Final: Arbitrum Stable Treasury Endowment Program

[thedevanshmehta]

Thanks for your detailed comments!

@AbdullahUmar

We believe that one predominant way by which DAOs mature and become sustainable organizations is by establishing a strong runway in the form of a diversified portfolio of assets. Selling off $ARB tokens for ensuring Arbitrum’s future success is an important financing lever. So far, most initiatives that we’ve seen in the past year have revolved around grants.

This is such a great point, until now grant programs have been the only game in town for Arbitrum (and other L2s) to support their ecosystem and we really need to move beyond this meta.

My research over 3 months has led me to believe that ecosystem support should be the guiding star for our treasury’s diversification strategy & investment policy. The unfortunate truth is that grants attract grifters while customers are attracted to great products. So Arbitrum should diversify (and support) by being a customer of good products built on our chain.

@AbdullahUmar

This particular proposal acts simply as a pilot program, so the diversification won’t happen immediately–it calls for using an insignificant amount of capital relative to the entire DAO treasury.

If nothing else, there is some wisdom in dollar cost averaging ARB. So we think STEP isn’t a small or big amount of capital, but just right for the time we are in.

We also have wildly divergent views in the DAO for how much should be diversified in the first place. For eg @Frisson is concerned with too much diversification leading to us becoming unaligned with ARB.

@Frisson

I have mixed feelings about the DAO doing treasury diversification, because I believe it is essential for the DAO to remain aligned with the ARB token.

@karpatkey on the other hand produced some great analysis on how diversifying upto 40% of our treasury with approximately 1.2-2.5% yield can help us meet all our expenses.

@karpatkey

• With the DAO’s commitment of 103,481,000 ARB towards various initiatives, the total amount of Investable Assets — those that could theoretically be diversified for yield generation — is estimated to be in the range of 3.4 to 3.5 billion ARB ($6.2 to $6.4 billion).
• To meet the financial demands of its approved ARB distribution initiatives, the DAO’s required rate of return on its investments would vary between 1.19% and 2.54%.

@Aera suggested keeping 85% in ARB and diversifying the rest into Eth, stables and RWAs.

@Aera

For instance, a proposal could be made to allocate 85% of the treasury to ARB, 5% to RWAs, 5% to ETH staking, and 5% to yield-generating stablecoins

So there’s quite a range of expressed opinions that’s hard to bridge and build consensus around!

@AbdullahUmar

For transparency, we’d like to have the DAO have a say in which providers are most desired, then give discretion of particulars to the WG. A middle ground here, for example, is if an entity like Karpatkey were to recommend certain allocations, stating the pros/cons to each, then let the DAO make a more informed decision.

If i am understanding correctly, you’re advocating for the DAO to appoint a manager to make allocations to providers. Such a manager would obviously need to be in step with our primary goal of ecosystem support guiding diversification, but i still have mixed feelings about this approach.

One thing I’ve observed as an outsider diving deep into treasury work is how interconnected & well-knit the industry is. So giving power to any one centralized group to provide huge business opportunities to the industry is a formula for corruption. It doesn’t even have to be obvious bribes or anything - people we appoint might switch jobs later in their careers to the people they give allocations to and there is already a pre-existing system of favors, relations, networks, biases, etc

Since stable RWAs are as close as we can get to a perfect competition market, we tried having the best of both worlds in ensuring a strong committee screens out those with undue risk, while still giving the actual allocation power to a decentralized base of ARB token holders. The job of the committee is narrowing the applicant pool to 6-8 providers, such that whoever we end up allocating to, our money will be safe.

A final point I’ll note is that value accrual for ARB as a token is through governance power. And having elections or appointments every now & then isn’t nearly as much fun as proposals that make each vote worth a certain amount of money to a provider