[Discussion] Should DXdao participate in AGVE auction to recapitalize Agave after exploit?

Tldr: Agave submitted a proposal on the Gnosis DAO forum for a reimbursement and recapitalization plan for Agave. It’s selling 25,000 AGVE tokens in an auction and this post is meant to kickstart the discussion on whether or not DXdao should participate and under what conditions. Keen to hear feedback from the community.

Background

  • Agave exploited for $5.6m, 44% of lost funds are GNO
  • Sophisticated reentrany attack enabled in part by callbacks in token implementation on Gnosis Chain, as the attack wouldn’t work on other EVM chains
  • Appears Gnosis is ready to compensate a portion of the funds and then a capital raise (selling AGVE tokens from the treasury) will cover the rest + provide runway. Proposal from Agave in Gnosis’s forum
  • Gnosis will participate in the capital raise through an auction and hope other parties will participate

Opportunity for DXdao

  • AGVE is a fairly low market cap token ($2.5m circulating, $9m FDV) and there are not too many lending protocols out there (especially on Gnosis Chain).
  • A significant stake in a lending protocol would be a major value add to DXdao’s product suite. Integrations with other DXdao products would be beneficial, but the biggest value may come from the ability to add assets as collateral. DXD, of course, but this could be a huge offer of the DXdao product suite (lending protocol listing is the new CEX listing)
  • Growing a community - already lots of overlap between DXdao and Agave community and further integration would establish DXdao as a leader of the “xDai community”
  • Work together more closely with Gnosis

What would this look like?

The need to recapitalize Agave represents an opportunity for DXdao to purchase a large portion of Agave tokens at a reasonable price. DXdao could participate in the auction, buy AGVE tokens on the open market or even fund future product development in exchange for AGVE tokens.

Gnosis Auction will be used, which is a Dutch auction, so all winning bidders will pay the lowest bid accepted. It’s expected that Gnosis will put a minimum floor bid that would buy all 25,000 tokens and then allow anyone else to also bid.

Current estimation is that $750k could purchase 10% of Agave’s circulating supply (after the new issuance). DXdao could also purchase AGVE on the open market, where it’s relatively cheap, through a similar structure to the DXD buyback.

Strategic goals for DXdao

  • Expand the DXdao product suite, establish DXdao brand as suite of DeFi apps
  • Product integrations into Swapr, Carrot, DXgov, Jolt
  • Governance influence on adding collateral - a huge value add to attracting new projects to DXdao product suite
  • Grow the value of the treasury

Risks and other considerations

Agave has suffered a big exploit and the funds raised will be used to pay back depositors first. After this, it’s not clear that Agave has a robust governance structure to fund and continue development. The participation of Gnosis DAO, with its large financial resources as well as technical expertise and desire to see Gnosis Chain succeed, help alleviate this concern. The auction will first and foremost help refund the lost funds, but there may be additional funding needed to support product development.

Purchasing a token as illiquid as Agave comes with its own sets of concerns and risks. Token prices could decline dramatically.

There is also a question of how this will affect the NAV of the treasury as it relates to the DXD buyback program.

Additional due diligence needed

There are still a number of outstanding questions. The specifics for the auction are not laid out in the proposal and the details on how the funds would be used to recapitalize are not fully developed. And then there is a further question of how to “restart” the protocol. These issues should be further explored before DXdao makes a capital commitment.

There should also be additional due diligence into the Agave team, governance structure and roadmap. At the moment, there are a couple community members managing the Agave community and some developers managing the product but it’s important for additional due diligence to be conducted on understanding the team and the roadmap.

[Disclosure: Caney Fork had 1,975 xDai in Agave at the time of the hack and holds a miniscule amount of Agave (from their farming rewards)]

Feel free to post thoughts, comments or criticisms below. Also follow along the discussion in the Gnosis Forum.

11 Likes

I agree about the synergies with DXdao’s existing products. I suggest DXdao enter negotiations to buy Agave and make it a wholly DXdao-owned-and-governed product, rather than simply owning a portion. This would allow for more integration with Swapr, specifically, combining Swapr and Agave into one single platform. A combination lending and AMM would have many advantages:

  • Depositors can borrow against their liquidity without leaving the platform, having lending and an AMM in the same protocol increases efficiency and reduces risk for all parties
  • Depositors can easily switch capital between lending and liquidity pools, even create automations based on yield, price movements, etc.
  • With the right setup it will become possible to short any token which is in a liquidity pool, creating additional yield and utility. This allows more accurate price discovery as well, as current pools don’t allow shorting - a disadvantage to CEXs - only buying
  • See the ideas behind UniLend finance, which may or may not end up being successful but they have unique ideas for flash loans and other new possibilies which emerge when combining an AMM and a lending platform
  • In the future: Better derivatives

In short, Agave and Swapr would likely be worth more combined than they are separately

3 Likes

FYI, a proposal has been submitted to the Agave snapshot that would initiate a Gnosis Auction where 12,500 AGVE would be auctioned off for at least 450 WETH:
https://snapshot.org/#/agavedao.eth/proposal/0x111fb6c3f1141ac224d85611195f1b9f6c7dbf1c3806979afbcb1058edba78e5

There has not been as much discussion in the community lately on participating in the auction. Should DXdao consider participating?

2 Likes

I believe lending is a foundational part of finance and DeFi. Gnosis Chain is still somewhat in its infancy when it comes to lending protocols on the platform. It would be great for DXdao to have some exposure to the lending sector.

With Gnosis DAO potentially setting up a ecoystem growth fund of over $250M (GIP-38) and already actively looking to bring large players to the platform (see: Launch Aave V3 on Gnosis Chain) I expect to see a number of new lending protocols moving to GC.

With that said, I’m not sure if DXdao should partake in the auction.

Agave seems to mostly be a side-project with few, if any, full-time contributors. I was also personally not enthusiastic about their handling of the post-hack matter (Disclaimer: dlabs lost a low 4 digit USD amount in the hack).

When a community member asked if there was any attempt to work with the hacker to return the funds, a core team member simply responded that they didn’t because they “don’t negotiate with terrorists”.


While it’s great to have morals - and abide by them - IMO you can’t apply those to funds which are not yours. The priority post-exploit should always be to return the funds to users. Most likely the hacker wouldn’t have even been interested in a deal - but dismissing it from the get-go because one does agree with the morals of it, is not fair towards the community IMO.

Agave – being a fork of Aave – has a saftey module where anyone can stake Agave for an APY. Post-exploit Agave was tweeting about the amount of Agave in their Saftey Module: https://twitter.com/Agave_lending/status/1510184953400766472?t=0TqrWm7WleKFZvvQRrgyjQ&s=19 However, when asked on a community call, about what happens to these funds in the saftey module it was simply dismissed as “oh, that’s a staking module, not a saftey module”. This is contradicted 1) on their own website (see screenshot below) and 2) on their social media (see tweet above).

I’m confused as to how these funds (~$1M) in the “Safety Module […] to secure the protocol in exchange for protocol incentives” will not be used in any capacity to makeup for the lost funds. Why wouldn’t you do so, unless the core team are those providing most of the Agave to this module, and don’t want to loose their funds? (Note: ASSUMPTION)

Gnosis Chain is also somewhat incentivized to fill the auction at a higher price, as the exploit happened on their chain and there is some argument that they are partially at fault due to the fallback in bridged tokes. Moreover, Agave TVL was mostly being driven by GNO incentives.

With all of that said, I don’t think DXdao should partake in the auction. There will likely be more opportunities to enter the lending-protocol sector.

p.s. I still wish the Agave community and contributors all the best - and hope for them they will suceed in the long-term. I simply disagree on certain aspects.

6 Likes