Beta-15 Doctrine for Diversified DAO Treasury Funds

A so-called "Beta 15" strategy that determines an optimal structure of DAO LP treasuries is proposed in this article. In a nutshell, this strategy means keeping 15% of market volatility risk for GTON and 85% in stablecoin LPs. Below we explain the reasoning behind the strategy in relation to the current market sentiment.

Finance math foundations

The regression formula calculates the return on asset valuation:

image

where image is the factor of the internal (independent) return on the asset and its economic characteristics and performance,

image is the portfolio return that represents the market,

image is market sensitivity factor,

image is noise.

Detailed explanation of beta from Wikipedia

The market beta of an asset i is defined by (and best obtained via) a linear regression of the rate of return of asset i on the rate of return on the (typically value-weighted) stock-market index:

image

where image is an unbiased error term whose squared error should be minimized. The y-intercept is often referred to as the alpha.

The ordinary least squares solution is
image

where Cov and Var are the covariance and variance operators. Betas with respect to different market indexes are not comparable.

Beta-neutral (beta = 0) means that an asset has no correlation with the market and fully depends on its own (intrinsic) economic fundamentals.

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 imagebecomes 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.

Voting

1. :link:Snapshot(Ethereum)

2. :link:Snapshot(Fantom)

So, if I understand correctly, the beta 15 strategy translates to adopting an economic strategy that seeks to have a limited correlation with other market tokens. Am I correct to assume that this strategy is chosen with the idea that GC can grow more easily on itself and is not as much dependent on the crypto market overall, for better or worse?

Is this type of strategy (beta-?) adopted by other cryptos or is this more common in other financial markets?

Something tells me we’re going to see a lot of greek letters being used by GC in the future ;).

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Hi all,

first of all, i have to say that i very much appreciate the theoretical grounding
of the fundamentals of this project. This proposal is a good example!

Nevertheless, i have some questions:

  1. beta15 would basically mean that in any given market condition, the influence
    on GTON could at most be -15%. Correct? If so, assuming that another asset (which
    we invest parts of the treasury into) will not dump to zero (yes, that is not 100%
    secure, but probably a legitimate assumption) we could have way more than 15% in
    this asset. Given that we will only consider reasonable assets (not pretty new ones,
    no high risk assets, …), we should be able to get a clear picture about their
    historic volatility.

Small example of the idea: let’s assume we have asset a_1 in which we want to
invest parts of the treasury and we know that the (historic) volatility of a_1
is 50%, then we would be able to invest 15% * 1 / vol(a_1) of the treasury in a_1
and still be beta15 with a very high probability.

  1. I think we have to be careful here for not mixing up two concepts. On the one
    hand we have to consider POL (Protocol Owned Liquidty), basically the treasury in
    our case, and the market cap (mcap). It is very important to understand that
    mcap does not equal POL. Therefore, i think a very reasonable question is, even
    if we agree on a beta15 approach, that we have to think about how pathway works.

Basically, the idea of pathway is to secure the mcap (not POL / treasury). In
contrast, pathway even uses POL in order to secure the mcap (at least in
extreme market situations). Therefore, the concepts of mcap and POL are closely
connected via pathway (Attention: this does not necessarily hold for every
DeFi 2.0 project, but comes with the pathway approach!). My impression is that
the current proposal mixes those things up to some extend.

In order to clearly differentiate, i would suggest the following: currently,
pathway works on the GTON / FTM pair on spritiswap, and by this, GTON is heavily
correlated with FTM, e.g., if FTM drops, pathway has some work to do. To me,
that does not seem to be reasonable, especially looking at other crypto projects
and how much they fight for losing the correlation to BTC. We do artificially
introduce a strong correlation for GTON to another coin. Why artificially?
Because nobody forced us to do so. Therefore, i would suggest to reconfigure
pathway to work on a GTON / USDC (or any other stablecoin we trust) pair, e.g.,
on spritiswap. By this, we would remove the correlation to FTM, and we would make an
implementation of the beta15 approach easier.

Why would the beta15 approach be easier then? Ok, that’s a bit tricky. Basically,
in the current approach our both important variables mcap and POL have a correlation to
volatile assets (as described above). And we have, via pathway, a functional
connection (even in the mathematical sense of the term function) between mcap
and POL. Therefore, we have two formulas (for mcap and for POL) which themselves
depends on volatile assets and are interconnected (via pathway).
If we now reconfigure pathway to a GTON / stable pair, we remove the connection
to the volatile asset for the one variable (mcap) and only have this connection
for the treasury.

Of course one could argue to do it exactly the other way round and to leave
pathway on the GTON / FTM pair and remove the connection to the volatile asset
on the POL end, but this would lead to a beta0 strategy, for which Aleksei already
argued why this is probably not a good idea.

Ok, sorry for this maybe overcomplicated response, but i hope we can discuss it
a bit further.

Best
Marc

exactly :fleur_de_lis:

“Is this type of strategy (beta-?) adopted by other cryptos or is this more common in other financial markets?”

yes, funds managers are using ‘beta’ to balance portfolio of assets and estimate how much they must hedge their positions

yes, we’re using 4-6months average values for such computations and beta-15 is also aiming for 4-6 months forward

yah, it’s temporary mixed, after several months of collacting data we will have accurate ‘beta’ estimation in place

it’s true

but the thing is with candy and other dApps which will utilize $gton as liquidity poxy we can’t avoid such correlation anyway

so beta15 is bringing us limits of how much volatile assets (ftm, eth, wbtc, any, link and so on) are able to be deposited into candy farming tool

not only into dao treasury

Does it actually matter which pool pathway ‘works’ on with regard to it’s correlation to volatile assets? I assume ‘works on’ in this context means which pool is used by pathway to calibrate the mcap.
If pathways is applied on another pool (eg. GC/STABLE), arbitrage bots will automatically adjust other pools accordingly. I would think the most important property of a pool is the liquidity present, to reduce slippage.

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Well, my view is the following: yes, you are right, at the end of the day, it will be arbitraged one way or the other. That’s the basic idea of pathway just using one pool. Anyway, the difference is the following. Let’s assume we continue to use FTM/GTON as the pool for pathway, FTM falls, then pathway has to become active, mainly we need to stabilize the price with funds from the treasury, only after this step, the arbitrageurs will take actions to adjust the price on the other pools. In contrast, if we use an GTON/ pool, if ftm falls, arbitrageurs will directly adjust the FTM/GTON pool. Therefore, in this scenario, the treasury doesn’t need to take care of this situation.

I would assume that this is way better for the treasury, cause it only needs to act if the price of GTON (in USD, which is the basic measure for pathyway) falls.

But of course, liquidity is another very important aspect.

I think the difference between our understandings lies on the fact that you see pathway as a continuously active bot rather than a randomly activated bot (around twice a week) that buys/sells according to projection and current market condition.

As arbitrage bots always immediately respond to market conditions there would be no relevance to whether pathway works on GTON/FTM or GTON/USDC.

Hey Jim,

that indeed would make a difference. Well, i guess then it all comes down to how “instant” pathway will be and how much time arbitrage bots would have to settle the pairs.

2 Likes

this is actually true,
recently we published an research article about pathway:

the source code is also here and you can see that pw interventions happens instantly if the peg is far from market price in the pool