Final: Arbitrum Stable Treasury Endowment Program

[pedrob]

Hello!

First of all, thank you very much for all the work developed over these months in devising a system to encourage the DAO to diversify its treasury into RWA.

I would like to propose something different. In the fast-paced environment we’re operating in, it’s crucial to occasionally ‘take a step back and reassess’ our strategies and outcomes.

I believe that with numerous programs underway that anticipate significant expenditures, and in line with the discussion started by @tnorm, it’s time for the DAO to reach a wide consensus on ‘what the DAO wants to do’ with its funds. In my opinion, there’s a need for a debate to align our short-, mid-, and long-term objectives, and based on that, to develop suitable investment frameworks.

In the past there were a couple of temp-check polls (1, 2) but sadly they didn’t receive much engagement.

Experienced actors in the ecosystem have expressed the same sentiment:

@karpatkey

While we will dive deeper into this topic in our study for the WG, we recognise that each DAO has specific needs and wants, which will guide its treasury’s active management, and it is important to spend time discussing this topic.

@GFXlabs

We know this is far off in the future, but we encourage there to be a discussion of whether there even should be a larger investment policy. While it’s not impossible to do it well, the tendency at other DAOs (even those that specialized in asset allocation) has been to operate as an unregulated investment fund with poor risk-adjusted rewards. It’s tempting to say “Arbitrum can be an L2 protocol while also wisely investing a large treasury” but there really are not many success cases to point to in DAOs allocating assets – and the few that exist are mostly DAOs focused on asset management and restrict themselves to on-chain investments.

Before the practical implementation of the proposal, we should reach a consensus on the DAO objectives in the short-, mid-, and long-term, and based on that, prepare the appropriate investment frameworks.

@karpatkey reiterated this in response to your question in their report’s forum post:

@karpatkey

while the DAO is still in a growth phase and sustainability isn’t the immediate priority, we need effective frameworks. These should help identify needs, set priorities, establish goals and KPIs, allocate resources efficiently, measure results, and provide feedback.

Something very positive, as a first step in this direction, was the investment in the reports. (By the way, as a side note, a 10k ARB investment for two months of in-depth research work, yielding these great results, should now set the bar for comparison against future excessive requests for funding or retro-funding).

Karpatkey Arbitrum Treasury and Sustainability Research:

While Karpatkey ultimately recommends diversification into stablecoins or stable RWAs (yield-bearing), this results in a strategy triggered by the projection of DAO’s expenses based on current spending.

Before moving forward with an RWA strategy, it would be good to clearly define the DAO’s spending strategy concerning short-, medium-, and long-term goals to make the appropriate projections and based on that, decide.

So far, the DAO’s spending proposals have been asking for funds without considering the impact, cost-benefit, or potential sustainability. These issues need to be addressed before diversifying the treasury. Hiring a treasury manager, who can project expenses and make recommendations, could be an alternative.

Avantgarde Demystifying DAO Treasury Risk Reduction

While not specifically analyzing the Arbitrum DAO finances, their report concludes that traditional asset classes can be useful tools for reducing treasury volatility and improving risk/reward potential.

Aera Arbitrum Treasury Management Report

@Aera

For a DAO to be sustainable, it must have a strategic approach to planning for future projects in the long term, while ensuring that there are enough readily-available funds in the short term to support ongoing initiatives. Effective long-term planning involves forecasting future expenses and revenues, and assessing the risks of unforeseen costs or market moves

I agree that diversification is equally advisable for reducing portfolio volatility and ensuring a more stable treasury value. However, it’s crucial to ensure that this spending is not just for the sake of spending, but rather thoughtfully planned to translate into tangible growth for Arbitrum.

Interestingly, Karpatkey did their own interpretation of The Arbitrum Constitution + the sentiment they got from the forum, and concluded that

“While not explicitly stated, discussions and proposals on the forum suggest that a primary objective of the Arbitrum DAO is to ensure the sustainability, viability, growth, and development of the Arbitrum ecosystem through responsible management and strategic resource allocation, guided by these principles:

1. Ethereum-aligned (from a cultural, technological and economic perspective);
2. Sustainable (with a medium/long term in sight);
3. Secure (safety of the Arbitrum ecosystem first);
4. Socially inclusive;
5. Technically inclusive;
6. User-focused; and
7. Neutral and Open.
   ”

Before moving to an execution phase, we should discuss and agree on the key guidelines for treasury management. What Karpatkey has developed is a great starting point.

@thedevanshmehta

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.

I agree with this and that’s exactly what we need. Define a strategy/program for the vertical before the execution.

Thanks again for the great work

*This opinion is my own and does not reflect the one of SEEDLatam