Stag Basics #1: Remaking the DAO Treasury

Greetings and Happy New Year! This is the first in a series of five pre-launch articles designed to preview the motivating ideas behind Stag DAO. The articles assume a basic knowledge of DeFi, but they are written for a general audience. You’ll find additional information in our documentation. If you have additional questions or ideas, join us on the Stag DAO Discord.

What is a Reserve Currency?

The original idea for a DeFi Reserve Currency as Olympus DAO defined it is a token whose price is backed by a treasury of assets, which the protocol acquires by selling bonds for the token. Since the issuer of the reserve currency oversees the treasury (typically through a DAO governance structure), you will often see these DeFi 2.0 models referred to as “protocol controlled liquidity” (PCL).

The idea is quickly evolving, however; what we call a “Reserve Currency” in DeFi today might in 5 years (or even 5 months) be called something else. In fact, we’re already seeing a general shift beyond the “zero-risk” reserve model, in part because terms like “risk-free value” and “treasury backing” have been revealed as misleading, but even more so, I would argue, because people have also begun to recognize that attempting to eliminate risk altogether runs counter to the basic idea of investing, which is why most of us are involved in DeFi in the first place. It’s as though the stablecoin treasuries have collectively forgotten that inflation exists.

For me, then, a Reserve Currency is simply the idea of a currency that is attached to a treasury. The interesting part comes in what the treasury is made of and how it is utilized. This is the area that has so much potential for DeFi and all of crypto. It creates new links and opens new doors. The possibilities are endless and I’m incredibly excited for where this takes us.

Protocol Controlled Liquidity: Recent Innovations

So where are we headed? I’m going to start off a little strangely here, by talking about things not directly related to Stag DAO. The reason being is I think it’s important to understand what Olympus DAO set in motion, where the glut of forks that emerged in Q4 2021 have taken us, and where I think we’re headed next with the protocol controlled liquidity (PCL) model. I’ll focus on three key innovations in the space before discussing how Stag intends to distinguish itself within an increasingly crowded field.

The first project I’d like to put up for consideration is Rome DAO. Rome began as an Olympus fork, but they are differentiating themselves by building a game on top of the protocol with inventive DeFi mechanics. This is an ingenious idea, and it dovetails perfectly with the current boom we’re seeing in GameFi and the metaverse. My first thought for a DAO project was actually to do something with gaming for this very reason. I’m personally invested in Rome DAO and think it will do well, but the fact that GameFi is in such a boom phase right now also gives me pause. How much room is there for a gaming Reserve Currency? My guess is Rome fills that niche for the foreseeable future.

The second project/innovation I want to talk about is Magnet DAO, which recently launched on Avalanche. Magnet recognized what several other projects have come to see, which is that an PCL platform essentially becomes a crowd-sourced Hedge Fund if the treasury is reoriented toward growth rather than mere stability. This basic pivot–from a defensive treasury approach to a proactive crowd investing model–is arguably the most significant development we’ve seen in PCL projects to date. Every new project now becomes a new chance to see exponential growth in the treasury. Again though, how much room is there in that space? Since the underlying change here is really more based on increasing the overall risk tolerance of the treasury, it is crucial to understand that many of these newer incubators and “decentralized VCs” are simply increasing volatility, which will accelerate the rate of failure in many instances (and, perhaps, success in a few). My guess is that only a handful of investment-style treasury protocols survive the next two years.

The last innovator I’d like to highlight is actually the OG itself: Olympus DAO. Not content to rest on their laurels as DeFi 2.0 pioneers, Olympus DAO continues to innovate. They recently launched Olympus Pro, an innovative, “liquidity-as-a-service” platform that integrates the PCL model into existing protocols in order to bolster growth and stability. It is their attempt to make DeFi 2.0 retroactively available to classic DeFi projects.

While Stag DAO draws elements from each of the aforementioned projects, Olympus Pro is perhaps closest in spirit to what we are doing. However, we are taking it one step further. Instead of offering Stag DAO Pro (liquidity-as-a-service) atop regular Stag DAO (reserve currency), we are largely forgoing the stablecoin treasury model in favor of a liquidity-boosting model that replaces stablecoins with unpegged, but price resilient protocol tokens. In this way, we are aiming to combine the relative stability of conventional Reserve Currencies with the upside growth of the newer investment fund models. Our underlying thesis is that value in DeFi is based on transactions (i.e. use). With this in mind, we are going to capture the inherent value of transactions.

The Stag Thesis: Transactions = Value

Stag DAO is taking a fundamentally different approach to a crypto Reserve Currency. Instead of looking at the market and asking “What is the most stable crypto asset?” we are turning the question on its head by asking “What is the most constant?” The answer, of course, is transactions. At the end of the day, every blockchain is just transactions and a history of transactions with different ways to organize and sort them. Transactions are the basis of value for cryptocurrency.

Given this, shouldn’t we then build our treasury to target transactions instead of “value” defined in terms of fiat-derived stability? Sounds great Witcher, but transactions spend gas not create it! Well, you are correct that we can’t as a treasury capture part of the value of every single transaction. However, we can look to where the bulk of transactions are taking place now and into the future. We can also find places with relatively low transaction volume in the present but potential for huge growth and take a big slice of that transaction pie for ourselves.

This is where Elk Finance comes into play. They are building a protocol that will not only allow near frictionless movement between all EVM chains, and eventually non-EVM chains. In other words, they are building the critical infrastructure for the future of crypto–a transaction engine.

There are two primary ways to capture the value of a transaction: run a blockchain node or be the primary provider of LP for a trading pair. We are going to do both. In the near future, Elk will take the plunge into a decentralized ElkNet and as a trusted partner we will serve as a primary node operator. As a result, Stag DAO will capture part of the value for every single transaction that moves across ElkNet.

We are also going to provide as much liquidity to their key trading pairs as possible. Currently, this primarily means native tokens and ELK: ELK-MATIC, ELK-BNB,. ELK-AVAX. Every time someone trades into and out of ELK and goes across the chains, we will be in a position to capture some of that transaction, and therefore some of that value.

Say it with us: transactions = value.

Not building on stablecoins!?

It’s true it comes with risk. But let’s be honest: tokens backed by stablecoin treasuries assume far more risk than the operators of those protocols would lead you to believe, while at the same time severely capping upside. They’ve garnered a reputation as “ponzis” because ROI is dependent on faith that more people will buy in, rather than delivering value through utility or growth. If you are interested in “risk-free” growth, you’d be much better off staking your money in Terra/UST and settling for a respectable 20% APR.

Now, imagine if you had a chance to invest in a project in 2018 that was going to fill a treasury with ETH and you’d receive a share of that value equal to your share of the total project market cap. Would you regret jumping into that project now in 2022? I highly doubt it.

ELK is a deflationary token, meaning there are only so many that will ever exist. As Elk rolls out more features that better connect all of the chains together, it will only become used more and more. As these uses generate transaction volume, we generate revenue for the treasury. We also lock a significant portion in a treasury, reducing the amount of ELK available for trade.

Our goal is not to make ELK artificially scarce by restricting supply. But with more of the LP in the hand of a treasury rather than distributed across users, it means less token price fluctuation with market fluctuations, which ultimately aligns with Elk’s vision. Elk has already shown to be a remarkably stable token in terms of value. It has achieved this relative stability while only having the barest minimum of features to really be called cross-chain. Imagine its value and stability when it is moving millions if not billions of value each and every day.

Capturing emissions and other yields

Not only will Stag DAO accrue the trading fees from Elk, but we will also capture emissions. By partnering with a DEX instead of building our own, we get to capture some of their existing value and add it to our treasury.

To ensure that we are getting the absolute most out of our farming, these emissions will be funneled into raven.moe, an auto-compounding protocol optimized for Elk. On a good day, Elk is already producing more rewards in trading fees than emissions. This means that one day Elk could turn off emissions for farms, and Stag DAO would still be generating 100%+ APRs. Those steady returns, based on a steady stream of transactions, will make the treasury thrive, creating a runway to expand to new areas.

Conclusion

If the article doesn’t already give it away we are quite excited about this project. Most exciting of all is we get to bring all of you along with us. So come join Stag DAO and let’s capture the value of utility and transactions.