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.

1 Like
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)
3 Likes
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.

1 Like
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?

1 Like
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:

4 Likes
8

While we appreciate the initiative to further diversify the treasury and support the growth of RWA on Arbitrum, we agree it’s important to first assess the outcomes of the initial STEP program before allocating additional funds. By analyzing detailed reports and performance metrics from the first iteration, we can identify successes and areas for improvement, ensuring that the next phase is even more effective.

Regarding the ARB price, we’re currently at a low point, but it’s uncertain whether it will drop further. Hypothetically, we might regret not selling earlier. To avoid the risks of speculation, it’s better to follow a consistent strategy like DCA. You could also set a rule to sell if the price increases by more than 10%, allowing you to capitalize on gains without getting caught up in emotional decisions.

Could you provide any specific data or analysis to support the statement? It would be interesting to see if there are financial models or historical precedents that back up this approach.

Thanks you.

9

The following reflects the views of the Lampros Labs DAO governance team.

We welcome the move to diversify into various sectors of RWAs, which signals strong support for projects deploying on Arbitrum. However, there is still some confusion about when the ARB will be liquidated at the target price of $0.85. The alignment of major projects deploying on Arbitrum will likely happen with the completion of STEP 2.

While allocating ARB for GCP & Foundation Strategic Partnerships is important, the risk of depleting ARB tokens in the treasury may leave room for governance attacks at a lower cost. If not in this proposal, this issue should be addressed.

Additionally, directly holding the tokens and saving the 1% AUM fee is a beneficial improvement.

1 Like
10

I’m happy to join the discussion, as I will soon be a delegate in the Arb DAO :). I noticed there was no outcome report from the previous STEP, which makes it difficult for me to evaluate the current proposal. Am I missing something? Is there a report for STEP 2?

Btw, I support diversifying the treasury and promoting the growth of RWAs on Arbitrum, especially since RWAs were a hot topic at Token2049 this year and are expected to be significant in near future.

11

I now recognize the significance of diversifying DAO funds, at least it would make external expenditures much more convenient. My only concern remains the same old issue that everyone talks about: transparency in fund management. Can the current strategy completely eliminate irregularities or even misuse in fund management?

12

We support the STEP 2.0 proposal. We believe aUSDC would be an excellent addition to the program. As a safe, yield-bearing stable asset, it aligns well with STEP’s goals of stability, liquidity, and uncorrelated yield.

We look forward to participating in the RFP process and potentially contributing to Arbitrum’s treasury diversification strategy.

1 Like
14

Overall, the direction of the proposal is good, but clearer implementation steps and transparent communication could be used to ensure that the program is implemented smoothly and to best effect.
For example, I would have paid more attention to topics related to the timing of conversions, the value of conversions, risk control and risk diversification.

If practicality is predicated on concrete processes and results orientation, the community needs to be transparent and engaged by having regularly updated reports to report on progress, especially regarding the conversion of funds and the selection of projects.

15

This is good feedback and one reason why we want to wait until the first report from STEP comes in before moving to any vote.

Still thinking through the best way of liquidating. One option is dollar cost averaging to make sure there is a STEP held within a definite timeframe, creating predictability. Another is to be strategic in building up an endowment without compromising Arbitrums security, since the security of our protocol depends on ARB token price and we already have a $30 million endowment through the first program.

You can see Karpatkey’s report which did some financial modeling to try understanding how ALL expenses can be covered from yield earned.

If we follow a patient strategy where diversification for STEP can only happen above a floor price set by the earlier diversification programs, we should reach 10% of present expenses covered via yield (~250 million RWA endowment) with 5% of treasury.

That also leaves ample room for other diversification initiatives like the treasury manager proposal, GCP, etc

16

This one is actually quite a difficult one to answer and hinges in part on whether STEP is an ecosystem growth initiative or a treasury diversification one.

if its the former, we want to ensure STEP is an annual occurence. If its diversification, we want to be patient and strategically build up the endowment with a good rate.

This is one reason why @GFXlabs insisted on yield being streamed back to the treasury.

As long as we know that managers are only responsible for protecting principal, with all interest being put back in our treasury, it is much easier to ensure there is no irregularity.

Makers experience is that programming yield to cover expenses, compound the principal, etc just adds complexity which makes misuse easier to hide.

@steakhouse will be coming out with a report after allocations are complete and they sign a contract with the foundation. we will only be moving this to a snapshot after the first report comes out for voters to analyse.

Curious to know which of these 2 goals you think is more important.

Currently thinking through liquidation strategies in STEP programs, which would be quite different depending on the goal.

Will be great to have your application in the next iteration of the program! Feedback we’ve got is that even if service providers were not chosen, they appreciated the indepth look into their product

1 Like
17

We appreciate the vision behind STEP 2.0, as building a sustainable endowment through real-world assets (RWAs) is crucial for the long-term stability of the Arbitrum DAO. However, there are several concerns that need to be addressed before we can fully support the proposal.

Key Concerns:

  1. Performance Reviews and Reporting from STEP 1:
    We believe that before allocating an additional 35 million ARB, there should be comprehensive reporting on the performance and outcomes of STEP 1. While there have been positive developments like OpenEden’s TVL increase and Ondo’s token launch, we still lack formal performance reports that clearly demonstrate the success and lessons from STEP 1. Transparency is key here—without it, we risk compounding any inefficiencies from the pilot phase.

  2. Program Manager Compensation:
    The proposed doubling of ARB for management raises questions about whether the program manager’s compensation should also be increased proportionally. While managing more assets could justify additional compensation, there needs to be clear evidence of outperformance or added responsibilities before considering any adjustments to the program manager’s pay. Proper evaluation of their role and deliverables from STEP 1 would help guide this decision.

1 Like
18

I’m for this, as I think treasury diversification is important. However I would agree with others that we should get some type of reporting on how STEP 1.0 has gone so far. Has any type of update / tracking dashboard been provided so far?