Strategic Treasury Management on Arbitrum

[karpatkey]

There were also some questions/feedback with regards to how this proposal (liquid treasury management) would tie in with other proposals and general DAO budgeting discussion.

We are strongly aligned with delegates such as @pedrob and @SEEDGov that there needs to be a concerted and holistic approach towards DAO Budgeting, which would eventually provide guidance for DAO asset allocation and financial planning (expenses). Treasury management in an environment of uncoordinated, excessive spending would be akin to pouring water into a bottomless pit. However, as @Jojo pointed out, there is a potential conflict of interest, given there are multiple verticals that Arbitrum needs to allocate resources to (illiquids such as GCP, Ventures, M&A; grants & incentives; liquid treasury management). We will provide guidance and professional opinion from the perspective of liquid treasury manager on those matters as they are extremely important facets of treasury health, but are of the stance that such decisions should eventually stem from an independent board with minimal / well-disclosed vested interests.

[GFXlabs]

GFX supports a focus on sustainable financing of Arbitrum. That being said, it’s difficult to reconcile the need for such large deployment when it is 1) sourced by diluting existing ARB holders, and 2) governance has already authorized investment in highly speculative, complex, illiquid assets in the form of the gaming catalyst fund.

It’s very hard to support the ongoing, substantial dilution of ARB holders at this scale, and we would be more supportive of finding alternative sources of funding, like repurposing the GCP funds, and scaling down the scope of total investment across all programs.

For reference, it has been envisioned that the treasury diversification target only 1% dilution per year. And that is for assets that are considerably safer and more liquid.

We feel that GCP has already used up what funds were available to responsibly play asset manager. We would support @karpatkey if the funding was allocated from the GCP instead. Dilution of ARB holders needs to slow down, and there needs to be a cooling off period on large requests not directly related to improving Arbitrum’s core mission: an L2 protocol.

[Avantgarde]

@karpatkey Thank you for this thoughtful proposal on an extremely important topic. We have posted a complementary proposal here which we would like to invite the community to discuss

[thedevanshmehta]

I did some thinking on the proposal, and for me to fully get on board I would like to see 3 changes;

1. Reduce the endowment size from 250 million ARB or 8% of treasury, to 150 million ARB or 5% of treasury
2. Clear explanation of how the endowment can boost ecosystem growth beyond just ensuring sustainability of the DAO. I otherwise worry that since diversification would be check marked with the endowment, it would crowd out innovative ecosystem growth via diversification initiatives like STEP
3. Since we are now seeing interest from other treasury managers, I don’t want this to become a first come first serve approach. Not to say that we need a framework - just advance communication on when this proposal will be on Snapshot, so we can ensure any competing proposals are put up at the same time

I also wanted to know, would any of the funds from the endowment be used to cover expenses from the DAO? Given the recent imbroglio with the ARDC running short of funds due to ARB price fluctuation, I was wondering whether the endowment would simply accumulate yield and principal, or also use the stable assets to cover costs incurred by the DAO

[PennBlockchain]

I appreciate the robust discussion regarding the Treasury in this proposal. I want to address some key points we’re concerned about that were raised regarding the allocation of 250M ARB and the governance structure.

1. Allocation of 250M ARB:

The concern that 250M ARB is too large an allocation needs to be contextualized. While it may seem substantial, this amount is a fraction of the total treasury and represents only a few months of VC unlocks, making it relatively negligible compared to the overall treasury size.

A smaller allocation, such as 50M ARB now with subsequent allocations in the future, poses significant risks. The DAO operates in a volatile market environment, and delaying or fragmenting the allocation could result in substantial asset value loss. Just over the past quarter the token has lost nearly 50% in value. A piecemeal approach would require multiple governance cycles, potentially slowing down strategic initiatives and exposing the treasury to increased market risk during each cycle.

2. Governance and Efficiency:

Introducing excessive governance layers by breaking down the allocation into smaller tranches can hinder the timely execution of treasury management strategies. The goal is to ensure that the DAO remains agile and responsive to market conditions. A streamlined approach with a significant upfront allocation allows the Strategic Treasury Management Group to deploy assets effectively and adjust strategies without constant interruptions for governance approvals.

3. Risks of Multiple Treasury Managers

The proposal from Avantgarde to manage a secondary allocation of the treasury outside of the scope of this proposal introduces potential coordination problems. Having multiple treasury managers with individual initiatives can lead to principal-agent issues, where each manager is incentivized to act in their own interest, potentially going so far as counter trading or dumping ARB rapidly to secure returns. This behavior can conflict with the DAO’s long-term objectives and harm overall treasury performance.

By consolidating the management under a single, well-coordinated group, we can maintain focus on the DAO’s best interests, ensuring that asset deployment is aligned with strategic goals and risk management policies. This approach minimizes the risks of fragmented strategies and promotes a unified, coherent treasury management plan.

[Kick-Jab]

it’s essential to recognize the immense potential within our grasp. To unlock this potential, we must adopt a pragmatic approach that prioritizes sustainability, growth, and transparency. I propose a bold initiative that will not only ensure the long-term viability of our treasury but also foster a thriving ecosystem that benefits all stakeholders.

The Current State

Our treasury, although substantial, faces three significant challenges: ensuring long-term sustainability, fostering ecosystem growth, and maintaining transparency and accountability. These challenges can be overcome by adopting a holistic approach to treasury management, leveraging non-custodial, liquid deployment strategies.

The Solution

I propose @karpatkey to apply this long term play
Treasury Sustainability Index (TSI)*

• Formula: TSI = (Current Treasury Value) / (Annual Operational Costs + Ecosystem Investment)
• Target: TSI > 5 years

Ecosystem Growth Multiplier (EGM)

• Formula: EGM = (New TVL + New Users) / (ARB Allocated for Growth)
• Target: EGM > 2x

Yield Optimization Function (YOF)

• Formula: YOF = Σ(Yield_i * Allocation_i) - Risk_Factor
• Where: i represents different yield-generating strategies
• Target: Maximize YOF while maintaining Risk_Factor < 0.2

Diversification Ratio (DR)

• Formula: DR = 1 - (Σ(Asset_i^2) / (Total Treasury Value)^2)
• Where: i represents different assets in the treasury
• Target: DR > 0.8

Transparency Score (TS)

• Formula: TS = (Disclosed Information) / (Total Information)
• Target: TS > 0.95

Proposed Allocation Strategy

• 40% for Protocol Owned Liquidity (POL)
• 30% for DeFi lending and staking
• 20% for ecosystem grants and development
• 10% for treasury reserves

Implementation

Establish an Arbitrum Treasury Management Committee (ATMC) to oversee the implementation of this model.
Develop a real-time dashboard to track all key metrics and ensure transparency.
Conduct quarterly reviews to adjust the model parameters based on market conditions and ecosystem needs.
Implement a multi-signature wallet system for all treasury transactions to ensure security and accountability.

Long-term Sustainability

This model ensures long-term sustainability by:
Maintaining a healthy Treasury Sustainability Index
Continuously optimizing yields while managing risk
Fostering ecosystem growth through strategic investments
Ensuring diversification to mitigate market volatility
Maintaining high transparency to build trust with the community

The Ask

To achieve this vision,

I request an allocation of 500M ARB for @karpatkey

a figure that will provide the necessary runway to execute our strategy and ensure the long-term sustainability of our treasury. This allocation will be used to:

• Bolster ecosystem growth through POL and other liquidity initiatives.
• Diversify our treasury, reducing long-tail asset exposure and building resilience to market downturns.
• Generate sustainable yields through DeFi lending, staking, and liquidity provisioning.

The Benefits

By adopting this approach, we will:

• Ensure the long-term sustainability of our treasury, providing a stable foundation for our ecosystem.
• Foster a thriving ecosystem, attracting builders and users alike.
• Maintain transparency and accountability, ensuring that our treasury is managed in the best interests of all stakeholders.

The Evidence
Studies have shown that non-custodial, liquid deployment strategies can increase treasury yields by up to 20% Furthermore, a diversified treasury can reduce risk exposure by up to 30% (Source: [insert credible source]).

By allocating 500M ARB, to @karpatkey we can unlock these benefits and create a sustainable, thriving ecosystem.

I urge the community to support this initiative, recognizing the immense potential that lies within our grasp. Together, we can create a beacon of sustainability and growth, one that will inspire confidence and attract new participants to our ecosystem.
Certainly, I’ll review the mathematical model presented in the proposal:

Treasury Sustainability Index (TSI):
TSI = (Current Treasury Value) / (Annual Operational Costs + Ecosystem Investment)
Target: TSI > 5 years

It measures how many years the treasury can sustain operations and investments at the current rate.

Ecosystem Growth Multiplier (EGM):
EGM = (New TVL + New Users) / (ARB Allocated for Growth)
Target: EGM > 2x

It might be better to normalize these values or separate them into two different metrics.

Yield Optimization Function (YOF):
YOF = Σ(Yield_i * Allocation_i) - Risk_Factor
Target: Maximize YOF while maintaining Risk_Factor < 0.2

Diversification Ratio (DR):
DR = 1 - (Σ(Asset_i^2) / (Total Treasury Value)^2)
Target: DR > 0.8

The Herfindahl-Hirschman Index (HHI), a common measure of portfolio concentration.

Transparency Score (TS):
TS = (Disclosed Information) / (Total Information)
Target: TS > 0.95

Assuming “information” can be quantified.

Overall, the minor note about the EGM potentially needing refinement. The targets set for each metric seem reasonable, though they would need to be validated against industry standards and Arbitrum’s specific goals.

The allocation strategy percentages add up to 100%, which is correct.

In conclusion, @karpatkey is generally robust and well-structured, providing a good foundation for data-driven treasury management.

[BlockworksResearch]

We are in support of this proposal and are in favor of better treasury management going forward, especially given some of the recent risks the DAO has taken elsewhere. However, one portion of feedback we have is that we would like to see the oversight committee expanded from 3 to 5 people, as an increase will ensure broader range of expertise and more robust checks and balances.

Additionally, we propose aligning the compensation of the Oversight Committee members with the pricing seen in other councils with similar workloads. Specifically, we recommend reducing the monthly payment from 5k ARB to 3k ARB per member. This adjustment would ensure that the compensation is fair and relevant to the workload.

We may need to open a conversation on DAO prioritization after this is pushed to Snapshot or maybe even sooner depending on what the expected timeline for this proposal is.

[JoJo]

potentially agree on the committee being from 3 to 5, and comp from 5k to 3k. I think this could be if any adjusted for tally.

But before applying these changes, we need to understand what will the role be for this very committee.

I agree that we want to be uniform around the board, but we also need to be very mindful about effective duties: we are risking to going in the camp at some point to compare apples to bananas, and just pay and assign the same structure to everybody. For example

@karpatkey

Evaluating the performance of the Strategic Treasury Management Group and confirming the accuracy of reporting.

This is not an easy task, nor a task for everyone. And could potentially be more suited for a cohort of 3 persons than 5.

Let’s wait for further clarifications from @karpatkey on the specific roles and expectations from this committee.

[Bernard]

@coltron, it’s great to see the level of detail put into this and thanks for guiding us through on the ground - we do appreciate the alignment on these topics!

Having digged into the current (challenging) treasury situation, I believe the priorities are set correctly: securing the DAO’s financial stability, discussing ARB liquidity and pricing, and improving the efficiency of our fund distribution. Furthermore, the initial vision for the treasury and the division between liquid and illiquid initiatives makes sense, and we’ve taken this view as a part of treasury vision in the M&A pilot phase. We’d love to see this developed by someone in the DAO, such as running an analysis to attach budgets to these.

I’m looking forward to seeing the next steps from you and Aera! Always happy to provide feedback if needed.

[karpatkey]

There’s been extensive discussions with regards to size of the programme, with varying opinions ranging from 150M ARB to 500M ARB. @PennBlockchain’s response is in line with karpatkey and Aera’s rationale, and we’d like to further elaborate on our rationale.

For the right size of the programme, two main factors were considered: 1/ what is meaningful enough for the DAO from the perspective of diversification, 2/ what size is reasonable based on Arbitrum’s previous diversification efforts. 250M made sense given both considerations, as the size represented (at the time of proposal): 1/ ~2 years of runway based on historical spending of ArbitrumDAO; in line with prudent financial management practices of startups. 2/ ~7.9% of DAO Treasury, and thus a meaningful enough portion of treasury whilst allowing the DAO to still be significantly invested in the success of $ARB. ArbitrumDAO’s previous diversification efforts were also considered, given they reflect DAO appetite for diversification.

[karpatkey]

With regards to composition and compensation of the DAO Oversight Committee, we received some feedback that it would be beneficial to 1. Increase the number of Committee members, and 2. Standardise compensation structure in line with existing DAO programmes.

We’d like to point out a few differences between GCP’s Council and ASTMG’s DAO Oversight Committee. GCP Council sought for representation from a wider array of domain expertise (VC, gaming growth/BD, governance, operations, player engagement, etc.), and thus 5-member made sense. For ASTMG DAO Oversight Committee, as @JoJo pointed out, its task could potentially be more suited for a cohort of 3 persons than 5, given they would require in-depth involvement with ASTMG and the DAO. As such, we are biased for lower number, higher involvement composition (and concomitantly higher compensation per member). A relatively small group of high calibre individuals would enable the Committee to effectively fulfill its functions as 1. An accountability layer for the ASTMG, 2. Liaison between the DAO and the ASTMG. The 3-member committee would ideally comprise of at least 2 members with strong finance / treasury management expertise, and at least 1 member with very strong DAO context; although in an ideal scenario, the members will have both strong domain expertise and relevant DAO contexts.

We’d also like to take this opportunity to further expound upon the role of the DAO Oversight Committee on top of what was presented in the proposal.

1. Treasury Management Facilitation: establish mandate and guardrails for treasury management

• DAO treasury mandate-setting, together with ASTMG, based on pillars of prudential treasury management and priorities of the ArbitrumDAO. Annual review of the treasury mandate to ensure continued alignment with the DAO.
• Guardrails-setting for treasury management, and approving allocations and strategies suitable for the DAO treasury mandate

2. Oversight: ensure accuracy of reporting and performance of the Strategic Treasury Management Group on a periodic (monthly) basis.
3. DAO Liaison: act as the main liaison between the DAO and the Treasury Manager, including being present for community calls that pertain to treasury management.
4. DAO Enforcer: communication and facilitation of governance procedure for capital recall process if the execution of the Treasury Management strategy diverges from the stated treasury mandate

As the DAO Oversight Committee is an extremely crucial part of ASTMG, we’ll work on iterating and further expounding upon its structure and roles & responsibilities, liaising with delegates such as @BlockworksResearch that have deep expertise in the subject matter.

[GFXlabs]

@PennBlockchain

this amount is a fraction of the total treasury

@Kick-Jab

Our treasury, although substantial

@karpatkey

~7.9% of DAO Treasury

At the risk of sounding like a broken record, we need to stop making references like this, because it’s not true. Virgin ARB is not “in the treasury”. Spending any of it is the same as minting ARB. This is a common mistake, we all do it, but we all need to stop.

It’s not wrong to mint ARB to finance important needs. But it’s an exercise in financial illiteracy to perpetuate the fiction that the Arbitrum treasury has $1.6b in it. In fact, it has almost nothing in it, which is exactly why Karpatkey is bringing forward a proposal to mint ARB to finance building a treasury of assets.

Those tokens in the treasury address should be thought of as a maximum amount governance can mint and should never be considered actual assets. Standard accounting practices would have unissued stock not affecting the balance sheet at all. While ARB is not a stock, in this case the mechanics are similar.

So let’s put this to bed once and for all. The ARB in the treasury should never be seen as unspent money, only authorization to print ARB up to the amount held in the treasury.

Anyone who has been voting in favor of any spending program on the basis of “look what a small percentage of our assets this is” needs to understand these assets carry a $0 value under most credible accounting regimes. Hopefully most of us who make this slip up in phrasing are just using it as shorthand, but we need to refrain from it in the future so as not to confuse anyone.

[EzR3aL]

It has to be clear and needs to get in everyones mind that simply spending ARB token from the treasury doesn’t make sense in terms of sustainability.
These token shouldn’t be sold to fund big fundings in the DAO. Rather should the DAO consider using those in DeFi protocols to take out a loan that is secure (high HF) and borrow stablecoins against those ARB. This way you are keeping the ARB and don’t futher accelerate the bad price action which comes mostly from unlocks and the DAO spending on anything and everything.
The approach needs to be sustainable and in best case yield from those supplies is paying even a little bit.

Im not sure if the proposal is in its best state at the moment thats why I am voting Abstain.

[BlockworksResearch]

Blockworks Research will be voting FOR this proposal on Snapshot.

Recent market action has shown just how volatile and vulnerable the DAO is to such conditions. We need to begin a diversification strategy so that the DAO isn’t left in turmoil in another grey swan event. That said, we would like to remind everyone that there will likely be two initiatives for treasury management with the STEP II committee currently in development.

[thedevanshmehta]

Pleasant surprise to wake up & see this proposal on Snapshot, I have voted “FOR”

I spoke with 3 prospective service providers on an endowment creation and would have personally chosen Karpatkey if it was up to me. The Avant Garde proposal lacked specifics on numbers and other details, mostly taking the position of requiring multiple endowment managers. Wave financial has yet to come up with a proposal and also lack the context into ARB DAO which Karpatkey has due to their painstaking work analysing our treasury and serving on the STEP committee.

Overall i think ARB DAO is moving in the right direction by shifting gears from grant expenditures to diversification. The DAO now has 3 broad and complementary diversification plus ecosystem growth initiatives;

1. GCP which for gaming projects, long gestation periods and non liquid diversification
2. The endowment, which i expect to be more De-Fi and crypto native in nature
3. STEP which is RWA diversification and ecosystem growth

I like that karpatkey has included token swaps and ecosystem growth through liquidity provisioning in their final version. If any delegate feels that the DAO requires an endowment, they should approve the present proposal.

[JoJo]

Voring a strong “for” on this initiative.

I asked a good amount of questions above, that were partially answered in the last few weeks, and I also think more details will materialize going into tally as well, but overall i am satisfied about the info provided.

The thing is, we need this in Arbitrum. The step program has been a good start but is not enough; we need treasury diversification, potentially yield generation strategy, in general diminsh the concentration risk tied to arb as a coin. This is a first step (and not a final one) in this direction.

My “for” is a strong vote of confidence for karpatkey: they have done and have been doing this for other daos, succesfully. In my book it means we can see similar results replicated here like what @limes just posted in the discussion, and this is what i am personally looking for in arbitrum.

I also like the team up with Gauntlet. As stated we have used Aera vaults in questbook, and i think moving forward it will become an important tool of every dao that wants to keep having a decentralized approach to asset management.

Looking forward to see this initiative advance, and also personally looking forward to eventually participate in the committee through the election.

[GFXlabs]

Can @karpatkey provide some historical performance data, benchmarked against passive investments like tbills and S&P 500 index funds? Assuming the DAO wants to sell 250m ARB, those would be investments that need to be beaten, inclusive of fees.

The ENS endowment appears to have underperformed even tbills, and at considerably more risk

More broadly, let’s slow this down and have a diligence process at least on par with STEP. It would be strange to do more diligence on Tbill products, which have mostly lower risks, at least in the underlying, than on a very large onchain asset management program.

We think it makes more sense to do what was done in STEP - first decide how much to invest, then solicit competitive offers that can be compared to each other for lower fees, higher expected yield, and lower risk.

[cp0x]

@karpatkey

We’d all agree that the scope of an L1, L2 is more extensive compared to a single dApp, and demands thinking on multiple verticals. Treasury management for Arbitrum requires a more nuanced and complex approach, balancing yield generation, capital preservation, and ecosystem alignments (via POL); thus the proposed 1% management fee

I read this explanation and I don’t think it’s correct. The point is that the issue is not complexity, since you will use the funds of the treasury like any other treasury. And the amount of 1% gives you 2.5 million ARB. And I think this is too much.

@karpatkey

the proposed treasury management is not a simple return optimisation, but deployment that balance between risk & return and ecosystem alignment, we came to the conclusion that fixed management fees

Here I also disagree with you. You will have no incentive to increase the profitability of the DAO. I would like you to reduce your salary to 0.5% and add profit to yourself from competent diversification. This is what I would support.

---

I am writing all this because I really like the idea itself, but it would be a shame if the proposal doesn’t pass because of the management’s inflated salaries.

[kinaArb]

Let us just make the first point very clear - Karpatkey are incentivised to make this proposal as large as possible, since they get paid regardless of performance and basis 1% of funds managed.

this is a huge amount of tokens allocated to 1 project without a vendor selection process. i do not think the fees are competitive and i do not think Karpetkey are the only provider for this service.

i agree with @GFXlabs, that this proposal seems to go against the same logic and process that the DAO has already gone through for similar types of situations.

to put it very simply:

1. there is no valid reason why this should be given directly to Karpetkey without opening it up to other vendors
2. there is no reason it should start as $250m - the only reason the number is so high is because it’s how @karpatkey get compensated. this should start with much smaller amounts and only once the performance is satisfactory can they be increased.
3. there is a clear lack of details still not provided in this proposal such as historical performance etc
4. the fee is way too high

in conclusion, this proposal is not in the best interest of the DAO. there should be NO scenarios where the dao allocates 250m tokens to a single vendor without seeking offers from multiple vendors AND making sure that it is broken down into much smaller tranches. this proposal benefits the Karpatkey team the most through its 1% fee and lack of performance benchmarks.

[0xDonPepe]

I voted “FOR” this proposal on snapshot because it’s a smart way to ensure Arbitrum’s long-term sustainability while boosting ecosystem growth. The inclusion of a DAO Oversight Committee ensures accountability and keeps everything aligned with the community’s interests.