Clipper is a novel DEX with liquidity pools that track the benchmark of a theoretical daily rebalancing portfolio (DRP). Based on Modern Portfolio Theory, rebalancing portfolios provide optimal exposure to a diversified group of assets. Allocations are continuously rebalanced to constant weights, which has the effect of systematically “buying low and selling high” through mean-reverting volatility. Risk-adjusted returns are higher than simply holding any single asset or even holding a similarly diversified portfolio of assets that is not rebalanced.
For these reasons, Clipper’s liquidity pools are an ideal place to park DAO treasury funds.
We are proposing that the DAO allocate __________ in ETH, WBTC, and USD stablecoins from its DAO treasury to the Clipper Core pool on Ethereum.
Please see the 'Specification' section for the full rationale behind this request.
The simple summary above states our proposal and how the DAO stands to benefit from it. We will use this section to dive deeper into the specifics of how Clipper’s rebalancing portfolio-benchmarked Core Pool operates and what enables its low-risk, superior returns.
Clipper’s Core Pool rebalances daily with target allocations similar to Curve’s Tricrypto pool; namely, 60% volatile blue-chip cryptoassets (ETH & WBTC on Ethereum) and 40% stablecoins. Since these volatile assets are relatively mean-reverting, rebalancing on a daily basis transforms daily price movements into a source of returns for the portfolio (“volatility harvesting”). This actually earns additional yields above and beyond the benefits of diversification. Meanwhile, the stablecoins serve to anchor the value of the portfolio in times of market turmoil and buy/sell through volatility.
Clipper uses a novel Formula Market Maker mechanism which incorporates real-time off-chain price oracles so that rebalancing happens at market prices. In contrast, traditional CFMMs rely on arbitrageurs who rebalance at off-market prices, which creates impermanent loss and removes the well-researched benefits of modern portfolio theory.
Comparing Performance
At time of writing, Clipper’s mainnet core pool base APYs were ~14%, while Curve’s mainnet Tricrypto pool base APYs were ~1%.
In addition, Clipper reports real-time performance against the benchmark of a perfect daily rebalancing portfolio and is at or above the benchmark target more than 90% of the time. In other words, it has gains vs. rebalancing instead of the loss vs rebalancing borne by CFMMs. The rebalancing process is what generates the high APYs by transforming volatility into pool appreciation.
https://lh4.googleusercontent.com/N9e74jP1RdCpezX3JOXVRhGgeCY-8p3EqenXXKcHyvIjCa7uxbcgqtZ6BoTb3NSVJbM0S2v2pvmstudDLnlQav5RxBT8nWeWxDMDJHRrcafZe4NPOhlrj6qz4owOuiUMTseZB4PoPzvGeUlP6_wfhGk
Finally, Since Clipper’s last deployment at the start of Q2 2023, LPs outperformed HODLing each month by 0.6%, 3%, 21%, and 34%.
Currently, the DAO treasury is losing out on more return with less risk because it is simply holding several blue-chip assets on its balance sheet instead of being strategic with its portfolio management. A passive, zero-cost rebalancing portfolio is the best way for DAOs to safeguard and grow their funds with above-market, risk-adjusted returns. Doing so in a crypto-native protocol ensures transparency and audibility and ensures that the DAO retains full control and custody.
Also, note that while you can get ETH and stablecoin staking yields elsewhere, crypto is still a volatile enough market that harvesting the volatility through a DRP will outweigh the returns from staking individual assets.