Thanks for all the comments @BraveNewDeFi! To respond to some of your points;
Between the initial deposit date in August 2022 and the aftermath of FTX (November 2022), the Nexus Mutual community was unaware that the concentration of lenders in the pool had gone from ~5-6 funds to largely just 2 (Orthogonal and Auros) with limited liquidity allocated to the Amber Group and Flow Traders. In the case on actively monitoring this sort of development, members were not aware and once it become well known that the mutual was exposed to these two firms, it was too late to withdraw without sizeable losses to the initial investment.
The Maple strategy was not one that we proposed and our mandate was to write the code to bridge the two protocols and then to execute on the MPL yield strategy that was initiated by the community. We were not tasked with actively monitoring or managing the portfolio on a discretionary basis but in hindsight, it would have been a valuable service given how the pool concentration changed. Actively monitoring does add to our cost base substantially (good monitoring tools are not cheap and require substantial attention and maintenance). However, we believe that we can still do this competitively because there are synergies in other parts of our business that can help bring costs down here.
What does active monitoring and management look like?
This is a great question:
From a management perspective we’d be looking for the following:
- Past track record at staking
- Regional exposure of hosting provider
- Any changes in the Nexus cover profile that require us to adjust our own exposure (eg. selling cover on rETH might mean reducing exposure hypothetical exposure to rETH).
- Diversifying between hosting services vs bare metal providers (to the extent possible)
- Ensuring Geographic diversity
- Reacting to any cause for concern (eg. slashing occurs which is unexplainable and/or likely to be repeatable)
- (LST’s only) reacting to any concerns with respect to protocol security.
- Understanding, monitoring and negotiating fees charged by validators (where applicable)
From a monitoring perspective;
- Define which risk elements need to be monitored and build an internal dashboard for this
- Build an alert system to notify us automatically
- Eg. Actively monitoring regulatory events, security alerts, governance proposals, withdrawal queues, LST liquidity, hosting service outage, slashing and reacting as necessary.
“While Rocket Pool isn’t listed, currently Enzyme V4 is listed. That potential for concentration risk would force a decision, imo, that if Enzyme was used to manage a large portion on the capital pool, Enzyme V4 would need to be delisted from Nexus Mutual to avoid overlapping risk exposure.
I wouldn’t be supportive of allocating 20% of the capital pool to the Nexus Mutual Enzyme vault, as members would have diversified exposure to risk across multiple staking providers or LST protorocols, but it would be a sizeable concentration of risk in the Enzyme smart contracts if an exploit on Enzyme were ever to occur (knock on wood that never happens). At most, I would be comfortable with the amount of ETH currently held in the Enzyme vault, but I would not like to see an increase.”
I understand your concern here but for context, the Enzyme cover in question was purchased by Celsius before they filed for bankruptcy. It was for a vault they managed which subsequently they had to close due to the bankruptcy procedures. We can either delist enzyme insurance from Nexus or limit it to a much smaller number (eg. $2-5m). Also I believe the Celsius exposure rolls off in May and will not be renewed. In any case, there shouldn’t be a reason not to increase AUM up to 20% of the Capital Pool over time as long as we are aware that we have to limit exposure on the protocol insurance side…
If the Enzyme vault were used, it would be largely beneficial to pursue staking options that would not be available due to a lack of a reliable oracle source (this is where Chainlink Proof of Reserve would be beneficial) and which require more complex transactions. Minority staking solutions, where the mutual can advance diversity, while reducing overall fees for the mutual would both help promote geographic, execution client/consensus client, and staking provider diversity and offset the 0.5% management fee for the services provided by Avantgarde.
This makes a lot of sense. We can certainly build a portfolio based on a mandate of direct staking options that do not have oracles and let the DAO interact with rETH directly.
It would also be beneficial to understand if/how much the Enzyme/Avantgarde Treasury team would need support from the mutual’s Engineering team to move this forward, should members approve this proposal. If you can comment on the potential technical requirements and if the mutual’s Engineering team would need to be involved (and, if so, at what level), that would be an important factor for members to consider, since there’s strong support to prioritize the Tokenomics Revamp initiative.
The way this conversation is going, I think the fastest way we can achieve the goals being discussed is to integrate Stakewise V3 which will give us a permissionless way to point to different validators. This will likely take 8-10 weeks (integration + audit) but opens up all the direct staking possibilities. This also gives us enough time to build the necessary research library for the starting portfolio as well as the monitoring infrastructure.
To answer your question more directly, we do not foresee the need for the involvement of the Mutual’s Engineering Team, which can stay 100% focused on the current priorities at hand.
One additional question I have is whether Nexus DAO would like us to take on a more holistic role and monitor the entire risk of the DAO regularly. This is something not currently proposed in the scope of our work. I’m thinking it might be useful to have periodic reports (eg. monthly) which highlight how the exposure has changed based on new premiums sold, current cover exposure, positions rolling over. Together with that, we could provide recommendations necessary for the DAO to remain within its risk thresholds. For this extra assignment it might make more sense to explore a fixed monthly fee (vs. AUM based).