Draft CIP-06: Enabling Treasury Protocol Controlled Value (PCV)

Summary

The purpose of this proposal is to enable Cover Protocol to utilize some of its treasury funds actively rather than having all of it sit statically in the treasury address. These active funds would be managed by governance, and is referred to as Protocol Controlled Value (PCV). This proposal in particular is simply allocating a maximum PCV % within the overall unallocated treasury funds, and then opening the door for future detailed, actionable PCV proposals to determine how to use those funds to benefit the protocol. Some example purposes of using PCV funds include growing the treasury through DeFi yield farming/staking, and/or deploying funds within Cover Protocol in a way that grows liquidity, protocol health, and usability for our users.

Background

Recently, Fei Protocol launched an article and whitepaper that included introducing the concept of Protocol Controlled Value (PCV) to the world. These documents briefly describe what PCV is and then goes into length about how Fei could use PCV to benefit its own protocol. Taking inspiration from Fei, some other protocols such as BadgerDAO have taken steps in consideration to applying PCV to their treasuries.

At its core, PCV is a change in perspective over the assets held/owned by a protocol. Currently, most assets/tokens/etc controlled by protocols are held in a static state to potentially be used at a later date via governance. However, PCV flips this concept on its head by reminding the community that these static assets could actually be dynamic - treated like a giant wallet actively managed by the protocol and community. These dynamic assets can now be used in ways that benefit the protocol, such as:

  • Staking/farming/lending/etc assets on its own protocol in ways that benefit the protocol as a whole - while growing the value of the protocol-owned assets
  • Staking/farming/lending/etc assets on other protocols that align with the vision of this protocol - while growing the value of the protocol-owned assets
  • Deploying assets on its own protocol in places where it may not be economically beneficial to grow the value of assets (where individuals would not likely choose to do so), but will still be beneficial to the health of the overall protocol

The simplest and most common example to apply PCV is a protocol’s treasury, which is typically managed by a DAO (Decentralized Autonomous Organization) such as Cover Protocol. The DAO can vote to allocate an initial set percentage of treasury assets to be implemented in various ways described in the above bulleted list. All 3 bullets are beneficial to the protocol in various ways.

Furthermore, a protocol utilizing PCV can also at any time choose to implement an autonomous manager of PCV assets using one or several written PCV Controller smart contracts. Implementing such a PCV Controller takes more time and audits to ensure safety and reliability, but can greatly open the possibilities of the protocol by constantly managing the assets so that the DAO no longer has to vote in the event of rebalancing purposes.

Motivation

The assets currently sitting in Cover Protocol’s treasury and owned by Cover are static and not accumulating any value - with the exception of price action of the underlying assets. Cover’s only sources of revenue are redemption fees (currently 0.1% but potentially changing with this CIP) and claims filing (very small, one-time fees).

The Cover Protocol treasury address can be found here, but it should be noted that several assets/tokens are earmarked for other purposes such as Rewards Mining. Funds from the recent OTC transaction with Yearn are found in a separate deployer address and are allocated for other reasons - therefore not counted here. The current estimated unallocated funds in the treasury are:

  • ~4.443 ETH, includes ETH for gas (~$1,700/token, $7,553 total)
  • ~848.3 COVER (~$700/token, $593,810 total)
  • ~64,398 DAI (~$1/token, ~$64,398 total)
  • ~3,250 yDAI (~$1.05/token, ~$3,413 total)
  • ~24,096 USDC (~$1/token, ~$24,096 total)
  • Total Unallocated Treasury Holdings: ~$693,270

Cover Protocol should be seeking new, novel ways to grow the treasury and protocol without overburdening the protocol users on fees. Treasury growth allows for future grants, audits, bug bounties, dev bounties and long-term dev payment.

Specification

Instead of leaving all of these assets static in the treasury, a set percentage of the treasury assets should be used to benefit the protocol and/or the treasury. This proposal is meant to expose the community to the concept of PCV, and symbolically enable future CIPs to develop detailed PCV plans, ideas, etc and act on them. This can be achieved by using these assets dynamically in ways outlined in the three bullet points described within the Background section.

It should be emphasized that user-owned collateral will not be used for or counted towards PCV, as it is of the utmost importance that Cover protects its users’ collateral and not put them at risk. Cover Protocol PCV is meant exclusively for treasury-owned assets.

While this proposal is solely meant to enable detailed, actionable PCV proposals in the future, here are a few examples of how PCV could be used within Cover Protocol’s treasury:

  • Buy a wide, aggregated set of NOCLAIM tokens within Cover Protocol to boost liquidity while likely providing a risk-adjusted return on investment.
    • Increases covToken (CLAIM/NOCLAIM) liquidity
    • Increased liquidity opens door for larger actors to purchase coverage, ramping up more redemption fee revenue
    • Provides a risk-adjusted return on investment to the treasury
  • Provide larger “liquidity seeding” upon new epochs by purchasing equivalent CLAIM/NOCLAIM tokens.
    • Does not provide a direct return or loss to the treasury
    • Jumpstarts initial liquidity to allow outside actors to purchase good initial volumes of CLAIM or NOCLAIM
    • Subsequently ramps up redemption fees
  • Stake/lend out the treasury’s reserve DAI/COVER/etc to protocols that align with Cover’s mission - such as Cream, Sushiswap, BadgerDAO, Yearn, etc.
    • Provides a return to the treasury
    • Furthers the aligned visions of the protocols
    • When economically efficient, the treasury could even purchase a small amount of CLAIM to cover its staked/lended value in other protocols.

Max PCV Limit

Enabling PCV should also include suggesting an initial limit on how much of the treasury should be used for PCV purposes. Keeping a portion of the treasury static and denominated in COVER is important to keep the treasury aligned with protocol growth, as well as keep some assets directly and instantly accessible for other governance spending purposes. However, the PCV maximum limit should also be large enough to accumulate real value (either in treasury asset value growth or protocol growth) for the protocol.

For this reason, I suggest an initial maximum of 25% (denominated in $) of the unallocated protocol-owned treasury to be allocated to PCV operations. The poll below will allow this percentage to be adjusted based upon votes. Future detailed PCV proposals must be clear in proving that its initial allocation of assets will not overdraw from the maximum (suggested 25%) overall PCV allocation. A future webpage tracking Cover Protocol-owned treasury assets & their value may be a useful development from a community member.

Conclusion

Properly utilizing PCV can grow the treasury, further Cover Protocol’s vision, and benefit both the protocol and its users. Growing the treasury is vital to the health of the Cover Protocol as it allows Cover to spend more of the treasury for future grants, audits, bug bounties, dev bounties and long-term dev payment.

In addition, Cover Protocol furthering the concept of PCV may influence other protocols to adopt PCV as well. Such protocols may want to use parts of their PCV outside of their own protocol, but will likely want coverage on these outside protocols. Future PCV adoption across DeFi may directly result in more usage of Cover!

After the polls end on this topic, the CIP will be moved to a snapshot vote to finalize the governance decision. Upon successful acceptance of this proposal, I am eager to see the community’s detailed ideas of how we utilize PCV to our advantage!

Should Cover Protocol allow a portion of its protocol-owned treasury to be allocated for Protocol Controlled Value (PCV) operations?
  • Yes - Cover should allow part of its treasury to be used for PCV
  • No - Cover should NOT allow part of its treasury to be used for PCV. Things will remain as they were before this proposal.

0 voters

Of the unallocated protocol-owned treasury, what should the maximum % (denominated in $) initially be allocated for Protocol Controlled Value (PCV) operations?
  • A maximum of 33% of the protocol-owned treasury should be for PCV operations
  • A maximum of 25% of the protocol-owned treasury should be for PCV operations
  • A maximum of 10% of the protocol-owned treasury should be for PCV operations
  • None of the protocol-owned treasury should be for PCV operations (this option is reserved for PCV “no” votes and will be ignored if less than 50%)

0 voters

2 Likes

This is a very interesting concept. As the utility of COVER tokens increase (xCover, Ruler, CREAM, Unit, etc.), using treasury to farm (I believe Yearn already does so) is one way to grow the treasury slow and steady.

I like it.

2 Likes

I do think a portion of treasury should be put to work in some way. I think possibly providing liquidity to the COVER-ETH Sushi pool would be beneficial. Cover Protocol can LP and stake it into Masterchef to receive constant stream of revenue from xSUSHI.

  • The revenue generated from xSushi can be used for future funding (ex: marketing, helping with audits, xCOVER, and future development). This should be well throughout and must take into account impermanent loss.

While xCOVER is not in play, we can look into converting DAI & USDC into yUSDC & yDAI via Yearn earn.

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I think ETH should stay as ETH for gas costs.

Disclaimer: These are my opinions, not the teams.

Certainly some good ideas! Looking forward to seeing more in future proposals.

Addressing impermanent loss: Is COVER enabled as a collateral on Cream? If so, the treasury could collateralize COVER, borrow ETH, and LP COVER/ETH in Sushi while not experiencing any effective impermanent loss! There are, however, risks of liquidation on Cream and SC failure on Cream/Sushi that should also be addressed. SC failure could be mitigated through purchasing CLAIM, but the community/proposal would have to address how we plan to prevent liquidation.

With respects to COVER from the treasury as collateral, a liquidation event scares me more than a SC failure given the current volatile market. Also you run the risk of variable interests rates which could outweigh the reward.

Given the collateral ratio is only 45%, I am not sure its worth the risk.

1 Like

Agreed, most everything I’ve said so far is ideal conditions. Reality is much harsher and more complex!