Final: Arbitrum Stable Treasury Endowment Program

[krst]

This comment is my personal comment and not an official L2BEAT statement as I want to publish it before Twitter spaces regarding STEP.

I would like to start with a disclaimer that I have no economics education and do not consider myself an expert in this field, so if my questions seem basic and naive, please treat them as such - I may not have a proper understanding of the underlying mechanics and would appreciate any clarification.

Below are some questions I had after reading the proposal:

1. Even the higher amount is <1% of the Arbitrum treasury, from this perspective is it really even a treasury diversification experiment? $0.01 change in ARB price has a higher impact on the treasury dollar value, so this pool will be rather negligible in terms of treasury value stabilization?

2. Similarly, the presumed income from this investment (~$1M) is negligible in the scope of the treasury that we’re sitting on. I’m not saying this is not a lot of money, rather that this income as a goal in itself is not that significant.

3. If this is just a first step in a larger experiment (as the name suggests), what is the bigger plan? How is this experiment contributing to the bigger plan? What do we want to learn from this particular experiment?

4. Regarding the eligibility requirement (“To even be considered, the allocation should add to the TVL of ArbitrumDAO; accordingly, tokenized RWAs that are NOT on Arbitrum are ineligible”), from our (L2BEAT) perspective technically speaking having tokens bridged from the mainnet to Arbitrum also adds to the TVL of Arbitrum. After all, this is the value that is “locked” in Arbitrum. Currently, ~6B of Arbitrum’s TVL is made up of these bridged assets, compared to ~2.5B natively minted.
    
   Furthermore, from a user’s point of view, assets bridged from Mainnet could actually be perceived as even safer than those natively minted, because if something happens to Arbitrum, the user is still able to withdraw their assets on Mainnet, while with that’s not possible with assets natively minted on Abitrum. It’s less important if we just plan to keep those assets in the DAO Treasury, but if we plan to sell them, we should take it into account.

5. If we are aiming for safe assets that can be easily called back by the DAO then why aren’t we starting with staked ETH or DSR for example? It seems that from the DAO perspective an onchain investment is safer then RWA (no legal and counterparty risk).

6. Having said that I believe that this proposal is interesting from the perspective of onboarding RWAs and RWA providers to Arbitrum. But I would like to see some longer term plan of what do we can/want to achieve by doing that. I have a gut feeling that onboarding 25M ARB worth of RWAs on Arbitrum can serve as an enabler of sorts, but would like to understand it better.

7. Overall, I’d like to understand what the short and long term plan is for these RWAs that we’re going to be acquiring. Are we just going to hold them in the treasury? For how long? How are we going to manage them? Do we just sell 25M ARB into the market and lock in the RWAs we get?

[thedevanshmehta]

Thank you Kristof for taking the time to draft these 7 well thought out points. In line brainstorming below;

@krst

Even the higher amount is <1% of the Arbitrum treasury, from this perspective is it really even a treasury diversification experiment?

You have correctly identified this as a trial run - we don’t yet know the optimum amount of diversification for the DAO treasury. Is it less than 10% of the total treasury value? Or more/less?

To answer this question, we gave 10k ARB as rapid research grants to @karpatkey , @Aera & @elisafly from Avant Garde. We are also looking at ratios used by the Arbitrum Foundation in diversifying their own assets as a benchmark we can peg against.

@krst

Similarly, the presumed income from this investment (~$1M) is negligible in the scope of the treasury that we’re sitting on. I’m not saying this is not a lot of money, rather that this income as a goal in itself is not that significant.

I agree that the income itself is not significant in this trial run, but the procedures we lay down are nonetheless quite important as they set the norm for the future when the amounts are larger.

What I would personally love to see is the development of a norm where proposals asking for money without a larger framework can draw upon the interest earned, while proposals drawing upon ARB in the treasury go through a framework as is currently the case.

@krst

what is the bigger plan? How is this experiment contributing to the bigger plan? What do we want to learn from this particular experiment?

The bigger plan is STEP 2 or an investment policy for ArbitrumDAO, which balances the 3 objectives of return maximization, capital preservation and passive income generation from our assets.

What we are learning from this experiment is the risk appetite across players in Arbitrum DAO and a sense of the right balance of these 3 objectives for the particular situation we are in.

@krst

technically speaking having tokens bridged from the mainnet to Arbitrum also adds to the TVL of Arbitrum.

Thanks for this valuable comment, we will clarify that bridged assets are treated as par with ones natively issued when judging Arbitrum alignment across the service providers. This ties in well with @coinflip suggestion on the Twitter space that providers give atleast a statement of intent that they plan to launch or bridge to Arbitrum

@krst

Furthermore, from a user’s point of view, assets bridged from Mainnet could actually be perceived as even safer than those natively minted, because if something happens to Arbitrum, the user is still able to withdraw their assets on Mainnet, while with that’s not possible with assets natively minted on Abitrum.

I now understand why the Arbitrum treasury has 10 cents in bridged USDC rather than natively issued . We would add to those holdings so the interest earned would accumulate the bridged USDC already in the ARB treasury.

@krst

It seems that from the DAO perspective an onchain investment is safer then RWA (no legal and counterparty risk). Having said that I believe that this proposal is interesting from the perspective of onboarding RWAs and RWA providers to Arbitrum. But I would like to see some longer term plan of what do we can/want to achieve by doing that

I have been thinking about this ever since you brought it up on the Twitter space. I see 3 key longer term achievements by onboarding RWAs on Arbitrum;

• How correlated are assets within a portfolio? RWAs offer investment opportunities uncorrelated with the larger crypto market

• RWAs could be an entry point for large institutions or new users, who then diversify their holdings to ‘riskier’ de-fi native opportunities (and vice versa)

• RWAs are at the bleeding edge of legal knowledge across the space. Compliance is essential for capital preservation, and their expertise here can spread to our native ecosystem

@krst

Overall, I’d like to understand what the short and long term plan is for these RWAs that we’re going to be acquiring. Are we just going to hold them in the treasury? For how long? How are we going to manage them? Do we just sell 25M ARB into the market and lock in the RWAs we get?

In STEP 1 we only allow t bills with a maturity period of not more than 1 year. They would be managed by a separate multi-sig, similar to the Plurality Labs / STIP multi-sig, rather than directly in the treasury. OTC providers would be utilized for converting the ARB into RWAs.

After the one year period ends, our WG hopes to have the larger investment policy approved by the DAO, according to which these assets get redeployed.

Thanks again for your well considered feedback, this deep dive into RWAs and consensus behind proposals has been quite a learning experience for our WG!

[GFXlabs]

@thedevanshmehta

They would be managed by a separate multi-sig, similar to the Plurality Labs / STIP multi-sig, rather than directly in the treasury. OTC providers would be utilized for converting the ARB into RWAs.

There may not be need for this. If using a purely off-chain asset base, a legal entity will be needed to hold the assets. If using on-chain assets that are tied to treasuries, then the DAO treasury can directly hold those. When liquidating ARB for the diversification, the DAO can just vote to send the ARB to the address of a counterparty with a legal agreement in place (e.g. Galaxy) or in scheduled tranches to liquidate on Arbitrum’s DeFi venues. A multisig would probably just insert an unnecessary intermediary (either between the DAO and its funds or between the DAO and the legal entity holding its funds).

@thedevanshmehta

After the one year period ends, our WG hopes to have the larger investment policy approved by the DAO, according to which these assets get redeployed.

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.

Just food for thought on the topic.

[thedevanshmehta]

@GFXlabs

There may not be need for this. If using a purely off-chain asset base, a legal entity will be needed to hold the assets. If using on-chain assets that are tied to treasuries, then the DAO treasury can directly hold those

Thanks for the feedback! We have a call scheduled with the Foundation on the 4th of January and shall address this in the updated version of STEP 1 which we will put out after the call. Personally, I too would prefer not having a multi-sig and doing it directly from the treasury.

@GFXlabs

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.

Such a great point, would love it if @karpatkey or @coltron.eth could chip in here.
ENS and Gnosis are generally considered well managed treasuries and are quite similar to Arbitrum in many fundamental ways, so a minimum goal would be reaching par with them

@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

Your comments have sparked off some thinking around how we should only attempt broader treasury diversification if we have a mandate from the DAO.

So rather than our WG getting continued funding from Plurality Labs to work on STEP-2, our WG will apply to the DAO sometime in mid February for continuation or disbanding of our workstream.

It’s a win-win either way, as the signal from the DAO over diversification will let us know whether to double down or re-allocate our time/effort to more high priority areas.

[karpatkey]

Thanks, @thedevanshmehta!

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.

Indeed, the ENS Endowment and GnosisDAO have lessons we can use in the discussion phase as, for example, what is the main goal the DAO wants to achieve with its treasury management. It can be capital preservation, yield generation, or another specific purpose.

ENS, for instance, has a strong sense of promoting decentralisation on the ETH network, which translates into a higher diversification of its LST investment. GnosisDAO, on the other hand, has a treasury management/investment strategy focused on supporting its goal of being a Payment Network.

This WG is taking important steps to understand the topic better, and fruitful conversations will occur in the next steps of this discussion.

[Bob-Rossi]

Treasury Diversification : Diverse assets in our treasury can be called upon to defend the ARB price should the need ever arise. If the ARB price increases, we are in the green as it consists of 99%+ of treasury assets; if it goes down, we deploy these investments to buy-back ARB and send a positive signal to the market.

I read the comments and didn’t see it, but apologies if I missed this… Is there more detail on what this would like? Or would it sort of come from this trail run? I think if the need to rebalance positions arises that is fine (say, we target 10% of assets are always in stables, so if ARB tanks we can adjust as needed). However, I’d be concerned if the goal is using the treasury as a pool of trading capital or using it to prop up ARB prices during a free-fall.

Overall I do think the goal of treasury diversification is a good one. I’ve seen too many projects that just let their token stack sit and are at the whim of the market. Which causes tons of problems during ‘bear’ markets

[thedevanshmehta]

@Bob-Rossi

I’ve seen too many projects that just let their token stack sit and are at the whim of the market. Which causes tons of problems during ‘bear’ markets

Yes this is a great point. How can we begin diversifying our treasury to hold assets other than ARB, so we are better placed in any downturn?

If this proposal passes it will be a stepping stone for STEP 2, a more ambitious investment policy for our treasury.

@Bob-Rossi

I’d be concerned if the goal is using the treasury as a pool of trading capital

This would be super difficult to implement in practice even if the DAO wanted to, as any usage of stable assets from the treasury would follow the same process of a snapshot + tally vote, which isn’t nimble enough for trading

We would not be having control of these stable assets, except recommending emergency liquidations if issues with service providers arise. Any proposed usage of these funds or interest they earn would follow the same procedure as requesting ARB from the treasury.

@Bob-Rossi

using it to prop up ARB prices during a free-fall.

This is still more doable, but as the amounts involved in STEP 1 are too small to do anything as magnificent as stopping a free-fall, such considerations would arise more in STEP 2 . My WG co-lead @sids2000 is working on some analysis regarding the optimum price ARB should strive to maintain that he can share when it’s ready.

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

[Bob-Rossi]

Thank you for the response.

I think my response may have been confused a little. Just to re-iterate, I don’t think we should actively be trading or propping up prices with the treasury. It sounds like this specific proposal won’t do that, which is good IMO, but it’s a possible goal in the future steps. (And yes, IMO I view using the stablecoin balance to find ‘the optimum price ARB should strive to maintain’ to be doing that - actively trading.)

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

Sounds cool, and look forward to it!

[thedevanshmehta]

@Bob-Rossi

I don’t think we should actively be trading or propping up prices with the treasury

I completely agree. Better to use the stable assets in the treasury to fund some of our recurring expenses so we don’t need to liquidate ARB all the time (especially in a bear), rather than trying to become some central bank with a basket of currencies to manage our token price.

At the same time it is worth recognizing that even the diversified assets belong to the DAO treasury and community can vote to liquidate it for conversion back to ARB, and there’s nothing we can or should do to preclude that possibility.

[Pepperoni_Jo3]

These comments and thoughts reflect my personal opinions on this proposal. Whilst I am a member of the Arbitrum Representative Council (ARC), they do not necessarily represent the overall views of the council or provide an indication of final voting decision.

Having followed this proposal for some time I’d like to commend Devansh and Siddique on their diligence and how receptive they have been to feedback throughout the process.

A few thoughts:

• As others have pointed out, diversifying between 10m-25m is only a fraction of the total value of the Arbitrum Treasury and so barely scratches the surface of what could be achieved with an effectively diversified Treasury. However it’s important to not run before you can walk and I see this proposal as an important first step to help the DAO progress toward a sufficiently diversified Treasury which can fund the ongoing operations of the DAO.
• Personally, I would have initiated Treasury Diversification by engaging traditional web3 Treasury Managers (such as Avantgarde, Karpatkey, Flowdesk), allocating capital to on-chain yield-generating sources, and subsequently venturing into Real World Asset (RWA) investment management. However, after discussion, I respect Devansh and Siddique’s rationale for commencing with RWAs first, and wouldn’t want to let my reservations on ordering hinder a proposal that is still taking the DAO in a positive direction.
• I like the approval and allocation mechanism proposed to determine funding among providers. It provides an elegant solution to ensure high-quality service providers can manage funds without the need for multiple vendor proposals or extensive vetting and research by delegates.

Looking forward to seeing this proposal progress. Thanks for all the hard work gents.

[DisruptionJoe]

@Pepperoni_Jo3

Personally, I would have initiated Treasury Diversification by engaging traditional web3 Treasury Managers (such as Avantgarde, Karpatkey, Flowdesk), allocating capital to on-chain yield-generating sources, and subsequently venturing into Real World Asset (RWA) investment management. However, after discussion, I respect Devansh and Siddique’s rationale for commencing with RWAs first, and wouldn’t want to let my reservations on ordering hinder a proposal that is still taking the DAO in a positive direction.

In parallel to this work, they also allocated 3 grants of 10k ARB each to Avantgarde, Karpatkey, and Aera Finance! While the working group focused on this specific question, they had the service providers working to make recommendations on other key components of good treasury management. I believe these grants all have January 15th deliverable due dates.

[thedevanshmehta]

Thank you for the kind words! We have completed the finishing touches on a revised framework incorporating all feedback received so far.

We are awaiting selection of a legal representative to the screening committee before posting the final version of STEP 1 on the forum.

@Pepperoni_Jo3

diversifying between 10m-25m is only a fraction of the total value of the Arbitrum Treasury and so barely scratches the surface of what could be achieved with an effectively diversified Treasury

This has been modified to 20 , 35 or 50 million ARB in light of our increased confidence in the members that have thus far agreed to be on our screening committee.

We have confirmations from Karpatkey, Steakhouse Financial, GFX Labs & Netherminds. We are speaking to lawyers well versed in RWAs and hope to finalize the 5th member in the coming week!

@Pepperoni_Jo3

I would have initiated Treasury Diversification by engaging traditional web3 Treasury Managers (such as Avantgarde, Karpatkey, Flowdesk), allocating capital to on-chain yield-generating sources, and subsequently venturing into Real World Asset (RWA) investment management

As @DisruptionJoe noted, we have initiated grants with Karpatkey , Aera and Avant Garde for working on a larger diversification framework. Our primary reason to begin with RWAs is to create the legal and infrastructural pipeline that future diversification proposals across any asset class can take guidance from

@Pepperoni_Jo3

I like the approval and allocation mechanism proposed to determine funding among providers

We wanted a mechanism where the right to actual allocation is distributed among all ARB token holders, while still ensuring only good service providers get chosen

We are confident in the screening committee’s ability to present only a few good options for delegates to vote on, along with preparation of a report card on each that can be consulted for voting.

This mechanism is a public good for our full ecosystem as the roster of vetted service providers can be used by any protocol or governance for investing their treasury assets into RWAs, without need of their own extensive due diligence.

[thedevanshmehta]

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.

2. 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.

3. 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.

5. 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.

6. 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.

7. 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”

8. 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

[thedevanshmehta]

Based on the feedback received, we are revising the options for the Snapshot to 22.5 million, 35 million and 50 million ARB. The strength of our committee and the process we have designed gives confidence to venture a higher amount in this iteration.

We have seen some comments from @krst , @Sinkas & the L2Beat team on eligiblity and whether this is even genuine diversification of our treasury, given the low amounts involved in proportion to treasury size.

if the snapshot is approved, @GFXlabs is taking lead on drafting the RFP. My current thinking is to keep it crypto-native, in the form of either tokenized t-bills/money market instruments or yield bearing stablecoins, but the final call rests with GFX.

On the size of diversification in STEP 1, we’d like to point out that even if we went with @Aera’s numbers of 5% to yield bearing stablecoins, the current proposal achieves between 0.65-1.5% of this target.

@Aera

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.

It is worth staggering our treasury diversification to yield bearing stablecoins until we have consensus on the final number and also to simply dollar cost average over multiple proposals rather than all in one.

[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

[GFXlabs]

@pedrob

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.

You make some very good points, and we agree there should be a “stop, look, listen” for larger direction and size of diversification.

We do think that STEP 1 should continue moving forward without delay, though, for two reasons.

1. STEP 1 allows Arbitrum to begin to source, hold, and then earn stable-value assets. Even if those stable-value assets are not used in a bull market environment, having those assets set aside now to pay for continued development of the protocol and its ecosystem later provides Arbitrum with a lot of flexibility. It should not be under appreciated how difficult it can sometimes be to attract top-tier partners if payments can only be made in a volatile token (it’s easy to forget this while most disbursements are grants, because grantees will never say no to funding like a vendor or contributor would). We’ve seen this play out in other ecosystems where it’s like pulling teeth to get someone to accept a payment in governance tokens. If Arbitrum wishes to subsidize audit costs or oracles or some other good, for instance, that may prove more costly if ARB’s market performance isn’t good.

2. Given the size of STEP 1, it’s difficult to imagine any other form of treasury diversification or investment program that wouldn’t use this as a prerequisite. We don’t recommend Arbitrum get into exotic RWAs, but even if it chose to do so, creating a reserve of stable assets would likely need to come first. Even MakerDAO – which can print stable assets – maintains a reserve of 50 million DAI, which is in line with the 22.5m and 35m ARB options presented here.

More broadly, your point about a larger strategy will take some time to develop a consensus upon and involve both political and financial trade offs, while STEP 1 is quite narrow with fewer degrees of freedom and focused on how to do a single task at hand in service to a larger strategy – that you rightly point out needs to be more developed, but it’s hard to see how STEP 1 wouldn’t be required regardless of the ultimate path taken.

[thedevanshmehta]

Thanks for your well thought out comments, its much appreciated! I also like the effort you took to dig into the reports produced by @Avantgarde , @Aera & @karpatkey . more useful content coming in season 2 of our WG!

If you haven’t already you will find it worthwhile to read our working groups end of season insights and future directions for some of the issues you’ve raised.

Here are some considerations for why we should move ahead with STEP 1, in addition to the excellent points raised by @GFXlabs

A. One of our most hard earned insights was that many of the best projects in the Arbitrum ecosystem don’t want free money or STIP like grants. What they actually want is the DAO to invest a portion of its treasury into their financial product, so they get the legitimacy of saying “ArbitrumDAO is our customer and they make money from our product”

STEP 1 is the first framework addressing this need and the lessons we learn here could play a big role in actually reducing expenditures for the DAO, by converting our grant programs into investment ones where we can recall the collateral. Delay here means STEP 2 where we sustainably support de-fi products in arbitrum gets delayed, which means ecosystem support grants continue being the only game in town.

B. Most diversification in DAOs, Maker included, has happened via treasury managers or closed door committees. Delegates only get to vote yes or no on the deals negotiated by these representatives. In my view, this process lends itself to corruption and we need to figure out a better process to diversify that retains the spirit of DAO democracy.

STEP 1 is unique in having a committee only for screening out providers deemed as being risky & for providing opinions to delegates on each applicant, but the ultimate award of funds is based on votes received by each provider. This will yield valuable learnings on its own accord for how we approach diversification and also potentially increase the utility of ARB as a governance token for not just elections to posts but actually deciding proportion of funds in a contract between provider A & provider B

C. As Karpatkey’s report notes, our DAO spent 5% of its treasury over the last year, which means 20 years of runway at the rate we are spending. My takeaway from that is we need to guard against foolish spending, not overspending.

Given that we are currently in the middle of the L2 wars, where no chain has yet begun enjoying the power law, we need to be less conservative and make bold bets. Well thought out, bottom up frameworks should move ahead & not be beholden to top down consensus , which in itself may be a chimera that isn’t possible to certifiably obtain (as you noted with the efforts on the temp-check polls).

I hope these are helpful and to have your support in the snapshot !

[thedevanshmehta]

Some of the last minute feedback we have got is to propose an amount ourselves, and not let the DAO vote on a range. Here is the reasoning :

looking at it from delegate perspective, I don’t really know how to make an informed decision between those 3 different options (22.5M, 35M, 50M). In case of other proposals like grants frameworks etc. there is a material difference between funding with X amount and Y yet here there’s no real differentiation between those numbers apart from the fact that we’ll diversify more ARB for t-bills. And I don’t know why are we choosing between those numbers and not some other ones. From my perspective it would be better if you had chosen some amount that you believe should be the amount to go with and we just vote whether to do it or not.

Accordingly, the snapshot will be a yes / no vote for the DAO to diversify 35 million ARB or 1% of our treasury in STEP 1

Here are some reasons why the committee has settled on this number.

1.from @GFXlabs : 35m * $1.50 price * 5% target return = $2.5m/year in income even w underperformance. a nice round number and plenty to pay for expenses in a bear market if a contributor does not want to be paid in ARB

2.from Stakehouse Financial : ideally you’d start from the end, i.e. what your expected liabilities are and then calculate what return you need at various endowment sizes. there are two factors you need to judge against the goal

firstly you are ‘issuing’ ARB so you are diluting token holders by the number of tokens issued to raise this capital divided by the total circulating supply. this sets the hurdle - if you don’t solve a problem greater than the dilution token holders are net worse off.

secondly you need to reach a targeted return to match your liabilities.

I would suggest reframing it the other way around. Per the above: your target return is to cover $2.5m in annual liabilities. to do that you need to return a benchmark 5% return net of expenses, which means your target fund size is about $50m. At $1.50 average execution price, 35m ARB is ~2.5% dilution (going off ~1.2bn circulating on CG).

The performance of the endowment should be measured against a clear benchmark and after accounting for the outlay for the selection process. In this case it sounds like 5% net of fees.

The committee needs to understand the tradeoffs that will be necessary as many providers will offer very similar features or performance but may differ on different dimensions, which need to be lined up against the adjacent constraints and objectives the DAO may want to solve for.

3.from @northlakeslegal : Most invest around $10M-$20M, but I do not know if they have the capacity to invest more. I would do 35M ARB as the amount deployed can always be less (with an explanation why). Further, a higher number allows Arbitrum to reduce concentration risk by investing through more than one sponsor.

4.from Nethermind : my hunch is to have 50m so the size is meaningful vs ARB balance sheet and also compared to work and cost involved. If we are confident in the RWA we will select (we will do thorough due diligence) and if there is proper diversification then there is little risk for arb in having 50M

5.from @karpatkey : Given the previous consultations around the value, we believe that 35 million ARB is a value that can deliver the objectives of the proposal:

• Achieve treasury diversification, tapping into the RWA market;
• Provide a steady income from a non-correlated source; and
• Test the reliability of the selected service providers.

As this is the first interaction, the 1% of the treasury is a reasonable amount to invest to learn how the process works, uncover any hidden implications, and use these learned lessons in the next iteration, with higher values and more detailed strategies and objectives. This is also the most voted option in the informal forum poll, and it addresses the concerns about the lower amounts not yielding an appropriate return for the work put in by the DAO.

[JoJo]

I won’t dabble too much into the discussion of RWA asset.

I think passive income, denominated in usd, is key in a 4-5-6 bill treasury. Would also, personally, question, why the dao should incour the crypto risk with the fee on top while it would just make more sense to access t bill directly (higher yield, less risk in general), and not sure if this was mentioned yet.

But, going into the discussion that increasing liquidity on dexes could be key to enhance the stability of $ARB as asset in light of sells from grant programs, why don’t we try to solve for both the problems (diversification of treasury, enhancing liquidity to avoid fluctuations from grant programs) by

• otc sale some arb for ETH, USDC
• provide liquidity in the major dexes
• plan to reassess this liquidity every quarter?

The reason is simple. By otc a portion, we would as first get exposure to different assets than arb.

By providing LP, we would provide utility to the market, in general.

By assuming that we are in a potential start of a new market cycle that could last maybe 18-24 months, we basically put this LP position as a constant limite sell of arb against the asset to which is paired with (eth, usdc), thus increasing exactly (well not exactly, will be the square root) accordingly to how much the market will value arb as a token and as an ecosystem these assets.

And, by assessing this position every quarter, we will be able to decide/vote if it’s time to reduce the portion of available dex liquidity, that hopefully will be increased by several folds in >1y, thus increasing runaway of the dao in non arb amount.

EDIT forgot to write the key part here. Idea would be to seed a pool of arb against an RWA asset, alongside what is already available.

EDIT 2: voted for, makes a lot of sense to move forward and get some RWA in the belly of the DAO. The amount is not such that will make a huge impact in term of yield, more in term of stash in usd terms, but is a start to get the toes wet on asset diversification.

[Frisson]

I voted for this proposal at the temp check stage. 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. However, I am huge fan of using the DAO to pave the way for ecosystem growth and strongly support this aspect of the proposal “…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.” I think the DAO can do a lot of help accelerate growth of verticals like RWA and I’m excited to monitor progress of this initiative going forward.