[RFC]: Investing the Mutuals Assets

I propose https://opendao.io/ ,
Lend with DAI ,USDT ,USDC ,mUSD , LinkUSD … stablecoin
APY is around 5 to 10%
Real-World Assets as Collateral

@Hugh how should we think through the max % of the DAI and ETH pool separately that we could deploy into one strategy/ protocol.

If you provide that can throw together a shortlist of tokenized exposure by APY in DAI/ ETH that we can consider for now and allocate between up to the limit.

I’ll create a table with criteria and an asset listing to more clearly work through the options.

In general I believe we need something like 3m-5m in DAI based assets at a minimum now, but with that increasing slowly over time as we gain scale. It’s much more important to be matched the larger we grow and in particular the more gearing the mutual takes on (active cover / MCR).

This implies we should be moving from 3-5m USD based assets to 30% of the the mutuals assets in USD slowly as we grow.

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I wanted to throw out here that Yam has been quietly collaborating with TokenSets to create a dao-managed treasury/investment portfolio set based on their new v2 protocol which is much more flexible and modular than their v1 protocol.

The general structure is that the dao controls who is the set manager. Governance votes on how aggressive they want the portfolio to be and the strategies to employ (i.e. simple buy and holds, LP’ing, staking, farming, hedging, etc.) and then the portfolio manager manages the portfolio within those governance voted guidelines. The dao is then free to change the portfolio manager and token whitelist at any time.

Yam is using a 1-5 (conservative-aggressive) scale that governance votes on. Each number in the scale correlates to a specific portfolio beta and correlation target. For example, Yam governance has already voted to approved a 3 of 5 portfolio, which means the portfolio manager will target a portfolio beta of 0.75 and a correlation of 0.5 (ETH is used as the benchmark asset).

We are probably less than a month out from launching our Yam dao treasury set. We have been contacted by another large protocol (I can’t say who quite yet but they are a top TVL protocol) that is interested in Yam launching a dao-controlled treasury TokenSet for them and have the Yam portfolio manager manage their set as well.

I wanted to throw this out there as a possible way for Nexus Mutual to implement an investment portfolio that is encapsulated inside of a token set which handles many of the technicalities of on-chain investing and in a decentralized manner. It also offloads a lot of the work so Nexus can stay focused on other high priority items. It would also allow from some neat collab opportunities between Nexus Mutual, TokenSet and Yam.

I think this is a huge mistake to store value in USD.
Ray Dalio would explain better than me why cash is trash and advises gold.


Michael Saylor converted its dollars and the dollars of his company into BTC.
He explains here why its treasury in dollars felt like melting ice:

Gold and BTC are better store of value than the buck. If you really want to go for a tokenized fiat currency and bear the risk of the fiat currency and the tokenisation, at least don’t go with the dollar. The FED have been on a binge of money printing and has warned that it will go again soon.

Also, if you want to generate yield on your store of value, it is unwise to choose DEFI because you cannot insure yourself. It is a negative loop. Because you love DEFI, you should not store your warchest in it. How will you protect DEFI if you burn with it?

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I’d like to ask a dumb question:

Is the goal to place the ETH assets in yield-bearing ETH instruments? I would hope so.

What I would not want is to convert the ETH into a basket of tokens like 20% BTC, 20% ETH, 20% DAI, 20% UNI, 20% AAVE.

We are on the cusp of a bull market in ETH (though obviously, that hypothesis could be wrong) and I hope the goal is to participate in the upside of ETH while earning yield on it as well.

In general I think we should adopt the following approach

Q1 2021

  • launch and allocate up to 20% of the assets in to 2-3 ETH2.0 staking derivatives
  • allocate $1m-$3m in DAI to pay any potential claims easily.

Remainder of 2021

  • start increasing allocation to ETH2.0 staking derivatives as comfort increases.
  • remain almost entirely ETH denominated until MCR starts being driven by cover amounts

MCR Being driven by cover amounts

  • When this occurs it starts becoming more important to be more closely matched from an asset-liability perspective. Fully matched means if we continue to write 30% covers in DAI we should allocate 30% of the mutual funds to USD based assets
  • We don’t have to switch to a fully matched position immediately, it can be graduated, but the higher the MCR is above the MCR Floor the more important matching becomes.
  • When fully matched the MCR and assets stay in sync with currency movements, meaning MCR% is stable.
  • there aren’t any absolutes here and we can decide to take on more risk on the investment side

Longer Term Asset Allocations

We should be targeting something like:

  • small amount of “cash”, eg 5% in ETH or DAI
  • vast majority of funds in lower risk yield bearing instruments, eg 75-100%
  • some funds could be allocated to higher risk strategies if members wish 0% - 20%
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Agreed - I imagine when we are talking about higher risk we would be thinking about those that are only slightly higher risk - for eg the almost risk free return on BarnBridge Bond stable pool which will run for another 15 weeks is 25% pa (or 0.5% a week) https://app.barnbridge.com/pools

Hi I’m new here. Chiming in on this topic. I believe the most important thing for the mutual’s asset is the need to generate a stable yield. And, I believe that will need to come from lending markets that powers leverage/margin (max 3x) trading or farming.

Right now the yield that is the most stable for ETH is either on BlockFi or Alpha Homora. You get 5.25% APY on BlockFi and an average of ~8% APY on Alpha Homora. If there is any worry about liquidity, we can then decide to only reward the interest earned to long-term stakers (> 3 months).

Deploying the mutual’s asset into a mixture of both centralised and decentralised financial products will be much better than staying solely in the DeFi world. Leveraged trading is still predominately only present in centralised exchanges.

@Hugh has their been any progress made towards investing the mutual’s assets? This has been a priority for 6mo. now and I think it should now be the top priority given the multitude of more well developed solutions at this point. The ability to generate yield off the mutual’s assets, which pays dividends in perpetuity, is likely the single biggest value project the mutual can focus on at this point

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Further, the yield generated from the mutual’s assets can be directed towards repurchasing WNXM whenever the discount to NXM exceeds the yield generated on the mutual’s assets (subject to a 5% discount floor). This would allow the mutual to retain the necessary assets to cover claims, decrease the float of WNXM & narrow the discount between NXM / WNXM, and create an instant further return on excess funds. Narrowing the discount in WNXM should also lead to further investment directly in the mutual as new investors will have less incentive to acquire WNXM, and will thus be more willing to purchase NXM from the mutual, further increasing the capital pool.

This creates a natural fly-wheel that increases NXM (vs. WNXM) demand, increases liquidity for holders, increases the capital pool and likely staking / cover capacity, and increases overall ROE/ROA.

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I agree that there needs to be some update regarding yield on the capital pool. With ETH at ATHs, we now have nearly $400m in the capital pool where some of this can be productive. I am supportive of utilising ETH 2 staking derivatives (2-3?) at first for a 20% allocation. Income could be used to purchase wNXM off the secondary market given the attractive discount that persists.

However, I would stress that the focus should be to increase the incentive for users to buy in through the bonding curve/hold NXM - receiving direct yield for NXM holders could be the most effective avenue here. The mutual can try and bring wNXM back to par with NXM but there is still the risk that people simply exit out of the system through wNXM with a lower discount.

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I agree with you on staking derivatives, but with regards to your second point on bonding curve, it would seem we are effectively at a chicken or the egg scenario. Without narrowing the gap between NXM and WNXM, there is no incentive to buy in through the bonding curve. Additionally, would be sellers want out, for whatever their reasons, and until they have all exited, there will be a persistent overhang of selling pressure / supply that will keep a lid on the price of WNXM (while MCR <=100%) and cause the discount between WNXM and NXM to persist until that supply is absorbed.

Additionally, I believe as it’s been discussed, any direct gain in value from the mutual’s assets would be retained by the mutual, and therefore indirectly benefit WNXM as there is always the option to unwrap. While we could institute a monthly dividend paid in either ETH or NXM with those earnings, I think that by buying back discounted WNXM, you not only juice your return over that of the underlying investment return, but you also increase liquidity and narrow the discount which makes WNXM less attractive vs NXM.

A hybrid solution may be to utilize up to [75]% of monthly investment earnings to purchase WNXM when {WNXMUSD < ([95]% * NXMUSD)} and pay a monthly dividend in either ETH or NXM equal to the remaining investment earnings for such month ([25]% at minimum; higher when {WNXMUSD > ([95]% * NXMUSD)}). This solution would both absorb excess supply and narrow the discount, while creating a distinct incentive to hold actual NXM and/or purchase WNXM on the market to unwrap for the dividends, which further acts to reduce the discount.

Once the discount between WNXM and NXM has been sufficiently narrowed (1-5%), there will be significantly less incentive to purchase WNXM on the open market, and instead purchase NXM directly through the bonding curve.

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Thanks everyone for the comments here. An update on this aspect is overdue, so I’m looking to provide some clarity here.

The capital pool is currently capable of investing into ERC-20 assets that have sufficient liquidity on Uniswap v2. To do so requires raising a governance proposal to set certain parameters (maximum and minimum holding values) as well as specifying an oracle.

We intended to use this capability to invest funds in stETH initially, something around 10% of the capital pool. The issue was that as we neared deployment the liquidity for stETH available on Uniswap v2 shifted almost entirely to Curve and therefore we’d suffer significant slippage and so decided not to proceed.

Additionally, Uniswap V2 liquidity is expected to shift to V3 quite quickly, so we need to take a different integration approach that allows us to be more flexible. We could have done better here, as these items shouldn’t have been entirely unexpected but we’re taking it as a learning point.

As such our current plan is as follows (noting we’re very open to feedback):

  1. Make some relatively minor smart contract changes to integrate with the stETH contracts directly to allow us to convert ETH to stETH. This won’t allow sells initially but allows investment earnings to start.
  2. Work out the best approach for more general integrations, recognising liquidity may shift to different places over time.
  3. Run an RFP (Request for Proposal) type process where we look to allocate ~20% of the capital pool to an ETH long manager at a higher risk/return level.

@Rei one of the Nexus Advisory Board members is currently pulling together proposal details for point #1, so look out for that soonish.

On point #3 the direction of travel is for Nexus to have a community driven “Investment Committee” which can decide on high level allocations to particular investment managers (who actually execute on the trading/strategy) and recommend changes. This would mean the capital pool would hold relatively few assets, as one asset might represent a holding in a particular investment managers portfolio. Such an approach leaves the strategic asset allocation to Nexus and the detailed implementation to particular managers.

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There is no incentive for any reasonably educated investor to buy NXM off the bonding curve when they can get it discounted via unwrapping WNXM.

Progress will be in two steps:

  1. Close the WNXM:NXM discount.
  2. Move up the bonding curve.

Any NXM investors that want to sell are going to sell regardless of what happens. In fact, I’d rather those weak hands get shaken out and are replaced by rock solid hands with a 5-year+ time horizon. And if that means that as the WNXM discount shrinks, they sell via wrapping, so be it. Better sooner than later.

I love voteless’ idea of paying a “dividend” to NXM holders from buying WNXM off the open market.

As an alternative, consider lowering the MCR (which I stupidly, in the past, espoused raising even higher than current levels–sorry everyone).

The market needs clearing one way or another.

People who want to sell need to be replaced with people who want to buy and hold for the long term.

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Yes I agree - I should have been clearer. Long-term we should be incentivising moving up through the bonding curve. The gap has to close at some point but you can really only expect that if there is option to realise the arb or simply bring in more long-term holders who will hold regardless of current liquidity constraints. Either way the MCR% has to increase to allow for this and I think the only way to reasonably expect this is to add incentives for long-term NXM holders - yield on the capital pool seems to be a good approach.

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Yeah, I think what’s happen is that for holders of NXM that want to sell, there are bots sell up to wrap into WNXM and sell whenever the discount closes or narrows. So we have repeated flirtations back and forth with WNXM:NXM parity and then following below. The market is trying to clear but can’t do it all at once due to bonding curve restrictions, so it does it over many months instead of in a day of capitulation.

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Absolutely agree! Think it would be a reasonable step to buy back wNXM if their discount is higher than 15-25%… (right now 35%). It would increase the book value of nexus mutual (more ETH per NXM) and thus also close the problem of MCR staying around 100%.

It’s the same as someone like Warren Buffett buying back his own stock if its below book value… its the most reasonable strategy to increase token holder value and alleviate the illiquidity of nxm itself.

I don’t think this increases book value, it would decrease it, as book value of assets decreases proportionally more. On the basis that wNXM is trading above book value, which it currently is and has never really dipped below for any meaningful time.

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great point! but if wNXM would be trading below book value it should make sense… but unlikely to do so with enough liquidity to be worth the effort for the protocol I guess.