Stake Capital Group Treasury Management Proposal

[aminecryptoquant]

Stake Capital Group Treasury Management Proposal <> Nation3(NATION)

This proposal outlines the indicative terms of an agreement for the treasury management services (the “Agreement”) to be provided by Stake Capital for NATION3, and provides relevant background on Stake Capital. The aim of this proposal is to seek approval from the community.

Stake Capital Group: Who are we?

Founded in 2016, Stake Capital is a $1B+ AUM Group that is combining quantitative techniques with asset management, investment banking experience and a sophisticated understanding of cryptocurrency to identify, capture and risk manage opportunities across multiple markets.

• DeFi Strategies : Designed to extract maximum value from protocols’ tokenomic models.
• Smart-beta / thematics Long-only strategies : Designed to outperform traditional benchmarks by tilting the composition.
• Yield enhancement risk premia Long-short strategies : Designed to provide a positive return profile (earned for bearing a specific risk) with a low correlation to traditional assets (ex: carry or yield enhancement solutions).
• Tail Hedging : is an effective way to limit losses in adverse markets. It enables investors to stick with their long-term positions through a bearish market. The Stake Capital approach favors cost-effective solutions that balance protection against dominant risks in a portfolio with long-run returns.
• Arbitrage Yield and cross DEX Arbitrage Strategies : Designed to exploit market inefficiencies and price discrepancies among different instruments (Spot, Futures, Perpetuals, Options, etc)
• Liquidation Strategies : developed by acting as an agnostic actor, checking liquidation levels, profiting from price discounts and maintaining price stability in the DeFi lending market
• Tailor-made Options Investment Solutions : We can provide dedicated structured products tailored to each client’s risk appetite and investment objectives (e.g DNT, Twin Win, Daily Range Accrual, Strips of Digitals, Reverse Convertible, etc…)

Treasury Management Proposal

Stake Capital Group is proposing to manage a certain amount of Nation3’s capital under the following conditions:

Nation3 will provide a minimum agreed sum of 1m USDC (or equivalent)

The coins accepted by Stake Capital have to be discussed and agreed between both parties in advance

Stake Capital Group cannot guarantee to make a profit by managing Nation3’asset. The capital is not guaranteed as all the investments below, even in stable coin, face smart contract and protocol hack risks.

Stake Capital Group will actively manage Nation3’s fund by investing in different strategies, example of strategies are suggested below. The strategies will be pre-agreed between both parties.

All the APY shown below are based on last week’s APY on Stake DAO protocol and is only an estimation for indication purpose. This APY is constantly changing due to demand/ask/volume/market conditions.

For Stable strategies, Stake Capital will actively manage and rebalance the portfolio according to the updated APY between Strat number 1 to 4 below.

We assumed 0% management fees & 20% Performance fees under 10m, 15% above 10m for Stake Capital.

The performance is denominated in the underlying asset hence there is no benchmark to take into consideration for volatile assets.

For example if Nation3 gives 10 ETH and in 1 month there is 11 ETH. The performance fee will be calculated on 1 ETH without taking into account the ETH price.

Stake Capital will Implement a smart contract to manage the funds.

Stake Capital can :

• Move funds between whitelisted strategies.
• Withdraw perf fees.

Stake capital can’t :

• Withdraw funds from the smart contract (except perf fees) without the permission of Nation3 governance.

Nation3 governance has control over the funds and can withdraw funds with a penalty of:

50k if funds are withdrawn before a 6months period with a starting date of when at least 1m USD are into the Strategies.

Stake capital will produce a reporting that will include the AUM, the strategies, the pnl net and vs the benchmark. The reporting will be done each month.

Performance fees will be calculated and paid on a monthly basis (monthly performance will be taken into account) when the reporting will be issued. If Nation3 decides to add more funds at t, then the performance fees will be calculated and paid to Stake Capital at t based on the previous total AUM on t-1. The timeline will reset with t=0 being the new date when additional funds were added.

• Scenario 1: Stable only

100% in Stable Coins among strategy 1 to 4

• Scenario 2: Stable & ETH options

90% in Stable Coins among strategy 1 to 4

10% in the ETH Covered Calls Option Strategy of Stake DAO (weekly options)

• Scenario 3: Stable, ETH, BTC & GLP

70% in Stable Coins among strategy 1 to 4

10% in the ETH Covered Calls Option Strategy of Stake DAO (selling 10 delta weekly calls)

10% in the BTC Covered Calls Option Strategy of Stake DAO (selling 10 delta weekly calls)

10% in GLP, providing liquidity to GMX and gain trading fees of the platform.

[Skyborn]

For me this proposal needs more detail.

1. What is the expected risk of each strategy?
2. What are the expected average APY’s of each strategy?
3. What mechanism in detail protects the fund from taking the funds and running? The hand wavy answer was too vague for the importance of how over 1 Million will be handled.
4. Why pay the 20% performance fee? What edge do they have that we couldn’t do ourselves?

After looking at the website it appears they invest in mostly private capital ( pre-seed, seed and series A) rounds, which I saw no mention of in the proposal.

I don’t see the value prop here in this original proposal without a lot more details and less hand waving. I’m getting red flag vibes give us your money and trust that we'll make some kind of profit.

Without major revisions this is a hard no for me.

[Skyborn]

Btw, I did not mean to like the post, it was an accident and I can’t seem to unlike it.

[aahna]

Is there a more easy-to-understand TLDR for those of us who are not already familiar with all these technical terms? I didn’t understand the overall idea of the proposal.

[0xGallego]

My try of a TLDR; We convert part of our treasury to USDC and allow Stake Capital to manage it to generate profits through a bundle of Defi investments strategies. They get a 20% of the monthly profits in exchange.

---

They offer us 3 different scenarios with different risks and projected APRs (yearly returns over the investment before fees, not compounded):

1. Stables only | low risk | 8.50% APR
2. Stable & ETH options | medium risk | 10.15% APR
3. Stable, ETH, BTC & GLP | medium - high risk | 12.45% APR

IMO, outsourcing treasury management to an already stablished professional investment group it’s good for us on our current state.

[anastasiya]

I think it would be beneficial to add some background here.

I reached out to Stake Capital a few weeks ago to discuss this partnership as I believe that achieving a healthy, sustainable treasury that can fund Nation3 operations long-term is best done with a specialist, reputable partner - than with a guild of individuals that we need to recruit individually.

Currently Nation3 treasury holds $NATION only. Using this to pay contributors, or selling as-needed to cover operational expenses is subject to multiple risks, including:

• affecting the market with as-needed selling by the DAO
• too much selling pressure if contributors have to sell $NATION each time to cover living costs
• no confidence in runway length & big dependancy on market conditions.

A much better approach is the following:

1. Through the already-approved partnership with GSR, achieve better liquidity for $NATION
2. Again through GSR, and once liquidity is sufficient, start programmatically selling some $NATION in a way that doesn’t affect the market (GSR is very good at doing this)
3. Work with Stake Capital to then deploy these assets (ETH, BTC, Stables) into various DeFi strategies to generate consistent return, that can then be used to fund operations.

Now, to address some specific questions:

1. the risk: as Stake Capital mentions, there is always smart contract and protocol hack risks. The way to mitigate it is by using only white-listed, safer protocols.
   As for specific strategies risks, I’ll let them elaborate more on it. I recommend this article from StakeDAO academy to understand specifically the Options strategy and its risks: How do Options work in DeFi?

2. the expected average APY is mentioned in each strategy (see at the top of each screenshot, Scenario APR)

3. @aminecryptoquant could you please address the point about the mechanism that protects the funds from being stolen - is it open source? if so, could link to it?

4. The edge is following the market closely, understanding when to move between strategies and how to extract most value within given risk limitations, and having the track record of doing so successfully for a range of clients. StakeCapital and StakeDAO have strong reputation in the space in this domain.

@Skyborn I recommend checking STAKE CAPITAL - Quant and https://stakedao.org

In terms of fees, in my experience there is typically a 1-2% management fee and 15-20% performance fee. In this case, I think it’s best to align incentives towards outperforming simple holding an asset (eg ETH strategies vs simply holding ETH and benefitting from market going up), so in this proposal there is 0% management fee and a higher performance fee (in the case of ETH, charged on the difference between capital appreciation of just holding ETH, and the strategies).
I am certainly in favour of trying to negotiate the performance fee closer down to 15%.

[anastasiya]

it’s a bit of a longer tl;dr than @0xGallego’s, but hopefully some background is helpful!

[Skyborn]

Wow thanks for the context, this was a very helpful post Anastasiya. I wasn’t aware you approached them first so this makes a lot more sense to me now.

1. Yep agree with smart contract / protocol risks.
   For me though, it lacks enough information to make a good decision if the reward is worth the risk. What’s the max expected loss for each strategy, where is the money being deployed? Is it being loaned out to over collateralized borrowers? Off-chain corporate debt lending? Being used for Seed funding? It’s not super clear to me because all that’s listed is the chain and protocol.

2. Ah yes! I can’t believe I missed seeing that. I looked at the paper but somehow didn’t notice the APR in the upper right corner. facepalm

3. Thanks, I’m interested to hear more on this. Will their team doxx themselves to us, incase they don’t hold up their end of the deal or run away with funds?

4. That’s a fair answer.

If we can get more info as discussed above then I’m happy to vote yes.

[luis]

I like the proposal, only two major points I’d like more clarity on:

1. When does the proposal actually execute? Since N3 doesn’t currently have any other asset than its own token, the DAO would need to cash some out before having some assets to give to Stake Capital to manage
2. I’d like more info on the custody front. As @Skyborn and @anastasiya mentioned, we need some strong guarantees that the funds cannot be stolen/cannot be used in reckless ways. I wonder if you use something like Enzyme to manage the funds

[WilsonNG]

I am very clear about the whole plan after Anastasiya’s explanation, and same question as others:

1. how can we be sure our funds are safe?
2. how will we balance our investment, will Stake Capital provide their suggestion to us, like how many percentages for low risk investment / mid / high?

Furthermore, I am thinking will we also provide some funds to the actual trading market like what Tether is doing, as it will be safer, but lower returns?

Much appreciate~

[Skyborn]

I was looking through StakeDAO and found the products talked about in the proposal above. https://app.stakedao.org/

If Stake Capital Group is using our treasury to put on this platform, what do we need them for and why pay a 20% performance fee for work done mostly by computers? 20% is usually paid to high performing hedge funds, this type of work (looks like mostly rebalancing) does not warrant these high of fees.

[Chago]

Hi everyone, I am Chago from Stake Capital. We really appreciate all your feedback and I am here to answer, if I miss anything don’t hesitate to let me know.

First of all, thanks anastasiya for covering everything in your post.

0xGallego did a great TLDR. I recommend it.

Skyborn, to answer your concerns about risks : every strategy is managed through smart contracts and that is the main risk : smart-contract risk. As soon as you join DeFi, you are exposed to the smart contract risk. The average APY are given in the first message of that proposal, note that APY will change overtime (up or down) and Stake Capital will have an active mangement to optimize the overall position in order to capture the maximum yield according to the risk profile chosen here. As anastasiya said, there is no management fee in order to better align incentives towards outperforming simple deposits in strategies by rebalancing the postion over time.

Luis, Nation3 will deposit funds into a smart contract created by Stake Capital which can be reviewed once created; and as aminecryptoquant said :

Stake Capital can :

• Move funds between whitelisted strategies.
• Withdraw perf fees (so only on profits)

Stake capital can’t :

• Withdraw funds from the smart contract (except perf fees)

Skyborn about your last question, Stake Capital is likely to use Stake DAO products to max yields such as mentionned by aminecryptoquant on Liquid Lockers or options since it’s the best on the market but not obligated to do so over time. We are constantly looking for better opportunities in the market, to provide the best risk/rewards ratio, for example you can see in the proposal, there is a GLP strategy on Arbitrum, which is one of our new strategies , not related to Stake DAO, the risk is greater, so is the APR.

If i missed any anything, feel free to ask me.

[luis]

One question here since you mention Arbitrum: how do you deal with strategies on different chains? Since I imagine the smart contract you mention with whitelisting etc. will be deployed on Ethereum.

[aminecryptoquant]

Hello Luis,

We will deploy one smart contract per BC, if we use strategies on Arbitrum and ETH for instance we will have two smart contracts, one in arbitrum and the other one on ethereum.

[luis]

Makes sense. And how do you bridge assets between them in a trustless way?