[Non-Constitutional] Treasury Management v1.2

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

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.

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.

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.

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.

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.

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.

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).

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.

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.

  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.

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.

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.

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Thank you for this great proposal ! I agree that Arbitrum DAO requires effective Treasury Management for its long-term sustainability, including using stablecoins to pay service providers and generating ‘safe’ yields on ETH.

I believe that Treasury Management should be conducted by a single entity with clear objectives rather than by two committees. I understand your answer about the rationale of having two committees with different skill set but imo it is crucial to have a macro overview and a comprehensive perspective that oversee the balance between ETH exposure, stablecoins, and ARB tokens. I guess the OpCo position you mentioned will be accountable and will have this role and responsibility ?

The following comments are more ideas that can be useful for the future TMC and GMC:

Regarding the conversion of ARB to stablecoins, which could impact its price, have we considered using ARB tokens as collateral on AAVE to borrow stablecoins? There is still a capacity for supplying 12 million ARB before reaching the cap, as seen here: AAVE Reserve Overview this could be a way to get Stables without selling ARB token.

To demonstrate alignment with Ethereum, it could be good to allocate ETH to some LSTs/LRTs that support minority Clients to avoid having one that represents >66% of the total. You can learn more about this in this tweet from our Treasurer at Kleros Cooperative, Juan.

Good to see Arbitrum DAO moving forward with Treasury Management !

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The rework of the proposal as of October 30th is good, the only thing I’m missing is a focus on investing the treasury on protocols/projects that are value-aligned with the Arbitrum DAO. In this case, this would be a focus on transparency and decentralization. I know that the DeFi collective will son release DeFiScan, which is kind of an L2BEAT for DeFi protocol decentralization. I think while it’s still ramping up, we can go for a much simpler system with a couple of questions like:

  • Does the protocol have governance?
  • Is that governance onchain?
  • Is the code of the project open-source?
    Happy to brainstorm more questions, but this could be a way that we give protocols on Arbitrum a big incentive to be open source and decentralized.

Following additional feedback from delegates, 2 additional changes have been made to the proposal on November 6, 2024:

  • The pay for TMC and GMC members is no longer monthly, but instead tied to deliverables. Timelines were also added to the TMC and GMC deliverables, thus ensuring the proposal moves forward in an efficient and timely manner.
  • The RFP processes no longer need to be approved via Snapshot, but instead just their recommendations. This is inline with how STEP was run.
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I’m sorry for coming back at this only now, and for my apparent lack of clarity:

The ETH can be used in different ways and accrue yield. And this be a source for the staking program. So yes, this ETH can be seen a type of asset for that other initiative.

I’m in favor of this proposal; I think securing and growing the DAO’s funds is key for continued progress. I support exploring diverse strategies to secure ETH holdings, particularly in ways that promote decentralization within the Ethereum ecosystem.

I think its a good idea to consider allocating ETH to Liquid Staking Tokens (LSTs) or Liquid Re-staking Tokens (LRTs), especially those supporting minority clients, as well as exploring Distributed Validator Technology (DVT). These mechanisms align well with diversified staking approach, protecting against over-centralization and increasing resilience.

This proposal should include a risk management framework to establish a systematic process to evaluate smart contract, counterparty, and market risks. I understand the TMC will be in charge of building this framework but an overview would be very helpful. About the TMC and GMC members, more visibility into their backgrounds would be useful, not to question their qualifications but to better inform our decisions as delegates.

Finally, I believe its important to consider insurance solutions for on-chain and CEX assets as a proactive measure. Of course, integrating KPIs such as target yield, liquidity improvement, and risk-adjusted returns is always a good idea and will provide transparency to the DAO.

The point is that such a solution does not require any working groups, it is an obvious solution.

Therefore, it is logical that this source of income alone is not enough to justify the creation of working groups.

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.

Appreciate taking the time to respond to this. Hearing it would a) only be Snapshot & b) there is a non-voting escape mechanism alleviates some concerns.

However, I think I’m still in the ‘agree to disagree’ camp here, but maybe more explanation would help. Is the expectation of Growth group a more long-term approach or short-term one? If the plan is to drop the ETH somewhere and let it sit for a year then I think this isn’t as big of a deal… but if the DAO is going to have to have constant because we’re putting 1000 ETH in protocol abc this month and then half the ETH is sold off to go into protocol xyz the next month and then 100 ETH a week is going into protocol 3… and so on… I think you run into those risks I noted before.

And the more I think about it, from a delegate perspective that seems to open the project up to issues with voter fatigue and conflict of interest concerns.

Just my thoughts, I’m really for Treasury Management (I’ve seen too many DAOs die from avoiding this) so I’m don’t want to throw the baby out with the bathwater, but I think this really something to think about.

I think you missed the point as well.

There is a potential conflict between what this proposal see as available assets to manage and the assets the staking WG sees as assets avaliable to generate yield for staking.

Is it a big deal? Probably not. But if the staking proposal earmarked them beforethis one, this proposal will have:

  • Or fewer assets to manage
  • Or manage them to generate yield for staking and not for other purpose/initiative or other objectives.
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We’d like to request some confirmation on this qualification. This does not match our recollection as longtime MakerDAO contributors, and occurred while Austin was still working at Citi, according to LinkedIn.

Hey GFX! We reached out to Austin and highlighted this question, and in order to get back to you very quickly given it’s a serious consideration for the wider DAO, we are posting his response below:

“At Citi we were interacting with multiple stablecoin issuers and advising them. I cannot speak further about that given confidentiality issues but you can perhaps draw some conclusions. Additionally while at Paxos I ran many of our stablecoin partnerships to keep Paxos coins deployed throughout the ecosystem and part of key facilities, including interest sharing deals, which you can also likely draw conclusions from even though I can’t give specific terms.”

We hope this helps alleivate any skepticism.

Lastly, we are happy to host an open governance call with both TMC and GMC members prior to a Tally vote where anyone can ask questions/raise any concerns with the appointed members. It is of utmost importance to us that the DAO feels confident with these two groups’ members. Please let us know if you think this type of call would be helpful.

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We’d like you to inquire a little more, or we can do it at the governance call. For more context, our confusion arises from the following:

Carl Vogel was the point of contact at Paxos for the USDP (then still called PAX) in summer of 2021. Carl proposed the USDP PSM. Inquiries to other contributors, while anecdotal, couldn’t locate records of contact with Austin until the following summer of 2022.

It’s also notable that Paxos broke its commitment that was part of the onboarding terms. This was partly while Austin was at Paxos for 10 months of 2022:

While there was a later revenue-sharing agreement between Maker and Paxos, this was after Austin’s tenure at Paxos and was negotiated by a third party consultant in 2023.

We’re not saying it’s impossible Citi was advising Paxos on what to do here unbeknownst to Maker, but it was Carl Vogel who got the deal approved at Maker as the Paxos representative. Austin was not at Paxos until half a year after the USDP PSM was approved, and had left half a year before the interest-sharing deal with Maker was proposed.

Perhaps Austin has great qualifications, but we wonder if there is confusion about the extent of his involvement to negotiate USDP’s inclusion at MakerDAO. The original deal also was not honored to the best of our knowledge, so it’s not a recommendation in our eyes, (though we are biased as longterm MakerDAO contributors who helped approve the original onboarding).

So I will answer this one personally:

There is a lot I cannot say here for confidentiality reasons, but you will note that the DAI support being added to the Paxos platform, as was committed to in 2021, includes several components:

1 - DAI being listed on the platform (which includes going through the listing procedures of Paxos, which are agreed upon by the NYDFS and might require regulatory approval depending on the nature of the asset listed)

2 - After such approval is received, engineering actually doing the work to onboard it (e.g. custody, buy/sell as if it were USD equivalent, and deposit/withdraw) and then having this reviewed (potentially both audited and also approved internally and potentially externally)

3 - Neither of those were completely under the control of the partnerships or DeFi team, and at least one of them was not unilaterally under control of Paxos at all (if not both, depending on exact terms).

Obviously I cannot say more than that re: specifics, but it might be the case that there should have been some questions around promising fixed dates in deals when Paxos was not in unilateral control of those dates as opposed to commitments on a best efforts basis, contingent upon external/regulatory approvals.

On the revenue sharing, one might note that initial discussions for that began in early 2022 with negotiations that had to span product, strategy, and the treasury team, and that Trident was hired by Paxos to manage those things after certain personnel had left the firm in all three of those groups, as there were a number of departures from those teams.

Put differently - if you have serious concerns or think I actually lack risk management or treasury expertise despite having built the modern reserves, disclosure, and risk management framework for the only stablecoin in the entire industry to go from double digit billions to nearly zero without losing anyone’s money in the process, I’m more than happy to step aside and let someone else attempt this. Is that your ask?

A

No, we don’t really have an opinion on portfolio management at Paxos because we don’t have much insight into it.

It’s more that you did clearly not address this:

  1. USDP was onboarded in 2021. You did not begin working at Paxos until 2022.
  2. We don’t recall your involvement in including USDP in the PSM.
  3. Contributors we reached out to and public documentation do not support your involvement in the inclusion of USDP in the MakerDAO PSM.
  4. You didn’t address this in your reply above.

This is simple diligence in response to a discrepancy in one of the main credentials presented, our own recollection, and documentation we could locate today. We look forward to resolving that discrepancy.

I did address that, so to be very clear:

“Obviously I cannot say more than that re: specifics” means there are confidential business, regulatory, or legal issues that I’m not allowed to speak about on a public forum under any circumstances that are central to the discussion you keep attempting to have on a public forum.

I genuinely cannot tell if you are not picking up that point or you are specifically fishing for confidential information, but to be clear I take my professional obligations around these things exceptionally seriously so you can vote yes or no based on the current disclosed information and there will not be more forthcoming.

Put yourself in our shoes.

Imagine someone applied for a job, citing a business deal that you were on the other side of. You have no recollection of them. And their work history seems to also contradict the claim. And your colleagues likewise can’t locate any points of contact with that person in that time period.

Help us out here. We’d be negligent not to follow up on this. You have the benefit of the doubt, but we still have to verify.

Can you maybe provide someone to confirm your involvement? We’re not looking for confidential information, just a way to verify the claim. Happy to chat in private channels as well, if it’'s something that, while not under NDA, you don’t/can’t share publicly.

ACI are supportive of the v1.2 of this proposal and would be happy to work with the committees on deploying funds to Aave on Arbitrum to achieve their goals of supporting Arbitrum DeFi.