Introduction

GM miners,

This publication serves as a follow-up to the “Mining Deeper” article, with the ultimate aim of providing full-spectrum context of past, present and forward policy.

Consistently, the biggest problem for Concave (in money terms) is our ability to turn a profit. To date, there has not been a single quarter in which revenues exceed expenses. Without regurgitating what is already covered in the previously published article, the question simply is how does Concave return real tangible value back to stakeholders. This answer has actually always been consistent, but the methods in achieving it have changed. Originally, the organization believed that the bonding flywheel would allow the treasury to grow significantly, thus also paving the way for significant excess earnings derived from treasury and venture activities alone - obviously, this is not the case. Today, the cash position leaves little doubt that treasury management alone cannot push Concave to positive operating margin. The missing piece in this puzzle has always been deliverance of useful products to the DeFi space. The only reason why Concave has always had dozens of contributors comes from the idea that deliverance of value comes ideally from multiple streams, else Concave would realistically only require a much smaller team for treasury management purposes.

A majority of my work formerly could be reasonably classified as research and development. The results of those efforts thus far have led to decisive decisions to develop two products to the market: a binary options protocol and an insurance derivatives product. The former product is a smaller market offering and was ideated as a gamified alternative to more traditional derivatives. The latter is a product which could potentially deliver substantial value to a financial ecosystem with high risk premia - this has, is, and will continue to be my main focus outside of day-to-day responsibilities as a department head.

Officially, as the Asset Management lead, it is my privilege to present to you, our valued stakeholders, the culmination of our efforts throughout the reorganization period. We look forward to hearing your feedback.

                                   - zuff

Deprecation of pCNV

The team hereby introduces a finalized structure with respect to pCNV, with minor changes aimed at providing additional clarity and structure. However, firstly, the organization wishes to express some of the reasonings for why pCNV is being chosen to be deprecated via conversion:

1. The implied present and future value of the token in forward return terms is dampened due to the design of the token itself, thus providing little incentive for current and future contributors to unlock the full privileges afforded by the warrant-like provisions embedded
   
   
2. By removing pCNV, a better structure for incentivizing current and future contributors is pursuable - a topic that will be explored in the second part of tokenomics adjustments
   

The proposed flow for the dissolution of pCNV and the current privileges it affords are introduced:

1. Burn all pCNV not issued to the market (inclusive of pCNV unissued to newer contributors)
2. Forward mint 10% additional CNV supply to a redeem contract, with respect to circulating pCNV only; the CNV to mint is calculated as pCNV_MarketOwned / 33,330,000 * (CNV_Supply * 10%)
3. Create a snapshot of pCNV holders
4. Calculate the CNV issuable, per wallet address, according to the snapshot and subject to the following equation: pCNV_Owned / 33,330,000 * CNV_Minted
5. Publish, after internal audit, the list of qualifying wallets and CNV redeemable in the conversion process as a spreadsheet
6. Authorize pCNV holders to redeem for CNV via contract created from Step 2, subject to the calculations in Step 2 and 4, with no duration attached to the claim; during this step, announce conversion is live and include CNV minted from the operation (as calculated in Step 4)
7. Remove, or otherwise edit, documentation regarding pCNV to provide clarity to the market that the token is discontinued
8. Issue summary of execution via announcement
   

A few additional comments are made with respect to the current plan:

1. The viability of auto-converting pCNV to lsdCNV positions was explored and ultimately discarded due to the implied gas costs associated
2. Given a CNV supply of approximately 1,000,000, the CNV that would need to be minted for the purpose of conversion stands at around ~35,000 due to the fact that most pCNV sits unissued in the treasury wallet; the conversion is being treated this way to “properly” simulate conversion as if all pCNV was issued to the market at terminal supply and no additional pCNV was earned by existing pCNV holders
3. This directive makes no special accommodative considerations for NFT holders or, more broadly, pCNV holders with “tiny” amounts; the team is aware that many users are unlikely to claim solely due to the gas cost considerations - a similar reality observed in the case of standard quarterly airdrops
4. Any pCNV previously redeemed assumes no conversion privileges
   

The conversion from pCNV to CNV is slated to be available from 1 June.

Revisions to Revenue Reporting Standards

The following section covers one of the most important pieces of internal governance presented in the document as a whole. The segment covers critical transparency initiatives that also serve tandem to Section IV following which will utilize the framework laid out below. For all reporting in the future, the following terms will be utilized:

• Revenue is hereby defined:
• Yield realized from investment activities (i.e. venture deal vested)
• Net discretionary and/or investment profit (loss) realized
• Realized profits from venture activities
• Realized profits from product activities (i.e. cash generated from raises of in-house developed products)
• Miscellaneous income generated from services, products (i.e. MaaS, EaaS)
  
• Operating Expenses is hereby defined:
• Contributor salaries cumulative, inclusive of provisional incentive/bonus pay
• Tooling & administrative costs (i.e. Jira/Confluence)
• Miscellaneous expenses (i.e. gas costs)
  
• Operating Profit is hereby defined:
• The net of Revenue less Operating Expenses
  
• Retained Earnings is hereby defined:
• The portion of Operating Profit, if applicable, that is provisioned for operations outside of repurchase of outstanding CNV and/or cash airdrop
  
• Earnings per CNV is hereby defined:
• Calculated as (Operating Profit - Retained Earnings) / CNV Staked in Pool
• Each staking pool retains the same privileges with respect to earnings issuance; in plain language, a staker in the 360 day pool with 100CNV will receive more than a staker with 100CNV in the 45 day pool
  

To provide additional clarity across sections concerning Revenue and Operating Profit, the team is providing additional context for embedded items:

Yield Farming

Earnings are derived solely from realized - non-compounded - returns liquidated to stables with no consideration for mark-to-market value on the ibTKN(s) asset(s) unless it is liquidated prior to the end of the relevant quarter term, after which it is counted as part of net discretionary profits (loss) realized. In the final month to quarter end, all yield generated from productive assets shall be liquidated to stables with no consideration for auto-compounding and included for the purpose of EPT.

Trading Activity

Earnings are calculated as the sum of quarterly trading activity across all accounts; additionally included are trades made in previous quarters but are being realized in the relevant quarter.

Ventures Activities

The handling of profit/loss realization for ventures deals is managed by the former ventures team wholly. A few venture deals in the portfolio have begun vesting or will begin to vest soon. Items in this section are not counted as revenue unless liquidated to stables.

Services Rendered

Any one-off or recurring service payments received for broad-spectrum services, i.e. Marketing-as-a-Service, Engineering-as-a-Service (to be clear: accounts payable are deferred).

Product Stack

Composite one-off and recurring revenue generated in the relevant quarter for any ‘product(s)’ Concave develops. The implications here are broad; products in the later stage of development may, for example, benefit from raising capital (further discussion on implications of cash-up-front vs. eFCFs + valuation welcome and encouraged) of which can be utilized to issue straight ROIC to tokenholders. Alternatively, but not exclusively, Concave may also issue native tokens from products incubated in-house, which also will contribute to earnings - the value for revenue reporting purposes will be treated as mark-to-market or last round valuation, whichever is lower.

Miscellaneous Earnings

Uncategorized revenues with respect to the above categories; an example of an item that fit within this category would be fees generated from Conduit. Earnings in this segment should be liquidated to stables with the same guidelines as Yield Farming.

Operating Expenses

Inclusive of contributor salaries over the relevant quarter period, of which can be referred to as the “burn rate”. Additional contributor payments are considered in operating expenses if it results in additional payment, outside of standard burn rate, wherein either treasury is involved for outflow; critically and transparently, this means that alternative ‘pay’ i.e. token allocations for protocols being built are not included as a line item. The last standard item includes recurring costs of business inclusive of subscriptions, infra, tech stack, website domains etc. Miscellaneous deductions in the form of one-off payments i.e. domain costs, travel, gas costs etc. are itemized individually. The discretion of both standard and non-standard operating costs are deferred to resident accountant BoneFire.

Operating Profit

The figure derived in this item, at the discretion of Asset Management, can be utilized to repurchase CNV from the open market, issue airdrops, retain capital or any mix of the aforementioned with flexibility powers to adjust QoQ issuance.

Retained Earnings

Capital retained in the treasury for the purpose of issuing to active contributors and/or growing the treasury.

An example statement of how future reporting will look like can be found here:

Clarifications and Standardization of Earnings Issuance

Previously, it was decided at the core level that “earnings” be issued irrespective of operating costs (specifically, this was true for both the Q3 ‘22 Special Airdrop and the Q4 ‘22 Airdrop). Moreover, the way that earnings were calculated followed no specific standardization and were issued more-or-less arbitrarily. As such, it is wholly necessary to totally revamp the framework - of which is explored in the sections that follow.

The former Earnings Distribution Model (EDR) is being done away with entirely. As mentioned in the Mining Deeper article, Concave intends to generate $5mm in revenues over the target period as part of a core KPI. Additionally, for the time being (and until [if] sentiment improves), Retained Earnings are deferred in favor of excess earnings issuance. However, the way that earnings are issued will now be discretized by Asset Management on a quarter-by-quarter basis either as repurchases of CNV from the open market and/or airdrop issuance. The department intends to hold flexibility powers in earnings issuance, but some general points are given below:

• Open market repurchases are prioritized when (if) CNV trades at a discount to cash, with some conservative buffering for changes in treasury balances and operational expenses; the further the discount CNV trades to cash balance, the higher the priority for repurchases
• For quarters where Asset Management intends to utilize excess earnings for repurchases, the purchases shall not extend beyond the time right before the following quarter begins - any unutilized funds intended for repurchases at the end of the quarter will be airdropped
• In quarters with limited profitability margin, airdrops may be issued on a less gas intensive chain and/or final airdrop amount will take into account gas costs for sending airdrops directly to wallets

There are a few reasons for only considering issuing excess earnings. Firstly, above all else, a protocol issuing revenues with no consideration for operating costs assumes, in the base case, a race to zero in treasury balance terms in the absence of meaningful growth. With each quarter of treasury contraction, the more difficult it becomes to maintain a positive margin from a perspective of cash management (i.e. less money deployable for yield farming). Furthermore, it is the opinion of Concave that issuance of revenues will not necessarily contribute to long-term sustainability of positive price action derived from a soft computation of forward revenues of standard activities; to put it another way, the strategy is to deliver real tangible value to existing stakeholders which may then inspire broader market confidence.

In the worst case scenario, should this structure and plan broadly fail, Concave liquidates in a few months and returns value to vested stakeholders.

Revisions to NAV Reporting & Data Presentation

Understandably, one of the biggest pain points that stakeholders have is making sense of the current Transparency Dashboard. But moreover to that, the lack of standardization in reporting items has left Concave in positions wherein the presentation of data may have been (not intentionally) omitted or inaccurate. The following section presents a concrete framework for forward reporting.

Monthly, the following two statistics will be provided:

• Liquid Book Value (LBV)
• Net Asset Value (NAV)
  

Both of these numbers will be calculated by resident accountant BoneFire, with approval, auditing and sign-off from the Asset Management lead for quality control purposes. The two figures will provide distinguishable and enlightening information for stakeholders, of which the specifications are hereby provided:

LBV splits the overall book into two broad categories, Cash/Cash Convertible and Illiquid Assets; the determining metric for if a portfolio item falls into the former or latter is if the line item is implied to be liquid within six months of the reporting date - any item that is currently not liquid (irrespective of category) will include comprehensive footnotes for any discounts/markdowns justifiable. LBV is reported on a per-CNV basis (line items, inclusive of any discounting and markdowns, are summed and then divided by the CNV float).

NAV provides a simpler calculation of the Concave portfolio, taking mark to market figures across the entire portfolio but providing footnotes for line items with limited or zero liquidity. Like LBV, NAV is reported on a per-CNV basis.

Additionally, stakeholders have made very clear that the overall presentation of data is difficult to understand. The department is actively listening to the feedback and intends to report data spreadsheet-style in the future, as many have requested.

Revisions to CNV Inflation Rate

In the current architecture, stakers generate three types of yield: base yield (native and constant), bond yield (native and anti-dilutive) and quarterly airdrops (non-native). The base yield was originally conceived to give stakers a non-requisite ability to generate native token rewards between intervals. Bond yield is directly proportional to bond purchases within a given protocol interval. Conversely, base yield is controlled by a general inflation parameter contained in the staking contract and rewarded to stakers continuously - regardless of bond purchase events.

Base yield also serves a dual process, allowing the protocol to control general inflation of the CNV token. The mechanisms behind base yield are based on total supply, not volume staked. Therefore, the protocol can elect to control base inflation of the native token by adjusting the base yield parameter. Please note that total CNV inflation is a function of both base inflation and bond activity due to anti-dilution effects. Base inflation is best described as the general inflation if no bond-mints occur, or additional inflation if bond-mints do occur.

Base yield is shared between staking positions unequally according to term weights and token staked in positions. Due to the fact that the volume of native tokens staked will never equal 100% of the token supply and the distribution of token staked will likely be spread across more than one position. Stakers in the 360 pool will always receive a yearly base yield APR in excess of the protocol inflation parameter. Put another way, users will not only maintain but in fact grow their share of market cap irrespective of bond purchases taking place.

When the protocol launched, base yield was initially conceived to sit in a range between 5 - 30% and controlled by Policy. Its secondary use case was to provide stakers anti-dilutive effects against bbtCNV in the event bond purchases were lower than expected.

In September 2022, due to (valid) concerns about dilution stemming from bbtCNV the base yield was increased significantly to 50% APY. In November, APY doubled for a few weeks time to account for a two week period where the interval rewards were not paid due to an issue with a protocol bot. Since, the figure has returned to the 50% mark where it sits today.

The department intends to decrease the current inflation rate for a number of reasons given below:

1. Although base yield can be utilized to address staker dilution from seed holder unlocks, it was conceived to be a general inflation parameter. Now that seed token unlocks have concluded, its use as an instrument for anti-dilution purposes is no longer necessary
   
   
2. Mechanisms behind protocol rewards require a minimum amount of treasury value for every token that is minted, bond events can increase mint allowance when an excess value is generated. The protocol can only sustain the current base yield rate for approximately ~1.2 years so it is necessary for us to reduce the figure
   
   
3. Withstanding future cash flows, the treasury is utilized as a proxy valuation method for the native token, and is referred to regularly in communication channels as an argument for under valuation. Base yield is independent of treasury growth and therefore dilutes assets per CNV - currently projected at ~33% dilution over the next year alone
   
   
4. Protocol stakers and stakeholders should be aligned and incentivized to activate bonding. Bonding requires minimum prices for bond purchase due to liabilities to existing stakers (anti-dilution rewards). Each bond increases 360 term aggregate treasury position, this is achieved by stakers maintaining their market cap with a growing treasury. A larger treasury means more yield opportunities, and implied higher earnings potential

Given the above, the team aims to decrease the base inflation rate by 5% each month, for six months.

One of the longer term goals the team hopes for is, through confidence building and deliverance of value, that we may be able to turn bonding back on. The price at which Concave is able to issue bonds depends on a few variables, but we are currently able to theoretically offer bonds way below the longstanding front-end figure. Should bonding be turned back on, the APR reflected in the UI across all pools would, by association, also increase.

Commentary on Forward Portfolio Strategy

Concave’s revenue generation foci can broadly be classified into six broad areas:

1. Yield Farming
2. Trading
3. Services
4. Product Development
5. Venture Investments
6. Miscellaneous Earnings
   

For investment related income, revenue (or losses) is accounted for in the relevant month where the positions are liquidated. For BAU types of revenue, they are recorded in the month payment is received.

Yield Farming and Trading

Considered market-facing activities, both Yield Farming and Trading components are dependent on participation in cryptocurrency markets. The team targets to generate a return of 15% annually on floating cash stockpiles.

Between the two categories, the allocates more weight to yield farming activities, of which the majority of is into stable farms to minimize portfolio volatility. The team is constantly on the lookout for opportunities to maximize yield farming income.

Trading activities are further classified into systematic trading activities and discretionary trading activities. Our systematic CTA continues to deliver value, and makes for an important hedge in volatile markets. Discretionary trading now requires specific authority from the Asset Management lead - as of recent internal directives, no such trades are planned to be authorized for the foreseeable future.

Services

With the dissolution of the Business Development arm, revenue generation from the services category is expected as zero for the foreseeable future. Should remaining departments engage in relevant activities, i.e. consulting, we may revise our estimates.

Product Development

This segment comprises the majority of Concave’s strategy to make outsized gains, by building products and protocols which can bring in huge one-off profits (via grants, airdrops, and venture investments). Successful products also bring in recurring income via fee generation.

Ventures

The co-op has also made several seed investments into promising new projects. Venture investments were done with the aims of supporting the growth of the crypto/web3 industry, and of course to make multiple fold returns on our investments. Of course, we acknowledge that the risks are also magnified, and gains can be slow to vest.

Misc. Earnings

This is a broad category for opportunistic earnings derived from activities that do not fit in the other categories above. Examples of such would be one-off services rendered such as programming deliverables, consulting etc.

Outside of the categories, a number of internal developments have been initiated to generate a consistent stream of alpha. As a department, we are aware that there are countless opportunities for liquidity provision in DeFi. However, manually identifying the best opportunities out of thousands of pools is a challenging task. That's why we are developing a machine that automates the process of opportunity exploration. Our flywheel collects the latest data from various different sources, processes it, analyzes it, and presents the results to the team on a daily basis. This automated approach will help us save time and increase efficiency in identifying the most promising LP opportunities, enabling us to improve portfolio efficacy in total return terms relative to risk.

The flywheel machine has been designed to be highly adaptable, allowing us to adjust our filtering and processing based on our current needs. To achieve this, we have implemented a microservice-based architecture, where each service is solely focused on a specific strategy. As we continue to develop our machine, our current focus is primarily on optimizing our internally-named DEX/CEX Delta Neutral Arbitrage strategy.

Primer on DEX/CEX Delta Neutral Arbitrage

Yield farming opportunities in volatile-stable and volatile-volatile pairs have always been dependent on trading activity and price volatility. In times of high trading activity, pools earn more fees/yield, making the yield opportunities look attractive. However, they also take on more risk of impermanent loss. After all, increased trading interest in pairs naturally occurs in trending or hyped markets. When trading activity moderates though, the LP position no longer looks as attractive, but exiting the trade means realizing the loss.

Nonetheless, these abnormal spikes in pool rewards can still be good opportunities. To exploit these, the policy team has been studying and building automated pipelines to, generally, do the following:

1. Constantly search for yield farming pools with heightened trading activity and thus increased trading fees
2. Enter into LP positions in those pools
3. Immediately hedge any volatile token exposures using Perpetual swaps on CEXes
4. Rebalance if needed
5. Farm until LP yields no longer look attractive
6. Exit with minimal portfolio delta

In addition to the above, it should be noted that the machine built goes beyond the (synthetic) delta neutral case. The most recent efforts have broadened the scope of the initial project to aggregate stable-stable yield sources given a series of input parameters i.e. TVL, reward token(s), historical yields and so on - not dissimilar to DeFiLlama.

Commentary on Ventures Activity & Forward Strategy

As part of broader restructuring, the Ventures department has been dissolved; originally, it was intended to be absorbed into Business Development, but after hearing from stakeholders that department was also dissolved. The critical members of the Ventures team have been repurposed into other needed areas of the organization (and did formerly contribute cross-department anyway), and will maintain the management of existing investments. No new deals are being entertained, but meetings are still being held on occasion with teams actively building.

Formerly, it would have been the Ventures lead that would manage the way ventures deals flow back to stakeholders. The extent of power the (former) Policy team had was solely to manage the budget available for such divestments. Continuing, Asset Management, in continued collaboration with the former Ventures team, will manage the issuance of investments as according to market conditions at that time.

The team would also like to make boldly clear that Asset Management does not intend to issue any additional funds for ventures activities for the foreseeable future; should the treasury see growth, this topic may be revisited, but the internal consensus has been to allow deals to roll off the balance sheet. Additionally, as a reminder, in the event that Concave fails to meet its goals set as part of ‘Mining Deeper’, the team wishes to remind stakeholders that Voke will manage issuance of investments, as they vest, at no cost to the organization until the completion of all venture items.

Commentary on Forward CEX Activity

We currently utilize well known CEXs to execute trades for both our CTA strategy and discretionary positions. For all the privacy advantages of going on-chain, liquidity and execution speed remain superior on CEXs.

Understandably, there have been calls to reduce or even totally abandon off-chain trading. The issue stems from both the reported performance thus far, and the perceived lack of transparency of what trades lost money.

Discretionary trading, whether on-chain or off, always carries the risk of poor luck, timing, incorrect execution, and of course the wrong view. The team acknowledges that our discretionary positions did not perform to expectations.

Given the community’s stance on this aspect, the team will temporarily agree to reallocate the funds for discretionary trading to other revenue generating strategies. Of the NAV in discretionary trading, the team will allocate:

1. 30% to on-chain yield farming opportunities
2. The balance to our CTA strategy
   

Our CTA strategy has shown a good performance track record thus far, and in theory has a diversification effect for our yield farming positions. Given the stable profile of returns, further allocation of funds there will scale up absolute profits generated.

Concave does, however, intend to execute on CEXes solely for the purposes of hedging and in-house structured products. Because we intend to continue utilizing Binance this way, Concave will publish positions which are actively utilizing CEX balances as a single line item, i.e. if we’re managing a synthetic delta neutral strategy i.e. long wstETH, short ETH perps on Binance then the overall value will be reported as the net value across both positions. The same general rules apply for hedge positions; when Concave is actively hedging a portion of the overall portfolio, the position will be specifically denoted as a separate line item with appropriate comments (as footnotes) for what is being hedged. No Binance positions will be taken for any purposes specifically outside of these strategies for the foreseeable future.

Miscellaneous Notes

1. Do lsdCNV holders need to relock at the end of the locking period to continue receiving rewards?
   
   

• No, there is no need to relock. Once the end of term arrives, a stakeholder may opt to keep the position, sell it on the NFT marketplace or unlock it for the underlying CNV. Do note that only lsdCNV (not base CNV) is privy to receive airdrops.
  

1. Any plans to dampen sell pressure from remaining bbtCNV?
   
   

• No. The team did discuss, on multiple occasions, what can be done here; outside of pre-existing policies keeping base inflation rate high, any other efforts are dangerous in precedent (i.e. forced locks or sales) - considering that remaining bbtCNV claims are much fewer than the past few months of unlocks, our intention is to allow remaining tokens to roll off or get locked.
  

1. Any specific plans for how the liquidation process could occur should Concave fail to meet the specifications highlighted in ‘Mining Deeper’?
   
   

• Not yet. Liquidation processes are not a one-click procedure. That said, stakeholders can expect to receive cash and cash convertibles in the immediate term following liquidation procedure. Remaining items, namely ventures, are expected to be issued as it actively vests. Other logistical items will be explored, if need be, at a later date.