This article is based on the interview that Marcelo, Karpatkey DAO co-founder, and GnosisDAO Treasury Manager held with Coinshift on August, 4th 2022. The interview was hosted by Patrick, its Head of Growth, and co-hosted by Dave, its Head of Marketing, and addressed Karpaktey’s professional approach to managing the treasury of DAOs.
During this interview, Marcelo explains how Karpatkey DAO was born and how it has evolved over time. He also describes Karpatkey’s current structure and how such structure supports the growth of GnosisDAO and Gnosis Chain.
With the aim of ensuring that this article explains the different topics discussed in the interview in a more reader-friendly way, a rearrangement of its content has been made.
The Origins of Karpatkey DAO
Karpatkey, a DAO incubated through Gnosis, was initially formed to solve the problem of managing a large treasury that would support the GnosisDAO products and portfolio and, at the same time, would generate cash flows with idle funds in a risk-controlled and trust-minimizing way. At the time, Karpatkey was part of an ideal ecosystem due to two main factors:
- We could make use of the Gnosis Safe (later rebranded as “Safe”), which, as Marcelo well describes it, “… in our opinion, is the best product in the market nowadays for managing large funds on-chain.”
- We could work in collaboration with the Zodiac team who builds DAO tooling on top of Safe.
To solve the problem stated above and assist GnosisDAO in efficiently managing their assets, we needed to set up a DeFi native team with a background in finance. Karpatkey started with a team of three people, and we continued building our team adding more professionals with different backgrounds who brought best practices from world-class organizations mostly related to processes and quality assurance. We grew from being a 3-people team to different dedicated teams of Research and Strategy, Execution and Reporting, Business Development, and Technical Development. In short, Karpatkey was born by creating a treasury core unit for GnosisDAO and, in the meanwhile, we have developed the required capabilities to support other DAOs.
Karpatkey’s Organizational Structure
Karpatkey DAO is a global team of mostly engineers, some with a financial background and others with a technology background, with 10+ years of experience in our fields and we’re distributed to cover every timezone. We divide our work into different business teams:
- The Research and Strategy team focuses on evaluating opportunities and risks;
- The Execution and Reporting team for operations;
- The Tech team that acts as our eyes reading on-chain data and works to automate actions, improving capital efficiency and minimizing risk;
- A Business Development team who manages incentives and DAO-to-DAO deals.
Is Karpaktey 100% Focused on GnosisDAO?
The GnosisDAO has a huge treasury with quite complex operations for incentives. The DeFi ecosystem built on top of the Gnosis Chain has a very large and complex portfolio with a lot of projects. Therefore, most of our resources are dedicated to the GnosisDAO and the Gnosis Chain which is the main product of the GnosisDAO. We have a dedicated team to manage their treasury including 14 full-time team members and some part-time collaborators.
Karpatkey currently manages Zodiac’s treasury, our own treasury, and some private funds. We’re also in a negotiation stage with other DAOs. Our goal now is to create new treasury core units with different organizations.
Karpatkey’s Approach to Professional DAO Treasury Management
When asked about Karpaktey’s approach to treasury management, Marcelo pointed out that Karpatkey doesn’t aim at providing isolated outsourcing financial services. In fact, from our perspective, outsourcing this type of service does not scale in the long term because trust does not scale. As a result, we do not see our business as a service that can be outsourced by DAOs with no involvement from DAO members. On the contrary, we believe that to be successful in what we do, we have to become part of DAOs that are aligned with our values, as we are convinced that treasury management should be done within the DAOs.
Karpaktey co-founder also stated that “…every DAO is different; they have different goals and needs, the composition of their assets is different, they have different cultures.” As a result, we believe that Karpatkey’s main role in professional DAO treasury management is to assist DAOs in setting up their own treasury core units. We are committed to helping them with hiring and training, which are essential tasks in the creation of a treasury management core unit, and to supporting them with our current structure.
Another important factor mentioned in the interview is that most of the top DAOs are led by technical people who do not necessarily have a financial background; hence the need for the creation of a new treasury management core unit within the DAO. Developing this infrastructure so that transactions can be executed in a trust-minimizing way is a key step Karpatkey can help DAOs with. We support the decision-making process involved in the management of their treasuries and we work on building the required safeguards to do everything transparently, making all data available on-chain.
Our Viewpoint on DAOs as the Long-term Solution for Organizations to Manage their Treasuries
Treasury Management should evolve into a robust trustless system. There is still room for improvement in the minimization of trust assumptions which will in turn reduce the scope of treasury core units. In Marcelo’s words “No one likes surprises.” A key element in treasury management is transparency, i.e. everything is on-chain without any surprises.
Karpatkey at Gnosis
GIP-20 as the Foundation for Building Karpatkey DAO
GIP-20 is a proposal passed last year by which Gnosis delegated Karpatkey their treasury management in a non-custodial way; i.e. Karpatkey acquired the responsibility of proposing investment strategies within the scope described in the GIP, which would later be verified and approved by GnosisDAO. In other words, GnosisDAO held their funds at all times and Karpatkey could only initiate transactions that were later executed by GnosisDAO’s trusted signers.
This initial process of treasury delegation was later replaced by a better one developed by the Zodiac team, which took trusted signers out of the equation. This new process involves the use of the Management Safe which allows us to deposit funds to predefined smart contracts making it impossible for anyone to steal funds or execute unexpected strategies. Once again, no one likes big surprises in treasury management.
Developing Investment Strategies for the GnosisDAO
Treasury management involves a complex system and strategies really depend on each DAO’s goals. The strategies we have developed for GnosisDAO have changed over the past year due to different factors. During the bull market, we were mostly focused on accumulating stablecoins with our farming rewards. Today, our main focus is financing the multiple teams that are joining the GnosisDAO to build the Gnosis Chain and contribute to the growth of its DeFi ecosystem.
Shifting the Focus of the Strategies, How Did That Happen?
The main goal has always been to fund and support the success of the products of GnosisDAO. Now the Gnosis Chain is one of their main products; therefore, now we’re strategically focused on helping the Gnosis Chain build its DeFi ecosystem, and market make the token.
The process of Creating a New Investment Strategy for GnosisDAO
For formal investments, Karpaktey negotiates terms and conditions to protect the GnosisDAO’s interests and later creates proposals. So we’re intermediaries for opportunities that are beneficial for the GnosisDAO. Regarding liquidity mining or farming positions, a distinction should be made between small and large opportunities. For small opportunities, which make up about 1% of the portfolio, we only interact with public-audited, battle-tested protocols, and we require an economic analysis and a risk assessment. For larger opportunities, we also carry out due diligence with the teams, which may include internal smart contract audits, financial modeling, and emergency plans. Around 90% of our strategies are optimizations of current positions. One competitive advantage we have is that we have the flexibility of optimizing current positions. Every week, strategies are shared with GnosisDAO auditors in advance and are later executed following our procedures.
What Type of Auditors does Karpatkey Use? How do They Fit into the Process?
Karpatkey uses auditors in specific cases, for larger opportunities. GnosisDAO has smart contract auditors, who are involved in the process.
The process to Implement a Strategy
A weekly strategy usually involves more than 20 transactions for optimization, which are shared with GnosisDAO auditors for their approval. Once this is done, we use Zodiac modules built on Safe to execute transactions without holding custody of the funds. In other words, the GnosisDAO holds the funds at all times, which minimizes trust assumptions by limiting the scope of our actions to a predefined set of smart contracts and addresses.
Transparency in What We Do
The cooperation with GnosisDAO was built based on transparency. Karpatkey’s operation is based on a set of rules to avoid surprises and build trust. We do not do trading in any way, we’re not traders. As mentioned before, we focus on long-term opportunities and we limit our scope to a predefined set of allow-listed contracts. We only interact with public, audited, and battle-tested protocols and we share our actions with the community on a weekly basis.
The downside of this is that we cannot use CeFi exchanges because they’re off-chain black boxes and they still have some of the best liquidity for financial products and derivatives in crypto.
How is transparency defined at Karpatkey?
When asked about how Karpatkey DAO defines transparency, Marcelo assertively pointed out 3 key factors:
- Doing everything on chain
- Sharing everything we do with the community
- Setting our own rules and following processes, which limit the actions we can take, but at the same time, allows us to standardize our actions.
Karpatkey Weekly Reports for Gnosis DAO
Karpatkey provides GnosisDAO with weekly reports. The Execution, Reporting, and Technical teams work collaboratively in the process of building them. This process involves the use of a Python library that our team created to interact with smart contracts from the different DeFi protocols and retrieve the data needed to build the report. This data is audited and later shared in the GnosisDAO forum.
Karpatkey’s Interaction with the GnosisDAO
Our main tool is the forum, we also use Discord and Telegram. We work very closely with the different stakeholders who are helping with the growth of the Gnosis Chain.
Risk Management
Risk is managed through processes that include risk assessment sessions where different risks, ranging from regulatory and OPSEC ones to the economics of protocols, are analyzed. We also review our strategy in a weekly team meeting.
When considering new positions, for small opportunities, which make up around 1% of the portfolio, we require audited and battle-tested protocols, an economic analysis, and a risk assessment. For larger opportunities, we additionally carry out due diligence with the teams, which can include internal smart contract audits, financial modeling, and emergency plans.
Daily risk management is conducted through the use of different tools such as on-chain alerts and the tracking of key metrics. To illustrate, we have on-chain alerts to track liquidity and high slippage risk, and loan liquidation risk. We constantly check a set of KPIs such as collateral ratio, loans interests APR, fees and rewards APR, liquidity available, price ranges, and volume traded, among others.
One Win and One Lesson Learned Resulting from Karpatkey’s Risk Assessment
One Karpatkey win shared during the interview is “…definitely having rejected Terra when everybody else was doing it.” Another worth mentioning achievement stated by Marcelo is “having survived the last crypto crash while keeping healthy collateral rations.” To us, this was real proof of the success of our business.
On the other hand, as Karpatkey co-founder explains it, “One lesson we have learned is that doing money markets well is very difficult and we need to be careful with the tokens we provide liquidity with.” He further elaborates on this by stating that participation in experimental money markets like permissionless Rari pools must be checked because there could be hacks and market manipulations that could indirectly affect our liquidity. We’ve learned to be very cautious.
Some Advice for Small DAOs
When requested to provide small DAOs with advice on how to manage their treasuries, Marcelo claimed that it’s really difficult to advise with no risk assessment involved. However, he suggested that the following simple rules might apply to DAOs with small funds who cannot spend a lot of time on managing their treasuries because it is not their core business:
- Don’t get exposed to liquidation risks; they require a lot of maintenance;
- Always use audited, battle-tested protocols;
- For stablecoins, use Compound and Aave.
To conclude, this article aimed at describing some of the main topics addressed during Coinshift’s Treasury AMA taking place on August, 4th 2022, which touches upon Karpatkey’s approach to professional treasury management and its work with GnosisDAO. If you wish to listen to it, the recording is available here.
