NounsDAO holds ~$50M in assets, with about half of those assets in Lido staked Ether (stETH). Members of the DAO have long wanted to hedge risks associated with the liquid staking protocol, but they had a problem: nobody was offering protection. The Cozy v2 protocol solved this problem.

Creating a market for stETH peg protection

While other protocols were unable to offer markets covering stETH, users of Cozy v2 were able to quickly and easily create a market for stETH, using the permissionless market creation mechanism. The resulting market “stETH Peg” would pay out if the price of stETH diverges from the price of ETH by 50% or more.

To hedge their stETH exposure, the DAO would acquire an amount of protection from that market at a cost that felt fair to the members. If the market triggered, the DAO would be able to redeem their protection for USDC.

Empowering the DAO to buy protection L2

But there was one other problem: the DAO needed a way to buy the protection completely trustlessly, without relying on any privileged third parties. Whereas regular, eligible users can simply go to the app and buy protection, the DAO needed a way to buy protection entirely through transactions executed through governance proposals.

Audited helper contracts enabled the DAO to bridge its assets from L1 to the CozyV2 protocol on Optimism where it was able to place an on-chain bid for the desired protection. These helper contracts are open sourced and can be used by NounsDAO and any other DAO to establish and manage a footprint on L2. To learn more about the helper contracts, visit this proposal.

Placing an onchain bid for protection

NounsDAO used the helper contracts to place an onchain bid for stETH peg protection at a 2% cost rate. This bid presents an on-chain arbitrage that should attract economically rational third parties to fill the order.

Once filled, the DAO will have an active hedge on a portion of their stETH exposure. From there, the DAO can choose to increase the amount of protection by placing another on-chain bid. Or choose to hedge other assets like the newly acquired Rocketpool ETH using a similar mechanism.

A tool for DAO risk management

This proposal is a powerful example of how Cozy V2’s on-chain, permissionless protection can be used not only by individuals but also DAOs to protect funds from protocol risks. If you want to learn more about how you or your project can manage risk with Cozy V2, visit cozy.finance.