Summary
This proposal outlines a collaboration between karpatkey and Nexus Mutual, focusing on the management of the Nexus Mutual DAO Treasury.
Upon approval, karpatkey will assume the role of treasury manager for Nexus Mutual’s DAO treasury. Utilizing proven non-custodial solutions, karpatkey will manage the entire treasury’s assets, coordinating all actions with the Nexus Mutual DAO’s investment committee.
The asset management strategy will involve gradually diversifying out of wNXM and NXM to accumulate ETH and ETH derivatives. The targeted allocation will result in approximately $2M in ETH and ETH derivatives, $1.5M in stablecoins, and $3M in wNXM/NXM, totaling $6.5M under active management.
For its services, karpatkey requests a 0.5% management fee and a 20% performance fee. The management fee will be applied to the net asset value (NAV) of all funds under non-custodial treasury management, while the performance fee will be based on the yield generated by karpatkey’s strategies. Payments will be made monthly instalments denominated in NXM or wNXM.
Nexus Mutual DAO retains the right to terminate this agreement at any time through its Governance Mechanism.
Rationale
Nexus Mutual Protocol
Nexus Mutual is a decentralised insurance alternative that allows people to join as members and share risks with others. Members can purchase cover products that protect against various risks.
Members who hold NXM can stake it by delegating it to Staking Pool Managers. When members purchase cover and pay the cover fee, 50% of the cover fee is minted in NXM rewards and distributed to stakers in the pool.
If a claim is filed and approved by claims assessors, then the staked NXM allocated to the relevant cover product is burned proportionally across all stakers within the pool(s) from which the cover was purchased. NXM stakers earn rewards but risk losing their staked NXM, as NXM burns can result in burning a portion of a position or the whole position.
The protocol is mainly supported by The Foundation, which handles product development, engineering, and business development.
The DAO has also organised work around DAO working teams, namely Community, R&D, Investment Committee, Marketing, and Operations teams. These teams are also funded through governance. The latest budget proposal funded these teams for 706.5K USDC and 2464 wNXM (NMDP-71) for a year.
Nexus Mutual DAO Treasury
The Nexus Mutual DAO treasury is managed by the multisig safe with address 0x586b9b2f8010b284a0197f392156f1a7eb5e86e9. Approximately the treasury holds $11M, after accounting for already earmarked funds. NXM and wNXM represent the largest portion of the treasury, adding up to 95% (11M), while stablecoins and (W)ETH represent each less than 1%. Assuming earmarked funds are paid with NXM, the resulting treasury may look like the following chart.
Professional treasury management can improve the DAO’s runway. With DAO expenses estimated at $900k p.a. and an annualized income from cover sales commissions of $550k approximately, there is a $350k deficit which yield generated on DAO funds would help cover. The capacity to generate yield on this treasury relies on proper asset diversification and allocation.
karpatkey
karpatkey is a DeFi-native organisation specialising in professional DAO finance through industry-leading research and tooling since 2020. We’ve been working with GnosisDAO, Balancer, ENS, CoW Protocol, Aave, SAFE, Arbitrum, Uniswap, and Lido on financial planning, operations, and strategy, diversifying their treasuries into sustainable portfolios of DeFi investments designed to support DAOs in executing their missions. Check out our values to understand a bit more about our guiding and decision-making principles.
As DAO treasury developers, we contributed to some of the most reputable DeFi protocols in our industry. Our extensive experience provided us with advanced practical knowledge of DeFi primitives like stableswap and concentrated liquidity AMMs, liquidity, voting incentives, veTokenomics, leverage and lending platforms, and integrations with top protocols.
We now believe we can meaningfully contribute to Nexus Mutual’s mission, not only through domain expertise but also through pushing positive-sum initiatives across DeFi.
Specification
This proposal outlines a strategic collaboration between Karpatkey and Nexus Mutual to enhance the financial sustainability of the DAO, improve the capital efficiency of its treasury, and explore business opportunities with other DAOs. The key initiatives of this collaboration include are:
Asset Management Infrastructure
- Deploy non-custodial asset management infrastructure.
- Implementing automated risk management tools, prioritising the safety of Nexus Mutual DAO funds.
Treasury Management
- Explore treasury diversification to create value and reduce concentration risk.
- In particular, diversifying NXM may be an opportunity to improve the DAO risk management and capacity to generate yield.
It is important to ensure alignment with the DAO on the amount of NXM to include in the scope, assets, and execution steps. Doing this in tranches will enable adjusting the speed to the market price and ratchet mechanism. - Initially, karpatkey suggests diversifying the first tranche into ETH, stablecoins and staked NXM.
- In particular, diversifying NXM may be an opportunity to improve the DAO risk management and capacity to generate yield.
- Allocate treasury funds into DeFi strategies that offer risk-adjusted returns. karpatkey interacts only with renowned and battle-tested DeFi protocols to minimise risks (e.g. technological, market, or governance risks).
- Provide detailed and regular reports on Nexus Mutual Treasury’s asset allocation and performance.
DAO-to-DAO Synergies
- Explore opportunities to expand Nexus Mutual product adoption through partnerships with other DAOs where possible.
Operations and Non-Custodial Infrastructure
The first step in enabling active treasury management will be setting up the leading solution on non-custodial asset management infrastructure based on Safe, a battle-tested protocol currently holding over $100Bn in assets, and Roles Modifier.
Roles Modifier is a role-based access control technology based on Safe and Zodiac Modules that enables the definition of strict and granular permissions policy. This smart contract module enables owners of an asset-holding safe (avatar) to define roles (combinations of addresses, functions and parameter values) and assign them to an external Management safe. Accordingly, Zodiac Roles Modifier facilitates karpatkey’s proxy management by ensuring that only pre-approved transactions, defined by the permissions policy voted on by the DAO, can be executed. A visual interface of Roles Modifier is accessible here. This article provides further information about the infrastructure karpatkey builds on top of Roles Modifier, with the newest version recently introduced in ENS. Both Safe and Roles Modifier have been audited and battle-tested, with results published here and here.
An important aspect of introducing the Roles Modifier is reaching an alignment on the core set of DeFi strategies to be enabled. Through governance, the DAO will grant the appropriate policies for karpatkey to enact these strategies. These strict guardrails will define what is in the scope of the treasury strategy. More specifically, Permissions Policies consist of:
- a set of allowlisted contract addresses;
- a set of allowlisted functions within these allowlisted contract addresses; and
- a function-specific set of argument constraints.
Monitoring and Alerting
The monitoring and alerts system is designed to enhance risk management and ensure timely responses to potential threats. Besides conducting thorough risk research for each position and protocol, frequent meetings are held to assess strategies, set alerts, and evaluate processes.
Alerts are configured for various metrics such as prices, collateral ratios, and liquidity. Emergency plans and automated disassembly functions are implemented to ensure quick response to any threats. The system ensures proactive management of positions, maintaining liquidity and operational stability. This infrastructure allows for continuous on-chain monitoring of prices, collateral ratios, impermanent loss, and pool balances. In-house developed Anti-Liquidation and Position-Disassembler Protection Bots (Guardians) enable automated position adjustments in response to market changes, further enhancing risk management.
Guardians are keeper bots that implement automated risk management strategies and handle execution tasks. These Guardians enable the automation of day-to-day execution aspects such as rebalancing or autonomously disassembling or modifying positions potentially at risk in response to specific triggers, including suspected exploits, abnormal pool behaviour, rapidly decreasing collateral ratios, and other predefined risk scenarios.
Initial Setup and Portfolio
Based on Nexus Mutual DAO’s preference, a new Safe will be deployed separate from the existing Treasury safe. To ease the implementation, karpatkey will setup the Safe and the initial configuration. The initial deployment will include the Permission Policies reviewed and approved by the Nexus Mutual DAO. Once the Roles Modifier is fully configured and tested, karpatkey will transfer ownership back to Nexus Mutual using the set of signers in the existing Treasury, and the Nexus Mutual DAO will fund the Avatar Safe. This will enable karpatkey to allocate treasury funds through the Manager Safe multisig without retaining custody of the funds. After a successful deployment, the DAO mutual commission receiver address will also be updated to the new Avatar Safe address.
Contingent to further discussion with the Investment Committee, karpatkey proposes to actively manage approximately $6.5M worth of assets:
- ETH and ETH Derivatives for $2M,
- stablecoins for $1.5M,
- and $3M in wNXM and NXM.
karpatkey proposes to gradually diversify out of wNXM and NXM to obtain the balances of the ETH, ETH derivatives and stablecoins specified above.
As detailed above, defining the repository of DeFi strategies will result from an educated joint discussion between Nexus Mutual and karpatkey. As an example, the following is a list of DeFi strategies with potential application to Nexus Mutual DAO treasury:
- Stake NXM in Staking Pools
- Liquidity provision of wNXM in AMMs to increase market depth
- Stake ETH on reputable Liquid Staking protocols like Lido, and RocketPool
- Supply assets to battle-tested lending markets like Aave v3
- Provide liquidity to Impermanent Loss minimised AMMs, like rETH/ETH or DAI/USDC, in DEXes like Balancer and Curve
- Stake assets in yield aggregators like Aura and Convex
- Deposit stablecoins on low-risk native strategies like Maker DSR or Aave stkGHO (Safety Module).
More examples and specifics of each category above can be found in karpatkey monthly reports here.
Reporting
As part of our efforts to maximise transparency and visibility to the DAOs karpatkey collaborates with, Nexus Mutual DAO will have access to a monthly report showing a detailed description of the treasury’s assets and DeFi allocations. Some of the key metrics that will be part of the report are the Net Asset Value (NAV), the value of assets allocated to DeFi positions, and the treasury annualized performance based on the analysed period. Similar reports for other DAOs can be found on karpatkey’s reports site.
Future reporting products, such as accounting dashboards, will become available for Nexus Mutual DAO in the future as karpatkey develops them.
Fee Structure
A 0.5% management fee will be charged in NXM or wNXM and collected in monthly instalments. This fee will be 0.5% of the Net Asset Value (NAV), which includes all assets in the Treasury and considers asset prices at the end of the month.
A 20% performance fee of the yield generated over the last month will also be charged in NXM or wNXM on monthly instalments.
Termination
Nexus Mutual DAO may terminate the engagement under this agreement for any reason by Governance Mechanism. karpatkey DAO may terminate this agreement upon four weeks’ notice posted as a new discussion thread in the Nexus Mutual’s forum. In case the termination is requested by Nexus Mutual without at least a 4-week notice, karpatkey will be granted an exit fee equal to the fees collected during the last two months, which will be paid in ETH. Regular fees will be collected until the day of termination.
Next Steps
This proposal is open for review and comments for 12 days until August 19th. After incorporating feedback, we intend to transition this RFC to an NMDP.