Proposal [Non-Constitutional] Arbitrum Treasury Token Swap Program

Title – Proposal [Non-Constitutional] Arbitrum Treasury Token Swap Program

Abstract - We seek comments on the Arbitrum Treasury Token Swap Program, a proposal to elect 5 dealmakers for negotiating token swaps with top apps in our ecosystem. This proposal does NOT seek to transfer any large funds, only enough to elect, empower and compensate dealmakers who upload token swap agreements on Tally for ArbitrumDAO to directly approve.

Motivation - This is the second of the Stable Treasury Endowment Program proposals put forth by the Treasury Working Group, formed in September ‘23 with a mandate to propose best in class solutions for diversifying Arbitrums treasury, currently containing ~3.5 billion ARB.

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.
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Rationale

A. Ecosystem Growth : We see broadly three categories of projects that would benefit from and apply for token swaps

  1. Builders: Some founders, such as Susruth Nadimpalli of Catalog (Ren Protocol), were seeking an L2 they could devote themselves to. A token swap emerged as one way to ensure they build on our chain.

  2. Mature Apps: Many of the top apps in Arbitrum have their own token. Although some of them have ARB in their treasuries because of the airdrop, we do not possess any of their tokens. We think ARB DAO should seriously think of getting a nonzero amount of the top tokens in our ecosystem to promote closer integration with successful dapps on our chain and more generally create positive sentiment in the ARB ecosystem.

  3. Orbit Adoption: The third category consist of big players that want to launch their own Orbit L2 or appchain. For example, Celo is researching a tech stack for their chains. A token swap deal can help cement their decision of choosing Orbit over its competitors for their L2.

More broadly, getting a voice in the apps in our ecosystem may prove critical in the future for ensuring they remain Arbitrum aligned (such as by voting against their migration from our chain). At the same time, for it to truly be an ecosystem growth initiative, we need to ensure it doesn’t appear that the DAO is picking winners and that the source of tokens we receive in the swap is not from the founder encashing their holdings but a community treasury with clear guidelines on holding periods.

B. Treasury Diversification : The first proposal by our WG diversified our treasury into stable RWAs such as tokenized t-bills, while helping with ecosystem support through the DAO being a customer of such products built on our chain. The present token swap proposal takes this one step further by becoming more closely integrated with apps in our ecosystem through owning their tokens.

More generally, we do not think apps that have launched their own token should be receiving large grants from ArbitrumDAO. People will always line up for free money; but when they have to give something in return such as their token, they would be more judicious about the amounts they are requesting.

Some of the risks to take care of are avoiding what happened to FTX with their BitDAO token swap. After $BIT migrated their token and became $MNT, they invalidated all tokens held by the FTX estate by preventing their exchange. We also want to prevent one sided deals where we hold in perpetuity while the other side liquidates ARB received. In the future, a DAO treasury manager could keep tabs on alt tokens in our treasury and recommend or even unilaterally hold power to liquidate them with an explanation to the DAO.

Specifications

One big issue with token swaps are price increases upon announcement of a deal. We want to mitigate this issue by the elected dealmakers making the announcement of projects shortlisted via an onchain proposal on Tally, with the applicant locking in terms of the deal using Hedgey’s token swap escrow tool and Arbitrum DAO accepting or rejecting the deal via a direct onchain Tally vote.

All shortlisted applicants will need to undergo KYC with the Foundation, before any deal is uploaded on Tally.

We would also let dealmakers negotiate the vesting lengths, lockup periods and other details, which would vary depending on the applicants requirement (a builder seeking a token swap would be different from one launching their orbit chain and wanting a voice in governance).

Steps to Implement

  • Snapshot approval of the proposal

  • Elections for dealmakers held on Snapshot

  • Tally vote approving or rejecting the dealmakers elected in the Snapshot poll and transferring remuneration to them (in case the DAO is not satisfied with the candidates or changes its mind, they can reject the proposal at this stage).

  • Dealmakers put out an RFP for projects to apply for token swaps with Arbitrum DAO

  • Shortlisted applicants complete KYC, lock up their tokens in escrow and dealmakers upload the deal on Tally ; if passed, tokens are swapped between our treasuries and if rejected, applicant gets back their tokens.

Timeline

April : Solicit comments and feedback on the proposal

May : Put forth a Snapshot vote and if successful, invite applications for people to become ARB DAO dealmakers

June : Snapshot election for appointing dealmakers

July : Onchain tally vote to authorize and pay elected dealmakers

August-October: RFP for DAOs seeking token swaps + search and review of applicants

November: Submission window closes and KYC checks for shortlisted candidates

December : Upload deals for the DAO to vote on Tally

January : Vote on continuation of the program or its disbanding

Overall Cost : 210,000 ARB

We are still working out the right amount of pay and seek feedback from the DAO and interested candidates in the position. We propose 35k ARB to each of the 5 dealmakers and the Treasury WG as facilitating, nonvoting member except in tie-breaks (upper range should be 50k and lower 20k)

35,000 x 6 = 210,000 ARB

This will be the only incurred cost in the proposal, as the DAO will directly approve or reject any token swap deal uploaded to Tally.

We are keeping a soft target of uploading token swap deals worth at least 10 million ARB before seeking additional funds for continuation of the program. 2% of this amount for implementation is reasonable by industry standards , especially considering the power these dealmakers have.

As a concluding note, we would highlight that it is not terribly important whether these deals are approved or rejected, just that apps in our ecosystem are aware of Arbitrum’s token swap ecosystem support program that they may one day benefit from.

10 Likes

I love seeing this group push another thoughtful proposal. I am in support of having this capability and testing it out. I think this is safe to try.

2 Likes

I’m very excited about this proposal.
I would like to know more about the following questions:

  1. Does the agreement with the projects imply that they also hold ARB tokens in their Treasuries?
  2. I like the idea of ​​being able to participate in the management of projects on Arbitrum, but since these tokens will be in the Treasury, who will have the right to vote? How will this procedure be arranged? Or are these votes delegated to someone?
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I like this idea and support the proposal.

We’ve seen pushback against requests for large grants and agree that they have largely been perceived as ‘free money’. This solution intertwines apps more closely with Arbitrum and creates an in-built alignment on both the app and the chain growing and succeeding.

I do think that some of the devil will be in the detail of how the processes and governance of the five dealmakers is structured as well as the criteria for projects to meet. It will be particularly important to ensure dealmakers are not conflicted by their financial interests or connections / network. Apps should be able to apply for this programme rather than being contacted for BD by dealmakers themselves to ensure impartiality.

All things that could be worked out though so overall I think this is a good proposal.

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Great questions. As I said in my response there are things to work out and agree but yes, exciting proposal.

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I am personally not seeing the utility of a token swap between arbi treasury and others. The reasons are the following

  • we basically create a really complex treasury to maintain. you have now 5, 10, whatever amount of coins in your belly that are not arb. What do you do with this? Do you sell them? If so, when? And since market is usually high correlated in downturn, why don’t skip all of this and just sell some arb at some point at peak of market if we really want to go down this route?
  • the choice of asset is really difficult, and it any would potentially make sense only with DAOs that are of the same size. But then again: you do a treasury swap usually when both assets have similar characteristics, namely, staking and revenue mechanism, which currently arb doesn’t have. Approaching for example balancer, aave or others in this case would mean “take our coin. you can use it for governance, or to sell, we take your coin, we can use it for revenue, governance or to sell”. We also have a treasury as massive that most can’t be able to put on the plate.
  • If I recall, the group was created to diversify some of the treasury into stables and yield bearing stables. Managing a treasury with riskier asset, and risk on asset, is a very different job, that not only explicits itself in different tasks (ie: if you get a stable now, you just need to monitor that stable doesn’t collapse; if you get a coin now, you have to put it at use and likely also sell it down the road), but also requires a different expertise.

Thanks all for the feedback!

We did indeed try to design the proposal with what we call 'safety hatches" where the DAO can change its mind at various points. So even if the snapshot is approved and elections are held, they can still reject the Tally proposal; even if the Tally is approved, they can reject all the deals put forth by the dealmakers.

In our opinion, minimizing trust assumptions and not asking for large amounts to be transferred out to an offchain entity is super important as we are all strangers on the internet trying to work together.

Yes the ARB would be held by projects and subject to holding periods or lock up conditions negotiated by the dealmakers

This is a great question on metagovernance and we don’t currently have a fixed way of enabling it. A simple way to do it would be that once token swaps are complete, elections are held to receive the delegation from our treasury and represent Arbitrum’s best interests in the project. A more complex way would be dividing the voting power among ARB voters so when they delegate, they also get voting rights in the projects we have done a token swap with.

We have only fully thought through the details until December, when the token swaps would be executed. Thanks for prompting us to think on the details of what comes after! I hope to see you apply for being a dealmaker if the proposal goes through :smiley:

Conflicts of interest are always hard as the best dealmakers are also in high demand across the ecosystem. We need to ensure they sit out any deals where they have an interest, similar to how we saw council members in LTIPP declare any CoI.

Appreciate the positive feedback! It is indeed more of an alignment play than a treasury diversification one, a way to ensure apps and the infra layer can share in each others success and remain intertwined. It’s also a self-regulating mechanism for grantmaking since projects wouldn’t ask for large amounts from ARB DAO if that means giving up over 50-80% of their community treasury

I would advise not looking at the proposal too narrowly from a diversification viewpoint only. If a token swap with ENS or Celo gets them to choose an orbit chain over the competitors, that’s a much bigger win than the alt tokens we’d get in our treasury. Same for builders or mature apps getting support from us, think of it as a grant replacement program than solely diversification, the final stage of ecosystem support that might begin with a questbook grant and graduate to a token swap.

This was not the purpose of our group. Our purpose is:

The present proposal falls well within the mandate above.

We are working with @sid_areta for a treasury manager procurement framework, where it can be added to their responsibilities. In any case, the token swaps would only be executed in 9 months, which is a long time and lots would change by then.

The present proposal is rather low-risk, only 210k ARB to elect dealmakers who scout out opportunities in the ecosystem. If we don’t like what they come up with, we can reject the deals and that’s the only cost incurred; if we do like them, we’ve unlocked a token swap capability for attracting projects to come on arbitrum. It’s a win win either way.

3 Likes

I appreciate the intent here, but I believe some initial research should be done before this program goes live.

STIP,LTIP and the countless other incentive programs have shown Arb DAO support for protocols. I expect this support to continue as the DAO learns from these programs, but it doesn’t meant the DAOs need to hold their token.

If this was to move forward in its current state, I would vote against it. There is a lot more that needs to be thought about it here.

  • RFP for a research group to spend X amount of time researching token swaps between protocols
    • Was it only a token swap? What were the terms here? Any other support provided? How did these token swap play out? Etc.
  • Sentiment gauge of the DAO - do delegates want to diversify into protocol governance tokens?
  • Orbit adoption is a great example. Celo, Mode and probably others have received support from optimism to build on their stack. Further research into this and how Arb DAO could do a similar program is great.

To make it clear, I would like to see some further research and flesh out before we get deal makers. This would help the DAO understand the landscape a lot more before we allocate X amount ARB to this initiative. I originally wrote about some of the logistics of the described program and how there is no mention of the “Sell side” but its something the DAO will need to consider but this can developed further after the research IMO.

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@Bobbay , are you considering the Treasury and Sustainability Working Groups’ purpose and objectives in your review?

If the intention is in part to diversify the treasury and to convert grants into investments, doesn’t this proposal draft a framework for that to be achieved?

My understanding is that the specifics of each swap would be presented for review and voting before they were final.

Further data and research is always helpful in decision making but for me its most helpful to compare this model directly with grants. The grants are perceived as an incentive or reward with no strings where upside for the DAO / chain is derived from the success of the app and the additional marginal usage of the chain. The token swap model on the other hand, aligns the app with the chain and provides potential upside for the DAO treasury as both enjoy growth and success (as well as advice, networking, collaboration etc as secondary benefits from the ongoing alignment).

I absolutely acknowledge that there are details to be ironed out but I think the benefits over a straight grant model are clearer than what is being acknowledged in the feedback to date.

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As I mentioned above, the intent is good and fits perfectly well within their mandate, but research should be completed and details ironed out before it moves forward. It’s a good idea, but it still needs work. This is an initial draft and details need to be cleaned up. We don’t need to rush this. If some research is sponsored whilst this proposal get fleshed out, it will provided a better background for this proposal.

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There was 78k ARB spent on research in Q4 2023 from the Arbitrum Treasury and Sustainability Working Group that produced four independent reports:

Out of this research produced by Centrifuge, Avantgarde, Aera, and karpatkey, I only found one mention about token swaps. This mention came from karpatkey and did not appear to be a significant recommendation.

Four industry leaders provided pages of documentation that, in their own way, suggested moving Arbitrum towards a consolidated treasury strategy that reduces risk and increases long-term sustainability.

@thedevanshmehta Considering token swaps were not a significantly recommended action, and actually goes further out in the risk curve in terms of treasury deployment and complexity, how is this justified or achieve the goal of treasury aside from virtue signalling? Also curious to see if there’s any data to back mid- to long-term outperformance of dApp tokens vis-a-vis L1/L2 token, given the general observation suggests otherwise.

My underlying concern is that this is yet another piecemeal treasury-related proposal that will not lend to a cohesive treasury plan or framework. It risks instantiating disconnected strategies with nebulous benefits, clear complexities and the impossibility of dismantling if gone awry.

Thanks for the critical feedback @Bobbay and @coltron.eth and collective pathfinding, it always results in a better end outcome!

To first get this one out of the way,

We have no intention of moving forward until theres broad consensus among those engaging in this thread! i often say that proposals are like cooking a good meal, best done on a low flame

This is a great one and something that @krst flagged during yesterdays governance calls. There are currently 4 proposals like the AVI, M&A, etc that are in a similar ballpark. We should ideally come together and create one proposal from this jumble rather than piecemeal.

I like this idea too, of studying past implementations of token swaps in some detail and preparing case studies. Maybe worth a firestarter @DisruptionJoe ?

@krst again gave some prescient advice on this, that he wants to see our plan to use the governance token we get. For example, how would arbitrum participate in the governance of whoever we are doing the token swap with? Adding this part into the proposal is needed for the next version

This is honestly the main impetus for this program, we’ve currently funded 2 direct grant programs at the DAO (QB & PL) for a total of ~8 million. It makes sense to have an equivalent amount dedicated to token swaps.

This insight came about after EthDenver, once season 1 of our WG concluded. We heard overwhelming feedback from good projects that token swaps is what they want to see us do. I heard many sentiments like this one that everytime they ask for grants it feels like begging, which some self-respecting projects don’t want to undertake.

This was the other good point that @krst raised at the gov call, that there are dependencies in this proposal that haven’t been called out. For example, we envisage a treasury manager with jurisdiction over these alt tokens so that there is no coordination failure for liquidating or dismantling on time if need be. So ideally we would need to time this proposal with DAO approval of a treasury manager role.

Appreciate the engagement! I can already see some major revisions required to the next one, mostly on defining the jurisdiction over the alt tokens for liquidation & how we use the governance power awarded to us in the swap.

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I really don’t see the logic behind this statement to be honest…

To me, the ideal pathway is probably a firestarter, as it can help us understand the landscape here and the pros and cons. There’s a lot to unpack here, and the firestarter would help us evaluate whether it makes sense to move forward with this proposal and in what capacity.

Specifically, one of my hesitancies about such a program is the management of the tokens, and hopefully, this research can provide some clarity there.

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With this context, it’s unclear if this is a grants strategy or a treasury diversification strategy. The motivation and rationale of this proposal references treasury diversification.

Agreed, that more treasury direction before engaging is these adventures is the correct order of operations. As my first comment alluded, I’d like to see professional opinion taken into account before embarking on another treasury diversification effort.

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Is there a QB program this would fit within? If not, perhaps we could experiment with a firestarter program using oSnap from a direct snapshot vote?

I’d suggest an application for a 250k ARB program for Snapshot firestarters!

@Srijith-Questbook, looking at @DisruptionJoe comment above, is it possible through QB?

If not, a firestarter program + oSnap is an ideal pathway. It keeps the process transparent and fast enough to move forward.

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I’m in support of diversifying the treasury with some positioning in stable coins and yield strategies but I believe entering treasury swap deals is a dangerous game which can even turn out to be harmful for Arbitrum.

I understand potentially utilising treasury swaps as a “cheaper alternative to grants” as long as the terms allow Abritrum to also use the tokens under the same terms, but it does become a lot to manage when you have so many high volatility assets.

I believe treasury swaps really only make sense if treated and proposed as an alternative option to simple grant funding, not as an investment strategy.

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Hey yes, @JoJo or @cattin maybe we can fit it into the new protocol ideas domain as a general firestarter idea, or under the community growth initiative, not sure but we can definitely try fitting it under either

QB grants are for early stage projects, not more mature ones for which we don’t have any program except except liquidity incentives.

Open to ideas other than token swaps for how we can support more mature apps in our ecosystem!

This is a great idea , we have submitted an application with Bobbay and I as research managers who do outreach to projects that would apply for a token swap were we to have such a program, and 2 service providers with experience of token swaps to do retrospective studies on how they should be structured.

My own opinion is that this is a grants/partnerships strategy where there is a natural limit to how much is asked for since they would also have to give up their treasury tokens. So far more accountability here rather than direct grants and a possibility of being able to share in the success.

In the long term, this could well become a source of strength for ArbitrumDAO treasury.

Thanks for helping out! Im hopeful that our firestarter application is approved and we can have more data and research to back this proposal!

3 Likes