CP132: Strategic Token Swaps Initiative for Centrifuge DAO

,
cp: 132
title: Strategic Token Swaps Initiative for Centrifuge DAO
authors: Kate_Bee, ImdioR, 0xJulCaesar, theoyster
contributors:
uses-component: CP4
technical-proposal: no
requires-onchain: no
impacts/modifies: no
status: rfc
date-proposed: [2024-10-16]
date-ended: [YYYY-MM-DD]

Short Summary

This proposal seeks to establish a framework for Centrifuge DAO to engage in strategic token swaps with other DAOs and RWA projects. The initiative aims to diversify our treasury, forge valuable partnerships, and enhance our position within the DeFi/RWA ecosystem through token swap opportunities.

High Level Objective

Optimize CentrifugeDAO’s treasury management and ecosystem positioning by implementing a structured approach to strategic token swaps.

Foster inter-DAO collaboration and create mutually beneficial partnerships within the DeFi/RWA space.

Initiate and nurture strategic relationships with complementary DAOs and projects, opening doors for future collaborations and ecosystem growth.

Attract new investors and communities by associating Centrifuge with high-quality partners in the DeFi/RWA space while increasing its visibility.

Preamble

This is a starting point for discussion on a potential token swap strategy for CentrifugeDAO. We are seeking community input to shape our approach before developing a comprehensive proposal. Your thoughts, concerns, and suggestions are crucial in determining our path forward. We encourage all community members to review this document and share their perspectives.

Background

As the DeFi landscape matures, inter-DAO collaboration and strategic partnerships have become crucial for sustainable growth and ecosystem development. Token swaps have emerged as a tool for DAOs to align incentives, share governance, and create mutual value. However, it’s important to approach token swaps with caution, as their effectiveness can vary greatly depending on the specific circumstances and partners involved.

Several prominent DAOs, including Gitcoin, BanklessDAO, GnosisDAO, Alchemix, Thales, Saddle, Sperax, Layer2DAO, Giveth, OlympusDAO, Juno, Celo Network, Balancer, Paladin, Enter DAO, Fiat DAO, Agave and many more have successfully executed token swaps, demonstrating the potential benefits of this strategy.

The total value of these token swaps was $560.8M based on execution day prices. However, BitDAO and FTX’s swap, valued at $496M, was an outlier. Excluding this, the remaining DAO token swaps totaled $89.2M.


The current status of 50 token swaps completed as of Q2 2024. Credits: LuukDAO

Token swaps serve a purpose beyond mere financial transactions, acting as governance alignments that allow DAOs to gain voting power in each other’s ecosystems. This integration enables participation in significant decisions that impact both parties, fostering a shared interest in mutual success. By exchanging tokens, DAOs effectively invest in one another, aligning their communities and long-term goals, which not only strengthens individual DAOs but also contributes to the overall stability and interconnectedness of the DeFi ecosystem. Through strategic swaps, DAOs can establish a network of alliances, amplifying their collective influence and ensuring long-term viability.

Direct integration of solutions enhances collaboration relevance, as seen in the AaveDAO and BalancerDAO swap. AAVE uses Balancer for liquidity, while Balancer incorporates AAVE’s lending markets. (Case study: DAO Token Swaps as Ecosystem Enablers Appendix A.)

Active token utility for governance and value generation, like staking, benefits partnerships. The GnosisDAO and BalancerDAO swap exemplifies this, with Balancer deployed on Gnosis and Gnosis participating in veBAL markets.(Case study: DAO Token Swaps as Ecosystem Enablers Appendix B)

Evolution of Token Swaps

Token swaps gained prominence in the DeFi space around 2021, with pioneering DAOs like OlympusDAO, PrimeDAO, and Frax leading the way. Since then, the practice has evolved:

  • Over 50 significant token swaps occurred between 2021 and 2023, involving 46 different DAOs.
  • The total value of these swaps (excluding outliers) was approximately $89.2 million.
  • Top performers like OlympusDAO executed multiple swaps, accounting for 21.8% of the total swap value.

While these numbers are impressive, it’s crucial to note that not all of these swaps have resulted in significant long-term value or successful partnerships.

Why Selective Token Swaps Can Matter

When carefully implemented, token swaps can offer several benefits:

  1. Ecosystem Alignment: By holding each other’s tokens, DAOs can create a foundation for long-term alignment and mutual interest.
  2. Governance Participation: Token swaps can enable DAOs to participate in each other’s governance processes, fostering deeper ecosystem integration.
  3. Risk Sharing: In specific cases, token swaps allow DAOs to share the risks and rewards of new initiatives, encouraging more ambitious collaborative projects.
  4. Deep Integration: When a project is building exclusively on another project’s stack, a token swap can align incentives and foster closer collaboration.
  5. Exclusive Partnerships: In cases where two projects form a unique, symbiotic relationship, token swaps can ensure both parties retain upside in each other’s success.
  6. Treasury Diversification: Token swaps provide an opportunity to diversify the DAO’s treasury holdings, potentially reducing risk exposure to a single asset and creating a more balanced portfolio.
  7. Revenue Generation: By acquiring tokens of other ecosystems, DAOs can potentially become validators or participate in other revenue-generating activities, creating new income streams for the treasury.

Cautionary Considerations

However, it’s essential to approach token swaps with a critical eye:

  1. Limited Success Stories: While many DAOs have executed token swaps, truly successful and impactful swaps are relatively rare.
  2. Potential for Distraction: A broad token swap strategy can generate noise and distract from core objectives.
  3. Project Quality: The success of a token swap is heavily dependent on the quality and longevity of the partner project.
  4. Market Volatility: Token swaps expose both parties to the price fluctuations of each other’s tokens, which can be significant in the crypto market.

CentrifugeDAO, as a pioneer in the RWA space, is uniquely positioned to leverage selective token swaps to expand its influence and create synergies with complementary projects. However, we must approach this strategy with careful consideration and strict criteria.

Description of Activity

1. Establishment of Token Swap Framework

a. Allocation:

  • Up to 2% of CentrifugeDAO’s treasury is allocated for strategic token swaps over a 12-month period.

b. Swap Parameters:

  • Minimum swap value: $10,000 USD equivalent
  • [Will be filled after rigorous debate with DAO members] Vesting period: … months with a … -month cliff (adjustable based on specific deals)
  • [Will be filled after rigorous debate with DAO members] Holding requirement: At least …% of acquired tokens for a minimum of 12 months

2. Token Swap Process

a. Identification of potential high-value partners based on strict criteria
b. Initial due diligence and partner outreach / or inviting them to open a proposal on our forum
c. Development of detailed swap proposal, including:

  • Comprehensive partner project analysis
  • Clear strategic rationale for the swap
  • Specific integration and collaboration plans
  • Proposed swap terms (amount, vesting, etc.)
  • Risk assessment and mitigation strategies

d. Extended community discussion and feedback period (minimum 14 days)
e. Formal proposal submission for DAO vote, with detailed pro/con analysis
f. If approved, execution of the swap using a secure, audited smart contract or third-party platform:

  1. A secure, audited smart contract

  2. Code

  3. Fork

  1. Third party platforms

QUESTIONS:

1- How will the token be stored?
2- Who will have the control of them?

We have some answers to these questions, but we wanted to get the DAO’s opinion first. The tokens can be stored in a multisig linked to the treasury. A multisig used exclusively for Token Swaps. This way, it will also be easy to track.

But the question of who will control the multisig is not clear. If a new delegation is created for the Token Swap process, they could control it.

3. Post-Swap Engagement and Reporting

TAG will be responsible for:

a. Implementation of specific collaboration initiatives outlined in the proposal
b. Regular progress reports on the partnership and its impact on Centrifuge
c. Quarterly reports on the status of executed swaps and their impact on the treasury
d. Annual review of the token swap initiative, including:

  • Performance analysis of swapped tokens
  • Assessment of partnership outcomes
  • Recommendations for program adjustments

4. Collaboration and Ecosystem Engagement

a. Regular check-ins with swap partners to explore collaboration opportunities
b. Joint marketing and educational initiatives to promote both DAOs/projects
c. Exploration of potential product or service integrations
d. Participation in partner DAO governance processes, when applicable
e. Explore Staking & Validator opportunities

5. Governance Delegation Program

A process will be created for CentrifugeDAO members to apply for delegation of acquired governance tokens. We will establish clear criteria for delegation, including expertise, engagement history, and alignment with CentrifugeDAO’s goals. To ensure diverse representation in partner DAO governance, a rotation system will be implemented for delegated voting power.

6. Risk Management

To mitigate risks associated with token swaps, we will implement strict limits on total treasury allocation, capping it at a maximum of 2%. Regular reassessment of swap positions will be conducted, with rebalancing performed if necessary. Each swap will undergo thorough legal review to ensure regulatory compliance, and all swap transactions will be subject to smart contract audits. Clear exit strategies will be developed for each swap agreement to protect CentrifugeDAO’s interests.

Potential Partners and Strategies

Initial target projects for token swaps include projects who are actively seeking swap partners as well as other high value DAOs:

  1. Arbitrum
  2. Aave
  3. Sky (MakerDao)
  4. Optimism (OP)
  5. zkSync (ZK)
  6. Cardano (ADA)
  7. LayerZero (L0)

Open Questions

As we explore this strategy, several key questions need addressing:

Token Control: Who should manage the swapped tokens, and under what governance model?
Swap Mechanism: How should the token swap be executed technically?
Token Utilization: How should acquired tokens be used? (e.g., governance, staking)
Delegation: Should there be a new delegation for this incentive? Or should we implement a bounty system for community members?

We welcome your insights on these questions and any other aspects of the proposed strategy. Your input is valuable in refining our approach and ensuring alignment with CentrifugeDAO’s interests.

Conclusion

While we recognize the potential benefits of strategic token swaps in specific scenarios, we approach this initiative with caution and selectivity. Token swaps will only be pursued in cases where there is clear, demonstrable strategic value and deep integration potential.

This refined approach ensures that any token swap CentrifugeDAO engages in will be thoroughly vetted, strategically aligned, and focused on creating tangible value for our ecosystem. By being highly selective and focusing on quality over quantity, we aim to avoid the pitfalls of unfocused token swap strategies while capitalizing on truly synergistic opportunities.

We invite all DAO members to critically evaluate any future token swap proposals on a case-by-case basis, ensuring that each potential partnership receives the scrutiny and discussion it deserves. Our goal is to pursue only those opportunities that offer clear, long-term benefits to Centrifuge and its mission in the RWA space.

Change or improvement

This proposal introduces a strategic token swap framework for responsible treasury diversification and targeted partnerships in DeFi and RWA spaces. By implementing strict evaluation criteria, we aim to mitigate risks while enhancing Centrifuge’s ecosystem influence. This approach balances potential benefits with careful partner selection and risk management.

Alignment to the mission of Centrifuge DAO

The proposed token swap strategy supports Centrifuge’s mission to bridge real-world assets to DeFi. It expands our ecosystem reach, optimizes resources for RWA innovation, and fosters strategic collaborations. By gaining governance rights in complementary protocols, we can accelerate RWA adoption across DeFi. This approach positions Centrifuge DAO to more effectively create an inclusive and efficient financial system by integrating real-world assets into DeFi.

Sources:

Token Swap Framework

Proposals & Successful Swaps

4 Likes

As a fan of diversification in my own life, I think this is a worthy endeavor. Some of the mentioned DAOs are long-standing Web3 protocols and communities that could certainly add longterm value to the Centrifuge DAO treasury (e.g. AAVE, Maker/Sky, etc).

2 Likes

This is undoubtedly a good initiative, and can only help democratize RWA by facilitating partnerships.
That is, as long as it’s done properly and with the right partners.

2 Likes

Hi, thank you to TAG for starting this discussion, clearly explained and presented.

From my point of view, this proposal is very well aligned with the following two previous agreements:

• CP130: Goals and Themes for Resource Allocation for the Centrifuge Treasury
• CP107: Updated Treasury Spending Agreement

Some questions that come to mind:

  • Do you know if there is any correlation we could follow between projects that have managed to succeed with this strategy?

  • Do you think that the high token inflation rate of some protocols could impact on the benefits that Centrifuge would have with this swaps strategy?

My comments regarding your questions:

1- Agree with using a multisig.
2- In general, I agree with the criteria you propose for the Governance Delegation Program.

Finally, a maximum 2% Treasury allocation over a 12-month period as you propose seems prudent to me, I am all for implementing a no-sale clause during the first year and implementing a vesting period, in my opinion all this combined increases the probability of success.

Thanks again for presenting this discussion.

1 Like