D2 Finance Step Application

DAO Programs & Initiatives STEP Applications
1

D2 Finance STEP Application

Name:
D2 Finance

Address (Headquarters):
TBC, paperwork submitted

City, State, Postal Code:
TBC, paperwork submitted

Country
British Virgin Islands (BVI)

Project Links:

Primary Contact Name:

  • Frank, Head of Growth / Operations

Contact Information:

Key Information

D2 Finance offers a robust suite of institutional-grade managed strategies within our innovative, non-custodial single-click vault architecture. Our strategies are designed to maximize returns by balancing risk and reward efficiently, drawing on our team’s deep expertise in hedge fund management and derivatives, and institutional grade infrastructure.

From the Arbitrum perspective, the strong competitive advantage of our ARB++ managed strategy over other proposals is that it doesn’t require the Foundation to sell any ARB, which may be less optimal from an optics standpoint, while also driving additional ARB token volume throughout the ecosystem as collateral.

Expected Yield:
D2 Finance’s approach to generating risk adjusted returns is deeply rooted in sophisticated active trading strategies, similar to those utilized by market makers and asset management firms. These strategies are inherently subject to market volatility and are designed to capitalize on this volatility to achieve a positive expected value (EV) over the long term. Thus we do not advertise a base yield at the start of an epoch; instead, our yield is dynamically generated based on the performance of our active trading strategies.

D2 brings the sophistication of a top tier hedge fund, 100% on-chain, 100% non-custodial

ETH++ Strategy: 84.3% ROI (247% annualized) since inception 22 Dec 2023. About doubling ETH performance with estimated 1/5 the risk.

ARB++ Strategy: 30.74% ROI (321% annualized) since inception March 22, 2024.

Past performance is not a guarantee of future returns.

Expected Maturity
D2 Finance strategies are deployed on a long term basis, by capitalizing on structural inefficiencies, while managing the risks within the strategy mandates. There is no maturity date on strategies. Vaults auto-roll monthly and strategy is optimized for the current opportunity set.

Underlying asset
ETH++

  • USDC is the underlying asset
  • Delta exposure is -20% to 200% of ETH, but averages lower downside volatility due to efficient use of optionality and hedges
  • Average historical delta +10/+15%

ARB++

  • ARB is the underlying asset
  • Maintains delta exposure ranging from 20% to 60% of ARB.
  • This strategic positioning enables us to average lower downside volatility by efficiently utilizing optionality, thus providing a cushion against market downturns
  • As strategy AuM scale, we are able to become liquidity provider on ARB market. ARB++ acts as a natural buyer in “market dumps’ ’ hence if ARB++ achieves reasonable TVL, it can work as a shock absorber for the ARB token ecosystem while providing liquidity when its needed most.

Minimum/Maximum transaction size

  • ETH++ no min, 5M USDC maximum
  • ARB++ no min, 1M ARB maximum

Current AUM for product

  • ETH++: 200k (capped)
  • ARB++: 60k (capped)

Current AUM for issuer

Strategies TVL = $320k, which is at capacity for most vaults during the initial proof-of-concept roll-out.

Not including POL or other treasury assets.

Caps to be raised to align with recent grant incentives received as part of the ARB LITPP in stepped phases.

Volume of transactions LTM

  • $12.45m notional trading volume across 19+ Arbitrum protocols
  • $16m + options trading volume in Lyra finance

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https://dune.com/d2_finance/d2-finance-analytics

Source of first-loss capital
N.A.

The strategies are not risk-free, and some epochs may result in a negative return. D2 Finance employs robust risk-management processes developed through many years of practical experience and academic research and has been battle-tested at the institutional level in TradFi.

Basics and background

1. How will this investment improve Arbitrum’s RWA ecosystem?
D2 Finance brings a unique and innovative value proposition to the Arbitrum ecosystem consisting of; D2’s distinct position to on-board institutional capital to Arbitrum, a direct positive feedback loop to integrated protocols, and unique implementation of complex strategies typically reserved Multi-Billion AUM Hedge Funds and the strategic use of epochs to align investment opportunities with market conditions.

Investing in D2 Finance managed strategies will enable Arbitrum to diversify their treasury through our Digital Assets Hedge Fund, earning risk-adjusted returns on deployed assets.

From the Arbitrum perspective, the strong competitive advantage of ARB++ over other proposals is that it doesn’t require the Foundation to sell any ARB, which may be less optimal from an optics standpoint, while also driving additional ARB token volume throughout the ecosystem as collateral.

2. Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.

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3. Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.

Luca
Luca’s track record boasts a significant tenure in traditional finance most notably as Portfolio Manager/Developer, Volatility Strategies at PAG and Quant/Volatility Trading at Northwest Investment mgmt, where he generated over $21M for investors with a Sortino ratio of approximately 1 over five years.

Alongside his professional experience and academic credentials as a Ph.D candidate in Applied Finance/Machine learning, a recent two-year foray into DeFi has consistently outperformed benchmarks. This wealth of experience positions D2 Finance at the pinnacle of financial innovation, offering institutional investors SECURE access to the potential of DeFi.

Alex
Alex is the Chief Compliance Officer for a Swiss based company specializing in the issuance of fiat backed stable coins. His remit spans EU, APAC and US markets. With 20+ years of combined advisory and in-house expertise, he specializes in advising global public companies on governance, risk management, and compliance. His experience spans digital assets, financial services, and fintech.

Sean
Utilizing over a decade of career experience in APAC prime services hedge fund equity finance sales trading & coverage, as well as institutional fintech SaaS sales, to advise family offices, EAMs, and institutions on allocating to the web3 digital asset class, through venture capital & private equity (primary & secondary) deal flow, fund allocation, and cryptocurrency investment.

Natali
Natali boasts expensive experience as an execution / FX trader at Morgan Stanley, BlackRock and RBC capital markets

References available upon request in private.

Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.
No

4. Describe any conflicts of interest for your entity and key personnel.
None

5. Insurance coverages, guarantees, and backstops Name of insurer or guarantor Per incident coverage Aggregate coverage
N/A

6. Historical tracking error in your proposed product, or similar to that being proposed Product 2024 YTD 2023 2022 2021
N/A

7. Brief reason for above tracking error
N/A

8. Please describe any experience your firm has in working with decentralized organizational structures
Our protocol, D2 Finance, itself leverages a legal decentralized DAO structure to connect decentralized Front Ends to our Managed Trading strategies. At D2 Finance, we mirror the workings of top-tier hedge funds entirely on-chain and in a non-custodial manner. Our commitment to decentralized structures is not just a preference; it’s the bedrock of our entire operation.

Our proprietary order management system (OMS) is meticulously crafted to integrate with fully permissionless, decentralized ecosystems to facilitate our trading strategies, within our institutional grade framework. This ensures we are able to provide 100% transparency as well as provide a fully non-custodial solution.

Moreover, D2 Finance participates in governance to facilitate the evolution of our protocol in ecosystems like Arbitrum.

Decentralized structures are integral to our ethos and operational framework.

9. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?
$4.2m DeBank | The Web3 Messenger & Best Web3 Portfolio Tracker

10. How many of these assets held are present on Arbitrum One, if any?
100%

Plan design

1. Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.

D2 Finance employs some of the most complex managed trading strategies available in DeFi, based on our extensive experience developing and managing volatility based strategies in TradFi, including a mix of:

Volatility arbitrage strategies, Relative Value opportunities ( e.g. options vs LP), and funding arbitrage.

Our strategies are deployed and managed according to the strategy mandate mimicking a true dynamic hedge fund and not just a wrapper on a static strategy/Asset.

ETH++ Strategy
ETH++ employs volatility arbitrage-like strategies by buying or selling ETH and other blue-chip derivatives, then hedging and actively trading the delta on platforms such as GMX, typically extracting a funding arbitrage.

ETH++ allocates on a risk adjusted basis for the long-term and employs opportunistic relative value strategies. Conservatively aligned with a smoother return profile.

Strategy Details

ARB++ Strategy

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The ARB++ Vault is designed to outperform traditional Arbitrum ecosystem allocations on a risk-adjusted basis. By capitalizing on the inherent inefficient DeFi options, concentrated liquidity, and reward mechanisms provided by premier protocols, we aim to offer superior returns.

It’s important to note, funds added as ‘ARB incentives’ ( we recently approved a 100k Grant) remain as ARB being utilized strictly for collateral within the strategy. Based on the strategic use of collateral, D2 is able to engage in absolute strategies on top. This ensures the strategy maintains exposure to ARB, reduces downside volatility, and offers risk-adjusted returns on top.

The ARB++ Vault maintains delta exposure ranging from 20% to 60% of ARB. This strategic positioning enables us to average lower downside volatility by efficiently utilizing optionality, thus providing a cushion against market downturns.

Strategy Details

Do investors have any shareholder, investor, creditor or similar rights?

N/A.

1. Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.
The D2 Finance DAO (D2 DAO, Marshall Islands) is entered into an agreement with Ayers Rock Technologies (ART, BVI) to provide Front End access to ART managed strategies.

2. Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.
N/A. Funds are entirely on-chain in a non-custodial manner.

How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?
Funds are entirely on-chain in a non-custodial manner, Arbitrum maintains full custody of funds. We proposed that the Arbitrum DAO will be the owner of the vault, so can revoke at his discretion the executor role.

Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?

1. Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.
Funds remain as digital assets 100% on-chain

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Vault Funding Period

  • user deposits underlying asset into vault
  • any applicable incentives deposited into vault by D2 Finance Multisig

Vault Trading Period

  • Trader Management system gets access to utilize funds dictated by smart contract & strategy mandates

All strategies adopt the same theoretical principles:

  • Market Drivers: Identifying key factors influencing market dynamics, ranging from simple momentum to advanced unsupervised learning models.
  • Signal Building: Crafting signals that accurately capture these market drivers.
  • Execution: Converting signals into actionable positions.
  • Risk Management: Safeguarding positions through comprehensive risk management, both on and off the blockchain.

Our approach to quantitative signal generation leverages in-house machine learning and modeling expertise. These signals are then qualitatively refined by human traders, extracting optionality and exposure at a discount by capitalizing on the inelastic behaviors of options end-users (e.g., convenience yield, barriers to entry). This results in a hybrid model that amalgamates quantitative and qualitative inputs.

Funds can be deployed in any number of the identified protocols noted here: https://dune.com/d2_finance/d2-finance-analytics as well as “helper vaults” including Pendle, Gearbox and particularly Lyra

Vault Withdraw Period

  • All funds are returned to the vault in the underlying asset
  • Users can withdraw their original funds +/- pnl
  • Alternatively, they can do nothing and allow their funds to rollover to the next epoch
  • User shares in vault are tracked by ERC-20 token which accrue value via pnl, thus changing the exchange rate. Initial exchange rate for all vaults is 1:1 underlying asset to vault token.

2. Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.
As D2 is non-custodial, tax implications of digital assets remain solely responsible for their tax obligations and should consult with a tax adviser.

3. Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.
As Arbitrum remains in custody of funds, they can undertake liquidation at any period the funds are not in the trading epoch. Epochs are monthly for ETH++ and Monthly to Bi-Monthly for ARB++.

There is a secondary market which allows “courtesy” redemptions during the trading epoch at or near the current intrinsic.

4. What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?
N/A

5. Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.
ETH++ maximum epoch is 30days, ARB++ maximum epoch is 60days. Settlement can be fully managed when outside of trading epoch.

Funds are fully liquid +/- pnl at end of epoch.

However, the fund can be liquidated within one day under normal and stressed conditions without incurring unusual costs, highlighting efficient risk mitigation even during volatile periods

6. If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.
We have implemented a range of controls to enhance the security of the D2.finance platform:

  • Full transparency of trading positions and actions on the blockchain;
  • Trading team actions are constrained by the strategy smart contract to only whitelisted interactions;
  • Dual sign offs within the team for all code deployment;
  • Hardware wallets and Multi-sigs
  • Modern DevOps practices to ensure the integrity of the frontend / dApp
  • We have commissioned bespoke monitoring software to interrogate the configuration of our cloud infrastructure – including DNS records and the Content Delivery Network – to immediately alert us in the event of any unauthorized changes. This proactive security monitoring would allow us to take down our website if it were compromised before users could be prompted to sign any fraudulent transactions in their wallets.
  • Smart Contract Audited by Paladin Sec D2

While no protocol can eliminate the risk of exploitation, D2.Finance has implemented stringent measures to minimize the risk and assure users of the safety of their capital deployment to the vaults.

7. Does the product rely on any derivative product (swaps,OTC agreements?
D2 Finance trading strategies utilize swaps, aggregated routing, options, money markets, margin trading, perps trading and other derivative products, through audited integrations, in order to capitalize on market inefficiencies. But 100% is on chain at this stage.

8. List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties
N/A. Major counterparty risk are AAVE, GMX, Camelot.

9. Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?

Fund Risk Management:
Our core approach is to manage risk by efficiently using options and hedges dynamically optimized according to market conditions. By adding market hedges to the portfolio, we can take advantage of opportunities created by downside volatility and market crises while still maintaining some upside potential

  • D2 employs Monte-Carlo based simulation based on greeks exposure.
  • Fund stress tests can be audited independently via Bloomberg stress test scenario at any major change of positioning.
  • Chief Risk Officer and Execution trader(s) monitor risk is maintained within strategy mandate

D2 Finance Fund Due Diligence Questionnaire can be provided upon request direct to Arbitrum, to maintain privacy.

Performance reporting

1. What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.

Benchmark ETH++ = 0.1 ETH performance + 0.9 aave USDC yield

Benchmark ARB++ = 0.4 ARB performance

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Note: past performance is not a guarantee of future results.

2. Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.
Our CRO is currently building a specific tailored report, TBC, and will be provided privately to Arbitrum https://rwa@dao.arbitrum.foundation/

  • Monthly 1-page fund performance report
  • Quarterly fund performance report with select case studies

3. Who provides the performance reports in respect of the underlying assets?
The performance report is Generated by the Chief Risk Officer with inputs from the CIO.

4. Describe any formal audit process and timing of such audits.

  • Weekly internal book risk review
  • Monthly fund report
  • Quarterly report with select case studies
  • Randomized challenges

Pricing

1. Provide a copy of your standard contract, or one similar to what is being proposed here.
Arbitrum Treasury can choose to simply deposit in the vault. Alternatively, Arbitrum and D2 Finance can enter a standard SMA agreement.

2. Fee summary: Inclusive of the full scope of services requested. Product Fee schedule If asset based Fee calculation for our plan if asset based Annual fee if flat fee Any other fees (including redemption or minting fees)
D2 Finance fees are based on a standard Hedge Fund 2/20 split. 2% management fee for AuM, 20% performance fees.

3. Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)
Fees collected at end of each trading epoch, client withdrawable funds are net D2 fees each epoch

Smart Contract/Architecture

1. How many audits have you had and name of auditors? Please provide a copy of reports.
D2 Finance has undergone 1 audit, through Paladin Blockchain Security.
https://paladinsec.co/projects/d2/

2. Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?
D2 Finance maintains a whitelist requirement for vault deposits

Geoblocking Front End access per US/OFAC Compliance agreement

Residents or citizens of Antigua and Barbuda, Algeria, Australia, Bangladesh, Bolivia, Belarus, Burundi, Myanmar (Burma), Cote D’Ivoire (Ivory Coast), Crimea and Sevastopol, Cuba, Democratic Republic of Congo, Ecuador, Iran, Iraq, Liberia, Libya, Mali, Morocco, Nepal, North Korea, Somalia, Sudan, Syria, Switzerland, United States, Venezuela, Yemen, Zimbabwe or any other country to which the United States, the United Kingdom or the European Union embargoes goods or imposes similar sanctions (collectively, “RestrictedTerritories”) are not permitted to interact with D2 Finance.

3. Is the product present on several chains? Are there any cross chain interactions?
Not at this time

4. Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem
N/A

5. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?
N/A

6. Is there any custom logic required for your RWA token? If so please give any details.
N/A

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