[Non-Constitutional] Treasury Management v1.2

[Entropy]

Thank you to everyone who provided highly valuable feedback. Please find the relevant responses below.

@Larva

How will 15M ARB be swapped to stablecoins within 3 months? Will it be sold directly on CEXs or via OTC? Could this cause significant market volatility? Given the current liquidity shortage, 15M ARB represents a large selling pressure. If not handled properly, it could harm all ARB holders and the overall interests of Arbitrum DAO. Is there a detailed plan in place?

This will be up to the TMC to decide/design (and ultimately the DAO to ratify via Snapshot), but some options include OTC, an Aera or Enzyme-like product that can TWAP out of ARB over a specified time period, periodic CEX spot sells, putting the burden on the Arbitrum Foundation, etc.

@Larva

How can we ensure the security of funds during transfers and subsequent management? Will the ARB and ETH stay on-chain, or be moved to CEXs? If transferred to CEXs, maintaining full transparency will be challenging. What contingency plans are in place in case of a hack or theft?

The Foundation will serve as the counterparty/custodian for these funds. When researching other treasury management programs, it became apparent that the DAO as the direct counterparty for treasury funds is a legal gray area, and having a foundation with clear jurisdiction and laws to abide by is the proper path forward.

For the TM track, this will again be up to the TMC and ultimately the DAO once it ratifies the path forward. Our personal opinion here is to keep all TM funds onchain with non-custodial infrastructure, but that is just our opinion.

For the GM track, hack or theft is a legitimate concern. Some of the deals that are brought forth to the DAO will inevitably include smart contract risk, require sacrificing the element of non-custodial, among other things. But please note that the DAO must approve these deals on a case-by-case basis and weigh the pros and cons of each offer brought forward by the GMC. It’s very difficult to define all of the risks given how different every deal could be in nature. But in our opinion, the important point is that the DAO is the ultimate decision-maker on all deals and no funds can be allocated unless it garners support.

@BlockworksResearch

It’s good to finally address this conversation. Given the overlap between the proposed Treasury Committee and the Growth Committee, what are the plans for STEP II and its Steering Committee? Should we consider these as completely separate initiatives?

For now, Yes. But we believe that it’s possible for OpCo to consolidate the roles of the TMC, GMC, and even the STEP Committee over time once it’s established, creating a unified treasury management function for the DAO (assuming the DAO wants OpCo tasked with doing so, which would of course require a DAO vote). As the OpCo is drafted now, there will be an individual who has extensive expertise in finance on the OpCo team. It is difficult to predict what the DAO will want and how OpCo will evolve, but we do believe it makes sense for OpCo to play a role in budgeting, treasury management, etc.

@jon1

what happened to dao budgeting? wasn’t there a consensus that dao-wide budget needs to be figured out before deploying any capital and treasury-management in general?
like this treasury is not gonna go anywhere, why the rush?

We agree with you that a DAO budget is sorely needed. However, as mentioned in the proposal, this task seems better suited for OpCo if we truly want it done the right way. Also included in the proposal is the foregone yield on the DAO’s ETH by doing nothing to date, which has led to an opportunity cost of $1M thus far. We feel as though the DAO needs a “checking account” in stables to hedge against lower offchain yields (STEP) that can also cover service provider short falls due to ARB volatility to enhance the service provider experience of working with Arbitrum. Setting up such a structure will take some time, and it’s beneficial to start putting the foundational pieces in place. 15M ARB is a lot of money, but it isn’t in relation to the DAO’s historical spending. The remaining 10M ARB is for ARB-only onchain strategies, so even though the yield will be extremely low, it’s good to have the service providers onboarded and the infrastructure in place so that the DAO can have many options at its disposal in the future for treasury allocation.

@cp0x

You are offering 30k ARB, which is 5k ARB per month for committee members.

This is a small amount and therefore, it may not be as effective if you do not use incentives for these committees.

Very often, when giving funds to management, performers can count on an additional bonus for achieving the result. I think this is worth considering.

You are not the only one to call this out. Thank you for doing so. The original rationale was aligning committee members with the Treasury/DAO’s long-term success, hence the ARB-denominated payment terms with a vest. Additionally, the amount was small considering the project returns / small size of the allocation. For example, 7.5M stables earning 10% and 10M ARB earning 2% would ultimately return 750k stables and 200k ARB per annum. If the overhead of the program gets too high, it hardly makes sense to conduct the exercise in the first place. We must also consider the fees of the service providers themselves. Frankly, we would like to increase the TM allotment to 35M ARB, but given the reluctance of community members on this topic, we need to gather more information before making changes to the sizing.

With all that being said, we have changed the compensation structure for the committee members to 10k USDC per member per month, totaling 60k USDC for each member over the course of their term. Additionally, payment to committee members has been amended to ensure deliverables are met.

@cp0x

And finally, why was the amount of 10 million ARB chosen for the Treasury organization? Given the expenses you indicated,

do you expect the committee to earn at least 1.24 million USD per month from these funds?
If not, then why exactly this amount?

The monthly expenses were provided solely to give the DAO some added context into how much we spend on general operations (service providers, grants, and council members) given some community members’ requests for a DAO budget. The goal should, in our opinion, be to cover a significant portion of DAO OpEx through treasury activities over time, but we felt this data point helped justify a 15M ARB conversion to a stablecoin balance to cover service provider shortfalls / other stablecoin needs.

@BlockworksResearch

We agree that the ARB token is in poor standing. Referencing Sidd’s State of ARB report, we can see that liquidity for ARB on centralized exchanges has dropped significantly, with trades as small as $2 million possibly causing a 20% price impact. With this in mind, swapping into stables on CEXes seems somewhat difficult; to echo @Larva here, is there a plan to OTC the ARB instead? Additionally, in general it has been observed that ARB’s liquidity is low compared to its market cap.

15M ARB being sold over the course of 3 months is, in our opinion, being overstated in terms of market impact. This represents a fraction of the amount of ARB that has been released into the market when compared to incentives programs and other DAO expenditures. With that being said, and in line with our response above, the TMC will be tasked with determining the optimal conversion process, which will ultimately need to be approved by the DAO via Snapshot (thus ensuring the DAO has the final say).

@gauntlet

Before proceeding to a Snapshot vote, we urge the DAO to consider the amount of ARB the DAO is comfortable depositing into this initiative if its intended use is to be used for funding DAO working groups. We’d also ask for clarification around the withdrawal process (e.g., are funds accessible only after six months?) and how the committee will decide which vendor(s) funds will be withdrawn.

Another potential pain point is scalability. Assuming the DAO selects multiple vendors and demand increases for a larger USDC allocation, how is this increase managed? What will the standard be for reporting and accounting? Establishing guardrails around the approved protocols, strategies, and contracts would be prudent to ensure managers act responsibly and toward the appropriate KPIs as they participate in the TMC.

These are 2 excellent callouts. As we mentioned above, we also think it makes more sense to increase the ARB budget for this proposal by 5-10M ARB (bringing the total to 30-35M ARB). However, we need more input from the wider DAO on this topic, as this was a primary point of contention in Karpatkey’s proposal and the working group calls on treasury management, and we do not want to derail the progress of this proposal.

In regards to the clarification regarding the withdrawal process for stablecoins, the reporting and accounting standards, the process for onboarding new treasury managers, whitelisted strategies/protocols, etc… this recommendation will be provided by the TMC and ultimately approved by the DAO via snapshot. We have updated the proposal to include some of the aforementioned points in the TMC deliverables section.

@jameskbh

There is a non-zero chance that both proposals are going after the same resources here (the ETH from the sequencer fees). Is there a plan to better coordinate (or to adjust one proposal) so we don’t “double-spend” the resources? Mostly likely, the Staking Rewards WG will present a study/proposal before this one is approved on Tally.

If the staking rewards source working group arrives at the recommendation of subsidizing stARB rewards by spending ETH that had previously accrued to the DAO treasury, that would be considered a failure from our perspective. The rewards source must be sustainable, and not spend more than the DAO can fund into perpetuity. Therefore, no historically accrued yield should fall into the staking rewards group conversation. These two proposals do not overlap.

@CastleCapital

This proposal is a comprehensive and well-considered approach to optimizing the Arbitrum DAO’s treasury management. We at Castle are in favour of this, with some caveats:

1. We understand the need to appoint members with the right skills and experience to the specific committees. However, a process should be in place to propose and vote out committee members to ensure the governance process continues to be upheld.
2. Regarding the allocation of ARB and ETH now without a defined budget, we suggest a timeline be included in this proposal when the respective committees will revert with a budget breakdown and schedule for regular updates on planned budget utilization.
3. The plan for converting ARB tokens into stables should also be a point for the committee responsible to revert to the DAO prior to execution.
4. How will the committees under Treasury Management be aligned with other initiatives?
5. There should be a performance component to the Committee compensation and not solely be reliant on a fixed fee… we want to ensure the committee is incentivized to achieve the best possible result for the funds managed

1. This is a great point. We have edited the language of the proposal to include a course of action for committee members who are not performing and need to be removed. Please see the updated proposal.
2. Please refer to the above replies.
3. The proposal has been updated in the “TMC deliverables” section to ensure this point is clear. Thank you for pointing this out alongside Gauntlet.
4. The aim of this proposal is to ensure the infrastructure is in place for treasury management so the DAO can move nimbly in the future if a heavier allocation towards onchain strategies is desired. We expect more cohesion across the DAO’s overall treasury strategy (to include things such as STEP) once the OpCo has been established.
5. Payment terms have been updated after overwhelming feedback from interested committee members that the pay was not sufficient. We opted for a fixed rate given the problems that arise from performance-based compensation. We do not want to incentivize riskier strategy deployment due to committee payment structures. With all of that being said, we did add some protections for the DAO by anchoring pay to deliverables by only unlocking ⅓ of payment for each deliverable that is met (RFP approved via Snapshot, and each quarterly report). Please see the updated terms in the revised proposal above.

@Bob-Rossi

Having the DAO approve spend for each investment decision creates a lot of negatives with really no positives. I think needing DAO approval needs to be removed here. The DAO either trusts the people in charge of this or not, forcing them to come back to us every investment:

• Creates unnecessary burden for the DAO & Investment Team, in that every decision must go through a 1 month voting process
• The wait time will affect investment performance. Sometimes high APR events only last days / weeks. Or imagine a case like the LTIPP where incentive periods are only 3 months. Having to go through a DAO approval process could result in the opportunity being long passed by the time its approved.
• Likely will affect the Investment Team’s decision making. If you know every time you change investments you have to go through a DAO vote it incentivizes the project to avoid changing investment products.
• Is going to scare away potential applicants who apply for this role due to it being to restrictive in nature (I’ve already seen this happen with other projects)

We sympathize with this point of view, but given the limited DAO ETH holdings and the significant size in dollar-denominated terms, we feel that it is important for the DAO to remain in full control of how the funds are allocated. For clarification, only a Snapshot vote with 3% of the votable token supply would be required to vote in favor/abstain of the deals on a case-by-case basis, rather than the entire governance process (onchain Tally vote). This is in an effort to reduce unnecessary friction that you have pointed out.

Additionally, we have adjusted the GMC members to include a risk-focused member that can alert the Foundation if funds ever need to be withdrawn from a specific partner protocol due to changing market conditions or other risk-related reasons, and this would not be a decision required to go through Snapshot, but rather would be up to the Foundation to act in the best interest of the DAO.

@pedrob

Finally, I would like to inquire about the rationale behind creating two committees to execute each of the management’s objectives. In my opinion, we should appoint a single person -or entity- to carry out all the tasks. I don’t understand why we would add operational costs and additional discussions. One person, with clear objectives and KPIs, should be able to perform well and be subject to revalidation by the DAO after a set period. In this sense, I align with and support Gauntlet’s comment on prioritizing automation and tools that enable DAO oversight whenever possible.

We went with two committees based on the information gathered from the first two working group calls. Additionally, many community members were against treasury managers charging a performance/AUM fee on ETH strategies given the DAO’s ability to simply stake it. While the DAO could take this approach, and this could end up being the recommendation of the GMC, it makes sense to first see what type of concessions other protocols are willing to make to deepen their alliance with the Arbitrum DAO. This type of work requires risk assessment and BD skills, whereas the TMC requires more traditional financial skills mixed with risk and portfolio construction. The OpCo proposal recently hit the forum, which makes clear there will be an individual in charge of making recommendations on the DAO’s treasury operations with clear objectives and KPIs.