[ARCHIVED] BitDAO x Galleon: Delta-neutral, Yield generating Strategy

General Archive
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Proposal Title: BitDao x Galleon: Delta-neutral, Yield Generating Strategy.

Authors: Duck from Galleon

Date: 23rd June 2022

Background

The BitDAO Treasury is forecasted to grow via several avenues:

  1. Bybit contribution, Bybit Pledge - BitDAO. The current contribution is composed of 50% ETH, 25% USDT, 25% USDC.
  2. Deployment of assets to Autonomous Entities (Game7, zkDAO, EduDAO, etc…), labs, venture/swaps, and yield opportunities. These are long-term strategies which aim to achieve a flywheel of growth for the BitDAO Treasury.
  3. Growth of project tokens in the BitDAO Treasury.

Purpose

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The purpose of the Galleon x bitDAO treasury diversification is to provide bitDAO with a low-risk, high-yield return on treasury assets which is in line with point (2) above and “Future Direction” under “the pledge”. Given the recent crypto market volatility, Galleon has just launched a new product The Basis Yield ETH Index ($BYE): (https://twitter.com/galleondao/status/1539613237003649024?s=20&t=R4plWJxfcEk8GmlqnBx9nQ) $BYE is an ideal product that aligns with bitDAO’s growth goals as a candidate to generate sustainable yield for the DAO.

How does the Basis Yield ETH Index work?

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$BYE is a basis trading strategy token that integrates with Perpetual Protocol V2 to create a leveraged, delta-neutral position - eliminating market price risk within the token contract by hedging $WETH spot exposure with an equivalent, levered short $vETH position. This enables holders to generate one of the highest, most organic yields in DeFi today via funding rate arbitrage.

Maintaining this target leverage ratio is fully automated, Galleon operates keeper bots that execute rebalances upon threshold breaches derived 100% from on-chain data (readable from the product smart contracts).

Generating auto compounding yield when funding is positive; inversely, when funding is negative, there is NAV decay. However, because of this Galleon wants to create the highest level of alignment with BYE holders by deploying a performance fee revenue model. Therefore there is no streaming, minting or redeem fee; the product only charges a performance fee (10%) on the yield earnt. We believe this is the fairest way to operate $BYE and Galleon succeeds when our product holders are happy.

Backtesting

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Galleon ran backtesting against the $BYE strategy between 27th November 2021 → 10th February 2022 and the projected yield was 15%. Funding was only negative for 11% of the time and even during periods of sustained negative funding the yield was positive.

Additionally, as per R72.fi historical data for perpetual protocol for 01/01/2021 - 31/12/2021 yield generated was 40.9%, in these conditions $BYE would have generated 27% yield while remaining delta neutral.

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How will your proposal, if activated, benefit BitDAO?

If the proposal is activated, BitDAO would benefit from a delta-neutral yield generating strategy. Any deployed capital from the treasury would be protected against market price risk (which is ideal in the current highly volatile market conditions) and generate an attractive APY % which would benefit the DAO’s longevity by increasing treasury ROI and TVL.

Liquidity incentives

In addition to the yield generated by the product, Galleon is actively seeking an optimism grant proposal to add OP tokens via an incentives programme that will run from between 12-24 months to encourage liquidity provision for long-term alignment between LP token holders, perpetual protocol, Galleon and the Optimism Network.

$BYE Purchase Plan

  1. We propose an initial deployment of $1-2m, to mint $BYE from tokenSets. This would be a “test amount” for the bitDAO team to monitor the performance of their capital.

  2. After 3-6 months if the bitDAO treasury team are comfortable and happy with the returns of the $BYE product, we propose increasing the position to $5m.

  3. After a year, again if the treasury team are comfortable and happy, this number again could be further increased.

*Obviously, the above figures are fluid, whether the figures are increased/decreased at any stage of the Purchase Plan is entirely up to and at the discretion of the BitDAO team.

Phase 1 Purchasing

  • Initial purchases of $BYE would need to be minted from TokenSets via direct issuance, as we do not currently have enough liquidity for larger entities to purchase via uniswap v3. To do this all that is required is WETH & USDC.
  • Galleon is currently implementing a “flash issuance” feature for the product via our app on (https://app.galleon.community) this will enable an individual or entity to purchase via USDC only, useful for not having to have any WETH exposure prior to issuing BYE.
  • Galleon will be implementing either a xtokenterminal incentivised LP pool / an Arakkis (originally Sorbet Finance) incentivised vault, we would recommend that bitDAO join this LP pool for additional APR (from OP incentives) once this goes live (currently going through governance).

Phase 2 Purchasing

  • Discuss with the Galleon team performance/satisfaction of the product - if bitDAO is comfortable explore further deployment of treasury funds.
  • The flash issuance contract will be up and running, therefore this would most likely be the easiest way to deploy USDC into the $BYE product (due to slippage this most probably would be best in batches).

Timing

Start 2022 June / July

Other Considerations

Galleon prides itself on a “personable approach” to partners and investors, therefore the Galleon team would set up direct communication channels between bitDAO x Galleon so any queries or questions ongoing can be urgently addressed.

Review Process

Personnel

Galleon is a guild of experienced methodologists aiming to research, design, and create best-in-class thematic, leverage and yield based structured products on-chain across all EVM-based networks.

Our team consists of:

  • Andrew - Galleon Founder & Advisor @ Set Protocol
  • Duck - Operations & Biz Dev
  • Crown - Dev Ops
  • Additional two Senior Solidity Developers who are joining the team as part of the Galleon <> Beverage Finance Acquisition.

Galleon is an Set Protocol Ecosystem partner, with seed backing from 1kx, Co-founder of Polygon, Angel DAO and Fireeyes.

Technical

  • The Basis Yield ETH Index product is a fantastic, low-risk, high yield complimentary strategy for treasury diversification that performs well in any market conditions.
  • BitDAO would only be charged a (10%) fee on yield generated, therefore if the product is not profitable for BitDAO, Galleon does not earn a fee.

Temperature Check Poll

Would you like to see this proposal go to vote?
  • Yes
  • No
  • Needs work
0 voters
21 Likes
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Interesting proposal @duck, thanks for posting. We host a community Twitter Space every week and have an open call for proposal authors to join to share their proposals with the BIT Community. If you’d like to join us, let us know here or in the #governance channel in the BitDAO Discord.

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Hi @Je would gladly join the community twitter space. Will drop a message in the #goverance channel :+1: thanks!

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Thanks @duck for submitting this proposal.

While I look forward to touch base with you further, would you please clarify:

Why Optimism is chosen over other L2 chains? As, if not for obvious reasons, other chains also have grants programs.

While backtesting can’t be truly sacrosanct, even for decades’ worth of data, how you justify validating a strategy on hardly 2 months worth of data ?

Do you mean “negative funding” is a drop (decay) in NAV?

What’s vETH? How’s it different from WETH or stETH? Suggest any new terrms be defined as glossary, at the bottom of the proposal.

Would you elucidate your criteria for choosing the mentioned vault?

It would have helped if Founding team’s previous exp or background are mentioned in detail, given that your product is brand new, and yet to be proven .

Trust this helps.

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thanks for the questions @kravi happy to cover off below:

Main reason… perpetual protocol. We’ve used their V2 protocol for another product and it’s an impressive piece of tech, the team are awesome and great to build with.

  • optimism also has incredibly low fees, which is ideal for the rebalancing / auto compounding.

I should probably clarify here that the actual strategy is known as a “Cash and Carry” arbitrage, it’s not a novel / unique strategy that Galleon has invented, it’s actually a well known (and well used) strategy both in traditional financial markets and within the cryptocurrency market. Worth googling if you’ve not heard of it before.

Looking at Perpetual’s funding rate history we knew this arbitrage strategy was viable (crypto tends to be a very long only market in general, even during bear markets) the back testing was used to evaluate the automation of the strategy, the fee impact, rebalancing and auto compounding the yield. From the test data we concluded that the strategy (and product) was indeed viable and worth building given the appeal of delta neutrality especially in this current macro environment and market volatility.

Easiest way to explain this is:

  • When funding rates are >0% BYE earns yield (Longs have to pay fees to maintain their positions- this is the yield BYE earns)
  • When funding rates are <0% BYE has slow NAV decay (shorts have to pay fees to maintain the short position- this causing the NAV decay).

No difference, vETH is just the perpetual for ETH on perpetual protocol v2 (will add this to the proposal in a glossary shortly).

Simply put, they’ve got great reputations within the market, we’ve used them both previously for our own governance token and both teams were very helpful / reliable.

With regards to the team:

  • Andrew previously was part of the Set Protocol team, since founding Galleon he has remained an advisor and has a fantastic relationship with the Team. He has 8 years experience across engineering, leadership, product & strategy roles across finance, media & blockchain domains.

  • Crown has 7 years experience in Engineering, Cloud Architecture & DevOps.

  • Before joining Galleon, I worked in TradFi Asset Management for the last 8 years. Working across a number of key areas including Investment compliance, operations and client take-on.

  • We also have two senior solidity engineers who have joined our team as part of our Galleon <> Beverage Finance Acquisition.

Hope that helps

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Wanted to say thanks to all the participants of today’s call who came to listen in about Galleon and our proposal.

As promised here is a glossary and links that might be of use:

  • You can see the $BYE token set page here which provides further information, current TVL, and APY: TokenSets - Asset Management Simplified

  • Structured Products (Set Tokens) are customizable baskets of fully collateralized crypto-assets, represented as on-chain ERC20 tokens. These Set Tokens engage with popular Decentralized Finance (DeFi) protocols and follow the manager’s specific strategy - this allows investors to replicate an identical strategy easily by minting or purchasing the Set.

  • Set Protocol documentation https://docs.tokensets.com/#structured-products

  • A derivative or a derivative contract is a bilateral contract the value of which is derived from the value of an underlying asset or assets at a future date.

  • A perpetual contract is a derivative financial contract that has no expiration date or settlement, allowing it to be held or traded for an indefinite amount of time.

  • Perpetual Protocol only has Perpetual contracts available, the spot position within the $BYE Set Token is bought from Uni v3. The Short Pepertual position is bought and held in the $BYE Set Token via Perpetual Protocol v2.

  • Basis trading attempts to benefit from changes in the basis of futures contract prices.

  • Delta (Δ) is a risk metric that estimates the change in price of a derivative.

  • Delta neutral is a portfolio strategy utilizing positions with balancing positive and negative deltas so that the overall delta of the assets in question totals zero.

  • A cash-and-carry trade is a trading strategy that an investor can utilize in order to take advantage of market pricing discrepancies. It usually entails taking a long position in a security or commodity while simultaneously selling the associated derivative, specifically by shorting a futures or options contract.

  • Bitmex cash-and-carry article by Arthur Hayes (2015): Cash And Carry Arbitrage With BitMEX Futures | BitMEX Blog

Additionally some great materials from the Perpetual Protocol team: Perpetual Protocol in case anyone is interested :+1:

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