Aera, a rewards-based treasury management system for leaderless decentralized autonomous organizations (DAOs) has been launched by the team behind cryptocurrency data science shop Gauntlet.
The Aera protocol aims to make DAOs play a more agile and risk-aware role when it comes to investing in the fast-moving world of decentralized finance (DeFi). The hope is to create organic demand for the sort of structured products or derivatives used for hedging risk and improving capital efficiency in traditional finance.
Aera will incentivize certain DAO participants to allocate assets to risk products for which they will be rewarded with fees when investment goals are met, or penalized if they worsen the DAO’s welfare.
Areas like DeFi cannot rely on steady, non-speculative institutional flows into structured products, as is the case in traditional markets where big asset managers hedge industry-wide portfolios with credit default swaps, for example, or airlines hedge oil and energy costs in the futures markets.
A range of DeFi-tailored credit default swaps, options protocols and portfolio insurance products do exist but their uptake has been spotty. One reason is because there hasn’t been a nimble way for DAOs to perform the role of risk-aware DeFi institutions and proactively create derivative flows, according to Gauntlet CEO Tarun Chitra.
Unlike the high speed trading behavior carried out by holders of risk products, usually geared around rare market events, DAOs grind out slow and reactionary governance voting on everything from code changes to treasury allocation decisions, Chitra said. (Asking a DAO to manage a portfolio of derivatives would be akin to asking the U.S. Congress to be a derivatives market maker, passing laws to execute particular trades.)
“The only institutions that are fully on-chain that could generate organic demand for these derivatives products are DAOs, which have a need to deploy tokens strategically to maximize their longevity,” Chitra said in an interview. “DAOs have this capital, so it’s about starting a flywheel where they send allocations to other on-chain protocols, which causes the liquidity to rise in those protocols and lowers the price for execution, and then it makes it easier for new DAOs to purchase. That feedback loop has been missing.”
The $10 billion or so of assets held collectively by DAOs are also not used properly because of incentive mismatches between participants who may be averse to large block sales of the governance tokens they hold as it makes the price of those tokens go down.
“A good example is SushiSwap where people are using a token to vote to sell that token, which generally has not worked,” Chitra said. “There have been a few diversifications where DAOs were able to kind of rebalance their assets, but I think you need a new perspective on how to incentivize people who are trying to help manage DAO assets.”
Aera takes some of its inspiration from the early days of DAO experimentation and such lofty concepts as “futarchy,” the idea that a public company could hold its chief executive accountable to achieving a particular stock price over a given period of time.
“Futarchy is this older idea from Vitalik [Buterin] and Robin Hanson, which is like a prediction market that optimizes a key DAO metric,” Chitra said. “But Aera is designed to be DeFi incentive-compatible, as opposed to those initial versions of futarchy where a new asset had to be created every time there was a vote.”