Establishing a DAO Oversight Committee to bring strategy, process & accountability to treasury management on Arbitrum

Governance
1

Establishing a DAO Oversight Committee to bring strategy, process & accountability to treasury management on Arbitrum

Summary

DAO Treasury Challenges

  • ARBITRUM DAO’s treasury currently lacks sufficient diversification for a DAO of its size, with its spending power overwhelmingly exposed to ARB price risk.
  • There has been a lot of debate amongst delegates about whether to diversify ARB to increase long-term runway in stables (and thus, sustainability) or to focus on reducing ARB circulation and pricing pressure.
  • There is currently no work openly being done to scope out and agree on the needs of the DAO more holistically on the treasury side.
  • The DAO could benefit from having such a framework for DAOs to make more informed decisions moving forward.
  • There is currently no process or method of accountability to submit proposals in a competitive manner leaving the DAO susceptible to providers overcharging on fees or winning mandates simply because they were first to propose.

Goals of Proposal

  • Establish a DAO Treasury Oversight Committee to formalize a treasury management process and reach consensus on goals and objectives
  • Scope of said committee should be holistic and asset agnostic covering all of the DAO’s treasury management, including for example ETH and not solely concern ARB diversification.
  • The DAO treasury Oversight Committee should also be responsible for overseeing operational aspects of allocating to underlying DAO treasury managers.
  • Empower this committee to set overall DAO treasury goals and objectives as well as a holistic and comprehensive portfolio management strategy for the DAO which suits these goals and objectives
  • Empower the Committee as part of its deliverables to create a framework on research and selection/removal criteria of managers
  • Obtain feedback on this approach going forward from all key delegates and stakeholders
  • Kick off the nomination and selection process of the DAO Treasury Oversight Committee

Rationale

Last week, Karpatkey initiated one of the largest proposals in DAO history to manage 250m ARB of the treasury. This proposal hit a lot of good notes with parts of the community and was delivered by a liked and reputable team. However, it’s important to listen to the key messages and feedback coming into this vote which ended up with 61% of delegates against.

Some of the key messages arising from this result can be summarised as follows.

  • Fees were deemed too high (flat 1%) and potentially not aligned properly with the DAO (eg. based on performance rather than management)
  • The size was too big, especially for a single treasury manager
  • There was a lot of pushback on the lack of an RFP process, particularly given the size, fees, and the stark contrast to the rigorous process followed in other programs such as STEP
  • There were a couple of comments around operational risk and importance of infrastructure diversification
  • There were concerns around the optimal amount to diversify for a treasury denominated mainly in ARB (headline dollar number is not a “real” number)
  • There was some discussion around the tradeoff between “yield” on stable coins vs “higher circulation” of tokens in the market which could further depress ARB price making the whole proposition less attractive in the first place
  • Questions around the point of selling ARB upfront vs letting contributors sell it when they need to
  • No plan to maintain the ARB price (important) and thus neglecting security of the protocol
  • Debate around the size of the Oversight Committee (e.g. that it should be increased from 3 to 5)

It is clear that no-one stands to benefit from the current lack of strategy and process when it comes to deciding the fate of one of the largest treasuries. It’s essential to first have a DAO-wide conversation about treasury management, its purpose, and the amount of ARB we should allocate towards it. This conversation should be facilitated by a DAO oversight committee working towards this particular deliverable.

Proposal

We propose the establishment of a DAO Treasury Oversight Committee to establish treasury management strategy & process, undertake operational tasks of deploying capital and taking care of monitoring and governance of underlying treasury managers.

To get there we propose two key steps:

Step 1: Feedback & discussion phase (two weeks)

  • Asking delegates to provide feedback on this RFP process to create a Treasury Oversight Committee
  • Avantgarde to review feedback and update the proposal accordingly into a final RFP which is published and voted on

Step 2: Nomination period for DAO Oversight Committee

The DAO Treasury Oversight Committee will be responsible for:

  • Proposing the overall strategy and objectives for the Arbitrum DAO. Note: It is of extreme importance to strike the right balance between diversification of assets vs more circulating ARB liquidity in the market. It is important for the Committee to make a strong case for how much ARB should be diversified (if at all), into what assets, and why. This proposal will be voted on in a DAO-wide vote.
  • Creating an RFP process to search for and appoint treasury managers.
  • Screening for and assessing candidates looking to run treasury management strategies.
  • Providing overall thoughts and expertise for DAO delegates to vote in a more informed and effective way.
  • Facilitating the allocation of treasury assets to underlying treasury managers through operation of treasury management infrastructure where relevant.
  • Defining selection criteria to the assessment process which considers technical approach, provider diversification, operational set up, fees & rewards, legal set up, recourse rights, etc
  • Monitoring of treasury managers and ensuring adherence to agreed mandates, including deliverables of relevant performance reporting.
  • Where necessary, initiate the governance process for replacement and/or reallocation from treasury managers who are deemed to be underperforming in relation to their agreed mandate or where there is evidence the managers are not behaving in the DAOs best interests.
  • Holding quarterly community calls updating on the progress and performance of managers and giving room for community feedback.
  • Management the process from start to finish as well as the ongoing monitoring and removal process of appointed managers

Part 3: Implementation (To be governed by the Treasury Oversight Committee)

The Treasury Oversight Committee will be responsible for overseeing the overall strategy implementation which was put forward in Part 2 and voted on by the DAO. This will include;

  • Taking the RFP process live in such a way that seeks a competitive and diversified approach on both manager and infrastructure level
  • Ensuring that infrastructure being used is transparent and non-custodial where possible
  • Being clear about what kind of strategies it is seeking managers for (eg. yield on ARB, diversification of ARB into stables > stable coin yield, etc).
  • Managing price impact of ARB if and when necessary (or ensuring that any 3rd party vendors do)
  • Overseeing the allocation of funds to chosen managers
  • Monitoring and governance around managers (checking reporting, due diligence, regular calls, etc).

Running an open and competitive RFP process achieves the best outcomes for all stakeholders involved. It also promotes diversification at a manager and infrastructure level which is in line with the decentralised values of the DAO.

Treasury Oversight Committee Nomination Template

To kick off the process after the initial two week review, we would recommend that qualified community members/ organisations who are interested in applying for the Treasury oversight committee put forward their nominations before September 15th, 2024.

These could include:

  • Name and/or organisation (if relevant)
  • What relevant experience do you have for this role?
  • What familiarity do you have with the ARBITRUM DAO?
  • Examples of previous work (where possible)
  • Time commitment: Can you commit a minimum of 10 hours per week to serve as part of this committee?
  • Can you share any references?
  • Do you have any examples of relevant past work that you can share?
  • Declaration of conflicts of interest (if any)

We welcome feedback and suggestions on this.

Voting Eligibility & Conflicts of Interest

  • Entities who applied to be a member of the DAO Treasury Oversight Committee or voted in in the election of members to the DAO Treasury Oversight Committee should be ineligible to apply as a treasury manager during the RFP process.
  • When the DAO Treasury Oversight Committee initiates a vote of no confidence in a treasury manager, entities related to any treasury manager who currently has an allocation are not eligible to vote.

Timeline

  • Two week review and feedback process for this proposal before going to live vote

  • Election of a three member DAO Treasury Oversight Committee via a two week application period and five day Snapshot vote.

    • Each voter will select a maximum of three committee applicants to vote for. The three applicants with the most votes will be selected.

  • The Treasury Oversight Committee should put forward the roadmap for the strategy & process as well as the initial amount of ARB should be diversified from the treasury, with clear rationale that should be shared with the community. This is to be provided in a follow up document by November 2024 and kick off the RFP process for Treasury Managers. The DAO Treasury Oversight Committee will initiate the RFP for this, after which there will be a vote.

  • The RFP vote for treasury managers should take place by Snapshot vote, of which the top three will be selected. Each voter will select a maximum of three manager applications to vote for. The three applicants with the most votes will be selected.

  • The DAO Treasury Oversight Committee will be responsible for supporting the deployment of funds to the managers as indicated by the vote and then monitoring/removing managers where necessary.

Budget

Open to feedback and suggestions. Could either do a monthly rate of, say, 5.000 ARB per committee member per month or a fixed payment in line with the LTIPP Council and STEP Committee (i.e., 25.000 ARB per member)

Next Steps

  • Two week review process of this RFP proposal

  • Avantgarde to publish final RFP process for Treasury Oversight Committee with delegate feedback included

  • Establish the committee and give them until November 1st to post initial findings on how much ARB should be diversified, into what, and why. This will be presented and then go to vote.

  • If vote is successful, the Treasury Oversight Committee will continue it’s work and move to Part III (implementation)

4 Likes
2

Excellent offer, just what was needed after the offer of Karpatkey.

I think it would be better to specify not an exact date, but a period during which the committee must put its strategy up for vote.
Also, it would probably be worth thinking in advance about what to do with the committee if their proposal is not approved (one or more times).

I understand the small initial amount, which is about $2400 ($600 per week/$60 per hour), but what will their salary be after the initial 3 months? This is important to decide before the vote, as the best will not compete for a small amount.

1 Like
3

I quite like this concept and as discussed with a number of ecosystem stakeholders a longer term and sustainable Treasury Management Program (“TMP”) is certainly needed.

I would suggest the following be considered for inclusion or revision in the proposal:

  • Expand the committee from 3 to 5, with 2 of the members being nominated as part of the proposal with the intent of ensuring that there are individuals with applicable skills and experience overseeing investment programs and/or managers represented on the committee. The three remaining slots would go to election (similar to how the GCP administered their council election).

  • Revise the proposal to be agnostic as to the types of assets to be earmarked to fund the initial TMP so the committee can determine if ARB, ETH, or a combination of both should be used to fund the program.

  • Remove the treasury manager RFP process from the initial proposal and allow the committee to determine how best to administer the search, selection, and approval of managers.

  • The committee should propose the TMP framework for DAO confirmation by the end of November 2024 that includes (i) proposed size of the program, (ii) guidelines for manager selection, (iii) a description of the investment program including objectives, strategy, and any proposed guidelines or restrictions, (iv) fees and expenses, and (iv) the proposed roles and responsibilities of the committee on a go-forward basis and associated market-rate compensation.

Ultimately the committee should be empowered to create the framework and administer the program without being encumbered by the initial formation proposal.

2 Likes
4

Let me start with saying: it is INSANE that there is no treasury management right now. We have $42.66M USD in ETH. Arbitrum DAO is possibly the only organization in the entire world with $42M in cash on hand and no plan to manage it, no budget on spending it, etc… It’s embarrassing honestly.

Rational and need for this proposal is clear. I strongly support the creation of an RFP process with oversight committee with a big caveat: any organization which participates in creating the RFP or is on the oversight committee, or advises the process in any way must voluntarily abstain from submitting a proposal. Otherwise there are going to be too many conflicts of interest. If avantgard, or any other org, wants to help run a RFP they should publicly promise not to submit a proposal themselves, and to keep the process neutral. If they do that, then I am strongly in favor of moving forward as proposed.

I would also suggest that a proposed oversight committee must be made up of people independent from all other multi-sigs and committees on Arbitrum DAO, otherwise the incentives will be messed up here. It’s important to get this one right.

3 members is fine, they need to move quickly and decisively. This is not the group that is managing the treasury, its just the group doing oversight. :+1:

Budget seems reasonable and scrappy. I dont think we need to do more or longer term salary, we should choose people for this who have enough skin in the game that they will want to do a good job regardless of if they get 5000 ARB or a million. The actual treasury manager will give us a budget later in their proposals responding to the RFP.

Great proposal, and thanks for the initiative @Avantgarde !!

1 Like
5

We believe treasury management is a crucial topic for the DAO, and we appreciate Avantgarde’s insights and efforts on developing a sustainable treasury management strategy. Given the expertise within the DAO from various parties, we believe having a group of knowledgeable individuals and service providers advance this topic is the way to go.

It is important to consider the sentiment expressed throughout this discussion thread regarding the diversification of treasury managers. While we are not yet certain about the optimal level of diversification in practice, the DAO stands to benefit from welcoming a variety of opinions, systems, and strategies on this significant topic.

Overall, we think this is a good step toward establishing a comprehensive and structured treasury management strategy for the DAO that will hopefully enable all parties involved in the process, and we are excited to see the progress in this area.

3 Likes
6

I commend the efforts to establish a Treasury Oversight Committee and the initiative taken by Avantgarde in outlining the current proposal. As this process moves forward, I suggest that it would be beneficial for the DAO to consider referencing established framework documentation and best practices utilized by institutional investors, such as pension funds, foundations and endowments, when selecting and overseeing investment managers. This would allow the Treasury Oversight Committee to organize itself and avoid recreating the entire selection and oversight process from zero.

The CFA Institute, a globally recognized body in investment management, offers several comprehensive guidelines that can serve as useful references to increase the transparency and efficiency of this process. While I fully recognize that the decentralized and open nature of a DAO presents unique challenges that differ fundamentally from traditional organizations, these frameworks can still offer valuable guidance. They can help set baseline expectations for all DAO members, especially those less familiar with such structured approaches of institutional manager selection and oversight.

Incorporating CFA-endorsed practices can specifically aid in transparent frameworks for the following:

  1. Standardized RFP Process: By standardizing the questions and requirements for all potential treasury managers, we ensure a level playing field. This transparency prevents any single manager from having an unfair advantage by removing bias. This allows the DAO to compare proposals more effectively, leading to more informed decisions.
  2. Detailed Organizational and Personnel Information: Guidelines for comprehensive details about a managers history, governance structure, and key personnel’s experience ensures that the DAO is fully aware of who will be managing its assets. This depth of understanding is critical for assessing the potential risks and alignment with the DAO’s values.
  3. Clear Investment Philosophy and Risk Management: Understanding a manager’s investment strategy and risk management processes allows the DAO to assess whether their approach aligns with our long-term objectives. It also provides a basis for holding managers accountable, which is essential in maintaining trust within the community.
  4. Rigorous Performance Reporting: Implementing performance reporting standards, such as those outlined by the Global Investment Performance Standards (GIPS), introduces a layer of accountability, transparency and standardization that is often missing in DAO treasury management. This helps ensure that all stakeholders can track and evaluate the performance of treasury managers against agreed-upon benchmarks.

While these guidelines cannot be followed step-by-step due to the decentralized nature of the DAO and the role of blockchain technology in the governance structure, they can still serve as valuable touchstones. These aspects have been studied in depth by a large field of professionals with expertise in managing the largest treasuries in the world.

By following these guidelines, we can create a process that not only protects the DAO’s assets but also upholds the principles of decentralization and community governance. Adopting these established best practices would undoubtedly strengthen the decision-making process and help achieve the best outcomes for all community members.

Thank you for considering this suggestion. I look forward to contributing further to the success of this initiative.

Example reference guidelines and case studies:
https://www.cfainstitute.org/-/media/documents/support/advocacy/gr-bp-governance.ashx

7

I would like some more information into what questions the oversight committee is being paid to investigate, what their end output will be and the timeframe for delivering it. In my view, committees are only useful when they have an end date baked into them and a clear output to produce, else it can devolve into the worst forms of bureaucratic gatekeeping in the effort of self-preservation (giving work for the sake of continuing to exist).

Something that emerged clearly from the Karpatkey & Aera proposal is the need for 3 pareto improvements to the DAO;

  1. Having some reserve in stables so that contributors aren’t required to ask for pay in ARB and can request dollar value instead if they choose to
  2. Earning some yield on the short term dollar reserves held
  3. Improving ARB onchain liquidity

We saw in the karpatkey proposal that most delegates (with the exception of L2Beat) did not question the need for treasury related work so much as the process by which to get it done. So if the end output of the committee is an RFP, it should contain at least the following;

  1. A tight range of acceptable fee structures from applicants. For STEP it was between 20-50 bps, which we got by talking to existing players in the market.
  2. Selection process for applicants. I am in favor of this committee also being empowered to review applications under the RFP and preparing recommendations on who we should have as treasury managers, i also agree with @CJ.Bzdewka on having 2 nominated members but wonder who is responsible for selecting which 2 experts.
  3. Method for unwinding investments and reviewing or removing selected applicants based on clear KPIs
  4. Scoping out the total amount under the RFP that will be diversified (i am in favor of keeping one years runway in stables, we can get the exact number from the research produced by @Pepperoni_Jo3 )
  5. Details such as number of applicants to be chosen, amount given to each, etc can be left out and decided by the committee based on quality of submissions received, as we did in the STEP program. At the very least, having no single vendor lock-in is a must.

Overall I am in support of creating a committee with a tightly bound range of responsibilities. Kudos to Avant Garde for kickstarting this conversation :clap:

3 Likes
8

Quick question - I do not see anything about the DAO’s ETH in this proposal. Is this proposal solely focused on ARB?

2 Likes
9

@Avantgarde, do you plan on submitting a response to a potential RFP or are you solely seeking to facilitate the process?

10

Hey @cp0x thanks for engaging with the proposal and sharing your thoughts!

The period you allude to would be from the date if and when the proposal passes (that is, 2 weeks of review/feedback + 2 week application period + 5 days of snapshot voting from the day of posting, August 24th = September 26th) up until the proposed date of November 1st. We could definitely clarify the dates of this period in the proposal and as you say it makes sense to do so. If the community thinks we should change the dates around this period we’d obviously also be open to do that; November 1st is merely a suggestion at this point.

Happy to establish this up-front. We think the rate is reasonable and should persist into part 2 and part 3. Potentially there could be some incentives that are milestone based which emerge from the “performance” generated which are capped in USDC terms.

2 Likes
11

Hey @CJ.Bzdewka appreciate the thoughtful comments. We’re looking to start a conversation and crowdsource input from the community rather than dictate the exact outline of this process so the feedback is much appreciated. Addressing your points in order below:

We’re open to the idea of adding an additional 2 members if that’s what the community wants, though at the same time we believe 3 is probably enough and keeps it streamlined initially (remember, this committee will “merely” oversee the treasury management and managers themselves, not manage it).

The point of including 2 of the nominations as part of the proposal is an interesting one, though given that the same community would have to vote these members in either way, the benefits of this are not super clear - for example, how would you suggest said pre-proposal nomination process is managed?

The intention was for this proposal to be agnostic to the underlying asset covering Arbitrum’s treasury more broadly, which would include any assets that the chain holds, including ARB and ETH. We will revise the wording to make this more clear in the proposal.

The RFP process that we outlined in our proposal is solely for the Treasury Oversight Committee. We expect them to lay the treasury goals and vision along with an RFP process for treasury managers as part of their deliverables.

We are happy to incorporate this feedback. Others have asked for a “spending caps” to be determined somehow. We think this is sensible too and perhaps the Oversight Committee could research how that could be made possible.

Again, thanks for your feedback!

1 Like
13

Hey @cupojoseph thank you for your comment and encouraging words.

On this point we very much agree. We do not plan to apply to be on the Treasury Oversight Committee, which is the only RFP we have proposed an outline for. If a) this proposal moves forward in any way and b) depending on the views presented by the Treasury Oversight Committee, we may be interested in applying to be a treasury manager but we plan to have no say in defining the needs of the DAO (or the RFP) because we recognise we would be a potential conflict of interest.

2 Likes
14

Thank you @sid_areta - as you rightly say there’s a lot of competence across the DAO and the aim of this prop is to provide a structured way to leverage that towards sustainable, transparent, and competitive treasury management. This proposal can also stand to better coordinate that talent and overall oversight efforts in treasury management (eg. STEP).

1 Like
15

Thanks for raising this point @swmartin - we see the scope as a holistic one encompassing all of DAO’s treasury management more broadly, including ETH.

Will make sure to clarify this in the RFP text.

1 Like
16

Hey @thedevanshmehta very much appreciate the thoughtful feedback from you here. We agree that the Oversight Committee should look at treasury holistically (this may indeed include on chain ARB liquidity, USD yield etc).

In terms of setting conditions for the RFP of treasury managers themselves, we firmly believe these should be proposed by the Treasury Oversight Committee and then voted on.

Regarding pre-selecting two members, we don’t see a way of pre-nominating 2 members without bias but we are open to suggestions.

Again, appreciate your contributions here and happy to see there’s support for establishing such a committee.

1 Like
17

We are looking to get the conversation started and incorporate outside feedback but in an ideal world we would love for someone else to lead it. However, until now we have failed to see a hollistic discussion on this topic.

1 Like
18

Thanks @crypto_carlos for the elaborate comment!

As you say, a potential DAO Treasury Oversight Committee would do well to draw on established frameworks, but we do think that’s a job for the committee itself - we’re merely here hoping to kickstart a more holistic conversation about adding structure to Arbitrum’s treasury management. But we do support applying institutional best practice where applicable, in particular manager diversification (which is best practice for institutional allocators) and infrastructure diversification (which is more applicable in DeFi given the additional layer of idiosyncratic risk introduced by smart contracts), to name a couple of examples.

3 Likes
19

I’m glad to see a framework taking shape. However, $2k USD per month to define the treasury management feels rather low, no?

4 Likes
20

It seems that Treasury Diversification is currently a mix of different issues being addressed independently. While I’m not a Treasury Manager, here’s my perspective on the situation:

Problem 1: Misalignment in Funding Requests
DAO programs budget their expenditures in USD terms but request funding in ARB. This misalignment has led to programs either requesting a “budget surplus” or engaging individually in diversification efforts to avoid running out of capital, as observed in the ARDC.

Solution 1: Maintain stablecoins in the Treasury from which programs can draw funds (1). Or alternatively, establish a centralized DAO Treasury Management ™ function to manage ARB-to-stablecoin conversions on behalf of the programs. It seems @ImmutableLawyer is working on a solution in this area?

Problem 2: Unproductive ETH Holdings
The DAO is holding millions of dollars worth of ETH that is not being utilized productively, resulting in significant opportunity costs.

Solution 2: Form a group to oversee the productive use of ETH for yield or growth.
I support the Avantgarde Proposal to establish a TM oversight committee to spearhead this discussion. To avoid conflicts of interest, a neutral party like @Entropy should lead the setup, rather than a service provider. There seems to be broad support for this approach, and they have interesting ideas on this topic.

Problem 3: Lack of productive USDC
The DAO currently lacks USDC allocations that generate yield outside of the 30m to STEP. Some view the ultimate goal of stable yield as funding ongoing DAO operations, while others see deploying USDC as a means to drive growth. There’s no consensus on this.

Solution 3: An impartial party, not a service provider benefiting from DAO’s capital allocation, should lead discussions on diversifying from ARB to stables for productive use and manage an RFP process for service providers.

I recommend expanding the TM Oversight Committee’s mandate to include not only the productive use of ETH but also a comprehensive strategy for diversification. This would allow the committee to provide holistic leadership on the matter. The committee’s work should culminate in a proposal to the DAO, detailing the diversification of a specified amount of ARB into stablecoins and ETH and determining how these funds should be allocated between service providers. This approach allows the TM Committee, rather than the DAO, to make decisions on stablecoin allocations and mandates based on the RFP outcomes. I believe this will lead to more sophisticated and impactful decisions compared to a process where the allocation/selection is determined entirely by the DAO. I’m all about trusting the experts.

Problem 4: Undefined Annual Spending Benchmark
The DAO lacks a clear benchmark for annual spending, making it difficult to assess specific program requests within the context of overall DAO expenditure and budget.

Solution 4: Consider framing spending as an inflation rate relative to the current circulating supply, similar to Paper Imperium’s perspective. This would involve the Arbitrum DAO deciding on the number of tokens to introduce into the circulating supply each year.
Programs requesting funding should report the percentage of the overall budget they are requesting and the remaining allocation for the year if the spending is approved.
Addressing this requires coordinated efforts from Entropy, Delphi, Areta, r3gen, the TM Committee, and other key stakeholders. It is crucial to appoint a clear leader to drive this topic forward. With nothing confirmed around the ARDC V2, it’s vital to allocate a budget to continue this important work. @AlexLumley, given your interest in improving service provider scoping and coordination, perhaps this should be a higher priority?

In my view, the end objective from thai coordinated group would be to conduct a snapshot vote for the DAO to determine an ARB budget (e.g., 2%, 4%, or 6% inflation) for 2025. This will enable the DAO to better evaluate the trade-offs in funding different initiatives.

4 Likes
21

If they are willing, I would recommend @Entropy as one nominated member given their ratification in tally as having a formal role in the DAO, & @CJ.Bzdewka & @Pepperoni_Jo3 as the other team given their complementary experience in treasury management & DAO expenses/budgeting.

Completely agree, imo it should be fixed at 25k ARB per member to be commensurate with LTIPP council members pay and STEP committee pay. Good to be consistent on some of these things

Rather than inflating all at once, I would rather we define a fixed number of stable reserves to have on hand in the treasury at all times and the TM only keep topping up with stables as & when DAO contributors draw from the reserves.

Ideally better to avoid concentrated liquidations in a short time but instead spread it out based on expenses incurred by proposals that get passed and draw from the reserves.

2 Likes