Treasury Management
In this section we present an approach to treasury management.
Strategy
A so-called "Beta 15" strategy that determines an optimal structure of DAO LP treasuries is proposed here. In a nutshell, this strategy means keeping 15% of market volatility risk for GTON and 85% in stablecoin LPs. Below the reasoning behind the strategy is explained in relation to the current market sentiment circa January 2022.
Finance math foundations
The regression formula calculates the return on asset valuation:
where alpha is the factor of the internal (independent) return on the asset and its economic characteristics and performance,
Rm is the portfolio return that represents the market,
beta is market sensitivity factor,
zeta is noise.
Treasury diversification
DAOs should be tasked with evaluating beta parameters and designing funds management strategies to optimize and control the beta factor for its governance token in accordance with the project's goals and long-term vision.
Considering so-called DeFi 2.0 DAOs who manage POL (protocol owned liquidity) on different DEXes and CEXes, we can say that the majority of such funds/liquidity positions are related to LP (MM liquidity) tokens with the governance token in the pair. This means that the GovToken performance depends on the performance of quote assets within LPs.
To limit the beta factor to a certain range, DAOs have to diversify their LP positions proportionally between stablecoins, project tokens and volatile assets. Some DAOs planned to have more than one token as part of their tokenomics: these sets of tokens are considered as alpha factors and should not be limited.
In an extreme case where Rm becomes negative (market correction), the implementation of beta-15 means that this correction will only have 15% negative influence on the DAO token performance.
Practical implementation
Parameters like alpha, beta, and the noise are determined empirically which means that to be useful they must be measured on historical asset price performance. However, if there is no trading history yet or the project is changing its token economy model, we assume that it is safe to start with an initial LP diversification with 85% in stablecoin LPs and 15% in volatile asset LPs.
After some time, an empirical beta coefficient can be estimated and the LP treasury can be rebalanced to decrease or increase stablecoin LP allocation to bring future beta coefficient close to the target value (such as 15%).
Beta-15 example
The approach explained above has a target beta of 15 and it can be initiated as "85/15 = stablecoins/tokens" treasury diversification. The time period for this structure can be 4 weeks.
Why not beta-0
Beta-0 means that all GovToken liquidity is represented by stablecoin/GovToken LPs. This approach makes sense if there is no goal to use Governance token for trading utility. Therefore, no arbitrage opportunities or any other organic MM activity around governance tokens in that case will exist, or it will be severely limited. In addition, limiting beta by a certain X means that the managers of DAO liquidity will be keeping beta lower than X, meaning that for certain time periods beta can temporarily be close to 0.
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