API3 Treasury Diversification Proposal
Period: 4/2023 - 7/2023
Amount: 7,500,000 USDC
Destination: 0x0C4030768601A5b564FCD50Ec5957D516b0F2aD4*
*The destination is the API3 Hot Wallet multisig (Safe), owned by the API3 Foundation and controlled by signers Burak Benligiray, Dave Connor, Erich Dylus, Andre Ogle and Heikki Vänttinen.
Proposal tl:dr:
- Diversify API3 treasury (ex. API3) from 100% USDC to 50% USDC, 50% ETH
- DCA into ETH over 3 months following the passing of this proposal
- After establishing the full position, deposit the ETH into the DAO secondary agent
- Keep paying grants in USDC
Background
Due to the recent disruptions in the US banking industry, and the reliance of stablecoin issuers like Circle on the US banking sector, there have been discussions about whether API3’s treasury management strategy of keeping most of the project’s treasury in the USDC stablecoin is long-term safe and viable.
Even before the recent rumblings, key decision makers in the DAO have been keeping a close eye on the markets in search for opportunities to diversify and/or produce yield with the funds in the API3 DAO treasury. This, in order to protect and ideally extend the project’s runway. However, none of the solutions explored thus far (and we have explored many) have been a good fit for us. In fact, purposefully refraining from diversification and yield-generating activities has protected us from exposure to many of the events that have recently destabilized the crypto markets.
Despite our thus far flawless track record of protecting the API3 project’s assets, the events of the past few days have reminded us that simply dodging DeFi / CeDeFi ponzi schemes and avoiding exposure to smart contract risk is not sufficient to ensure that the funds reserved for building our project don’t go poof. This is because the structural risks that our treasury faces extend to the banking system that underpins the stablecoins held in the API3 treasury.
Our Exposure
The API3 treasury (with the exception of the API3-denominated ecosystem fund) is currently very close to 100% exposed to Circle’s USDC stablecoin and any risks associated with it. It is the main, and practically speaking only, asset that the DAO holds, besides the project’s own API3 token (comprising the API3 ecosystem fund).
I want to be clear and explicitly state that I do not believe that USDC will ever “implode” in the way some (algorithmic) stablecoins have in the past. I also don’t think there are any major short to medium term risks with keeping a significant portion of our treasury in USDC. This is because even though some of USDC’s collateral reserves may possibly remain locked in SVB (“possibly”, as the Fed stepped in to ensure all depositors’ access to all their funds, not only the FDIC-insured portion), USDC continues to be extremely well collateralized and maintains its redeemability against USD.
The above being said, with SVB, Signature and Silvergate now out of the picture as viable fiat-ramps for USDC, I do think there remains a non-negligible risk of the banking rails for USDC becoming fewer and farther between, and this, over time, causing the value currently locked in USDC to gradually seek safe harbor elsewhere.
Risk Scenarios
To continue on this hypothetical trajectory, were the aforementioned scenario of USDC losing banking support to unfold, there would be two possible directions for USDC holders: 1. Away from the crypto industry / “flight to safety” - i.e. redemption of on-chain value into fiat and injection of this value back into the traditional banking system, or 2. deeper into the crypto industry - i.e. into other stablecoins and crypto assets. In the event that Circle and its USDC were to lose their premium banking partners (e.g. due to political pressure from the US Govt), some market participants would certainly opt for option number 1 and cash in their stablecoins for “real” dollars. However, for many participants exiting crypto completely would not be a feasible or preferred option. In cases where there was a strong enough will or mandate to remain in the crypto markets (esp. with commercial banks closing their doors left and right), group nr. 2 would likely seek to diversify out of USDC, but stay within the crypto economy. This is when they would face the problem of a lack of better options. USDT’s collateralization is dubious at best while other off-chain collateralized stablecoins rely on largely the same banking partners as USDC. As stores of value, algorithmic stablecoins have not presented a serious alternative either. As such, for players looking to stay in the crypto markets, diversification would likely mean gaining exposure to “bluechip” assets such as BTC and ETH. In short, this would mean that the loss of trust in stablecoins would, to an extent (within the portion not escaping into fiat), drive demand for BTC, ETH and other crypto-native assets as safe havens, ironically in part fulfilling the promise of BTC as a safe haven from the fiat banking system amid a looming banking crisis. Loss of trust in stablecoins, due to whatever reason, would thus likely result in a scenario where market players would increasingly feel the pressure to diversify beyond stablecoins and into crypto-native assets, driving the price performance of these assets and creating a flywheel effect where those too stubborn to move with the herd would damage their competitive position in comparison to those more willing to “risk it” with more volatile assets.
Another real risk in maintaining a large USDC exposure is the inflation that the dollar is likely to face in a short-term future where the Fed ceases interest rate hikes in favor of stabilizing the economy after a close call with the banking sector. This would mean a gradual but meaningful deterioration of the API3 Foundation’s purchasing power, meaning a lessened ability to pay appealing grants for proposals that drive our project forward.
Thirdly, a black swan event connected to Circle and USDC can never be completely ruled out either. What this black swan might be is anyone’s guess, so this goes into the category of “unknown unknowns”.
Proposed Action
I propose we further secure the future of API3 with a position in the most on-chain available (to API3 DAO) blue chip crypto asset there is: ETH.
By most on-chain available, what I mean is that the asset does not need to be wrapped or bridged onto Etherum mainnet, where API3 DAO resides (e.g. wBTC, ruling out Bitcoin), nor does it rely on off-chain custody (e.g. PAXG, ruling out gold). With PoS scaling and true L2s (i.e. rollups) resolving onto mainnet, Ethereum remains in as strong a position as ever when we consider the future of Web3. Also, similarly to BTC before it, ETH has risen as an “index asset” of sorts for the entire crypto market (albeit with a slight leverage on BTC), meaning that its price movements are highly correlated with the overall market. Out of the available assets, ETH also remains the most uncensorable and decentralized, meaning that the risks associated with our ETH exposure will really only come from the price performance of the asset and not from structural uncertainties. Due to its position in the market, the performance of ETH can be assumed to be correlated with the entire crypto space and the general Web3 movement. Thus, a future in which ETH is worth fractions of its current price for a prolonged period of time is a future that likely does not provide a project like API3 much fertile ground to grow in. Conversely, a future in which ETH’s price has significantly increased from where it is today bodes well for API3 as a project, API3’s runway through its proposed exposure to ETH and decentralized applications (API3’s users) in general.
In a nutshell: If Ethereum/ETH dies, things will look bleak for API3 regardless of our treasury balance. If Ethereum/ETH does well, we have leveraged upside as a project.
In Practice
The sought portion of the treasury to be diversified into ETH is roughly 50% of the current treasury – 7.5M USDC. If this proposal is passed, the ETH will be bought by Dollar Cost Averaging 7.5M USDC worth of buys over 3 months from the passing of this proposal, in weekly equal increments, from the API3 Hot Wallet (3/5 Safe multisig) using DEX liquidity (Uniswap / DEX aggregators). OTC purchases (within the DCA strategy) are also not ruled out assuming we can find the right partner. Once the full position has been established, the ETH will be deposited into the DAO secondary agent. The remaining 7.5M USDC will be kept in USDC and will act as immediate liquidity for DAO proposals in the short to medium term. The purchased ETH will not be a primary method of funding proposals, as it should first and foremost be a store of value for us. Finally, as noted, I do not expect USDC to be going anywhere anytime soon, and it remains the safest stablecoin out there, so I suggest we handle our everyday financial requirements in USDC, as we have to date.
