[Non-Constitutional] Arbitrum Token Swap Pilot Program

[LuukDAO]

Thanks for the comment. I like the suggestion and agree that focused protocols may have a bigger, long-term impact.

I’ve added the % of protocol usage on Arbitrum as a parameter for the Committee to consider when determining swap size.

[LuukDAO]

Thanks for the input and feedback. Sharing my perspective on each of your comments.

• It’s okay to have a different perspective on the incentive program’s limitations. As the Incentives Detox thread reveals, not all stakeholders share your perspective on the efficiency of the initial programs.

• No decision is purely technical in this space; while it could be a leading factor, other elements are always in play. If Arbitrum held $MAGIC, it would have A. It likely received a clearer signal that Treasure was considering leaving and could have reacted. B. Influence the decision to stay or move away, C. and as a final resort, be able to recoup some of its value by either benefiting from $MAGIC growth in case it turns out their decision was better for their protocol or sell the respective $MAGIC to generate value for the Arbitrum Treasury.

• The bidirectional alignment relates to both protocols having a direct tokeneconomic relationship through the Token Swap. This allows both sides to participate in each other’s governance and benefit from the counterparty’s growth, creating an economic incentive to help the other party develop further. The additional questions you ask regarding Arbitrum-alignment are exciting and should be further explored in this pilot and potential follow-up programs.

• To clarify, the tokens unlocked to the relative Treasuries are not being sold. The default is for these tokens to vest in the respective treasuries.

• I don’t see how The Bigger Picture you outlined here would discredit this proposal, especially with @CastleCapital (the author of the resources you reference) being involved directly and in favor.

• The Council is required to streamline due diligence, plan and execute the swaps, set up supporting analytics, and provide learnings and resources from this initial pilot.

[LuukDAO]

Thanks for the great input; I hope my response gives you more confidence in the pilot!

Q: Have we considered using the parameters to calculate swap size? A: Yes, the Committee aims to use these parameters to determine the proposed swap size.

• Our aim is not to limit any partners’ participation in Arbitrum. This pilot doesn’t impose any new restrictions. The max swap amount is, however, set at 500k ARB since this is a Pilot. Once it is successful and we understand how to scale, we could look at bigger, more significant swaps.

• I will let each of the Committee members share for themselves, but from my side, I would have a CoI with one of the 19 listed protocols. I contributed to BalancerDAO in 2022 and still hold some veBAL that likely exceeds 0.001% of the total token supply. Hence, I won’t be voting on this potential proposal.

• H, they will be more mature and qualify for a token swap during the program’s continuation next year. Also, the scope of the Swaps could be different if Arbitrum decided to have a more aggressive growth strategy.

• I like the idea of having a clawback process, but this may be challenging to enforce onchain and decide on. We’ll explore this option further, but this may be out of scope for this initial pilot.

• Third-party DAOs would need a Governance process or team responsible for Treasury management.

• Finally, the Committee intends to assess the effectiveness of previous grants to determine the size and potential of a token swap.

[Bob-Rossi]

Thank you for clarifying, and re-reading I see where I misunderstood (I probably read to fast… ). I think that’s fair then

[Gabriel]

I’m voting in favor of the proposal, but I believe a 6.5% expense ratio is excessive.

[Argonaut]

@GFXlabs

and also want to stress the entire budget may or may not be utilized, depending upon the size of the universe of quality tokens

Even if the entire budget may not be utilized, as GFXlabs mentioned.

@Gabriel

I believe a 6.5% expense ratio is excessive.

We also believe that the budget is not proportionate to the total amount intended for the swap.

We compared the budget with other similar projects and think it’s in line with market standards. We’re curious about how the 2 million ARB figure was determined, why not allocate a higher amount to fully capitalize on the work being done?

[Vertex_Protocol]

We’d like to reiterate the feedback provided by @lindsey in the original thread about this proposal (emphasis ours).

This won’t be diversifying Arbitrum’s treasury into stable coins (a good diversification) but instead into other volatile assets that will be nearly impossible for the DAO to sell. Will there be an active manager with at-will ability to sell tokens? What negative sentiment would that bring on the DAO if it sold a protocols tokens? I think making super clear guidelines for what the DAO can do with tokens it receives and outlining the group that will be in charge of carrying out those actions would be important here. Otherwise it’s Arbitrum diversifying into an asset it wont be able to exit.

the reply was that

Ideally, a Treasury Team would operate the Financial department of Arbitrum DAO and define strategies to utilize and devest from Protocol tokens.

Treasury management with ETH and ARB is still in its early stages, and expanding to additional tokens will require consideration of both quantitative risks and social impacts which we don’t feel the DAO is prepared to handle currently. However, if the DAO’s goal is not to sell tokens, a more nuanced strategy could involve token swaps for more productive assets, like yield-bearing or staked tokens, where revenue sharing is attached to them.

If the DAO commits to keeping them permanently staked (or otherwise used as part of the revenue sharing system) this would enhance long-term value compared to orienting more around short-term liquidity needs.

As a result, the DAO could dually benefit from the revenue streams of both the protocol growth from the productive assets and the money made via sequencer fees – eliminating the need to decide which protocols tokens to sell and when.

In the future, once the systems are established, the DAO could also swap staked ARB with protocols via agreements around the length of staking from their side. The potential result would be a symbiotic relationship where projects are less reliant on one-sided incentive programs since they have an extra stream of income they can use to grow. The revenue stream would progressively increase in parallel with the Arbitrum ecosystem’s growth – sequencer fee revenue. Specifics of this can be iterated on but we’re curious to see if delegates have any feedback.

[0xTALVO.ETH_MTY]

Instead of focusing exclusively on projects already on Arbitrum, including protocols that joined later, like Aave, would expand the program’s reach and potential. Additionally, implementing mechanisms to ensure the long-term commitment of participating projects is crucial. Lastly, the program’s structure should be reviewed to ensure that strategic, not just financial, benefits are maximized for Arbitrum.

[APE]

We support this proposal but echo concerns about expense ratio mentioned by other delegates, and as @EzR3aL already stated, Aave would have appreciated the opportunity to be invited to participate in this program.

[LuukDAO]

Some additional insights into our budgeting approach for this Pilot @Gabriel @Argonaut @APE

This proposal is shaped as a Pilot, which means that our primary aim is not yet to maximize the program’s size but to learn how to design an even more effective program in the future to scale.

After feedback, we decreased the Swap Budget from 10M ARB to 2M ARB to reduce the risks associated with the pilot. This also allowed us to reduce the operating budget, but many of the valuable tasks associated with it (such as creating a review framework, swap execution flow, and dashboard creation) exist independent of the size of the program.

We aim to be as lean as possible, using an average hourly rate of ~USD 100, which has been used in other Aribtrum proposals and is honestly well under the standard rate for senior research contributors (fair price would be more in the 150-250 USD range).

I think only looking at % of ops vs program budget sets a bad standard where actors are incentives to blow up the overall program costs to get their fair pay, resulting in significant proposals (which we’ve seen before in Arbitrum) with potentially bigger downside risk for Aribtrum DAO.

In relation to swapping with newer value-aligned protocols, especially mature ones like AAVE. I see a lot of value in this. However, I believe it’s better to do that after the completion of this initial pilot, and hopefully with a more sizable ARB amount!

[PGov]

We appreciate the thoughtfulness behind the proposal and we’re interested in the directional relationships with key projects while potentially offering the Arbitrum DAO new strategic advantages.

Some key areas for consideration, particularly regarding due diligence and the committee’s role:

Importance of Due Diligence: Effective due diligence is essential in assessing the projects that are eligible for swaps. The criteria outlined, such as project treasury size, token utility, and past performance with grants, are crucial and initially, we’re hesitant in doing too many swaps off the start.

Role of the Selected Committee: @LuukDAO, @GFXlabs, @CastleCapital, and @thedevanshmehta—bring a great chunk of experience to the table, which is crucial for the execution and success of the pilot. We’ve known some member for a while such as @GFXlabs and are sure they will do a great job in the evaluation but overall, would like to err on the cautious side and encourage not too many swaps of the get go.

Concerns on Timeline and Alignment: One potential area of concern is the lock-up period of one year followed by a ten-month vesting schedule. While it provides a degree of protection, it may not fully achieve long-term alignment between Arbitrum and the selected projects. Longer lock-ups or even renewal mechanisms, as suggested by other delegates, could enhance alignment and ensure that both parties remain committed over a more extended period.

Overall, the is a promising initiative, but success will largely hinge on the rigor of the due diligence process and the ability of the selected committee members, and we’re in favor of something as intense as this be a selection process instead of a DAO vote.

[GFXlabs]

@PGov

but overall, would like to err on the cautious side and encourage not too many swaps of the get go.

Speaking only for ourselves, our fallback position is that there will be no swaps, and would only vote in favor of a swap that made sense after diligence suggested it was both a good asset and the relative economic terms were appealing.

This is different from STEP, where the goal was to deploy the funds amongst applicants and not doing so would be a failure. It’s not a failure state to go through the technical, economic, and relative value diligence process for the universe of covered assets and choose not to engage in a token exchange at this time.

[PennBlockchain]

We appreciate the work done for this Token Swap Pilot Program, but have some opinions and reservations:

1. What is the benefit for these projects to have even more ARB exposure? - By being integral apps of the Arbitrum ecosystem, ArbitrumDAO is already heavily incentivized to support these projects, and has done so through airdrops and variety of ARB incentive programs. The proposal doesn’t clearly explain why further exposure to ARB is necessary for these crucial projects to operate effectively within the ecosystem.
2. Risks for the Treasury: This proposal could pose significant risks to the Treasury. The tokens in question tend to have a high beta and are strongly correlated with ARB’s price, which would amplify the Treasury’s exposure to market volatility + idiosyncratic risks specific to projects. There is also the concern that these projects might use the opportunity to cash out of their less liquid tokens via ARB (after a 1 year lockup), potentially creating a perverse incentive where they focus less on their own token’s long-term success. Similar to concerns raised by @lindsey
3. Better ways for projects to manage treasury volatility: If the goal is to reduce the exposure of these projects to the volatility of their own token prices, it would make more sense for them to conduct token sales and swap into assets with more stable values. Holding ARB does not seem to align with the objective of reducing overall treasury risk.
4. Effectiveness of token swaps: The cited report on “DAO Token Swaps as Ecosystem Enablers” does not provide compelling evidence that token swaps directly lead to better outcomes between an L2 like Arbitrum and the projects building on top of its ecosystem. While it outlines some reasons partnerships fail, it does not show a clear connection between token swaps and partnership success rates.
5. Who gets to be responsible for ArbitrumDAO’s voting power? - We agree that it’s nice for the ArbitrumDAO to have voting power in these projects - but who in the DAO should be responsible for the votes on behalf of ArbitrumDAO?

In conclusion, a helpful way to frame this question is: If the Arbitrum Treasury were a venture capital firm, would investing in these projects yield a positive return, measured in both the marginal growth of ARB and appreciation in the tokens acquired? If these projects did not receive an investment, would their outcomes be significantly impacted? More importantly, do these projects currently lack the financial resources to achieve product-market fit and continue building/improving their apps?

[JoJo]

I’m voting AGAINST this proposal in the temp check.

First of all, motivation seems unclear.

@LuukDAO

By embedding Token Swaps as a vital element of Arbitrum Ecosystem Development and critical programs such as LTIP, Arbitrum can continue pro-actively incentivizing ecosystem growth

This is what is stated here. In the initial discussion, which I don’t know why it wasn’t linked, it was instead presented with a different motivation.

@thedevanshmehta

Token swaps are a form of treasury diversification that increases Arbitrum alignment of protocols. In our view, token swaps should be the final stage of ecosystem support by the DAO, which could begin with a small Questbook grant and finally graduate to a direct token swap with us.

The initiative has been moved from treasury diversification to growth of the chain, with a partial common goal of alignment of the protocols. But even here, the treasure example to me doesn’t hold: we are giving for granted that, if our treasury would have held magic, treasure would have stayed in our ecosystem. I don’t think this holds true.
For these reasons, seems like the end goals are a bit unclear.

Also, and maybe is me, I think this program is more a “virtue signal” than anything. Let me try to analyse the reasons why a protocol should do a token swap, knowing that the following are the terms.

@LuukDAO

Non-Sales Clause
Arbitrum DAO and the third-party DAO will swap tokens with a 3-month lock. After the three month lock, the tokens will unlock 10% monthly for ten months. If no Arbitrum Treasury Management team is in place within nine months of executing the token swaps, the Pilot team will propose a solution for managing these tokens before they unlock.

Using for OpEx / Incentive program
The protocol will start to receive to get unlocked arb, at a rate of 10%, after 3 months. I see little reason for a protocol to get into this deal for covering opex since these are the terms; but neither the terms are such that the protocol can use the sum easily to spin up their own incentive program, at least not before several months (and they could do it through their own token at that point).

Using as yield generating mechanism
We still don’t have staked arb. We are currently working on it, but will take some time to be implemented; as such, is quite difficult to project the economics in an exchange. Matter of the fact, most token swaps are done because not only you signal alignment, but also because is bad optic for yourself to farm your own protocol with your own token but is instead ok to farm a friendly protocol. How can we even put the real value proposition of arb if we don’t yet know how staking will look like?

Using for voting power
This is the only case currently that would make sense to me: a protocol wants to participate to the governance of Arbitrum. But, looking at the list of the 19 protocols whitelisted, almost all the upperhalf of them is already participating to the governance; the lower half, will be quite difficult IMHO to involve them in governance unless there has been specific contacts on this regards. Happy to be proven wrong, would be good to have more builders involved in our DAO directly.

---

There is also a final consideration on the management of these coins. Assuming swaps will go through, and let’s even assume we have everything vested, at that point there is definitely a different reputation consequences for the protocols selling the arbs, or for our dao to sell the protocols’ tokens.
For the protocol, selling the arb token will likely be ok, or even go unnoticed.
For our DAO, it will likely be negative (“you don’t support external protocols”) to sell non arbitrum native protocols’ tokens. It will be extremely negative to sell instead the token of arbitrum native one (“the dao doesn’t even support GMX/Camelot/insert name of native arbitrum protocol”). It could potentially be ok to utilize them in yield generating strategies through a treasury manager, but the amount exchanged, since we have a cap of 500k, won’t be worth the hassle in my opinion; plus, we are assuming that there will be good way to generate yield or that we will also have a treasury manager. TLDR: whatever token swap we do, it will be quite difficult for the DAO to sell these tokens.

---

In my view, the DAO should take a totally different approach to align protocols to the chain and foster growth: we should invest in protocols.
This doesn’t mean buying the token, but literally participating to raises of the protocols, and get a portion of the equity. This, to me, would make way more sense.
We are not there yet because we need legal infrastructure that we don’t have for example. But to me, not having yet the tools doesn’t mean we should go for the path highlighted above.

As a final note, i want to say I appreciate the work done so far. I think the proposal is for sure better than the initial one, and I think the people added (paper, castlecap) add a ton of experience and professionality to this group. Despite this, I really can’t find a way to frame the token swaps idea as a good idea for our DAO, sorry.

[alextucker]

what is the size of universe of quality token

[Larva]

Thank you for this proposal! Similar to companies holding each other’s stocks, the idea of Arbitrum DAO and high-quality projects within the ecosystem swap tokens can definitely strengthen the ties between Arbitrum and ecosystem projects, promoting the positive development of the entire ecosystem. However, I have one concern—how can we ensure that this process remains fair and just at all times? I noticed that the proposal mentions conflict of interest rules, but I don’t think they are detailed enough. How can we ensure that the intermediaries facilitating the transactions fully disclose whether they have any vested interests with the counterparties? This is a decentralized world, and many things can be done very discreetly. I’d appreciate your response to this concern. Thanks!

[TodayInDeFi]

Voting to REJECT this proposal

• The proposal is not really in the scope of work of the the treasury and sustainability working group (the proposer)
• As per mentioned by Jojo, given that most of the tokens of dApps are more volatile than ARB, the swap can hardly diversify treasury’s holdings
• Treasury doesn’t have the expertise or knowledge to manage the holdings of many external tokens
• Governance quality is now considered. As per mentioned by Wintermute, if the external dApps does not have a sufficiently decentralised governance and the treasuries are handled by the team, the quality of Arbitrum governance can suffer
• Lastly to seond jameskbh, mature dApps don’t have motivations to swap with Arbiturm
  • Do they want more ARB to participate in governance? Maybe
    Do they want the Arbitrum DAO involved in their governance? Uncertain
    Do they believe that ARB will outperform their own token in 1 year? Uncertain
• Also Jojo pointed out the liquidity problem
  • “we are talking about coins that have a relative low cap and relative low liquidity. GMX, the biggest of the pack, has a 250M cap, with around 20-25M in liquidity in dexes. Even just advertising in 1y that the foundation is mobilizing whatever amount of gmx to be sold would be likely have some effect on the market. If i look at camelot, having an 18M cap, the effect can be even bigger.”

There are some merits to this idea , but the current proposal is coming from the wrong working group and is poorly defined and specced in terms of how the tokens will be managed.

[duokongcrypto]

The highlight of the proposal is to ensure the long-term cooperation between the project and Arbitrum through the lock-up period and unlocking mechanism, and to provide a reference for future incentive programs. The token exchange pilot proposal is to strengthen the two-way coordination between the Arbitrum DAO and ecosystem projects, and to enhance the governance and eco-development through the token exchange, and the proposal is beneficial to both the DAO and the ecosystem, but to ensure that the token exchange is The proposal is beneficial to both the DAO and the ecosystem, but ensures transparency of the token exchange and oversight of the implementation process. Is there a more concrete implementation and detailed proposal?
In addition, seeing that the cost of implementation is so high, and the weekly payroll, I think it is still in the discussion period, which needs more deliberation and community discussion.

[kuiclub]

With regard to the cost component, I feel that the implementation budget of 130,000 ARB needs to be made more transparent, in particular the payment of 3,500 ARB per week. Whether this amount is reasonable and matches the actual workload needs to be carefully evaluated.
In addition, the 2,000,000 ARB token exchange budget mentioned in the proposal is high, but the unused portion can be returned to the DAO as a safeguard.
Overall, I personally think the fee structure is on the high side, and if implemented needs to ensure that all funds are spent on what really drives the program forward

[EzR3aL]

Voting against for the reasons mentioned [Non-Constitutional] Arbitrum Token Swap Pilot Program - #17 by EzR3aL