Final: Arbitrum Stable Treasury Endowment Program

Proposals Finalized AIPs
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We now have the next version of our proposal ready for review! We will leave this up for another week and aim to move for snapshot on the coming Monday (29th January '24), subject to any major feedback received.

TL;DR : This framework aims to support the budding RWA ecosystem on Arbitrum by diversifying 10, 22.5 or 35 million ARB from our treasury into stable & liquid US t-bills or money market instruments earning a rate of return roughly equivalent to US Treasuries (hereby called ‘stable RWAs’)

This proposal is a trial run for a larger investment policy of the ArbitrumDAO treasury, both in

  1. Creating a legal and infrastructural pipeline that future diversification proposals can take guidance from and

  2. Proof of concept that we can diversify our treasury in a way that supports ecosystem growth

This is NOT a grant; it is an investment that Arbitrum governance can exercise control over and recall, subject to agreed-upon conditions with a successful applicant.

Overview

The Arbitrum treasury and sustainability working group was formed in September ‘23 with a mandate to discover best practices & propose best in class solutions for mitigating price impact of ARB liquidations & diversifying Arbitrums treasury, currently containing ~3.5 billion ARB

The Stable Treasury Endowment Program (STEP) is the first proposal floated by our WG before the DAO. We are targeting stable RWAs backed by t-bills or money market instruments as the 1st step towards larger treasury diversification for several reasons;

  1. Once we figure out how to hold stable RWAs on our books, we can easily diversify based on best practices rather than procedural considerations.

The stable coins we use today in De-Fi are mostly backed by t-bill RWAs; creating our own exposure can increase capital efficiency and mitigate some risk of stable coin collapse or depeg.

  1. At the Arbitrum Days workshop at Istanbul, @AlexLumley found the DAO needs a strategy/program for different verticals - RWAs, gaming, NFTs, De-Fi, DeSo, DeSci, etc. Another way of looking at STEP 1 is that it’s a proposal boosting the stable RWA vertical on Arbitrum, with the added advantage that it’s in the form of an investment rather than a grant.

More generally, stable RWAs have an attractive risk-reward ratio for Arbitrum in terms of sectors we should be nurturing. The total US treasury market is over $20 trillion, some of which is expected to come onchain to satisfy demand from wealthy investors. As the home of De-Fi, it is important that we not cede space to Base or Mantle that have their own RWA support program.

  1. Even though protocols on Arbitrum and governance might wish to hold stable RWAs, they are limited by having to conduct due diligence on providers they can trust.

This proposal creates a qualified screening committee that evaluates applicants and prepares a Assessment Report on them, thus providing a roster of vetted service providers that anyone can use for investing their treasury assets into RWAs

In conclusion, we expect that lessons learned from implementation of this proposal can pave the way for a new form of an ecosystem support program, where the ArbitrumDAO supports projects not with grants but purchases of financial products built on our chain that also diversify our treasury holdings.

Timeline and Procedure

  1. Snapshot temperature check and [if successful] an on-chain vote via Tally to fully implement this framework in February 2024;

  2. Screening committee publishes RFP Framework with specific information requested from applicants and minimum criteria they must satisfy to be considered;

  3. Receive applications from service providers (30-day submission window);

  4. Screening committee reviews each application, and where needed, will conduct additional due diligence and research on a proposed solution;

  5. Assessment report on eligible service providers released by screening committee (March-April);

  6. ARB token holders divide their voting power among approved service providers to allocate sanctioned amount using the Snapshot Weighted Voting strategy. Providers receive an allocation proportionate to their support from ARB holders, provided they clear a threshold of 10% of all eligible votes.

Additional Considerations

  1. The Arbitrum foundation will act as the legal entity and face the service provider during the KYC process. They shall also hold any tokens/NFTs received in exchange of investments and have authority to withdraw assets from the service provider should any risks be discovered; however an explanation for the same shall be posted on the forum within 3 days of taking such an action. They will also periodically sweep interest earned from these assets to our treasury. Fire Drills will be periodically conducted to test solvency and clear out any AML delays in returning investments

  2. Interest earned from RWAs will be swept to our treasury for increasing our bridged USDC holdings (currently at 10 cents). For reference, $20 million in t-bills currently returns roughly $1 million in annual interest. Delay of more than 60 days in returning interest earned will result in liquidation of an investment from a service provider.

  3. Proposals to utilize interest earned will follow the same process as requesting funds from the treasury (snapshot + tally)

  4. The screening committee will comprise of 6 members: @karpatkey , @GFXlabs , Steakhouse Financial, Netherminds and @northlakeslegal , with our Treasury WG acting as facilitator and a tie-breaking vote

  • 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.

  • GFX Labs is the leading provider of professional governance services in DeFi. We are most known for our extensive past and present contributions at Uniswap, MakerDAO, Compound, and Optimism. GFX focuses on operational improvements and improving organizational quality and structure, with strong relevant experience in real-world asset onboarding and stablecoins.

  • Steakhouse Financial is the leading CFO-as-a-service consulting company for DAOs. We specialize in stablecoins and RWAs. Our team has been merging TradFi and DeFi for years – our team met as contributors to the Strategic Finance Core Unit at MakerDAO.
    We’ve contributed extensively to asset-liability management research and structuring MakerDAOs RWA portfolio, including its exposure to treasuries. We specialize in deep due-diligence reports of tokenized issuers and publish the leading research report and Dune dashboards covering the space https://dune.com/steakhouse/tokenized-securities

  • Netherminds is a blockchain research and software engineering company empowering enterprises and developers worldwide to work with and build upon decentralized systems. Our work touches every part of the Web3 ecosystem, from fundamental cryptography research to security, node infrastructure, DeFi, and application-layer protocol development. We have a team of over 220, with more than 180 engineers on board. Nethermind is a key contributor to the development of Ethereum, with our execution client representing over a quarter of all synced nodes. Additionally, we actively build the Starknet ecosystem and support our institutional and enterprise partners in advanced blockchain, digital assets, and decentralized finance (DeFi) fields.

  • @northlakeslegal is a law firm at the leading edge of bridging decentralized finance, DAOs and Real World Assets. North Lakes Legal implemented the standards for the initial high-profile real- world asset (“RWA”) financings in the DeFi space. Christian Petersen is the principal of North Lakes Legal and has 26 years of cross border project and structured finance experience. In support of Maker DAO, North Lakes Legal has structured, negotiated, and implemented the following:

  • Société General – DAI 40 million, tokenized French covered bonds
  • Huntingdon Valley Bank – DAI 100 million vault to acquire RWA loan participations
  • BlockTower Credit – DAI 150 million vault utilizing Tinlake for various RWAs
  • Monetalis Clydesdale – DAI 500 million to acquire U.S. treasury ETF
  • Most recently, North Lakes Legal advised Ondo Finance in the development, structuring and launch of Ondo USDY.

  1. The Assessment Report prepared by the screening committee on eligible service providers will be used to inform delegates and ARB holders in casting their weighted snapshot vote dividing sanctioned ARB among providers. Some of the details in the Assessment Report are the schedule for returning interest, relationship with Arbitrum (debtor or custodian), maturation period of asset, legal structure (bankruptcy remote assessment), solvency, alignment with Arbitrum, turnaround time for returning investment, transparency level (proof of reserves/read only access to accounts), and fees charged.

  2. 200,000 ARB is kept aside for implementation of this proposal

Anticipated expenditures include

  • 6 month third party audit on selected providers
  • Honorarium of 500 ARB per application for each of the 6 screening committee members (NB: this * may * be supplemented with a small application fee to prevent spam proposals; application fee will not exceed $1000 notional value, paid in ARB, and evenly divided amongst committee reviewers)
  • Engaging external experts and due diligence specialists where relevant.
  • Full account of fund utilization will be posted on the forum. Unused funds will be returned to governance after the provider selection vote.
  1. Eligibility: Full RFP will be created by screening committee post Snapshot approval. Some preliminary considerations;

  • While delegates may prefer voting for more Arbitrum-aligned service providers, tokenized tbills launched or bridged to Arbitrum are NOT a hard requirement to apply.

  • All providers need to have been attested for verifiability of assets by a 3rd party

  • A strong reputation with relevant team experience, evidence of managing assets, and regulatory compliance

  • Fully liquid, secured, and safe investments that can be called back by the DAO with 3 working days notice

  • Between 0.15-0.4% (15-40 bps) of total amount in fees with no bonuses, as service provider performance will be evaluated for renewal of contract.

  • Liquid t-bills or money market instruments closely approximating the so called “risk-free rate of return”

  1. As the immediate next step, we ask the DAO to vote in an amount for converting to stable, liquid and safe RWA’s earning yield equivalent to US treasury bonds.
  • 10 million ARB
  • 22.5 million ARB
  • 35 million ARB
  • Do not support the proposal
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