done, etc.

For best execution, the whitelist should be co-developed with the larger DAO treasury strategy that also needs to be developed. Knowing which strategies to prioritize using which assets depends on what the goals of the DAO are, and not just what brings the best risk-adjusted yield. This proposal does not say what the overall treasury strategy should be.

For this proposal, we will include an initial list of platforms that need to be voted on by the community. These platforms have already been discussed extensively within the community and are considered to be fitting for the Ren DAO to pursue, weighing in relevance to the assets that we are currently holding (primarily BTC), relevance to our partners, and of course relevance to how profitable they are.

Proposed platforms to be voted on

Badger is one of Ren’s core partners, the first Greycore member on Testnet, and offers some of the best Bitcoin vaults available. There are multiple vaults to choose from with different exposure setups to boost BTC rewards using BADGER for instance. There’s also non-BTC focused pools such as the Tricrypto pool, where we could get exposure to ETH and USD together with BTC. Most Badger vaults leverage Curve as the base pools. The best options are well-documented by Renfield here: CEF Yield Options - Ren Treasury Working Group - Google Sheets

Curve is one the leading swap platforms in the space, one of Ren’s core partners, and a Greycore member. They process around $400 million volume per day, have 17 billion value locked, much of that being in Bitcoin. Curve pools are some of the safest within DeFi to interact with, as there are no admin controls for the contracts and they have been out in the wild for a very long time getting battle tested. There are not just Bitcoin pools that could be leveraged here, but different stablecoin pools as well as the Tricrypto pool which has BTC, ETH and USD in it.

Convex allows Curve liquidity providers to earn trading fees and claim boosted CRV without locking CRV themselves. Liquidity providers can receive boosted CRV and liquidity mining rewards with minimal effort. Since Convex is a yield aggregator for Curve we have the same options here as with Curve, with some added smart-contract risk. More info on Convex stats: Dune

Element provides fixed yield per term, removing the volatility around changing APYs. This offers a stable and low-risk opportunity for us, which is helpful for treasury management as we can predict our income and balance it out against expenditures. Read more on Element here: https://docs.element.fi/

Solidly is a new Automated Market Maker (AMM) on Fantom that offers both Uniswap-style pools as well as stableswap pools (it only allows 2 assets in a pool compared to Curve which allows 2-4). The protocol has high token emissions at the moment as it launched recently, and Ren has significant voting power in that protocol, making it a good candidate for yield farming. Given that it is a new protocol, smart-contract risk is higher since it has not been battle tested in the wild for that long yet.

Solidex is similar to what Convex is to Curve, but for Solidly. It allows you to farm Solidly pools with boosted rewards. Additionally, Solidex is a partner with Ren, where we have a significant stake in Solidex. If we are supportive of farming on Solidly, Solidex is a promising platform to do it through given the boosted rewards. Read more on Solidex here: Why Solidex? | Solidex Docs

Disclaimers and risk

Pursuing strategies on one platform may involve or strictly necessitate the participation with a separate platform. E.g.: Badger’s boosted pools involve depositing assets into Curve in exchange for liquidity tokens which are then deposited into Badger who in turn deposits those tokens into Convex, with some or all automatically compounding rewards. These kinds of services typically provide better returns, but they compound smart-contract risk.

Members of the DAO should also be aware of the risks associated when investing CEF Funds, and understand that even when protocols are whitelisted, they are still subject to the below risks. The Yield Ops group will put forth its best efforts to manage these risks and rely on the community to provide available insights and best practices.

Risks:

  1. Valuation Risk: The value of tokens that are earned through yield farming strategies are subject to volatile prices thus impacting the presented annualized percentage yields and impacting the overall return that can be realized by the CEF. The price of APY changes daily as a result, and this can work in the CEF favor or against it.
  2. Opportunity Risk: The strategies whitelisted may not be the highest yielding or the safest strategies available after funds are deployed. This creates an opportunity risk, as locking investments into various protocols means we might miss out on better yield elsewhere. This risk is also present if the funds in the CEF are left alone not engaging in a yield strategy.
  3. Smart-Contract Risks: Although many of the proposed whitelisted strategies may have been audited by reputable third-party blockchain security firms, this does not remove the possibility of hacking, and various code updates that could result in catastrophic loss of funds. These risks can be somewhat mitigated if insurance is purchased, however the risks cannot be removed entirely. The Ren DAO does not, at this time, audit the code of external platform smart contracts.
  4. Regulatory Risks: There is a lot of uncertainty from various countries around the world on regulating, taxing, and reporting requirements of blockchain technologies including decentralized finance. Future whitelisted protocols may at some point become unavailable and funds may have to be quickly moved and yield targets lowered to address market regulatory conditions. Stablecoins, for example, have come under increasing scrutiny by the U.S. Government with regulatory steps expected in the near future. If governments began “picking favorite” stablecoins, those excluded from resulting licensure could possibly de-peg, and destabilize all markets and strategies they touch.
  5. Governance Risk: Protocols that are whitelisted are subject to various DAO governance, thus resulting in changes in fees, yields, timelocks, and various modifications to the smart-contract and pricing. This risk requires careful moderation of the protocol and its community.
  6. Oracle Risk: For transactions and contracts dependent on off-blockchain events, like changes in price, trusted entities called oracles are tasked to provide the data in a timely, secure way. Oracles can take the form of other smart contracts, other blockchains, or external data sources. However, because of their privileged position, oracles are specifically targeted for manipulation, with potentially catastrophic outcomes.
  7. Blockchain Risk: While certain platforms span multiple blockchains operationally, the most common platform design uses a singular blockchain for its protocol layer. This creates implicit risk on the blockchain itself. Were the underlying blockchain to be compromised or otherwise abandoned, the platform would similarly greatly suffer.
  8. Execution Risks: Based on the timing of the Yield Ops Multisig group execution protocol yield may not receive the same as presented to the community, this may result in incomplete transactions or modifications to the great or lesser yield.
  9. Compatibility Risks: As software and hardware security devices and wallets are updated and improved protocol services may at some point be depreciated, this creates potential issues in execution and in timely retrieval of CEF funds.
  10. Transparency Risks: Not every DAO, protocol management team, or controlling multisig signers from the protocols that will be utilized for yield farming have been KYC’d and/or identified by a responsible party / person. This lack of transparency and accountability of the decision-making and executing parties may result in the possibility of catastrophic loss of funds from theft or price manipulation. The DAO and community must remain vigilant and do its best to invest in protocols that have higher levels of safety.
  11. Impermanent Loss: When providing liquidity to asset pairs of non-equivalent values, sharp changes in values of any of the underlying may create principal loss greater than LP fees earned. Losses here may be compounded as arbitrage opportunities are exploited due to platform asset pricing delay relative to actual market price movements, allowing arbitrageurs to extract outized and lopsided percentages of the underlying.
  12. Depegging Risk: Assets such as stablecoins can be depegged from the currency or asset they are meant to mirror. Theoretically, this risk can be mitigated by only allowing exposure to stablecoins that are partially or fully-backed by deposits or other assets of real value, and where there is a redemption mechanism. A newer category of “algorithmic” stablecoins is growing in popularity, however, in which market supply is set programmatically and value is not said to be derived from deposits or underlying assets. Since these types stablecoins do not have a mechanism to redeem for deposits held, they bear greater risk of rapid devaluation when markets turn against them.

Implementation

  • Vote on the first cohort of strategies and platforms and asset exposure capacity
  • Ren team to release the CEF withdrawal feature on mainnet
  • Move funds to Yield Ops Multisig
  • Yield Ops group to begin yield farming and providing ongoing status reports to the community

Vote

Please vote on all 7 Snapshot votes, as we can’t combine all voting in the same one :ballot_box:

Main vote: Vote 1

Badger: Vote 2
Curve: Vote 3
Convex: Vote 4
Element: Vote 5
Solidly: Vote 6
Solidex: Vote 7

5 Likes
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Great work getting this together and ready for voting Max!

I just wanted to make a pitch for option B in the above list.

Reasons:

  • Bitcoin is the safe haven asset of all crypto and renBTC is kind of what REN is known for. We’d be expected to participate in related pools and there are far worse assets to be caught out in for longer periods
  • Stablecoin pools are relatively safe given the extremely low likelihood of impermanent loss, and a great proving ground for the Yield Ops group to demonstrate its money management abilities. Also, having a large stablecoin position insulates the CEF from large price swings
  • Altcoin pools are about as risky instruments as humanity has ever contrived. They may show incredible temporary yields, but these tend to fade quickly and rug-risk is real.

I would recommend we stick to basic BTC and stablecoin pools and expand from there. Let’s see what Yield Ops can do with that as a first step.

2 Likes
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I completely agree to stick to proven and safe assets such as BTC, ETH, DAI, USDC, TUSD (Not to be confuzed with USDT witch I prefer to avoid)

4

Great write-up, thanks for putting this together everyone who was involved!

Happy voting :grin:

1 Like
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The results

The community approved the main proposal and approved all proposed platforms to be whitelisted :white_check_mark:

For the main vote, the community opted for option D:

D. Yield Ops group to determine the split for growing the CEF

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For the whitelist, our first entries are:

  • Badger
  • Curve
  • Convex
  • Element
  • Solidly
  • Solidex

Important to note that a platform being whitelisted does not mean that the Yield Ops group will utilize it.

As for next steps, CEF withdrawals are about to go live on RenVM mainnet, so soon we will have funds moved to the Yield Ops Multisig, and the group will be having a call on which strategy to implement first. We will be making notes on the call and publish them publicly.

1 Like
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I am wondering would it be feasible or even possible to join the community yield with their own funds?