Why DAOs need to consider adding hyUSD — a Diversified and Yield-bearing flatcoin — to their Treasuries

Here is an appeal to DeFi, DAOs, and anyone managing treasuries: listen carefully to the case being made here, and decide if you are operating in the maximally-efficient and risk-averse ways possible.

Many of you operate in a world where USDC, DAI, or USDT make up a large amount of your treasuries.

This is not a criticism or call-out on those particular stablecoins — but it’s a reminder of what happens when the winds of change blow in, and you, your governors, and your community find yourself concentrated in a de-pegging treasury asset — and you have no idea what tomorrow will bring.

This piece will end with why you — OlympusDAO, MakerDAO, Aave, Compound, Venus, ENS, and more — should consider allocating a proportion of your treasury to the High Yield USD (hyUSD) savings flatcoin.

Allow us to build the case for how hyUSD can add a safety net for DAO treasuries.

BECAUSE WE WERE WARNED IN MARCH 2023

I’m not going to overly recap the event of the Circle USDC de-peg on March 10th, 2023. You either lived through it, or you didn’t. I’m going to highlight the effects and impacts of it.

It led to panic across both TradFi and DeFi. What we assumed was our “safest” stablecoin revealed it could not withdraw $3.3 billion of its $40 billion reserves from Silicon Valley Bank after the bank faced a sudden bank run and collapse.

Money lives or dies on trust — we trusted Circle, and Circle trusted SVB, right up until the point the bank announced a $15bn black hole in its accounts.

What bailed USDC holders out? An exceptional use of FDIC insurance, followed by assurances that funds would be made whole — this came after three days of stress, panic, and no insight to the best move forward.

Most DAO treasuries found themselves with forums of panicking people, and even if some plan could be hammered out amidst the noise, it would be days or weeks before any governance proposal could be voted and acted on. And throughout that time — March 10 to March 13 — none of us knew which way the cards would fall.

It’s worth pointing out that this wasn’t really Circle’s fault. They had an amount of our money, they placed it where they judged it was safe, and that bank’s poor risk management led to a total collapse.

Five banks have failed so far this year. None of us can ever really know when the next bank run or Black Swan is coming. But we can mitigate against it.

THE BUTTERFLY FLAPPED ITS WINGS

So far, so straightforward. On Friday March 10th, USDC dropped its peg — going as low as 87c over the weekend — before on Monday March 13th, it regained $1.

And here’s the thing, we’re not here to play “But what if it hadn’t regained the peg and gone to 0?” That’s a story that’s been examined repeatedly.

This is the story about the real-world damage caused by the risk of failure, and what it says about weaknesses and gaps in almost all current DAO Treasuries and Governance systems.

Because one morning you were all placed into a trap — and one that was out of your control, with external forces being in total control of the fate of large parts of your treasuries.

Let’s get back to that panicky weekend in March.

LET’S LOOK AT WHAT DAOs HAD TO DEAL WITH

It’s Saturday, USDC is at 87c, and none of us have any clue — just speculation — whether it will survive the hospital trip, or find its way to the morgue. And a diagnosis isn’t going to come for 48 hours because we’re in TradFi world, and the regulators and banks won’t be available until Monday.

And while we wait and speculate, this is how quickly the treasuries can move with a crisis:

AAVE — 13–14 days governance process to onboard new assets, reduced to three days in an emergency.

Compound — at least a week, including a 2-day proposal review period, voting for three days, and a two-day timelock

ENS — The shortest timeline for ENS DAO to take action is nine days in events such as a Black Swan — 7 days for a proposal vote and a two-day execution timelock.

BitDAO — At least 14 days, including a minimum of seven days for a proposal, and a minimum of seven days for voting.

But even with that process to consider, what exact proposal should any of the above DAOs even be considering?

Let’s look at the ENS forums, beginning on March 11, for a sense of what you had to deal with.

“…I am shocked to see maybe a total of 10 people become active on this forum in the past 2–3 hours…”

“That’s absurd. So Nobody cares? Well, I don’t have a signer, and nobody is online chatting about a potential solution.”

“…Life and death decisions need to be able to take place by an elected head of the DAO and or community. Perhaps not even a member of the DAO…”

“…Why not follow in the footsteps of the best money managers and have a well-diversified basket?…”

“…So we are just gonna watch our funding fall apart? USDC is going to collapse. period. We must have a conversation now or watch it all burn.”

We’re not here to pick on ENS, but at a time of crisis, it was noise — conflicting opinions, tangents, a call for centralized action, suggestions about what asset to move to (which would take nine days at the earliest, if a plan could be put together).

A sense of panic — a very natural state. And the first day of the three-day saga.

You can repeat and rinse across most of the major DAOs. And in the end, we were all saved by external factors (this time), when regulators and the FDIC stepped in.

It could have gone the other way — FDIC insurance wasn’t even sufficient to carry Circle’s losses.

If the FDIC had not made an exception and stepped in to insure all SVB deposits (even those above $250k), USDC holders would have lost money.

All the Protocol and DAO Treasuries with USDC inside would lose substantial money, let alone the loss of trust and increase in uncertainty.

While we should all be extremely grateful an external solution was found, that fact should sit uneasily with all of us in the space.

And in the bad scenario… if USDC had kept going down, action plans would be based on a reliance on forums to try to make sense of a) what is happening b) what was good intel vs bad, and c) what to do next.

Constant posts, filled with speculation, anyone signed-in could voice in an opinion regardless of merit. It’s an emergency scene where firefighters and bystanders are mixed together, shouting out what to do.

And if some proposal could be raised out of that, days or weeks before anything could be done about it.

It’s not just treasuries that were exposed — DAI, FRAX and 5+ other stablecoins were dependent on USDC. They all placed themselves in the Gods of external factors.

KEY TAKEAWAYS

THE SELF-HEALING STABLECOIN, eUSD, BORN IN FIRE

Here is how stablecoins (“RTokens”) on the Reserve Protocol handled it differently — self-healing. asset-backed, and over-collateralized.

Two weeks before the crisis, Electronic Dollar (eUSD) was launched with a $7m marketcap — backed by four assets (two based on USDC, two based on USDT).

eUSD at the start of the crisis

With 50% of eUSD’s backing in USDC, the weekend of March 10 was a true acid test of the stablecoin.

Yet before any of us had a clue what was to play out, eUSD autonomously re-collateralized by breakfast on Sunday.

Those who made the eUSD holders whole (RSR stakers) were also relaxed, and were back to making money a few months later for their role as the stablecoin’s backstop.

That autonomous, self-healing process would have happened regardless of USDC reclaimed the peg, or went to zero — and whether USDC’s fate was decided over four days, or four weeks.

eUSD holders slept soundly — despite this being a ‘trial by fire’ within two weeks of the stablecoin’s birth!

Why? How?

Remember that forum post above calling for “…Why not follow in the footsteps of the best money managers and have a well-diversified basket?…”

It’s what holders had with eUSD, which in March 2023 was supported by four yield-bearing variants of USDC and USDT (saUSDC, saUSDT, cUSDC, cUSDT).

When you have a Reserve stablecoin / RToken in your treasury, you now have a diversified basket.

So far, so not very new right? A stablecoin composed of other stablecoins, or any ERC-20 tokenized assets.

That is not the interesting part of a stablecoin on the Reserve Platform, just a “need to know” definition. It’s the rest that forms a safety net for these occasions.

It’s the safety features that are calmly, orderly, and autonomously placed around the basket that you should take notice of — we think they make RTokens the safest asset-backed currency on the planet, and if you use them, you can sleep soundly, or at least with only one eye open, while the rest of the world panics.

A TIMELINE OF eUSD’S SELF-HEALING

Here is how it played out over the weekend of March 10, and how it will play out when any backing asset, of whatever type, hits some oil in the road in the future and starts spinning out of control.

Saturday March 11th, morning:

Reserve Protocol, without human interaction, recognizes a depeg in USDC via the oracle price feeds: This sets both the cUSDC and aUSDC collateral into a “warning” state.

This starts a 24-hour clock, before announcing a depeg.

Sunday March 12th, morning:

The protocol declares USDC as defaulted and autonomously acts immediately to protect eUSD holders.

It launches on-chain auctions where it sells off the cUSDC and aUSDC collateral for the predefined Emergency Collateral (in this case USDT).

It makes Sells at an average price of ~$0.955 per USDC which, once concluded, leaves the basket of eUSD supported entirely by Tether and leaving eUSD about 98% backed.

eUSD has now self-healed within 24–36 hours of the first signs of trouble — and 24 hours before anyone has any clarity of the situation.

It happens while we are still days away from knowing if USDC is recoverable, or about to see a bank run down to zero.

While DAO treasuries watch nervously on, and try to navigate a path of governance, we are back into a safe world.

That said, eUSD is only at 98% backing (which is all explorable on-chain, we don’t need to bring in the term “Proof of Reserves” when the accounting book is open 24/7 to be audited by anyone).

THE DAYS AFTER: MAKING EVERYONE WHOLE

In all the time of eUSD’s existence, the yield generated by eUSD is allocated to RSR stakers (as of November 2023, that’s about 6% APY, with $400,000+ generated to stakers so far).

This yield was generated pre-USDC’s crash, during the asset swap, and resumed again straight after that 24-hour period.

With eUSD sitting at 98% backing following its move to Tether, the first priority was making sure all RToken holders were made whole.

RSR stakers lock up their RSR in eUSD, giving them governance rights over the RToken, and in return for the yield they share, they promise (enforced by smart contract) to make RTokens whole in the event of a de-peg.

The USDC depeg resulted in eUSD losing about $25,000 of collateral value. This amount of protocol-locked RSR was auctioned off to secure the collateral backing needed to bring eUSD back to $1.00.

RSR stakers took that hit, and then business resumed as usual — RSR stakers were able to see a live demonstration of: “You receive yield, sometimes you will take a hit, and then you will continue to receive yield”.

In this case, stakers took about a 2% hit to their bags, which within a few months was made good. In the time since, eUSD has generated a further $400,000 in yield for them.

eUSD just fixed itself, no middle-men required, all enacted by code, all inspectable, and no human action needed.

WE CAN’T CALL IT INSURANCE

Insurance is a specific, legal, term, and one that varies according to jurisdiction. But as an analogy, let’s try it out.

RSR stakers are both your “first loss” protectors, and, by staking, the governors of an RToken.

Once the drama over USDC had played out, governors could then step in and decide: “Do we want USDC back in our basket, or stay within Tether, or add another asset to the basket?” (In the end, eUSD governors voted to bring USDC back in).

All of that discourse that was happening in DAO forums, long before governance proposals could even be put together? All of that could be calmly back-burnered on the Reserve Protocol for another day.

Meanwhile, RSR stakers have to put RToken holders at the top of the priority list.

It’s not about what’s good for the stakers from a yield perspective, it’s about defining a safe, verifiable, confident basket that works for holders because stakers will be the first ones to suffer any losses. Stakers are self-motivated to put others first.

It’s not accurate to call it insurance, but think of it like how most of us pay a small sum so that, if that awful day comes when our house burns down, we will be made (at least economically) whole.

Stakers get a proportion of an RToken’s yield 365 days a year, knowing that now and then, they’ll be made (enforced by smart contract, with a two-week unstaking delay) to kick back — and that’s why it’s a staker’s duty to manage the asset basket — both the primary one and the emergency one — carefully.

And when Black Swans do happen, the fire crews that are called out are autonomous. No fighting, no difference of opinions, and not a centralized entity making the decision.

The back-up plan decided months or years in advance kicks into action. The time for new decisions by committee comes later, in calmness and with the benefit of hindsight.

DIFFERENT FLAVORS OF RTOKENS

We make the suggestion that RTokens are ideal candidates for DAO Treasuries, and can avoid repeats and loss of funds in future de-peg scenarios.

The three dominant RTokens right now (inspectable at register.app or on Etherscan:

They might not be the dominant RTokens for always — a DAO could launch their own, “better” RToken tomorrow (anyone can do so at Register.app), and can then invite people to stake, direct, and govern it in return for a proportion of the yield.

What all these RTokens do is expose you to all the yield potential of Defi platforms out there, and at the sign of any asset failing, their backup plans are pre-written and automatically executed.

They all live on Reserve Protocol, which has now passed six audits over 18 months, and has a massive $5M bug bounty out there for anyone who can find a weakness in the platform.

Consider all RTokens as “cousins”, all based on and protected by the same (siloed) security features, but all unique in their backing, yield potential, and amount they pay for backstop protection.

The largest RTokens on the Reserve Platform across Ethereum and Base, December 2023

What applies to one RToken on the Reserve platform applies to all. The acid test that eUSD went through was a learning curve and demonstration for all the RTokens that have emerged since.

But back to the main thesis: Why should DAO treasuries have to lose sleep at night, wondering when the next bank run or Black Swan is coming?

Either use a naked asset and trust that the Bad Day never comes, or diversify via an RToken, have your emergency collateral lined up, and give a slice of yield to stakers to motivate them to be continually monitoring both the basket and backup collateral, and dictated by code to make you whole.

They are happy to serve in that role. They know the protocol will calmly take the first steps to autonomously follow the safety plan, and they will be back to making yield on a fully-backed stablecoin.

From a DAO’s perspective? Sleep a lot easier next time March 10 rolls around.

WHY DO WE RECOMMEND HIGH YIELD USD (hyUSD)?

If this piece has served its role, you understand how RTokens can autonomously heal, make holders whole, and can be continuously transacted even during a crisis.

An RToken is an ERC-20 token for an umbrella of (as tokenization continues, potentially unlimited) assets, with assets constantly governed and safety plans always drawn up in advance and enacted without prejudice.

Why do we recommend High Yield USD at this moment in time?

Simple. We all like yield, and right now hyUSD is providing 6.49% yield to holders on Ethereum mainnet.

That’s 1.49% higher yield than Maker’s Dai Savings Rate (DSR), while coming with the numerous other comparative safety features outlined here.

With hyUSD, that an ERC-20 stablecoin, backed by USDT, DAI, USDC, fully-inspectable on-chain, censorship-resistant thanks to the composability of DeFi, with a diverse emergency basket (of six assets) lined up for unfortunate days.

Why have all your eggs in one basket? Instead, diversify across a basket of assets, knowing that watchmen are watching each individual egg.

Here are some of the qualities of hyUSD on mainnet (also available on Base):

OR CHOOSE A DIFFERENT RTOKEN?

At the risk of talking you out of hyUSD, you may see a different RToken at register.app that suits your sensibilities, desire for yield, or confidence in underlying assets.

Or you may simply launch your own branded stablecoin, with your own basket, setting aside a % of yield of your choosing to appeal to stakers to come in as governors and backstop providers.

Either way — we think RTokens are far and beyond the safest stablecoins in the world, and we think hyUSD is the most compelling option for DAO treasuries.

KEY TAKEAWAYS