Final: Arbitrum Stable Treasury Endowment Program

[thedevanshmehta]

Thanks to all for their patience while we worked on incorporating feedback received after the snapshot, on the forum and IRL during EthDenver

This is a meaty post with all the details required for moving to the onchain tally vote; we will keep this up for a period of 2 weeks for any comments.

There are 2 changes to the text that was posted on snaposhot;

1. Committee members will now recommend an allocation to providers based on a policy we come up with, and the DAO simply votes on its approval. Large delegates told us they do not want to vote for individual service providers and wish for our committee to perform the task of selection, as many still have PTSD from the STIP days

2. We will not mandatorily require our own external audit of selected service providers, but exercise the right to do so in case we do not trust their auditor or have another reason to do so

Let’s now get into the additional details requested!

@krst

breakdown of the 200,000 ARB which is the cost associated with the implementation of the proposal, including the compensation for specific contributors for this proposal

@Pepperoni_Jo3

We agree with @krst request for further information that would be useful to see prior to the Tally vote. However, we do recognize and feel comfortable with some degree of flexibility on budget and responsibilities to accommodate unexpected developments within the program.

@cattin

A detailed breakdown of the budget. I expect to have a full breakdown on how the 200K ARB are going to be used for the implementation of the proposal.

Budget

1. Committee Members : 60k-80k ARB
2. External counsel fees ( requested by @cliffton.eth ) : 50k ARB, possibly more
3. Program Manager : Received one quotation of $100k per year plus $15k for every selected service provider

Budget Narrative

1. Committee members are paid 500 ARB per application per member. Assuming 20 eligible applications, that amounts to 10k ARB per member and we have 6 in total which is 60k ARB.

2. We require external legal counsel for signing agreements with committee members and also the agreements with service providers. 50k ARB is a conservative estimate; it is likely to be more. This amount was requested for by the Arbitrum Foundation.

3. Assuming around 5 service providers are selected at current ARB prices, we estimate 80-90k ARB per year will go to the program manager overseeing service providers. We do not recommend being stingy with this budget; they play an important role in making sure we don’t lose any of our principal and the interest earned from the program will be ~3 million per year, of which program management costs are only 3-5%

@krst

more detailed description on scope of responsibilities of each contributor

As shared above, committee members are responsible for recommending an allocation to eligible service providers, which the DAO finally approves via yes/no vote.

Below is the scope of responsibilities for the program manager, written with help from the excellent @adamlawrence who is planning to apply with his company RWA.XYZ for being a program manager to STEP. Candidates for the role will be selected by a vote of the procurement committee, valid for a period of one year after which they need to ask the DAO for additional funds to continue in their role.

In the pre-allocation phase, we received a quotation of $1000 per application processed. The duties include;

1. Receiving applications from service providers

2. Conduct a first pass on applications received; filter out incomplete applications or those not fitting the RFP

3. After the committee reviews valid applications and shortlists eligible providers, prepare an assessment report on each provider that allows for easy comparison between them

In the post allocation phase, we received a quotation of $100,000 per year plus $15k for every selected provider (even if they recommend withdrawal of assets from a provider, they will still be paid the same amount to prevent unaligned incentives). The duties include;

1. Cashflow & Accrual Monitoring: Enable the Arbitrum Foundation to easily ensure that the Arbitrum Treasury receives timely payments or accruals. If payments are delayed or incongruent with stated rates, Arbitrum can take appropriate action (e.g. inquiry, divestment, etc). Specific functionality includes:

• Initial capital contribution and redemption tracking
• Track and notify interest accrual or payment amounts for each investment
• Ensure expected interest accrual or payment frequencies match service providers’ documentation

2. Underlying Asset Monitoring: Validate that service providers are investing in expected underlying assets and risk exposures. If nonstandard assets are being included in a provider’s portfolio, Arbitrum will be informed and can take appropriate action.

• Report on service providers’ underlying assets and reserves
• Provide portfolio statistics and risk analytics
• Report % of product AUM that pertains to Arbitrum’s investment

3. Operations & Counterparty Monitoring: Aggregates nonquantitative information to regularly inform Arbitrum of key structural information and material document changes and administer redemption tests.

• Collate service provider financial and audit reports
• Track underlying service provider changes (e.g. custodian or broker changes, change in 3rd party auditors)
• Track material changes in provider terms
• Administer Redemption Tests (i.e. “Fire Drills”) to test for provider redemption timeliness.
• Communication with the DAO on the governance forum for questions pertaining to the program
• Any other duties that may arise which are necessary for success

@krst

more detailed schedule regarding what the process of implementing the proposal

@cattin

More clarity towards the expected timeline. How much time should we expect until the screening committee publishes the RPF? How much time will they review applications?

March 15th : Upload to Tally for onchain vote
April 1st: Open for applications from service providers (1 month submission window)
May 1st: Review applications (1 month)
June 1st: Snapshot approval vote for recommended allocations

@cattin

Once investments are done, how much time do you consider must be waited until STEP it’s considered successful? Or what milestone must be achieved to consider it concluded?

@cattin

More clarity towards the goals of approving this budget. Is it to diversify the treasury? That seems too limited. Is it to experiment with RWA? Is it to incorporate as many providers as possible into Arbitrum?

After one year, the program manager needs to return to the DAO for a vote on paying their retainer fees. In case they do not get approval and there is no program manager overseeing our investments, the arbitrum foundation will liquidate and return assets to the treasury.

Our goal is diversifying our treasury via ecosystem support. This is a test run for an insight we had that many of the best projects in Arbitrum don’t want grants so much as the legitimacy of Arbitrum DAO being a customer of their product and earning money from it.

In their allocations, the committee will prefer projects that have either launched their stable, liquid and yield-earning product on Arbitrum or have a timeline for doing so. In case a provider commits to launching in say 6 months, they will get an allocation but it will be withdrawn if they do not meet this timeline.

@cattin

More clarity towards RFP and how to evaluate the committee’s work. If it’s not possible to have the definitive version of the RFP before the tally vote, it would be great to have some guidance points on how it will look like and what we can expect of their work.

In some good news, we have the RFP ready! Thanks to @GFXlabs for being the lead drafter and other committee members @Nethermind , @karpatkey , @steakhouse , @northlakeslegal for their excellent inputs.

The formatting isn’t breaking too badly so posting the RFP here;

Request For Proposals: Arbitrum Treasury Diversification (STEP 1)

Table of contents

1. Summary and Arbitrum info
   · Introduction
   · Requester background

2. Description
   · Asset information
   · Oversight
   · Scope of service/Criteria

3. RFP process overview
   · RFP timeline
   · Participants

4. Questionnaire
   · Applicant information
   · Primary contact
   · Key information
   · Background information
   · Plan design
   · Performance reporting
   · Pricing
   · Smart contract/architecture

5. Supplementary

Summary and Arbitrum info

Introduction
Arbitrum governance is seeking proposals from qualified applicants for the purposes of diversifying the governance treasury and supporting ecosystem growth.

The purpose of the RFP is to identify products that provide trading volume and depth (i.e., liquidity), are stable in value, produce income for governance independent of crypto market volatility, offer transparency, and can potentially see use in developing a nascent “real-world assets” sector on Arbitrum chains.

Applicants whose products meet certain quality thresholds will be presented to ARB holders and their delegates for possible asset allocation. All final asset allocation decisions rest with ARB holders and their representatives. This RFP is intended to both collect relevant information for the committee and also to recommend allocations for tokenholders to vote upon.

Requester background

Arbitrum governance maintains and upgrades the Arbitrum technology stack, upon which are built multiple blockchains, including the largest Layer 2 on Ethereum, with more than $2.8b in assets onchain.

Description

Asset information

This program is intended to convert 35,000,000 ARB into stable, liquid and yield earning assets. The dollar notional amount of this investment is subject to market volatility, but at the time of February 9, 2024, is valued at approximately $66,000,000. These assets do not have a specific futured obligation or liability they are matched against. The Arbitrum Foundation, a Cayman Islands legal entity, will be the transacting counterparty.

Oversight

The committee is comprised of 6 members including GFX Labs, Steakhouse Financial, Karpatkey, Nethermind, and North Lakes Legal. The Arbitrum Treasury & Sustainability Working Group also serves as a non-voting member of the committee, except in the case of ties.

All members are required to recuse themselves for any application in which they have a monetary interest, direct or indirect.

The Arbitrum Treasury & Sustainability Working Group leads this process, and answers to stakeholders within Arbitrum governance.

Scope of service/criteria

Please include the following as part of your proposal:
Sample or template investment contract and the governing instrument (credit agreement, partnership agreement, etc.).
Investment selection, monitoring, and reporting plan.
Compliance requirements. Be specific about requirements you anticipate from Arbitrum governance.

RFP process overview

RFP Timeline

RFP published : March 15
Submissions open : April 1
Submissions deadline : May 1
Finalists announced : June 1
ARB holders vote on propposed allocation : June 15

Participants

This RFP will be open to all applicants with a stable, liquid and yield earning product. The screening committee will review all submissions and announce allocation between finalists for ARB tokenholders to vote upon.

After receiving applications, the committee will prepare an allocation policy for distribution to applicants and recommend a split between them. The DAO will then vote on whether to approve the split or not.

Questionnaire

Applicant information

Name

Address (Headquarters)

City, State, Postal Code

Country

Website

Primary contact
Name

Title

Country

Email, Telegram, Forum, & other methods of contact

Key Information

Expected Yield

Expected Maturity

Underlying asset

Minimum/Maximum transaction size

Current AUM for product

Current AUM for issuer

Volume of transactions LTM

Source of first-loss capital

Basics and background

1. How will this investment improve Arbitrum’s RWA ecosystem?

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

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

4. 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.

5. Describe any conflicts of interest for your entity and key personnel.

6. Insurance coverages, guarantees, and backstops
   Name of insurer or guarantor
   Per incident coverage
   Aggregate coverage

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

8. Brief reason for above tracking error

9. Please describe any experience your firm has in working with decentralized organizational structures

10. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

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

Plan design

12. 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.

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

13. 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.

14. 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.

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.)?

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

15. 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.

16. Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.

17. Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.

18. 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?

19. 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.

20. If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.

21. Does the product rely on any derivative product (swaps,OTC agreements?

22. 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

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

Performance reporting

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

25. Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.

26. Who provides the performance reports in respect of the underlying assets?

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

Pricing

27. Provide a copy of your standard contract, or one similar to what is being proposed here.

28. 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)

29. Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)

Smart Contract/Architecture

30. How many audits have you had and name of auditors?
    Please provide a copy of reports.

31. Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?

32. Is the product present on several chains? Are there any cross chain interactions?

33. Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem

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

35. Is there any custom logic required for your RWA token? If so please give any details.

Supplementary

36. Please attach any further information or documents you feel would help the screening committee or ARB tokenholders make an informed decision.