Brief Whiteboard on CSWF

Hi, this is Charles Hoskinson broadcasting live from warm, sunny Colorado, doing a quick whiteboard video. I want to talk a little bit about our good friend, the Sovereign Wealth Fund. The current state of affairs is that we have a passive, unmanaged treasury in Cardano. It’s a passive single asset, meaning it does nothing for us. It holds only ADA and is unmanaged, meaning no one is in charge of it.

It just sits on-chain with approximately 1.7 billion ADA, give or take. The concept of a Cardano Sovereign Wealth Fund is to transition to an active, multi-asset managed treasury. You can think of some value alpha standing for the percentage of total wealth. This can be 10%, 20%, or 30%.

From a safety perspective, while it’s safe because there’s no risk from the management side, it’s unsafe from the single asset side. If ADA collapses, you lose enormous amounts of your spending power, as we witnessed when ADA went from $3 all the way down to 25 cents. We went from a treasury that had almost five billion dollars of buying power to one with substantially less. It depends on the lens through which you look at things. Passive means nothing is done; active means decisions are made regularly.

More broadly, when we look at this ecosystem, we have to consider the goals behind the treasury of Cardano. What are our goals? A goal could be wealth creation, meaning that the total value of the portfolio and its spending power goes up. We could look at liquidity, wanting the wealth to be in a form where we can easily deploy and use it. We could also consider ecosystem growth, deploying capital in a way that improves the ecosystem's value.

Let’s be specific; we can look at ecosystem growth in terms of KPIs. KPIs can include transaction volume, total value locked (TVL), stablecoin ratio to TVL, monthly active users, or daily active users. You can even look at the price of ADA as a KPI. We can do this as a decentralized ecosystem. There are different levers we can look at in terms of the Sovereign Wealth Fund and strategic partnerships.

What does that mean? If I own a part of your company, we’re friends. If I own 10% of your company and sit on your board, we’re not adversaries; we’re in the same boat. If you have a multi-asset treasury that holds assets in other ecosystems, it’s much easier to partner with those ecosystems. The problem is that we’ve lived in this passive, unmanaged world for a long time.

We’ve never really had a conversation about our goals or whether it’s a good idea to move from a passive unmanaged single asset treasury to an active multi-asset managed treasury. We all look at this from different lenses. We know we need to take some of the money in the treasury and deploy it into ecosystem growth. Money is going out for the first time ever outside of just Catalyst. The hope is that the technology and initiatives will influence these metrics.

That’s what people are betting on. However, these initiatives do not necessarily create wealth outside of the indirect appreciation of ADA. They don’t necessarily create strategic partnerships or liquidity inside the ecosystem or growth. We could look at DeFi growth metrics, but I’ll leave that nebulous because it’s too long to get into. Instead of just taking some funds and giving grants to people to write software or do something annually, we could treat this a true Sovereign Wealth Fund and have an asset manager do that.

This is what we’re talking about with this hundred million stablecoin concept. You have different instruments: CDPs like IUSD, a full algorithmic approach like JED, asset-backed stablecoins like USDM and USDA, and assets like Bitcoin, which are effectively digital gold. Each has its uses and value propositions. The basic idea is that if we move to an active multi-asset managed treasury, we would take an amount of raw ADA—let’s call it X ADA—and there would be a three-step process. First, there would be divestment, typically done with time-weighted average pricing or OTCs.

This is under the concept of “iceberging” in finance, which is a common practice when people want to exit a large position without disrupting the market. It’s an art. We know the people who do this and have talked to them regularly because it’s common in the cryptocurrency industry. For example, about 30% of all Bitcoin is held by institutions, which is about $600 billion, give or take, depending on the price of Bitcoin. Divestment would take approximately 30 to 90 days, depending on the market cycle and how much disruption one would tolerate.

You’d work with OTC desks first because they’re the least disruptive. You’d identify who’s buying large positions in the next month to three months. For a scale of exit worth $100 million, you’d probably saturate that entire thing to satisfy structured products. If you had to enter the market, you would do so with specialized firms that handle divestments. One of the businesses that Wade, for example, does is divesting cryptocurrencies after acquiring them at a lower price.

They can do this with highly liquid assets. There are many in this business of how to divest without moving the markets, and typically, they charge a fee between 25 to 100 basis points, depending on how aggressive you want to be and the size of the placement. Every week, billions of dollars of ADA cross hands either directly on exchanges or indirectly through OTC transactions. The markets are deep and liquid enough for the divestment phase. Next, there’s the placement.

You have a pile of cash, and you need to decide the ratio of these types of assets. Finally, you have to purchase the alternative assets and place those assets into DeFi. This is the active management component. Ideally, you would have a trade-off between yield and growth—things that are good for the applications versus things that produce the atomic amount of yield inside the ecosystem. An active strategy would involve an administrator working with regulated vehicles that do this for a living as treasury managers on behalf of cryptocurrencies.

They would develop a horizontal strategy, either quarterly or annually, including the ratios for these types of assets and then develop yield opportunities. These could include real-world assets, like making a deal with SpaceX for launch insurance with high yields, or tokenizing loans at 18%. Each of these has its value proposition. For example, if Cardano goes all in on Bitcoin DeFi, the headline that Cardano takes a position in Bitcoin as an ecosystem is powerful. This would also prime the pump for Bitcoin DeFi and showcase Bitcoin products coming into Cardano, creating yield for Bitcoin holders.

Currently, we only have $33 million minted of asset-backed stablecoins on Cardano. That’s a big problem. Our ratio is only 9.8% of our stablecoin to TVL, while Solana is at 110% and Ethereum at 198%. On the algorithmic side, these are nice because they’re not disruptive to the price and allow collateral to be handled on-chain by smart contracts.

However, they’re expensive. For them to work appropriately, you rely on over-collateralization, meaning you have to spend more than a dollar to make a dollar inside the system. After you’ve placed the assets into the market and generated something, there’s the question of profits. Where do the profits go? Typically, you would either reinvest those profits or purchase ADA and send it back to the treasury.

There’s a blog post from A16Z that discusses the death of foundations and the creation of new organizations, the decentralized incorporated not-for-profit association (Duna), which is a DAO organization in Wyoming. It’s similar to the type of organization we’re setting up for the Midnight Foundation, as well as the idea of cybernetic organizations—hybrid organizations where part runs in a smart contract and part in the physical world. You typically create a layered organization with a DAO structure at the top and a governing board. This DAO structure owns or controls an offshore entity, typically in BVI or Cayman Islands, which is well-suited for asset management. This entity holds the ADA, and when you purchase stablecoins, you have an administrator subject to the leadership of the governing board of the Duna.

The administrator negotiates a deal with asset managers, who get their cut for doing the heavy lifting of placements. You have a prospectus of what the rules are, what they can and can’t do, and whether you’re maximizing yield or growth and stability inside the DeFi ecosystem. Profits generated from this structure would either go back to buy ADA or be reinvested into the fund. In these cryptocurrency treasury management structures, the governing board would typically be elected by the ADA holders through some mechanism and would ideally have a background in finance to oversee the entire process. You’d also have an audit layer to verify that everything happening in this structure is correct.

The final part of this arrangement would be liquidation back to ADA. You’d have a protocol allowing people to divest all stablecoins, buy ADA, and send it back to the treasury. This allows you to achieve alpha. Once this structure is in place, you can set alpha to be 10%. For example, if the treasury holds 170 million ADA, worth approximately $100 million, you could decide to grow alpha to 20% the following year.

This structure gives a great degree of control and allows the governance of Cardano to engage in strategic partnerships by taking equity or tokens in other ecosystems. It enables strategic investments into the DeFi ecosystem, creating liquidity, transaction volume, and value. The returns can be 5% to 15%, depending on the nature and risk assessment, which can accrue to a significant amount over time. We know the treasury will eventually become multi-asset, even in a passive state, due to Babel fees and our transition to an AVS system with Midnight. Eventually, Cardano native assets earned or traded will end up in the treasury.

If Bitcoin DeFi grows and there’s a 20% transaction tax on Bitcoin transactions, that will also end up in the treasury. Currently, we have no management system to manage that portfolio. Even if you wanted to sell them from the treasury, you’d have to take them out on-chain into a vehicle and have someone divest that. With this type of structure, you can add arbitrarily many asset managers, and you have a governing board elected by any logic. This layer is effectively tax-free, and the audit and oversight ensure everything is done above board.

We need to have the courage to step outside of a passive, unmanaged yield-free treasury and move to a structure like this. There are many ways it can be configured, and I don’t have a personal stake in this. I’m just sharing how the rest of the industry operates. It’s frustrating for me when I’ve been in this industry for 15 years and regularly engage with people who do this for a living. When I point out the problem areas, I often hear, “I disagree, and my opinion is equally valid.

” I’m sorry, but it’s not. I’ve witnessed the sale of billions of dollars worth of ADA from Japanese whales who bought in at zero cents and sold at dollar increments. I know all the OTC desks, market makers, and traders. I know the trading volume and the state of the markets. I can assure you that divesting $100 million in ADA over a 30 to 90-day period will not materially move the markets if done correctly.

It has to be done the right way by the right actors with the right configuration. This is not a subjective opinion; it’s an objective reality. When you call people out on this, they say, “You need to apologize; you’re driving people out.” I don’t care anymore. I’m not here to protect your feelings.

We’ve crossed a Rubicon when I was accused of stealing $600 million after spending eight years doing the right thing. There’s some permanent damage there. I want to see Cardano succeed and grow. I want to see the things I built become the biggest in the world. I’m going to tell you frankly what I feel we need to do, and you get to decide if this makes sense for an active management pool.

If it does, a proposal will come, and you can vote yes or no. If it doesn’t make sense, then find something else to do. It will become clear to me if I share ideas that don’t get adopted, indicating that the ecosystem has lost confidence in my ability to lead. In that case, I won’t provide value to the ecosystem, and I’ll simply retire. If you adopt the ideas and they’re successful, I’ll stay.

If they fail, then I have bad ideas. There’s no ego in that; it’s just objective reality. I wish I could be nicer, but we’ve crossed that Rubicon. It’s never going to heal. Congratulations to those who accused me; you broke me a bit.

This is where we are now.