An introduction to the Bright Union treasury
How our treasury can accelerate the crypto risk market
The health of any organization can be measured by its available capital. Run out of cash and it’s game over, make more than you spend and a company can keep on building and growing. The same goes for Decentralized Autonomous Organizations (DAO), a brand new way for organizing companies based on blockchain technology.
Over the past couple of years, DAOs have experienced enormous growth and so have their treasuries. Together, the top DAOs are currently sitting on over $5 billion in treasury capital. This crypto cash is used to fund the development of the protocol, reward contributors and the treasuries can earn yield through DeFi. And there are so many more things you can do with DAO treasuries.
Bright Union platform will also have its own treasury and has designed it to boost the efficiency of the blockchain-based risk market as a whole. It can be used to fill in gaps of liquidity where needed, help efficient use of capital within the risk market and accelerate the growth of this exciting new sector in the crypto market. Eventually, the treasury will be fully managed by the Bright Union DAO.
Treasuries in crypto
Traditional companies deploy their treasury to invest in the growth of their business. DAOs essentially do the same and use their treasury capital to fund the growth of their network. The key difference is that the treasury is managed by the community of a DAO. This creates trust, transparency and includes all stakeholders in the process, but the most efficient ways to manage these pools of capital still have to be figured out.
DAOs have been accumulating substantial amounts of wealth over the past years, which is stored in their treasuries. DAOs and dapps are self-executing software. Once they are live, they keep on going. However, for the parts that can’t be automated, the treasury is used. Although often still managed by the core team, the idea of these treasuries is to have them managed through community voting. In some cases, such as with YFI and Maker, this has already proven successful, showing the way for future DAOs and their treasuries.
One key downside has been that most treasuries have been highly volatile as they lack diversification. The bulk of many DAO treasuries is made up of the project’s own token. This works out fine during bull markets, but during the inevitable bear markets, the price of these tokens can drop dramatically, taking the treasury down with it. Besides unhappy investors, this means that the spending power of a DAO decreases as much as the token’s price, which is bad for the long term prospects of these new organizations.
As a response, more and more DAOs have started to diversify their treasuries with stablecoins like DAI and other crypto assets such as Bitcoin and Ethereum. The cool thing is that through DeFi, treasuries can actually start earning yields, which can in turn be used to further fund the development of a project. Tools such as Balancer make this process more efficient by ensuring the allocation of a treasury stays roughly the same as was decided by a DAO through constantly rebalancing the pool.
With these learnings in mind, we’ve designed the Bright Union treasury.
The Bright Union treasury
At the heart of Bright Union is its treasury. The long term goal of our treasury is to make Bright Union self-sustaining. To get there, the treasury will be strategically employed in various activities that make our aggregator platform, offered risk products and the risk market as a whole more efficient. Not only Bright Union and the $BRIGHT holders will benefit, but also crypto risk platforms such as Nexus Mutual, Bridge Mutual, InsurAce and Cover Protocol and the remainder of the crypto risk ecosystem.
Management
We believe in progressive decentralization, meaning that the various elements will first be managed by the core team until there are enough guarantees that the management can be securely transferred to the community. Already, there is a lot of infrastructure for decentralized treasury management that we can easily employ including Aragon, DAOstack, Snapshot and DAOhaus.
Gradually, treasury management decisions will be outsourced to the community. These include voting on various parameters of our products, the allocation of assets in the treasury and the use of treasury capital in various risk products, platforms and our own Bright Risk Indices. The governance process will take place on-chain, creating full transparency in the process.
Asset allocation
The treasury will launch with a significant number of our native BRIGHT tokens. From this point onwards, the treasury starts growing through the fees and yield earned via the Bright Union platform. These earnings will be diversified in various other assets such as DAI, ETH and BTC. These allocations can be determined by the community and the active management can be outsourced to a protocol like Balancer, which automatically rebalances a pool of assets based on the predescribed allocation.
Earning
The Bright Union treasury earns commissions from the risk products that are bought and sold via the aggregator platform. Additionally, fees from the various products offered by Bright Union enter the treasury pool. As the treasury pool grows, the capital in it can engage in more yield earning activities specific to the risk market to further its growth.
It is a key goal of the team to have the treasury reach a critical mass. Once this is achieved, the treasury can be employed in a wide variety of risk specific activities. For example, the reserves of the treasury could be used to cover potential losses in risk positions when claims exceed premiums. But the treasury first needs to be big enough to absorb this, which will happen through the three components of the treasury; the staking, liquidity and investment pool.
Staking pool
Users can stake BRIGHT tokens to receive more tokens as a reward. These staked tokens are locked and therefore reduce the circulating supply while the treasury grows in value. The awarded tokens will first come from the community rewards pool, but over time the yield will stem from the difference between premiums and claims from the various risk products we plan to offer.
Liquidity for the risk market
The blockchain-based risk market is still in a very early stage. Because of this, there is low liquidity, meaning that there are only a limited number of buyers and sellers of risk products. Additionally the risk market is fragmented, the available buyers and sellers are scattered on the various platforms. This makes it hard to find a counterparty for a trade, for example when an investor is trying to find someone to buy his risk. When liquidity is low, generally transaction costs get higher as investors demand a premium for investing in an illiquid asset.
By providing liquidity to the market, we can help bring transaction costs down and also make returns for the treasury by acting as counterparty for well priced risks where a counterparty is lacking.
Additionally, the liquidity pool allows for secondary risk markets. Risk buyers are typically locked in a position for a specified period to ensure claims can be paid out. The Bright Union treasury can take over such positions, making them liquid.
Increase capital efficiency
Due to the limited liquidity and early stage phase of the blockchain-based risk markets, trust levels are still low and therefore capital requirements for buyers of crypto risk are still high. Capital requirements for buyers of risk are much higher as the potential claims have to be covered by a small group of investors. Premiums for sellers of risk can only go so high, and so, excess capital is required to provide confidence to risk sellers that their potential claims can be covered.
These high capital requirements lead to low APY on staking. Generally a 100% capital coverage ratio is required for buyers of risk, whereas in the “real world”, insurance companies only need a 10%-15% equity base as collateral for the risks they incur, as most claims can be paid out from the premiums received.
To move from a 100% capital requirement in the block chain based risk markets to the preferred 10%-15%, two things need to happen. Firstly, risk needs to be diversified, so that not one risk event can wipe out the capital base. Secondly, some form of reinsurance needs to be introduced to cover the small statistical chance of a major impact.
Tackling risk with Bright Risk Index
Bright Union tackles the risk diversification issue by introducing the Bright Risk Index, where users can invest in a basket of different risk protocols. This helps both the buyers and sellers of risk. If a basket consists of 10 different risks, the staker receives ten times premium. If one protocol is hacked and the staker receives a claim, it is only for 10% of the capital and the staker did receive premium on its entire capital. It means that the risk reduces for both the staker as well as the buyer of a cover, which can reduce the capital necessary to lock for staking.
About Bright Union
Bright Union is launching the world’s leading aggregator and accelerator for the crypto risk markets. Our mission is to make the crypto risk markets work. On our decentralized crypto coverage platform, crypto users can cover their assets, stake and cover the community, and earn guaranteed yield through Bright Staking with embedded coverage.
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