Padawan DAO lost half of its budget allocated to funding students to attend blockchain events through a risky approach to fund management.
The DAO was created by a group of young people and originally funded by Richard Burton, the open source designer of the Libra crypto wallet, and other donors. Last year, Padawan DAO sponsored 75 people to attend two crypto conferences, with the aim of continuing to encourage students to explore the crypto space.
“I am happy that we are allocating funds to teach web3 to young students. there is nothing more rewarding than using funds for such honest purposes,” a community member named Wilson posted on his Discord server.
Yet the DAO has been in disarray since the core team announced that half of the budget for sponsoring people to go to future events has been lost. These losses were incurred through the use of DeFi protocols during a decline in crypto prices.
The idea of making the funds grow
On Nov. 15, a community member named Daniel Bezerra suggested that there should be a working group for Treasury because holding his funds in ether (ETH) meant he was at risk for the market more wide of cryptography. Eason Wu, a member of the main team, replied that it was something the main team was planning to fix.
A few days later, community member Vampo came up with some suggestions for cash management. They said it should be diversified between tokens like solana (SOL), which they believed had growth potential, and what they described as high yielding tokens like olympus DAO (OHM). They added that converting holdings into stablecoins was a bad idea.
Bezerra argued that would be a risky approach. He recommended placing the funds in a stablecoin and loaning them out to earn interest.
“I’d rather stick to interest-earning stables than buy ‘high-growth-potential tokens,’ as the latter looks like gambling with donor money,” he said.
Creation of a debt
On January 2, Core Team Member Aleem Rehmtulla provided an update on the cash position.
Rehmtulla said the funds – worth around $150,000 – had been moved into a collateralized debt position (CDP) for the decentralized stablecoin DAI. This means that the funds had been blocked in order to strike DAI, backed by these funds. In order to recover the funds, they would have to redeem the DAI for them.
But this approach carried risks. If the value of the underlying collateral – made up of ether – falls too low, the funds could be liquidated. This function is to protect the stablecoin in general against under-collateralization.
Rehmtulla claimed this would keep the value of the funds stable and avoid market volatility. (Although that probably wouldn’t achieve its stated goal – unless they plan to hold only DAI – as the value of the underlying ether would still fluctuate.)
As Wu explained to The Block: “The reason we didn’t just trade our ETH to get DAI was because some people in the DAO thought ETH would continue to rise and therefore it would be more smart to get DAI while still being exposed to ETH…essentially on leverage.” He acknowledged that this would not protect against Ether price volatility.
A crisis erupted when the market fell significantly. As announced on January 27, when the price of Ether fell below $2,200, the DAI position went underwater. It was then liquidated by a third party.
As a result, the protocol sold 53 ETH for $117,000 to cover the loan and keep the DAI fully backed. At the same time, the project retained its DAI.
From the short-lived lows, ETH price rebounded to $3,100. This means that if the project had not been liquidated, it could have cashed out its DAI and recovered the 53 ETH. As a result, the project is $33,000 worse off than when it started.
Community member Yalor, who provided the update, said: “Unfortunately this cuts the budget for future events in half, but it is a valuable opportunity to improve coordination around cash management at the future.”
They added: “All credit goes to [Bezerra] to be absolutely right that CDP is risky in this bearish environment.
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