Non-Constitutional: Stable Treasury Endowment Program 2.0

Proposals
1

Abstract

This vote authorizes transfer of another 35 million ARB to the STEP multisig for the next edition of the Stable Treasury Endowment Program (STEP), for diversifying Arbitrum DAOs treasury into real world assets that are stable in value, liquid in conversion and have yield uncorrelated to crypto markets. The ARB will be converted by the Arbitrum Foundation only when macroeconomic conditions improve and the total amount obtained is similar to or higher than the first iteration (which got $30 million). The goal of the STEP program is treasury diversification along with ecosystem growth for Real World Asset (RWA) protocols on Arbitrum.

Motivation

This proposal kickstarts the next version of the Stable Treasury Endowment Program, which aims to grow the RWA ecosystem (many of the top protocols do not need grants so much as AUM for their product) while simultaneously diversifying our treasury into stable, liquid and yield-generating assets (the volatility of the ARB token has highlighted the need for prudent diversification based on fixed targets).

The RWA sector is currently $12 billion (it was $1 billion at the time of STEP 1), growing at leaps and bounds with much room to grow even further considering the US treasury market by itself is $20 trillion. To stay on top of this competitive sector, we need reliability and consistency in the programs we run for this vertical.

At the same time, we have seen increasing interest in treasury diversification initiatives across Arbitrum DAO. We propose 3 clear principles to follow in dealing with service providers proposing to help with Arbitrum treasury diversification;

  1. Directly own the process of selecting stable assets providing yield rather than delegating to a treasury manager (no point paying 1% AUM for them to hold low-risk assets on our behalf).

The STEP program is an example of how this can take place: an RFP under which projects apply with their product; a committee to review applicants; a program manager to monitor selected products

  1. Diversify the treasury in a manner that also promotes ecosystem growth, by conducting a competitive process where the legitimacy of Arbitrum DAO selecting a providers asset is as valuable as the business they get from it

Accordingly, have projects directly apply in a competitive process on our forum if they want us to diversify into their product and be ratified in some way through a vote, not privately approach a treasury manager to get included

  1. Use fixed targets for conversion to obtain a better bang for our ARB and reject treasury managers proposing point-in-time diversification below the target

We propose additional treasury diversification take place at a rate close to or higher than the first STEP program. Since we already have $30 million converted into stable RWAs, there is no urgency for more diversification at a significantly lower price.

Rationale

In mid-2024, Arbitrum DAO diversified $30 million into stable, liquid & yield generating RWAs. A comprehensive RFP process was undertake, where the DAO received 33 applications from RWA issuers, of which 16 were shortlisted and 6 were finally selected for allocations: Securitize BUIDL ($9.57 million), Ondo USDY ($5.22 million), Superstate USTB ($5.22 million), Mountain USDM ($3.48 million), OpenEden TBill ($3.48 million), and Backed Finance bIB01 ($3.48 million). These allocations helped us diversify the treasury into dollar denominated assets, got selected providers to launch on Arbitrum and are expected to generate a yield of roughly $1-1.5 million per year for our treasury.

While the 1st program narrowly targeted low-risk and liquid instruments (primarily US treasury bills and money market instruments), the second version will expand its scope to include products in private credit, equities, commodities and global bonds. We saw breakout interest from service providers with such products in the 1st version of STEP and had to turn down the majority of them due to a limited mandate. The dashboard at rwa.xyz lists these categories as fast-growing and we should be at the forefront of nurturing such products.

Overall, this proposal aims to achieve 3 broad objectives;

  1. Show that Arbitrum has a plan for the RWA vertical and such projects should build on our chain, by expanding the STEP program to more categories than just U.S. treasuries

  2. Let the DAO directly own stable RWAs through a competitive selection process for providers, instead of paying 1% AUM to treasury managers for selecting and holding low risk assets on our behalf. Use yield from the products to cover operational expenses.

  3. Provision funds ahead of time for optimal execution, so that the next STEP program is of a roughly similar value or higher than the last one ($30 million) at the same price tag, by waiting until the right macroeconomic conditions before liquidating the budgeted ARB

Specifications

  • We will transfer 35 million ARB to the same foundation managed wallet (0xe41d54471EfA03eFF6365795f60545F3cAF7C97e) used in the initial STEP program
  • The foundation will at their discretion either set limit orders for ARB or liquidate after average ARB price over the last month is close to or higher than the amount received for the initial STEP program
  • The Arbitrum Foundation announces availability of funds on the forum after completion of orders, kickstarting the next phase of an RFP for RWA projects to apply under on the governance forum
  • While funds are awaiting optimal execution or soon after, proposals are passed ratifying the RFP, committee composition for selection of providers, asset types, eligibility criteria for STEP 2 and other required details for running the program
  • Funds are allocated to selected providers after ratification by the DAO

Steps to Implement

The focus of this proposal is ensuring we have sufficient time to optimally convert and receive adequate funds for the next STEP program, along with laying out some general guidelines for treasury diversification into stable assets (no AUM % fees on stable assets, focus on ecosystem growth in diversification, do not diversify when macroeconomic conditions are poor).

Concurrently, the STEP steering committee (not involved in this proposal) is putting forth its own implementation budget to complete its research on STEP such as types of assets, eligibility criteria, liquidation methods, selection procedures and more. These deliverables will come into play after we are ready to run the next iteration of the program, upon successful conversion of the ARB into stables by the foundation, at a price similar to or higher than the last iteration of STEP.

Timeline

Forum Discussion: September

Snapshot vote: After first report from STEP 1 is released

Tally vote: After first yield from STEP 1 comes into our treasury

Indefinite : Waiting for optimal conditions before commencing diversification at a rate either higher than STEP 1 or not significantly below it

Overall Cost

Work on this proposal has been funded by Thrivecoin’s ThankArbitrum Firestarter program, so there are no implementation costs baked into this proposal. The Steering Committee will separately put forth its own implementation budget for working on the necessary research into the STEP program.

The only direct cost incurred with this proposal is the 35 million ARB to be converted by the Arbitrum Foundation at an opportune time to hold the next edition of the STEP program.

2

I am generally for diversification.

However, I have several questions:

  1. What are the results of the previous pilot stage of diversification?
    (It seems to me that this stage is only at the beginning of the path and there are no results yet, which means it is too early to draw conclusions)
  2. Since there are no results, how can this program be expanded?
  3. We have found financial discrepancies in the payment of the manager of this program. Given the increase in the amount of funding for which the manager is planned to be responsible from 35 to 70 million, should the manager’s funding increase? If so, then it is worth including these costs in this proposal.
  4. And finally - what results will be acceptable for the community, what are the specific goals of this stage?
    (It seems to me that it would be good to think through the strategy, what costs the DAO bears, how much we compensate with this program and what further steps to equalize expenses and income, if this is the goal)
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3

How can we define optimal conditions? Is it at ARB price at $1, $2 or $5? This is a tough one.

Maybe setting a timeline of slowly DCAing ARB into stables over some time (6 months for example) would be a better option?

4

i’m sorry but

  • how can we extend the program if we didn’t even see the results of the first one? Is the capital of the first one even allocated?
  • how can we extend it if we are even voting for more fund/no more fund/election for the pm of the previous election?
  • how does putting a limit price to arb be consistent with the goal of growth + diversification knowing that that price might just not happen and so the whole initiative could not be live for a long time?
  • has there been any consideration about the meaning of having an official, advertised, sell order of a certain amount in the market? That info is not something you want around and can be gamed for profits

To me it seems like this proposal is not only not well timed (no step results, literally program didn’t even start), but also doesn’t take in consideration the necessity of doing it vs the price of the underlying assets we have. And, the mechanism to solve for that, are not good enough.

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5

Hello!

I have some questions: why have this proposal detached from the revamps criteria to allocate the funds? At the first iteration, we decided the amount as well. For example, if the committee identifies more opportunities and it makes sense to have a higher amount deployed?

It doesn’t make much sense to have this proposal before the work of the committee, IMHO.

6

Generally speaking, we’re in favor of this proposal; however, we have a few concerns. While we know the previous STEP term recently concluded, we believe it would be best for the DAO to have some evaluation to see how performance of STEP was carried out previously. Steakhouse offered to complete monthly reports at the close of each calendar month following the first deployments for each program, should we expect something similar to this?

Moreover, when should we expect the first round of transparency reports, there was prior mention that these would come with the first deployment of capital from the program.

We understand that RWA deployments are a slow and lengthy process from start to finish, but as others have pointed out, it is difficult to move forward without some review of prior results or operational workstreams.

In the STEP Committee Recommendation thread, there was a list of general reflections, has there been any changes in the operational pipeline to answer some of the reflections prior?

7

Thanks to @cp0x for kickstarting the discussion and to the others for pitching in with questions. Can already see a major change to the proposal on the timing for putting this up for vote.

The reason to not do simple DCA is I don’t think we should be liquidating anything when ARB is at all time lows. We already have an endowment of $30 million thanks to STEP 1 and so we should play additional diversification from a position of strength and without urgency to increase its size.

The only instructions given in the proposal are to not liquidate at a price that is much below the rate obtained in STEP 1, primarily to address the valid issue raised by @krst

We have obtained some greatly positive results on the ecosystem growth front. @OpenEdenLabs has massively increased their TVL from $30 million at time of application to $115 million; Ondo USDY launched on Arbitrum following their selection; and Securitize (BlackRock distributor) is on Arbitrum, to name some Ws.

Franklin Templeton was rejected in part because we would have had to take funds to Stellar (their primary blockchain at the time), but they too have since launched on Arbitrum in August, showing some indirect ways STEP has made us a chain you need to have a presence on if you are in RWA.

The above comments are valid that we need to see how the program itself performs in giving us an endowment where we can spend from yield earned.

I propose that we take STEP 2 to a snapshot vote only after @steakhouse has completed at least one of their monthly reports, and to tally only once some yield from STEP 1 trickles in to our treasury. Until then, we keep the proposal open for iteration, discussion and improvement.

Steakhouse’ term as program manager is for one year only. I’m hoping that we have STEP 2 complete by the time their term ends, so that the new election for program manager will have the updated endowment amount and program managers can give quotations accordingly. It will be tricky timing though.

Ah this was the tricky part on which there was some back & forth with Matt from @Entropy. Creating a publicized sell wall is probably not a good idea, which is why we have left so many details vague and up to the interpretation of the foundation finance team, not even specifying what “similar” to the last STEP program exactly means.

The main reason to pass this sooner rather than later is so the foundation finance team has time to cook. The longer the period for conversion, the better the rate and lesser the price impact. More generally, I believe doing 1% of treasury every year for 5 years will set us up for long term success.

i hope you agree we should at least avoid the DCA over 7 weeks like we did in STEP 1. The work of the committee should proceed in parallel with transfer of funds to the foundation for STEP, not sequentially, if we are to be smart about timing.

The foundation required the snapshot vote ratifying the program manager terms of tenure to be complete before signing an agreement, so hopefully should be soon as that just got over. I am hoping we get their 1st report in Uptober but it might be November too, all in the hands of the foundation at this point.

Getting the funds to the finance team sooner for better conversion is the first of the changes. We were lucky in the 1st edition of STEP to obtain a decent endowment size, but we shouldn’t be relying on chance (it could have been much worse).

There will also be an incoming proposal from the STEP steering committee to work on the RFP for STEP 2, which additional asset types should be eligible, the members of the selection committee, etc :soon:

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