“`html
Gratitude to the EFers who offered significant input and feedback on the draft document: Bastian Aue, Vitalik Buterin, Bogdan Popa, Tomasz Stańczak, Fredrik Svantes, Yoav Weiss, Dankrad Feist, Tim Beiko, Nicolas Consigny, Nixo, Alex Stokes, Ladislaus, and Joseph Schweitzer.
Appreciation to kpk, Steakhouse Financial, and pcaversaccio for their invaluable and perceptive insights and the final evaluation of this document.
The Ethereum Foundation (EF) aims to enhance Ethereum’s ecosystem and uphold its long-established fundamental objectives: facilitating “applications that operate precisely as intended without any chance of downtime, censorship, fraud, or interference from third parties“. EF Treasury supports EF’s enduring authority, sustainability, and credibility. Capital allocations should be harmonious between pursuing returns above a benchmark and enhancing EF’s role as a custodian of the Ethereum ecosystem, with particular emphasis on DeFi.
This document outlines the principles and directives for EF Treasury management and addresses the essential indicators and considerations.
1. Macro Policy
To fulfill its aims, EF will sustain and periodically enhance an asset-liability management strategy and a broad grant allocation framework. EF will oversee its assets, taking into account risk, duration, and liquidity, while remaining consistent with Ethereum’s core tenets.
Our approach emphasizes two factors:
A: Annual Opex (defined as a % of the current total treasury)
B: Years of Opex Buffer (number of years of operational runway saved in reserve)
Where:
- A × B: defines target fiat-denominated (offchain or onchain) reserves. This value directly affects the volume and frequency of ETH sales.
- (TotalTreasury – A × B) determines the value of ETH reserves: dividing by ETH price provides the number of ETH that will stay in core holdings.
At regular intervals, the Board and Management reassess both factors, considering market shifts and community feedback to align short-term operations with long-term strategy. Two additional lenses influence each assessment: (1) pinpointing critical years that require increased ecosystem engagement and (2) adopting a counter-cyclical stance—raising support during downturns and scaling it back during bull markets.
Current targets are set at A = 15% of the treasury for annual opex and B = 2.5 years. This policy encapsulates our belief that 2025-26 will likely be pivotal for Ethereum, meriting increased attention on essential deliverables.
EF anticipates remaining a long-term custodian, but foresees its focus gradually concentrating. We plan to decrease annual opex in a roughly linear manner over the upcoming five years, culminating in a sustainable 5% baseline that is typical for endowment-based institutions. This trajectory and baseline will undergo review and adaptation as circumstances change.
2. Crypto Assets Policy
The EF will strive to achieve acceptable returns on treasury assets in a manner aligned with Ethereum’s fundamental principles.
The essential considerations for the on-chain portfolio include, but are not limited to:
- Safety and security: prioritize battle-tested, immutable, audited, permissionless protocols. Promote positive-sum participants within the Ethereum DeFi ecosystem. Strive to mitigate, not exacerbate, systemic risks to Ethereum overall. Continually assess projects for potential attack vectors and risks, including, but not limited to: smart contract, governance, custodial (e.g., stablecoins), and oracle risks.
“““html
- Moderate returns and hazards: opt for cautious selections with elevated liquidity levels rather than merely pursuing high yields. Protect against not only the potential loss of capital but also challenges regarding liquidity and overall portfolio adaptability. Investments that carry a slightly higher risk may occur, but these will be on a smaller scale and within separate segments. In all situations, aim to constitute a small percentage of any individual project’s total TVL.
- Ethereum’s broader objectives: facilitate the most secure, decentralized, open-source, cypherpunk applications. Cypherpunk DeFi operates without permission: no restrictive barriers. Desired protocols are trust-minimized, composable, and highly privacy-friendly.
We will regularly redistribute assets between protocols due to factors such as evolving market conditions, diversification, or emerging yield possibilities. Withdrawals should be perceived in this light and not as negative indictments.
2.1 Ether Sales
Throughout the year, EF will intermittently assess the divergence of the treasury’s fiat-valued assets from the Opex Buffer (“B”) target and ascertain how much Ether, if any, will be liquidated in the forthcoming three months. These transactions will generally occur through fiat off-ramps or onchain exchanges for fiat-denominated assets.
2.2 Ether Deployments
Our existing approaches encompass solo staking and wETH allocated to reputable lending protocols. Core investments are reassessed constantly but are meant for the long haul. EF may also procure stablecoins and pursue elevated yields onchain. EF Management and advisors will evaluate potential protocols for contract integrity, liquidity risk, de-peg risk, and additional elements. As the DeFi landscape evolves, EF intends to integrate specific on-chain allocations, involving painstakingly vetted farms and tokenized real-world assets, into its fiat reserve.
3. Fiat-denominated Assets Policy
The EF will distribute its fiat assets among:
- Liquid assets: cash and other highly liquid fiat-denominated instruments to satisfy immediate operational demands;
- Liability-aligned reserves: time deposits, investment-grade bonds, and other low-risk instruments that correspond with longer-term commitments; and
- Tokenized real-world assets: governed by identical strategic objectives and risk protocols as native crypto assets.
4. Transparency Policy
The EF Co-EDs are responsible to the Board for treasury management.
To foster transparency, accountability, and informed oversight, a systematic internal reporting schedule is established. Reports are created and kept by the Finance team, with distribution dictated by scope and confidentiality.
4.1. Quarterly Reports
The Finance group delivers quarterly statements to the Board and Management, which encompass:
- Performance (Absolute and versus Benchmarks)
- All positions (Open & Closed since the previous report)
- A synopsis of significant events, comprising:
- Operations (processes, infrastructure, security updates/incidents)
- Ecosystem involvement (meetings held, collaborations, etc.)
4.2. Annual Reports
The annual EF Report will encompass additional treasury-related details, including a recap of major treasury allocations. For instance, percentages in fiat, idle ETH, and deployed ETH.
5. Cypherpunk Goals
The EF (through its investigation, advocacy, and capital allocations) will expand on cypherpunk principles to assist in defining and implementing a practical assessment framework we identify as “Defipunk” which possesses the following attributes:
Privacy has historically been overlooked in the broader DeFi sector, yet it remains vital. Privacy shields market participants from both digital scrutiny (e.g., front running, sandwiching, liquidation sniping, targeted phishing, profiling, and data-driven coercion) and real-world threats (i.e., in-person coercion).
5.1. EF should actively support projects in their Defipunk journey
Ethereum is set to draw significantly larger inflows of capital, talent, and creative energy. Growth, however, is frequently path-dependent: standards established during chaotic rapid expansion solidify into legacy limitations, and designs that favor transparency may inadvertently foster scrutiny by default. Established systems frequently apply subtle pressures that confine the design space for innovative DeFi primitives and limit privacy-enhancing innovation. The Ethereum Foundation will counter these pressures.
Through research, advocacy, and tactical capital allocations, the EF can assist in nurturing an Ethereum-native financial ecosystem that upholds self-sovereignty and facilitates, at scale, “an open society in the digital age.”
Transforming this vision into tangible infrastructure necessitates effort. There are many hurdles to establishing cypherpunk DeFi protocols today: elevated gas costs for privacy, user experience friction, challenges in bootstrapping liquidity, more rigorous audit requirements linked to technical complexity and immutability, and, simply put, opposition to privacy. Consequently, a significant portion of today’s DeFi ecosystem depends on centralized components: backdoor shutdown options or fund extraction mechanisms, excessive dependence on multisigs or MPC, widespread use of whitelists, centralized and surveilled user interfaces, and a general lack of on-chain privacy – all of which expose both DeFi markets and participants to systemic vulnerabilities.
Securing privacy is particularly crucial. As A Cypherpunk’s Manifesto highlights, “for privacy to be widespread, it must be part of a social contract
“““html
”. Privacy possesses inherent network effects, yet it has garnered minimal attention thus far. This indicates that robust, early institutional backing from an EF-like organization can be exceptionally beneficial in shifting the equilibrium towards a more privacy-oriented DeFi environment.
EF is strategically positioned to assist in directing DeFi’s progression towards these objectives. For instance:
- Aiding emerging DeFi protocols in incorporating privacy features
- Motivating established protocols to enhance Defipunk attributes through research partnerships, liquidity, legitimacy, and various resources
- Encouraging the research and advancement of decentralized UIs
A more exhaustive list of criteria for project endorsement can be found in §5.3.
5.2. Defipunk initiates at home
Championing open source, privacy, and other Defipunk objectives extends well beyond EF, encompassing EF’s internal operations where feasible. Implementing Defipunk principles in EF’s treasury management represents a crucial initial measure in this context. More broadly, the EF can utilize secureware tools, establish a prudent operational framework that supports all qualified contributors, including anonymous and pseudonymous participants, and enhance its security and privacy measures. This will facilitate EF in remaining principled and enhancing its strength, stability, and resilience.
Personnel engaged in treasury management should employ and/or contribute to open-source, privacy-preserving tools for routine tasks, especially if it necessitates skill advancement in those domains. By diligently embodying and implementing Defipunk principles within its activities, EF will remain focused and acquire the capabilities to assist the broader ecosystem in doing likewise.
5.3. Defipunk Standards
Here are tangible standards for internal assessment of protocols and UIs, designed to motivate new initiatives to launch and current ones to enhance. They will be applicable to all of EF’s forthcoming onchain deployments. While certain benchmarks (e.g., permissionless accessibility, self-custody, and FLOSS) are clear binary criteria for deployment, others are more intricate. Currently, projects are not obliged to exist at the “ideal” end of every spectrum. We seek substantial progress and a plan for enhancement, instead of flawless execution from the get-go. We make this framework available openly to ensure transparency for EF decisions and foster consensus on these parameters, allowing the broader community to contemplate, modify, or utilize them in forming their own perspectives.
- Permissionless Accessibility
- Can any individual engage with the core smart contracts without KYC or whitelisting?
- Self Custody
- Does the protocol enable users to retain self-custody and present this as default?
- Free-Libre & Open Source (FLOSS)
- Is the contract code free-libre open-source, licensed under a copyleft (e.g., AGPL) or a permissive license (e.g., MIT, Apache)? Source-available (e.g., BSL) does NOT qualify.
- Privacy
- Transactions: Does it provide options for concealing transaction origins/destinations/amounts?
- State: Is user/personal data and/or position details obscured onchain?
- Data: Does the protocol (and its standard UIs) eschew unnecessary collection of user data (e.g., user-agent) and personal data (e.g., IP addresses)?
- Open Development Methodologies
- Is the development process adequately transparent?
- Are code repositories publicly accessible and consistently maintained?
- Are protocol modifications documented with clear rationales and version history?
- Is there visibility into the decision-making process for updates, settings, and roadmaps?
- Maximally Trustless Core Logic
- Immutability: is the basic logic of the protocol non-upgradable or governed by a highly decentralized, time-locked, and transparent process? (Avoid administrative keys with extensive powers.)
- Maximal viable cryptoeconomics: does the protocol depend mostly on cryptographic assurances & economic incentives, while minimizing the use of legal frameworks (like collateralization assurances) or off-chain enforcement to the essential minimum required for its primary function?
- Oracle Dependence
- Does it reduce reliance on oracles, and minimize losses when an oracle is compromised?
- Does it employ resilient, decentralized, governance-minimized, and manipulation-resistant oracles
“““html
wherever oracles are essential?
- General Security
- Are the agreements audited, and systems established to monitor the audited commit hash against the last deployment, preferably including alerts when the revisions change?
- Are contract attributes formally verified or at least bytecode-verified on blockchain explorers?
- Distributed UIs
- Are there several independent UIs?
- Is the main UI open-source and hosted in a decentralized format?
- Can users directly engage with contracts?
Enduring Stewardship
The EF is committed to maintaining a long-term presence and requires a solid long-term treasury management strategy. We have traditionally held ETH, but are now progressively transitioning into staking and DeFi, enhancing our financial viability and supporting a crucial application domain that promises open secure access to essential civilizational infrastructure for millions today. The EF’s participation in these fields is strategically positioned to establish standards for responsible tool use aligned with its core objectives. To achieve this, it plans to invest significantly in developing its own expertise over time.
If you have suggestions that could aid EF x DeFi, please complete this form.
Source link
“`