Diversify the Tornado Cash Treasury

Proposal - Diversify Tornado Cash Treasury

Author: Jamshed Cooper (Tg: @JC212 // Discord: @JC212#7101) - Index Coop (DAO Treasury Relations team)

Rationale - Why diversify the Tornado Cash Treasury

The Treasury performs a critical function for any DAO. One of the primary purposes of a treasury is to protect the DAO from unforeseen events via diversification.

The downside of Treasuries only holding their native token is that they may not be able to withstand prolonged bear market events. This is because any negative event (Protocol Hacks, Bear markets, Controversy, Regulatory, Reputational) is amplified given that the native token will sink in value .….when the treasury needs it the most to stay afloat impacting its health and viability

The benefits of a diversified Treasury are:

  1. Winning through a bear cycle will enable the protocols to grow & hire when competitors are shrinking
  2. Better Prepared for withstanding longer duration downturns
  3. Growing Yield by getting exposure to an uncorrelated sector during a downturn

Why diversify with Index Coop Products

Index products are a great fit for Treasuries. Some of the key features that make them attractive for Treasuries are:

  • Operational simplicity - Instead of diversification with a self-managed portfolio of tokens - Transact & manage a single Index token position. All of the complexities of portfolio rebalancing are done by the Index Product

  • Transparent - Fees per product are transparent and upfront. In addition, the index inclusion, exclusion and rebalancing rules are defined upfront for us to focus on highest value protocols and achieve highest yield for the risk profile

  • Meta-Governance - Provides governance rights to the underlying token protocols. For example, right now the index coop can vote on Compound, Aave and Uniswap which are all held within the DPI index.

The BED and DPI products - Diversification with a single token

The BED and DPI tokens achieve diversification with a single token. They also are very liquid & typically have low correlation with the native tokens (we can provide a correlation analysis of your token as this conversation progresses).

DPI is the most popular DeFi index product with, at the time of writing, ~$200M of market cap. The methodologist behind DPI is Pulse, Inc, creators of DeFi Pulse and the criteria for token selection can be found here.

DPI is an efficient way to get exposure to the DeFi sector. The index gives exposure to all the component tokens while only having to hold one single token. The top 7 tokens of DPI represent ~90% of the Index portfolio (Uniswap, Aave, Maker, Compound, Sushi, Yearn and Synthetix).

BED is an equal-weighted index tracking the top three crypto themes: BTC, ETH, and DPI.

Index Coop - Treasury Relations Team

Our team has been partnering with DAO’s in helping them diversify their Treasuries.

Some notable achievements & adoption of our products across multiple protocols.

  • Perp Protocol :$50,000 DPI
  • UMA $1 million BED
  • Visor $100k BED
  • FEI $60M DPI
  • Pickle Finance $300k BED

Next Steps:

We welcome feedback from the community on this proposal. Would be great if we can go through this in more detail, provide you with analysis, discuss any further questions and next steps

2 Likes

If the treasury is diversified, I think it should only hold un-censorable tokens (e.g. DAI, not USDT or USDC). I think there is a risk that the treasury address could get black-listed by governments unhappy with Tornado.

And if the goal is to hold assets that are un-correlated to TORN, it seems to me coming up with a few acceptable choices (maybe including BED and DPI, if they’re censorship-resistant and have been thoroughly audited for security issues) and then running some numbers to see how correlated or anti-correlated they’ve been would be a good place to start.

BUT… we haven’t seen a “defi winter” yet. If the goal is to survive a long bear market in crypto/defi, what assets besides a stablecoin like DAI are likely to not lose a large fraction of their value?

1 Like

Even DAI may have a “Black Swan” event.

Anyway, I’m not really against diversification. Most of the liquidity of TORN is on Binance, which is already scary enough. If some can be reserved in DAI (and why not let it mine TORN on Tornado itself?) sure. Or Ethereum. Or WBTC. Any decentralized well established coin would do, just to spread risk.

1 Like

Archie - All valid points

Lets me try and address your points
1/ It does makes sense to diversify with both (a) Stables which mitigate risk but has lower yield (BTW - We have a new index product of stables in the works called PAY) (b) Ucorrelated assets such as BED and DPI which give you the general market upside compared to stables - but yet mitigates specific risk.

2/DPI was audited by OpenZeppelin on Sep 2020 and has over 131,000 user transactions. Additionally, audits were completed from Chain Security & Trail of Bits were completed on Set Protocol V1.

I don’t know BED, but DPI is too custodial for my taste. My understanding is that the multisig holders could destroy all value in DPI simply by swapping the collateral for worthless dummy tokens.

Thanks @pass123. We did a correlation analysis of TORN with BED and DPI and the results show that TORN is indeed very uncorrelated with BED - hence a good diversification option.

Can we setup a quick call between the Index and Torn teams to explain the benefits, correlation as well as link up with the bankless team on some good marketing ? Thanks

1 Like

That’s not what I meant. I mean that the 3 (?) coop multisig holders (who determine the asset/collateral mix) could sell off any collateral and buy some random token with it that they launched/possess.

At least that’s my understanding of how the governance model works. Multisig holders = god.