Aera, a rewards-based treasury management system for leaderless decentralized autonomous organizations (DAOs), was launched by the team behind cryptocurrency data science shop Gauntlet.
The Aera protocol aims to push DAOs to play a more agile and risk-aware role when it comes to investing in the fast-paced world of decentralized finance (DeFi). The hope is to create organic demand for the type of structured products or derivatives used to hedge risk and improve capital efficiency in traditional finance.
Aera will encourage certain DAO participants to allocate assets to risky products, for which they will be rewarded with fees if investment objectives are met, or penalized if they degrade the welfare of the DAO.
Spaces like DeFi cannot rely on steady, non-speculative institutional inflows into structured products as is the case in traditional markets, where, for example, large asset managers hedge industry-wide portfolios with credit default swaps, or airlines hedge oil and energy costs in Switzerland futures markets.
There are a number of credit default swaps, options protocols, and portfolio insurance products tailored for DeFi, but their adoption has been patchy. One reason is that there was no nimble way for DAOs to take on the role of risk-aware DeFi institutions and proactively create derivative flows, according to Gauntlet CEO Tarun Chitra.
Unlike the high-speed trading behavior of risk product holders, which is typically geared toward infrequent market events, DAOs grind slow and reactionary governance votes on everything from code changes to funding allocation decisions, Chitra said. (Ask a DAO to manage a portfolio of derivatives would be akin to asking the U.S. Congress to be a derivatives market maker and pass legislation to execute certain trades.)
“The only institutions that are fully on-chain and could generate organic demand for these derivatives are DAOs, which need to use tokens strategically to maximize their longevity,” Chitra said in an interview. “DAOs have that capital, so it’s about starting a flywheel where they send allocations to other on-chain protocols, which causes liquidity on those protocols to go up and the price of execution to go down, and it then makes it easier for new DAOs to buy them. That feedback loop was missing.”
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The roughly $10 billion in assets held jointly by DAOs are also being misused due to mismatched incentives between participants who may be averse to large block sales of the governance tokens they hold, as this drives down the price of those tokens lets sink.
“A good example is SushiSwap, where people vote with a token to sell that token, which generally hasn’t worked,” Chitra said. “There’s been some diversification where DAOs have been able to kind of rebalance their wealth, but I think you need a fresh perspective on how to incentivize people trying to manage DAO wealth.”
Aera draws some inspiration from the early days of DAO experimentation and such lofty concepts as “Futarchy,” the idea that a public company could hold its CEO accountable for achieving a certain stock price over a certain period of time.
“Futarchy is that older idea of Vitalik [Buterin] and Robin Hanson, which is like a prediction market that optimizes an important DAO metric,” Chitra said. “But Aera is designed to be compatible with DeFi incentives, unlike the early versions of Futarchy, which required the creation of a new asset for each vote.”
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