3rd in a series of topics. This topic impacts 3 components. The treasury, authors of SIPs, as well as the community’s perception of what is considered worth it to spend on at any given time.
The DAO’s treasury is denominated in SAND only. Crypto prices, including SAND, can be volatile. If this recent bear market has taught us anything, it’s that prices can move up/down 15-20% in a matter of a day(s).
Currently, and correct me if I’m wrong at any point @Cyril/@Geraldine, passed proposals can be denominated in SAND or Fiat. The issue comes when proposals which are denominated in FIAT gets disbursements at a time of volatility.
E.g
An SIP goes into voting, requesting 80k USD in funding on Mar 17th 2024 (SAND price:80 cents). That’s a stipulated disbursement of 100k SAND.
By the time the same proposal gets passed and implemented (est. 1 month), SAND price on the 13th of April is at 40 cents. That means a stipulated disbursement of 200k SAND.
A 1 month difference has essentially doubled the cost of a single project in SAND terms. Now imagine that happening concurrently for multiple passed SIPs which are funded in FIAT.
Possible solutions
Having a part of the treasury denominated in FIAT at all times. A recommended proportion lies somewhere between 10-20%.
Converting 6% of every component of the treasury to FIAT every quarter(2% every month). This amount will be allocated for disbursement first.
Immediately converting SAND to FIAT once SIPs denominated in FIAT passes. This isn’t recommended, but up for consideration, because we won’t know if all SIPs will hit their milestones.
Side note: take note that unlike other DAOs, our treasury will get funding from TSB on a yearly(please fact check) basis as well. With the next round likely in end 2025 since the current budget is due to expire then.
Yeah I tried to unravel this at about 1:10:15 in episode 35, I covered the new budget guidelines and requirements but I need help trying to figure out a possible solution. I also put all my notes in this thread here. Here’s what I came up with
“We guarantee 70% of the requested budget in USD at the time the proposal is published for discussion in “SIP Draft”
Recommendation: change “SIP Draft” to “SIP Active” instead of Draft to account for SIP changes
See below, 7d range from CoinGecko can exceed financial commitment, much less 160+ day window
Ahh yes I’ve just read through your replies on both threads. It’s great to know that price volatility has been taken into consideration by the Admin team.
There’s no perfect answer for this. The only way I believe we can fully avoid this is if the DAO sells SAND at say, the beginning of a quarter, and then inform its community of what said quarter’s budget is.
I have the impression that if a SIPs funding is requested in FIAT the best is to convert directly the SANDs in FIAT. That does not mean that you transfer directly the entire amount of the FIAT to the SIPs author and you can still make payment based on milestones.
The only issue with this would be if SIPs does not go to the end and you do not use entirely the FIAT. But here again you would have the option to either used it for another SIPs, or to buy back SANDs.
I see one potential negative point is that for a big SIPs requiring a lot of SAND I am not sure it will be easy to sell those SAND in a fast way based on current liquidity of the market.
Yeah, I agree Kurchato. I’ve gone through something like this very similar when I had a GMF 2023 project, when SAND went up in value my payments were cut big time, while my expenses in USD to my developer didn’t change. If I didn’t have a contract clause that helped to equalize the USD value to the SAND trade rate at the time it was signed, then I would have been paid a lot less for something way outside my control AND I still would have owed my developer the USD cost.
So essentially I would have paid the Sandbox to develop an experience. And when GMF 2023 was replaced by Builder’s Challenge 1, that’s what ended up happening.
Here is an extract of our “finance playbook” - Work In Progress
Budget Bands: Guideline for FX Risk Management
Overview:
This guideline addresses how we manage foreign exchange (FX) risk when assessing proposals with budgets denominated in currencies different from our asset portfolio composition. Our goal is to provide financial stability to proposal recipients while mitigating FX risk exposure to our organization.
Guideline:
FX Risk Management Approach:
FIAT-Based Liabilities: for proposals with non-SAND-based liabilities, we aim to mitigate FX risk by linking the budget to USD values.
Guaranteed Budget: We guarantee 70% of the requested budget in USD terms at the time the proposal is up for discussion by the community.
Commitment Cap: To manage excessive FX volatility, we cap our financial commitment at 110% of the requested budget in USD terms.
Proposal Evaluation Process:
Initial Assessment: When a proposal is submitted with a budget in a currency different from our asset portfolio, we first convert the requested amount into USD terms using the prevailing exchange rate at the time of review.
Risk Analysis: Assess potential FX volatility and its impact on the final commitment. This includes reviewing historical exchange rate fluctuations, economic stability of the currency in question, and market forecasts.
Budget Guarantee and Cap: Apply the guarantee and cap to determine the range within which we can commit funds.
Suggested guarantee: 70% of USD values
Suggested cap: 110% of USD values
Communication with Proposal Submitters:
Budget Adjustment: Inform submitters of the USD equivalent of their requested budget and explain how the 70%-110% range will apply.
Final Agreement: Once the proposal is approved, confirm the final budget in USD terms within the agreed range, ensuring transparency and alignment with the submitter’s expectations.
Example Scenario:
Requested Budget: 100,000 EUR
Current Exchange Rate: 1 EUR = 1.10 USD
USD Equivalent: 100,000 EUR * 1.10 = 110,000 USD
Guaranteed Budget: 70% of 110,000 USD = 77,000 USD
Commitment Cap: 110% of 110,000 USD = 121,000 USD
Conversion rate to SAND: 1 SAND = 0.25 USD
Guaranteed Exchange Rate SAND/USD: 70% of ****$0.25 = $0.175
Cap Exchange Rate SAND/USD: 110% of ****$0.25 = $0.275
It’s also worth noting that we already are performing some tactical swaps with the OPERATION wallet. Given that this wallet is used to pay the bills (mainly in EUR, USD, and Stable coin) we are swapping a bit “in advance” (as opposed to “upon bill reception” as it was the case so far) to take advantage of the more current favorable price of SAND. (which btw also triggered a development to make sure the “dashboard page” of the website can read info from different token and present a consolidated view)
We are trying this with the OPERATION budget only has we have control over it. Any swapping on the other wallets, reserved for the community, will potentially will have to be done via SIP. (not sure to be honest, I have not fully wrapped my head around it, so keen for your feedback)
Ahh yes thanks for both the details! I’m actually exploring more towards the 2nd post, i.e hedging the treasury, not the whole thing, just a % of it, especially during periods of elevated valuations.
Thx for the explanation @Cyril.
But it is not exactly clear to me when is the swap done in FIAT.
What was the rational behind the 70% and 110%?
For the 70% is it somehow linked to a benchmark that traditionnal margin on those projects are about 30%? If usual margin is way less than 30% we might want to increase a bit this lower granted value.
For the 10% on the upper side I found this too generous and would lower it to 5%.
Other question, how do you planned to do with milestone payment. Do swap all at the beginning, and transfer the money based on milestone?
