Arbitrum Treasury and Sustainability - Working Group

DAO Grant Programs
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Treasury & Sustainability Working Group

Proposal: Plurality Labs Milestone 1 Grants

Grant Program: DAO Momentum

Grant Round: Firestarter Streams

Grantee Project: Treasury & Sustainability

Grantee: Treasury & Sustainability Working Group

Funding Decision & Accountability

We are pleased to announce the start of the treasury and sustainability firestarter under the framework of the plurality labs grant.

This post lays out the focus of this working group and its management structures. It will be updated with information as the program proceeds

TL;DR: The Arbitrum DAO treasury currently holds nearly 3.5 billion ARB. The treasury will be diversified over the coming years along with ARB liquidations from grant allocations

This group aims to kickstart a discussion on how to limit price impact from ARB distribution and diversification.

Why was this working group needed?

This working group will play 2 roles;

  1. Surveying the best practices out there for the following challenges:
  • Price Impact of large liquidations from grants and incentive programs
  • Treasury management and diversification
  • Sequencer fee utilization
  • Converting Grants into Investments
  1. Providing a judgment on which practices, tools or service providers we should integrate with

Who will the Working Group Comprise?

This group will comprise service providers, delegates and community members to come together with the goal of understanding how to best manage ARB distribution unlocks

It will be stewarded by 2 liaisons Devansh Mehta and Siddique Patel, each spending 10 hours/week at 100 ARB/hour

We are also allocating 2000 ARB a month (upper limit: 4000 ARB) for thoughtful engagement and help with tasks by the community

What KPIs for the Working Group?

  1. Productive engagement on this thread

  2. Number of proposals brought to an onchain vote

  3. Number of service providers engaged with on this forum

When will Working Group operate?

Updates will be posted by the liaisons every 2 weeks

Office hours will be held weekly as a Twitter space, communicated via the telegram group and updated on this post

Telegram: Join Group Chat

How will this Working Group Operate

Citations on the taskboard to posts addressing the challenges outlined below

Taskboard

  1. Taxonomy of all ways to mitigate price impacts

  2. Deep dive into over collateralized debt positions as a strategy to provide alternatives to liquidations

  3. Lit review of how other chains are using their sequencer revenue

  4. Categorising sentiment on Arbitrum for planned use of sequencer revenue

  5. Methods or case studies for how DAOs can diversify treasury holdings to traditional instruments like stocks/US bonds. Example: avantgarde finance or Centrifuge Prime

  6. Methods or case studies for treasury management . Example: how ENS or Gnosis manage their treasury with the help of Karpatkey

  7. Methods or case studies for increasing the amount of native token that is locked. Example: Golem Foundation creating Octant to lock up GLM supply

  8. Any other valid research contribution with references helping make progress on how to convert grants to investments, allocation of sequencer revenue, treasury diversification, earning yield and price impact of ARB distribution

Suggested : Pitch your proposal, research idea or interest to work on a bounty by posting on this forum, DM or twitter/telegram to @TheDevanshMehta

Who made the decision to fund this working group?

This working group is funded by Plurality Labs grants program as part of their Firestater Streams round of funding which is part of the DAO Momentum Grants Program.

Who is accountable for the working groups actions?

Both the liaisons are in charge of the working groups directions and allocation of resources

Devansh ( @thedevanshmehta )is a journalist by training and currently working as a next billion fellow at Ethereum Foundation

Siddique ( @sids2000 ) is a seasoned cryptocurrency researcher, involved in the space since 2013 offering insights to investors and providing applicable use cases to businesses.

Who is accountable for the working group results?

This working group serves to coordinate stakeholders and provide recommendations . No part of it should be construed as a fiduciary obligation or legal advice.

None of these activities are representative of plurality labs, which has provided seed funding for the working group under AIP-3 but operates independent of their direction.

Who has the authority to turn off or increase the stream?

The grant starts and streams payment from the PL-ARB Grants Safety Multisig. This multisig has the ability to shut off the stream. In the case of a dispute from PL or the working group, it can be forced to a snapshot vote. The current streams are set until the end of January. The Plurality Labs team will be designing pulse evaluations to continuously receive DAO feedback as to the support for this stream. While this grant lives as a program selection of Plurality Labs, it is the intention to use this experimental model in the capture-resistant framework PL is building for the future.

Budget:

8000 ARB month for 10 hours a week for both liaisons

2000 ARB a month to community (stretch: 4000 ARB)

Total: 10,000-12,000 ARB per month

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It’s great to see this initiative kickstarted :blue_heart: :rocket: I personally can’t w8 to learn more about:

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We are extremely supportive of this initiative and believe that research and thought leadership across these areas is timely, given the DAO’s goals to diversify the treasury over the coming years.

We represent Avantgarde Treasury. Our team members have been developing tools for on-chain asset management for as long as eight years through a smart-vault technology called Enzyme. Our principles are clear and simple. We believe in

  • Transparency: through verifiable real-time reporting, using on-chain data
  • Self-custody: where full ownership stays with the DAO (or sub-DAO)
  • Trustless delegation: leveraging smart-contract based roles & permissions to delegate asset management in a flexible and trustless manner

Aside from developing technological solutions, we also have a fast growing asset management business which supports DAOs and institutional clients with their portfolio management goals. We look after more than $50m worth of assets for leading names in the space.

Looking at the taskboard, we would be very interested in contributing towards the following tasks:

  • (1) Taxonomy of ways to mitigate price impacts of selling $ARB.
  • (4) Methods or case studies for how DAOs to diversify treasury holdings to traditional instruments like stocks/US bonds like avantgarde finance or Centrifuge Prime
  • (9) Producing research in the “other” category involving how to think about asset liability matching and building a framework for investing around that.

On the topic of mitigating price impact from $ARB we would recommend a relatively easy and quick first step. Currently an $ARB price feed is not supported by Chainlink on Ethereum. We think that having an $ARB price feed, together with some community coordination will increase the use-cases of $ARB token across DeFi. This could help counter some of the selling pressure that may come as a result of the recent distributions being made. For example, teams like Index Coop and Avantgarde Asset Management can add $ARB to indexes more easily. Another idea is that the community can work on getting $ARB added to Compound v3 so that long term holders can use it as collateral to borrow against. This increases the “buy” and “hold” appeal to $ARB. It can also increase the capital efficiency of long term $ARB holders.

Summary:

This proposal covers two areas:

  1. For Avantgarde Treasury to contribute to three research tasks (1, 4, 9) on the Treasury & Sustainability Working Group taskboard as detailed above
  2. To establish a Chainlink price feed for ARB on Ethereum

We appreciate any feedback where appropriate and are happy to answer any initial questions.

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TL:DR; Use coordinated limit orders to sell your ARB at designated price bands over time

Best Practices for Arb Grant Liquidations:

As you consider liquidating your grant funds, implementing some best practices can substantially mitigate potential market disruptions. Here’s a curated list for Arbitrum grantees:

  1. Break Up Your Order:

    • Avoid liquidating your entire position simultaneously. Segment your order into manageable portions and execute them incrementally via limit orders.
    • This phased approach stabilizes the price by curtailing any abrupt shocks to supply and demand

  2. Use Limit Orders:

    • Forego the allure of market orders, which transact instantaneously at prevailing market prices. Instead, employ limit orders letting you set ARB price levels to liquidate at.
    • Limit orders might not always be fully executed if the market doesn’t reach your designated price. However, traders can use stop-limit orders to optimize further.

  3. Trade During Peak Hours:

    • Engage in liquidation activities when trading volumes are at their zenith, typically during peak hours.
    • Elevated volumes more comfortably accommodate heftier trades, mitigating drastic price deviations.

  4. Collaborate and Liquidate:

    • If multiple grantees or projects are contemplating sizeable liquidations, coordination is beneficial

  5. Stay Informed:

    • Don’t dump in FUD. Regularly review market conditions, news, and sentiment. An informed decision, based on current market health, can significantly affect outcomes.

Strategic liquidation, especially with collaboration and adherence to these best practices, ensures grantees reap the full value of their awards. Moreover, it provides a more stable and healthier market ecosystem for everyone.

In the following days, we will provide price impact models to help determine strategies for even larger liquidations. We will also present case studies on how CDPs can be a scalable solution to mitigate price impact

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We’re glad to see the thoughtful and opportune preparation of this Working Group. Given the relatively new nature of the Arbitrum DAO and its significant investment in growth initiatives—it is of the utmost importance to start laying the foundations for a sound DAO finance practice—one that allows for the sustainable development of the Arbitrum ecosystem moving forward.

karpatkey is a DeFi-native organisation specialising in professional DAO finance through industry-leading research and tooling since 2020. We’ve been working with GnosisDAO, Balancer, ENS, CoW Protocol, and Lido on financial planning, operations, and strategy, diversifying their treasuries into sustainable portfolios of DeFi investments designed to support DAOs in executing their missions.

We’d like to apply for a grant to conduct research on the Arbitrum DAO’s treasury focused on the following topics:

  • (1) Taxonomy of ways to mitigate price impacts of selling ARB;
  • (2) Deep dive into over-collateralised debt issuing;
  • (3) / (4) Sequencer revenue allocation;
  • (5) DAO treasury diversification into traditional finance instruments, e.g. equity; t-bills;
  • (6) Treasury management best practices; and
  • (8) Any other valid research contribution.

We’re requesting a 10k ARB budget for a 2-months engagement, with the folowing deliverables:

  • Preliminary Results: a public report containing key data points and findings ahead of the Arbitrum Day in Istanbul (November 16th), designed to promote community discussions around the topic.
  • Final Report: a comprehensive public report containing all details and recommendations.

As DAO treasury developers and contributors to some of the most reputable DeFi protocols in our industry, we believe that our team has the knowledge, trust, and alignment to meaningfully contribute to the Treasury & Sustainability Working Group. Check out our values to understand more about our guiding and decision-making principles.

We’re looking forward to any feedback or questions the community may have.

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I can attest to the quality and consistency of Karpatkey as we work closely in ENS DAO. Karpatkey continually is present, implements DAO feedback well, and goes above and beyond their role as treasury manager.

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I am happy to announce that we are holding our first meeting as a Twitter space, on the coming Thursday at 3 pm UTC. Save the link!

The agenda for the upcoming meet:

  1. Our selection of service providers for a 2 month, rapid research grant.

Only organizations with experience of managing DAO assets are eligible. The purpose of these rapid grants are to help the community assess their capability our DAO manage its assets & for them to get acquainted with arbitrum’s treasury.

  1. Discussion on price impact of $ARB from STIP allocation & how to vote on proposals seeking additional funds to backstop 24 mn ARB of successful proposals from round 1 and/or go in for a 2nd round

We need an estimate on the expected price impact of the 50 mn arb allocation from STIP before being able to rationally vote on any extension or backstop of the program.

  1. Work with groups or individuals on proposals that seek a review from our working group before being presented on this forum for feedback & vote.
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Aera is supportive of this working group. Having been built by Gauntlet and a team of experienced developers, Aera is an autonomous, data-driven treasury management protocol with the ethos that it is a DAO’s right to manage its treasury in a non-custodial, fully transparent, and risk-aware manner.

The Aera protocol consists of non-custodial vaults, which are constructed on a per-protocol basis and can hold a combination of stablecoins, native tokens, and other cryptocurrencies. Each DAO determines its own treasury management approach and can fully customize it for their own needs, ranging from simply keeping fund proportions in line with liabilities to complex strategies using liquidity positions to provide POL. Vaults are automatically rebalanced after acceptance of recommendations by Vault Guardians, who compete on-chain to propose the best combination of assets in the portfolio. This ensures that the vault strategy is met across a wide range of market scenarios and time horizons.

Aera is applying for a 2-month, 10k ARB grant to leverage its deep-rooted experience in quantitative modeling, parameter optimization, and economic research as a means of furthering research in the following areas:

  1. Taxonomy of all ways to mitigate price impacts

  2. Methods or case studies for treasury management

  3. Any other valid research contribution with references helping make progress on how to convert grants to investments, allocation of sequencer revenue, treasury diversification, earning yield and price impact of ARB distribution

Here are some additional resources to learn more about us:

Feel free to reach us on X: @aerafinance or @gauntlet_xyz

Happy to answer any questions.

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We had a successful first meeting, with 122 people tuning in to our space! Some highlights were presenting our WG recommendations on the spending limit we should set ourselves (post forthcoming from @sids2000 ) and an announcement on the service providers selected for a rapid research grant. Recording link here

@karpatkey , @elisafly of Avant Garde Finance & @Aera have each been selected for a rapid research grant of 10k ARB , from today until January.

We look forward to seeing the results of their analysis! What’s particularly exciting is the mix of service providers for our first season: @karpatkey with their experience in DAO asset management across the ecosystem, @elisafly’s understanding of bridging crypto assets into real world financial instruments like stocks & @Aera’s familiarity with the Arbitrum ecosystem. Congratulations!

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Disclaimer: This content is for educational purposes only and not financial advice. It’s based on historical data which may not predict future market trends. Cryptocurrency markets are volatile and risky, and the authors bear no responsibility for any decisions made from this analysis.

In a recent call regarding backfund of successful STIP proposasls, @krst from l2beat mentioned his delegators were asking him about the $ARB price impact from grant programs approved by ArbitrumDAO. This linked with the objectives of our group in ascertaining a DAO spending limit.

Our analysis show that using a soft-cap on DAO spending within the range of 135-210 million USD this quarter (Oct-Dec ‘23) can be implemented without incurring a significant price impact assuming steady market conditions.

Here’s some back of the envelope numbers on major proposals passed & pending this quarter:

  1. Arbitrum STIP: $50 million
  2. Backfunding STIP: $21 million
  3. Arb Staking: $25 million per quarter ($100 million annually)

From our rough estimates, if the backfunding and ARB staking proposals are both passed the Arbitrum DAO has an additional ~ $100 million discretionary spend until December end without incurring significant price impact.

We hope to influence Arbitrum’s culture so that proposals list amounts requested as % of quarterly budget instead of % in treasury size.

Assumptions & Challenges:

  • We have analyzed data across exchanges with a liquidity score above 450. We have excluded exchanges that portray anomalies, have a low confidence score, and those that were omitted from aggregate data set.

    Orderbook Depth Data Top 20 Exchanges
    Orderbook Depth Data Top 20 Exchanges1280×800 103 KB

  • We have estimated order-book depth to fluctuate between 7-10 million dollars within a 2% price slippage. For the pursuant discussion we will be using $10million as buy side liquidity.

  • All grants are liquidated, and orders are executed proportionately across pairs and exchanges using an optimized execution strategy.

  • Market sentiments and liquidity doesn’t change drastically and remains within bounds. No major spike on the supply side through unlocks or investor liquidations.

  • Order-book data reliability such as errors in aggregating data from multiple sources, unharvested data, trading bots, wash-trading, etc.

  • Opaque OTC markets lead to closed order-books which are not included.

  • <20% of the daily open bids within a 2% price slippage can absorb selling pressure.

  • Estimates are based on historical data and not real-time trades which would create a feedback loop for optimization of our modeling.

Here are the liquidity metrics based on the last 90 days of trading data:

  • Average Daily Volume: Approximately $153.56 million was traded daily on average.
  • Cumulative Volume: Over the 90-day period, the total trading volume was about $13.82 billion.
  • Average Market Cap: The average market capitalization was approximately $1.17 billion.
  • Average Daily Price Movement: On average, the daily price movement (high - low) was about $0.0388.
  • Volume-Weighted Average Price (VWAP): The Volume Weighted Average Price (VWAP) is approximately $0.9342. This helps us determine a benchmark with relatively higher volume.

Based on the above metrics here are some observations

Order book depth
Order book depth1920×1080 62.1 KB

  • Order-book depth: Current bid levels suggest that selling $1.5-2 million worth of the ARB which accounts for 15-20% of cumulative open bids is likely to keep slippage within a limit of 2%.

    slippage capacity to volume
    slippage capacity to volume1217×460 68.5 KB

  • On the day with the lowest trading volume in the last 90 days, which was September 9, 2023, the volume was approximately $47.23 million. On this day, a $2 million trade size would have represented about 4.23% of the total daily volume.

  • Total Liquidation Size : Cumulative Quarterly Volume (USD)

    • 180 million: ~1.3%
    • 135 million: ~1.0%
    • 210 million: ~1.52%

Based on our analysis, we recommend a soft cap of between $135-210 million for grant programs in Q4 2023.

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Thanks Siddique for this important analysis. We had 45 people tuning in to our weekly Twitter space last Thursday at 3 pm UTC and there were some important clarifications that need to be shared on this group for the written record

  1. $135-210 million for Q4 is a spending cap, NOT a budget. The analysis is based on the NARROW parameter of minimizing price impact from $ARB liquidation. There are many other considerations like runway that are far more important to determining optimum quarterly expenses on grant programs

  2. So if it’s not a budget, what is the use of the analysis? We now have a methodology for determining the rate of treasury diversification every quarter. We currently have 4 billion+ ARB in our treasury; we can’t diversify too quickly as it would impact price, but we now know the rate of diversification (spending cap - grant allocations = diversification ceiling)

  3. HOWEVER, our analysis looks at optimum liquidation strategies which is likely NOT to be the case. Grant recipients choosing to market sell the entire amount can cause sudden spikes in downward pressure resulting in cascading liquidations from limit orders

We urge grantees to follow the guide @sids2000 laid out earlier on best practices for getting the most bang from your $ARB grant

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It is great to see the engagement within the community for this working group. With a treasury as large as Arbitrum’s, we believe this is a critically important initiative.

In addition to the other service providers here, the Centrifuge team would like propose an interim research initiative on items within the Taskboard.

We would like to conduct and present case studies and research on:

  • Diversification of treasury holdings using real world assets, including a deep dive into portfolio considerations, relevant asset classes, and overall portfolio execution
  • Operational and execution considerations for RWA investments, including legal and compliance considerations for decentralized entities, deal structures for relevant investments, and best practices across financial and risk considerations

The basis of our research is the Centrifuge Prime managed services offering for DeFi native organizations. This is the result of our years of work with DAOs such as Maker and Aave, our significant time in market as the first RWA protocol and current leader by TVL, and our expertise with legal and deal structures that have supported hundreds of millions of RWA investments. To date, Centrifuge and our ecosystem of partners represents the largest RWA investments within the DeFi and DAO landscape.

Centrifuge is actively working on deploying to Arbitrum and has been collaborating with the ecosystem in bringing RWAs here.

We believe our perspective and expertise is a significant value-add in relation to the work of other providers within this thread. We view providers such as AvanteGarde and KarpatKey as ideal partners for whom Centrifuge Prime can augment and expand their inherent capabilities. We see our role alongside these providers as collaborative, with the ability to offer bespoke expertise, legal and technical infrastructure, and an broad ecosystem of assets and issuers.

We look forward to hearing from the community and Plurality Labs. We’d like to thank the team for their time and engagement so far!

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Hi - I know I’m a little late to the party… but we’ve (FrontierDAO) been enjoying participating in the ARB Metagovernance Research round for GG19.
Jumping in to Tg to see if we can offer the community / working group anything.

Thanks for setting up this working group @thedevanshmehta and @sids2000 !