by @Mobius
Risk management of PandaDAO’s Treasury includes portfolio building which is based on trade-off between acceptable risk and profitable APY of underlying assets, weight allocation and risk analysis for portfolio.
Some bottom lines are required to build portfolio for long-term and steady growth of treasury portfolio.
Zero-Beta Porfolio
Treasury investment is constructed to have no systematic risk, or a beta of zero, with performance not correlated to swings in the broader market.
Easily Operated
More operation means more risk in hacking or manual operation error, especially DeFi cross-chain bridges were easily attaked by hackers. So it is required to build portfolio on reputable protocols with detailed documentation on Ethereum mainnet.
Competitive APY (in the same categorized porfolio)
With risk managed well and measures to control it being planned, portfolio is consist of Convex UST-Warmhole Farming and Frax-DAI uni LP Lock-up rather than other most stablecoin investment whose APY is under 5%.
Weight allocation 80% and 20% comparatively for Convex UST-Warmhole Farming and Frax-DAI uni LP Lock-up because latter one is required to be locked for 3 months.
Convex is a platform that boosts rewards for CRV stakers and liquidity providers alike, so the risk is originated from both side of the pool which are 3CRV and UST. Risk analysis of them are as below:
Risk
If one of the stablecoins in the pool goes significantly down below the peg of 1.0 and never returns to the peg, it'll effectively mean that pool liquidity providers hold almost all their liquidity in that currency.
Evaluation
There are DAI, USDC, USDT in 3CRV pool. Those stablecoin are backed by over-collateralized asset or custodied by an equivalent amount of U.S. dollars. Their underlying assets make them a stablecoin with a price pegged to USD $1.0 and long-term unpegged risk is very low and never happened before in even extremely bearish market trend.
Management
Even unpegged risk of those widely acceptable stablecoins is low, it’s still necessary to monitor stable coins’ price at a daily frequency.
Risk
Perhaps the biggest risk facing UST is what's known as the “death spiral,” such as what was seen with stablecoins such as Iron Finance. This scenario, which other algorithmic stablecoins have succumbed to, consists of a run on UST, i.e. mass redemptions, as a result of the stablecoin losing its peg to the downside. Were this to be the case, LUNA would be minted at increasingly high rates, causing more UST holders to lose confidence and further inflating the supply of the asset until it loses all of its value.
Evaluation
Management
FRAX is introducing a similar system as Curve for any FRAX pair across various protocols. Risk of Frax-DAI pool is originated from Frax and DAI. Risk analysis of Frax is as below (one for DAI has been introduced):