Suggested Governance Approach for June '24 Investment Proposals

Investment
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Avantgarde/Stakewise/Chorus One and Ether.fi have both put up proposals for investing the 6,585 ETH currently sat idle in Nexus Mutual’s Enzyme vault.

It’s not possible to allocate the ETH to both simultaneously, so a simple approval vote for each proposal is not possible. We need a process for deciding how we allocate between the two proposals.

Suggested Governance Process

The Investment Committee proposes the following process:

Step 1. The usual RFC feedback period on the two proposals lasting for 12 days until 18 June 2024.

Step 2. Following community feedback, a Snapshot vote with the following options:

a. Allocate the idle ETH in the Enzyme vault to staking in Chorus One via Stakewise V3
b. Allocate the idle ETH in the Enzyme vault to weETH
c. Do not allocate to either of the two proposed investments

The allocation decision is then made depending on the outcome. The list of outcomes and associated decisions are described below.

In order to have an allocation made to a) or b), that option must meet the threshold of least 20% of the vote. 20% represents roughly $5m at the current ETH price and seems a reasonable threshold for putting the tech effort into an investment.

The examples associated with the outcomes below are purely hypothetical and not intended to express a preference towards any option.

Outcome 1 - Both a) and b) get more votes than c)

If both a) and b) exceed the threshold, allocate the ETH proportionally according to the split of votes between a) and b).

If only one of a) or b) exceeds the threshold, allocate the full 6,585 ETH to that option.

Examples:

  • Scenario 1.1: a) 70%, b) 25%, c) 5%
    In this case, we’d allocate 73.7% (4,852 ETH) to option a) and 26.3% (1,733 ETH) to option b).

  • Scenario 1.2: a) 15%, b) 80%, c) 5%
    Here, we’d allocate 6,585 ETH to Option b)

Outcome 2 - Only one of a) or b) gets more votes than c)

Allocate the full amount to the option that has exceeded the votes for c).

Examples:

  • Scenario 2: a) 50%, b) 15%, c) 35%
    In this case, we’d allocate 6,585 ETH to Option a).

Outcome 3 - c) gets the most votes

Do not allocate the amount to either of the options immediately.

Examples:

Scenario 3.1: a) 15%, b) 15%, c) 70%
Here we would not allocate the idle ETH to either of the proposals.

There is a risk here of a majority wishing for an allocation, but c) still being the option with the most votes, e.g. a) 30%, b) 30%, c) 40%. In this case, depending on the outcome and preceding discussion, there can be a follow-up process to establish the true decision of the community.

Step 3. Following the conclusion of the vote, the Investment Committee will put up an NMPIP reflecting the above outcome-based decision.

Next Steps

Please make any comments or suggested improvements to the above. The target is to agree on a sensible approach by 18 June so that the investment proposals can move forward after the initial feedback stage.

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Thanks, @Rei, for putting these options together. If we want to gauge members’ preference for much much of the idle WETH to allocate to each strategy, it may be most effective to use Snapshot’s Weighted Voting voting type. This will allow members to split their voting power to signal their preference for ETH allocation across the two (2) proposed strategies.

I imagine some members will want to see 100% to one strategy and 0% to another, but my gut feeling is most members will be somewhere in the middle. Weighted voting will allow members to signal as closely as possible to their preferred allocation strategy, so that can be used in an onchain vote once these proposals move to a joint NMPIP.

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Thoughts on Allocation to Stakewise and Ether.fi

I appreciate the detailed proposals posted by both the @Avantgarde and Ether.fi teams ( @rok ). I will share my thoughts on both proposals but given we’ll be using a Snapshot signalling vote to gauge sentiment on where to allocate the idle WETH from the Enzyme vault, I wanted to share my thoughts on how to best split the allocation.

Allocation to Stakewise

  • Projected Base Yield: 3.99% APR
  • Chorus One Fees: 5% of Yield (1)
  • Avantgarde’s Proposed Allocation: 6,585.02 ETH
  • BraveNewDeFi’s Preferred Allocation: 4,938.765 ETH (75% of idle WETH)
  • Annual Yield Before Enzyme Fees w/ Brave’s Proposed Allocation: 249.60 ETH

(1) Any potential investment would be through Enzyme, so I’ll exclude the Enzyme vault fees from these reviews.

Rationale

Of the two investment strategies, the Stakewise allocation results in less stacked smart contract risk (i.e., Enzyme v4 and Stakewise smart contracts). While the overall yield is less, the base staking rewards are higher for Stakewise and the fees are lower, as well. From a risk point of view, I’d be in favor of allocating 75% of the idle WETH to Stakewise.

We’re not currently underwriting any risk for the Stakewise v3 protocol, so there’s no correlation risk here. Because we have the Chainlink Proof of Reserve oracle in the Enzyme vault, this allocation is possible. If we were required to make an allocation directly from the Capital Pool, there wouldn’t be an oracle we could use to track this allocation.

As the Investment Committee works through the Divestment Framework, the Mutual’s exposure to stETH and rETH will likely be scaled down over time to ensure there’s enough RAMM liquidity and capital on hand for claims, so having other investment assets that earn a reliable yield over time will be beneficial. If we can reduce correlation risk and stacked protocol risk, that also limits the Mutual’s exposure to smart contract risk on an ongoing basis as well.

Allocation to Ether.fi

  • Projected Base Yield: 3.5% APR (2)
  • Potential (Speculative) Reward Yield: 20% APY (assuming rewards taper in the longer term)
  • Ether.fi/ Node Operator Fees: 10% of Yield Total (3)
  • Ether.fi’s Proposed Allocation: 6,585.02 ETH
  • BraveNewDeFi’s Preferred Allocation: 1,646.255 ETH (25% of idle WETH)
  • Annual Yield Before Enzyme Fees w/ Brave’s Proposed Allocation: 348.18 ETH

(2) I’m not including expected rewards because I’d rather see what the current APY is vs. an expected yield in this decision.
(3) Any potential investment would be through Enzyme, so I’ll exclude the Enzyme vault fees from these reviews.

Rationale

It’s been impressive to see Ether.fi’s growth in the last several months, as they’ve scaled TVL and added an incredible amount of integrations across DeFi. The Mutual currently underwrites a variety of Bundled Protocol Cover products for Ether.fi yield strategies, including the Ether.fi Liquid Vaults. In total, the Mutual has ~$15M in active cover across the various Ether.fi cover products. This creates a certain amount of correlation risk between the Mutual’s investments and the cover we’re underwriting. However, this doesn’t disqualify eETH or weETH as an investment asset. This would need to be adequately managed.

However, Ether.fi does add more stacked protocol risk than Stakewise does, given Ether.fi includes their own smart contracts, EigenLayer smart contracts, and then the Enzyme v4 smart contracts. The added layer of risk is justified by the higher reward incentives, but it’s uncertain how long these incentives will last. It’s also worth noting that any EIGEN rewards won’t be transferable until a future date.

The yield will be higher when EigenLayer begins securing AVSs and yield starts flowing to restakers through Ether.fi’s AVS allocations. Because this isn’t live, the yield is still hypothetical and I can’t factor this into an investment allocation at this time. Ignoring the rewards, this higher yield does compensate for the added smart contract risk but it does also carry added slashing risk, which isn’t present in the Stakewise allocation.

In the past, the Mutual has shied away from allocate to new protocols. While Ether.fi isn’t “new” so to speak, EigenLayer isn’t fully live and the yield/risks are hard to gauge until we see AVSs go live.

Using the 40.6k ETH figure for withdrawal liquidity from the Chaos Labs report that was linked, this represents 2%+ of the total ETH staked in Ether.fi. While that’s a good amount plus the liquidity across DEXes, withdrawals in absence of this liquidity would take 7 days pending a withdrawal from EigenLayer. I do appreciate that Ether.fi was the first LRT protocol to provide users with direct withdrawals, but I am factoring this in, given the unlikely situation where sufficient withdrawal liquidity isn’t available.

I do think Ether.fi would be a worthwhile allocation for the Capital Pool, but I’d prefer to limit the allocation to 25% of the total idle WETH in the Enzyme vault. The Mutual can still earn yield and allocate to Ether.fi, while we continue to grow cover sales for Ether.fi products and manage our correlation risk.

In the future, I’d be open to a discussion about a weETH allocation for the DAO Treasury once we establish a treasury management strategy, but that’s a conversation for another day.

How I’ll Be Voting on the Snapshot Proposal

As I shared above, I’ll be voting for an allocation split across the two proposed strategies of:

  • 4,938.765 ETH (75% of idle WETH) to Stakewise v3
  • 1,646.255 ETH (25% of idle WETH) to Ether.fi

As the manager of Pool 22, I’ll be voting with the NXM in my pool in addition to my personal NXM holdings based on the above views in the Snapshot signaling vote.

If any members who have delegated to me have conflicting views on this vote, feel free to comment on this post or send me a DM on the forum, Discord, or Twitter to share your thoughts.

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Fully supportive of the weighted voting method on snapshot. Agreed that members would benefit from being able to show support for both proposals.

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Signaling Vote: How to Allocate the 6,585 ETH Between the Chorus One Stakewise V3 Vault and Etherfi weETH Proposed Investment Strategies

I’ve posted the signaling vote on Snapshot for the investment proposals. Members will be able to signal their support start on Wednesday (19 June) at 11:58pm UTC until Monday (24 June) at 11:58pm UTC.

This Snapshot signalling vote uses the weighted voting option, so members can split their voting power (if they choose to do so) across each strategy.

The outcome of this vote will be used to create the final NMPIP ahead of an onchain vote in July.