Title: Gitcoin Treasury Vision
Authored by Llama DAO Members: @HelloShreyas, @AcceleratedCapital
Posted on: 8/16/21
Abstract
The following document aims to outline and ratify a treasury management framework that aligns with Gitcoin’s values and mission. By doing this, we can better inform how individual treasury decisions should be made. Treasury management is an active process with the ultimate goal of mitigating operational, financial, and reputational risk while simultaneously providing Gitcoin with the flexibility to perform public goods funding experiments.
Principles of Gitcoin
Gitcoin began in 2017 with the goal of empowering the developers building open source, digital public goods projects. Some of Gitcoin’s key principles include:
- Serving the Public Good. Gitcoin is focused primarily on building public goods, and so any treasury strategy should be focused on helping “public goods go up”.
- Openness and transparency. Gitcoin should aim to act transparently with all counterparties. Decisions that affect everyone should be made by everyone.
- Collaboration, community and education. All efforts should be made to empower stewards to become active members of the community.
- Scale. R&D Costs on a percentage basis for building new protocols/dapps should decrease over time.
Objectives and Goals
Individual treasury decisions and strategies should broadly fall within the objectives and goals listed here:
- Maintain an infinite time horizon. The treasury should exist to serve Web3 public goods in perpetuity. Gitcoin should be a “pilot light” for the broader ecosystem that is always there to spark/nurture the next wave of innovation.
- Support public goods. The treasury must be flexible enough to support Gitcoin Grants and any other ecosystem funding mechanisms the community deems necessary in the future.
- Strategic partnerships. The treasury should help in forging new and/or strengthening existing Gitcoin relationships with partners in the ecosystem.
- Treasury growth. Inflows should exceed outflows, such that the value of the treasury increases over the long run.
- Diversification. By being a DAO of DAOs that holds the tokens of different communities, Gitcoin aims to become a diversified “mesh network” of incentives for the entire ecosystem.
- Transparency. The treasury should provide ongoing and transparent reporting, making data readily accessible to the community in order to facilitate governance decisions.
Investment Philosophy
The investment assets of the Gitcoin treasury are intended to fulfill the goals and objectives listed above. In order to accomplish these, it is necessary to:
- Create a strategic asset allocation. The focus should be on diversification while helping to minimize the idiosyncratic risk of the concentrated $GTC position.
- Develop a risk framework. The framework should identify and outline a strategy for dealing with potential risks to Gitcoin’s assets. Ideally, this risk framework will incorporate strategies that minimize drawdown during periods of heightened market volatility while simultaneously ensuring sustainable long-term capital appreciation. Risk will be considered holistically across the entire DAO.
- Identify and execute on key DAO-to-DAO alliances. This could be done through token swaps with mutually-aligned DAOs and/or other economic alignments.
- Make seed-stage investments. Since ecosystem growth is a priority, funding alumni from Gitcoin grants and Gitcoin Kernel should be considered.
A prudent investment philosophy will avoid excessive use of leverage and/or illiquidity, making investments in tokens that are antithetical to Gitcoin’s core values, and/or engaging in activities that could be misconstrued as antagonistic to the ecosystem (e.g. selling a position in a way that destroys the value of the project).
Portfolio Construction
The Gitcoin treasury will follow a portfolio construction methodology that operates within a prudent risk management framework.
The core tenets of the portfolio construction methodology will include:
- Diversification. Invest into a diversified portfolio of less correlated assets relative to the concentrated $GTC position.
- Maximize return for level of risk. Maximize total return relative to an acceptable level of risk while ensuring sufficient diversification throughout the crypto ecosystem. A bias will be given to productive and liquid assets where possible.
- Invest thoughtfully. Investments should align with Gitcoin’s principles.
Specific portfolio construction decisions will be based on the methodology presented in an upcoming Investment Policy Statement forum post.
Risk Management Framework
All treasury management activities, including portfolio construction, use of derivatives, capital structure modifications, and more, should be guided by the risk management framework.
Risk considerations for the Gitcoin treasury include, but are not limited to:
- Credit Risk. This type of risk is specific to off-chain collateralized stablecoins but can also be present anytime there are assets being delegated to or managed by a counterparty. We intend to perform internal monitoring specific to any credit risks that may arise during the treasury management process.
- Market Risk. Market risk is inherent in any investment that trades freely on secondary markets. As discussed in the portfolio construction section above, market risk will be managed within the portfolio construction framework with the goal of working toward a long-term, diversified strategic asset allocation.
- Liquidity Risk. Liquidity can be a risk if not properly accounted for. While some illiquidity is acceptable when considering strategic investments with lock-ups, this should be managed within defined constraints. A thorough analysis of required liquidity will be performed as part of the treasury reporting initiative.
- Infrastructural Risk. Crypto assets have varying levels of infrastructural risks related to the Ethereum network. When the Ethereum network is clogged during periods of heavy use (e.g. during periods of market volatility), an asset may lose its liquidity since transactions cannot be processed effectively.
- Smart Contract Risk. Smart contract exploits can destroy the value of an asset. When deploying assets productively, each additional layer of smart contract risk should be examined in an attempt to minimize contagion within the portfolio.
- Reputational Risk. To remain a leader in public goods funding, it is necessary to protect the image and reputation that Gitcoin has crafted over the years. Investments that are controversial or otherwise damaging to this reputation should be excluded from the treasury portfolio.
Reporting and Transparency
Transparency is a core pillar of the Web3 ethos. In order to ensure that community members are able to properly assess the state of the Gitcoin treasury at all times, members of the treasury management substream will work to create clear and transparent reporting. This reporting will incorporate industry best practices, and it will follow a regular reporting schedule. Types of reporting that are relevant to Gitcoin’s treasury can include:
- Real Time Data Metrics
- Performance Analysis
- Financial Reporting
- Cash Flow Statement
- Balance Sheet
- Income Statement
- Budgeting / Forecasting Expenses
Governance, Treasury Processes, Workstreams
The treasury management substream will fall under the public goods workstream. Treasury management proposals can be made by any community member. However, the treasury management group will actively make proposals, evaluate the effectiveness of other treasury proposals, and serve as experts in the Gitcoin community on treasury management. The treasury management members will attend bi-weekly calls and recruit relevant members to join the group. Besides asset allocation, the treasury management group will also work on financial reporting. GTC will be allocated as necessary for the proper function of the group.
Safeguards should be created by the broader Gitcoin governance, and the treasury management group should be able to act effectively within those safeguards. As much as possible, all treasury decisions should be executed on-chain and in a trust-minimized manner.
Conclusion
This is a living document that aims to outline an approach to treasury management that aligns with Gitcoin’s values and mission. As Gitcoin’s products, governance, and community evolves, we should revisit this document to see what changes need to be made.