Simple Summary
Clipper is a novel DEX with liquidity pools that track the benchmark of a theoretical daily rebalancing portfolio (DRP). Based on Modern Portfolio Theory, rebalancing portfolios provide optimal exposure to a diversified group of assets. Allocations are continuously rebalanced to constant weights, which has the effect of systematically “buying low and selling high” through mean-reverting volatility. Risk-adjusted returns are higher than simply holding any single asset or even holding a similarly diversified portfolio of assets that is not rebalanced.
For these reasons, Clipper’s liquidity pools are an ideal place to park DAO treasury funds. We are proposing that the 1inch DAO allocates $2 million in ETH, WBTC, and USD stablecoins from its DAO treasury to the Clipper Core Pool on Ethereum.
Abstract
The simple summary above states our proposal and how the 1inch DAO stands to benefit from it. We will use this section to dive deeper into the specifics of how Clipper’s rebalancing portfolio-benchmarked Core Pool operates and what enables its low-risk, superior returns.
Clipper’s Core Pool rebalances daily with target allocations of 60% volatile blue-chip cryptoassets (ETH & WBTC on Ethereum) and 40% stablecoins. Since these volatile assets are relatively mean-reverting, rebalancing on a daily basis transforms daily price movements into a source of returns for the portfolio (“volatility harvesting”). The stablecoins serve to anchor the value of the portfolio in times of market turmoil and buy/sell through volatility.
Clipper uses a novel Formula Market Maker mechanism which incorporates real-time off-chain price oracles so that rebalancing happens at market prices. In contrast, traditional CFMMs rely on arbitrageurs who rebalance at off-market prices, which creates impermanent loss and removes the well-researched benefits of modern portfolio theory. Clipper reports real-time performance against the DRP benchmark and is at or above the benchmark target more than 90% of the time. In other words, it has gains vs. rebalancing instead of the loss vs rebalancing borne by CFMMs.
Motivation
Currently, the 1inch DAO treasury is losing out on more return with less risk because it is simply holding several blue-chip assets on its balance sheet instead of being strategic with its portfolio management. A passive zero-cost rebalancing portfolio is the best way for DAOs to safeguard and grow their funds with above-market, risk-adjusted returns. Doing so in a crypto-native protocol ensures transparency and audibility, and ensures that the DAO retains full control and custody.
Specification
The ask for this proposal is that the 1inch DAO allocates $2 million of its treasury to the Clipper Core Pool on Ethereum.
This simply entails the allocation of treasury funds in the form of ETH, WETH, WBTC, DAI, USDC, or USDT (may be a combination) to the pool. These funds will not be a grant to Clipper, but rather a noncustodial liquidity provision that stands to earn yield and can be removed at any time permissionlessly.
Rationale
Clipper’s crypto-native daily rebalancing portfolio ensures steady, above-market, de-risked returns via a permissionless, non-custodial platform. Clipper, governed by AdmiralDAO, offers DAOs this DAO-native solution for effective treasury management. The following are ways in which the 1inch DAO stands to benefit from this proposal:
1. Enhanced stability in volatile markets:
The crypto market is notorious for its volatility. By diversifying treasury holdings into a DRP, the DAO can better manage risk exposure while benefiting from the space’s volatility. The DRP adjusts automatically to maintain an optimal risk profile, reducing the impact of sudden market swings and safeguarding the overall treasury value in any market conditions.
2. Simplified asset management:
Active rebalancing requires significant manual oversight, administrative expenses, and ongoing adjustments - things that tend to be hard for DAOs. An automated, passive rebalancing strategy simplifies the administrative complexity, so the DAO can focus on its core mission and initiatives.
3. Control:
The blockchain’s inherent transparency ensures that all members can audit the portfolio’s performance and verify the protocol’s integrity. Clipper is a permissionless, non-custodial platform, so DAOs will always maintain full control over their funds and can remove them at any time.
4. Costless rebalancing
Traditional portfolio rebalancing is burdened by transaction costs from frequent trading to maintain target asset weights. These costs blunt the benefits of rebalancing and force longer rebalancing cycles (typically quarterly or bi-annually). Clipper rebalances costlessly by allowing traders to pay the transaction fees, enabling rebalancing on a daily basis, which maximizes the benefits of rebalancing.
Considerations
While Clipper’s pools have a track record of hitting their benchmark, performance can never be 100% guaranteed. Additionally, there are price series in which the benchmark could underperform HODLing.
As a secondary benefit, this liquidity will generate further trading revenue for the DAO. Clipper has a long history of doing so - its trades have sent $646K in revenue to the 1inch DAO Treasury.