A discussion on the framework for PCV investment policy

PCV Development
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Following my previous suggestion I hereby start a discussion on the framework for PCV investment policy in keeping with its presumed purposes, i.e.:

  • while maintaining peg to be able to withstand any shocks and mitigate risks including, but not limited to those of market, macro (cyclical), regulatory, technological nature;
  • driving Fei integration with a broader panel of DeFi protocols;
  • funding Fei R&D, grants and other causes deemed necessary by the Tribe community;
  • possibly, stimulating market interest towards Tribe token/rewarding Tribe holders— subject to further discussion.

First, for risk-aware portfolio optimisation purposes I propose crypto assets classification:

  • Tier 1 (core): BTC, ETH;
  • Tier 2.1 (1 class DeFi): DeFiPulse Index constituents;
  • Tier 2.2 (1 class layer 1 non-Tier 1): DOT, Atom, XTZ;
  • Tier 3: all the rest;
  • Separate issue is debt instruments.

Certain risk weights to respective asset classes will be assigned as a result of further discussions, possibly after running stress-test simulations, e.g.: Tier 1 — 100%, Tier 2.1 — 70%, Tier 2.2 — 65%, Tier 3 — 20%.

Second, I propose that at least core PCV is managed on the Balancer V2 smart pool with the following metrics integrated into the pool controlling contract being constantly monitored and maintained by the means of Balancer’s continuous pool rebalancing mechanism:

Minimum\:capital\:ratio =\frac{Tier\:1\:+\:2\:capital}{Total\:risk-weighted\:assets}

MCR ensures (to a significant extent psychological) confidence that PCV guarantees peg in day-to-day operations without encumbrance.

Instant\:liquidity\:ratio = \frac{Tier\:1\:capital}{Moving\:average\:for\:the\:120-hour\:trading\:volume}

The ILR is designed to ensure that PCV maintains an adequate level of unencumbered assets that can meet its liquidity needs for a 120 hour period under a severe stress scenario. This means that the value of the assets and the outflows refer to those that would arise with a major financial shock and a protocol run-off.

Countercyclical\:capital\:buffer = \frac{Tier\:1\:capital}{Total\:risk-weighted\:assets}

CCB, separate from MCR, serves the purpose of absorbing losses during downside periods of crypto cycle and is replenished with earnings during upside periods. CCB level is designated by the governance decision, subject to change depending on the current stage of crypto cycle and overall macroeconomic outlook.

Hedge\:ratio = \frac{Value\:of\:perpetual\:swaps}{Total\:risk-weighted\:assets}

Hedge ratio is pretty straightforward.

The list is not exhaustive, very possibly will be augmented.

Concrete ratio levels to be designated by the Tribe community as a result of stress-test scenario simulations.

While maintaining aforementioned ratios PCV optimisation under the risk measure Expected Shortfall is run on the Balancer smart pools, which is a topic of further discussion.

Next steps: develop models for stress-test scenarios and PCV optimisation.

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Hi @pavel, great post as always!

First, for risk-aware portfolio optimisation purposes I propose crypto assets classification:

  • Tier 1 (core): BTC, ETH;
  • Tier 2.1 (1 class DeFi): DeFiPulse Index constituents;
  • Tier 2.2 (1 class layer 1 non-Tier 1): DOT, Atom, XTZ;
  • Tier 3: all the rest;
  • Separate issue is debt instruments.

A few thoughts:

  1. Is there a reason why other stablecoins (eg DAI) are missing as a potential PCV component?
  2. For DefiPulse Index constituents, I would suggest either the Index Coop’s DPI or BasketDAO’s bDPI. It simplifies having to manage the constituents separately, and allows us to have a potential integration/partnership. Both are solid projects.
  3. I would avoid Tier 3 altogether, it seems to overdilute the PCV’s assets.
  4. Is there any reason why we should not consider ETH layer 2 projects? Would this because it is still tied to the ETH ecosystem?
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I think the risk of option after 2.2 is still too high.We don’t need too many options, just like before we only had gold, silver and copper

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Market cap and liquidity of PCV Cryptos are important factors too . I would add Binance to tier 1. Thank you Pavel btw.

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Hi @pavel,

Awesome post.

Just a few ideas thrown, as additional to the ones you already listed, nothing but interested by your thoughts on this:

  • Did you consider protocols like Alchemix (that are not working like traditional lending/borrowing debt-based services)? - in the case of Alchemix, the protocol is fairly new so the protocol itself might need to be benchmarked in terms of risk.
  • What about using some Curve pool with a basket of stablecoins as an additional option? Again inspired by alchemix, using it to grow the PCV with future yield value?

Thanks again for this post.

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Sorry, lagging behind… Just saw the discussion around Stable Pools in Balancer v2 (A few thoughts towards algorithmic PCV management - #6 by Bruno).

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I’m leaning towards more conservative strategies. I disagree with what he is saying there. Hope to publish new thoughts soon.

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Ok, appreciate the answer.
Also, a more conservative strategy at first as you mentioned might open a clearer path to explore those other avenues.
Looking forward to read you.

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I do like the idea proposed with the Balancer v2 pool, however unsure if the team is in favor of moving funds from Uni to Bal. There might be some pre-aligned uses of Uni Pooling embedded into the economics of the platform development, bringing efficiency to the capital in ways we do not yet know.

Also have to say, love the fact that you mentioned R&D grants for projects that wants to develop on our protocole. Absolutely in favor of that being part of the PCV framework in all cases.

Great thoughts Pavel. Looking forward to see how the convo develops. I am also forming my thoughts on this hoping to post one day before bright minds here comes to a great conclusion :slight_smile:

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