Strategic Treasury Management on Arbitrum

Proposals
1

Abstract

karpatkey and Aera are proposing for the creation of Arbitrum Strategic Treasury Management Group and DAO Oversight Committee. This Group aims to provide services to the ArbitrumDAO treasury that will enable the DAO’s long-term sustainability, whilst supporting the growth of the Arbitrum ecosystem. This program is fully non-custodial and the DAO can pull back funds anytime. The proposal kickstarts with Strategic Treasury Management of 250M ARB assets under management; this will allow the Group to manage ~2 years of runway.

Content

I. Motivation

II. Expected Outcome

III. Introduction to the Arbitrum Strategic Treasury Management Group

IV. Deployment Initiatives

V. Non-Deployment Initiatives

VI. Strategic Treasury Management Group Operating Model

VII. Step Forward

VIII. Appendix: Motivations in-Depth

IX. Appendix: Technology and Risk Management

I. Motivation

Arbitrum is the leading L2 by all relevant KPIs, including number of protocols, TVL, and daily active address. ArbitrumDAO also has the 3rd largest treasury of any DAOs, but one key difference between Arbitrum and other protocols is the extent of independence and power given to the DAO from its onset.

Despite having the 3rd largest treasury of any DAOs, the ArbitrumDAO faces three main challenges with its current treasury (refer to VIII. Appendix: Motivations in-Depth):

  1. Ensuring long-term sustainability: treasury should be able to support ecosystem efforts through market cycles; in the long-run, DAO should be a self-sustaining vehicle, with expenses covered by yield generated from Treasury, without having to materially compromise Treasury principal.

  2. Fostering ecosystem growth: treasury should be used to foster a vibrant community of users and builders.

  3. Transparency and accountability: treasury should be expertly managed, and uses of the treasury should be transparent and held accountable to the DAO.

The Arbitrum Treasury and Sustainability Working Group and the broader Arbitrum community have previously researched and discussed the issues at depth, and there is a strong consensus that we need a more holistic approach towards managing Arbitrum’s treasury to prevent inefficient decision-making processes and misallocation of resources. Arbitrum’s impressive decentralization is a double-edged sword; the DAO can use its collective intelligence to make the best decisions, but without clear structure and oversight, conflicting opinions and divergent interests may hinder timely and effective resource allocation.

II. Expected Outcome

The Arbitrum Strategic Treasury Management Group aims to allocate assets within the Arbitrum ecosystem to ensure long-term sustainability and foster growth.

Three main areas of priority would be:

  1. Ecosystem alignment and growth. Bolster ecosystem growth by utilizing Arbitrum’s treasury via Protocol Owned Liquidity (POL).

  2. Fortress balance sheet. Diversify Arbitrum treasury to build sufficient runway and resiliency to market downturns by reducing long-tail asset exposure. As the DAO is currently spending $97M+ per year, it is ideal to maintain a treasury in excess of $200M.

  3. Sustainability. Leverage Arbitrum DAO’s treasury to generate sustainable yields via DeFi lending, staking, and liquidity provisioning. To reach sustainability at current spending levels, the DAO needs to eventually deploy $1.5B, targeting 6-8% APY.

Outcomes

  • Yield Optimization Program aims to generate sustainable yields to fund the DAO’s operations in a non-custodial and risk-minimized manner.

  • DAO Owned Liquidity Program, with the goal of expanding ecosystem liquidity, attracting builders to Arbitrum, and deepening ARB on-chain liquidity.

  • Treasury Diversification Program, to reduce long-tail asset exposure and capital raising.

III. Introduction to the Arbitrum Strategic Treasury Management Group and Tooling Providers

Initiative of Arbitrum Strategic Treasury Management Group will be led by karpatkey and Aera, combining experience across DAO treasury management and risk management.

About karpatkey

karpatkey is a DeFi-native organization specializing in providing financial services to DAOs. Since its inception in 2020, karpatkey has been a trusted partner to respected DAOs like Gnosis, Aave, and ENS, managing over $1bn in non-custodial assets. Through its comprehensive support in treasury management and financial operations, karpatkey empowers its partners to effectively pursue their missions. Leveraging its extensive experience, karpatkey will serve as the treasury manager, designing investment processes to meet the DAO’s goals and constraints.

About Aera

Aera is an on-chain solution to autonomously optimize DAO funds. It addresses the common pain point of inactive treasury management that often hinders a DAO’s ability to maintain runway, cover liabilities, and benefit from market growth. Unlike traditional institutions that rely on nimble managers for fund allocation, DAOs face a unique set of challenges that include governance and incentive alignment with external managers. To address these, Aera offers a unified solution for efficiently and transparently managing on-chain treasuries, grants, and incentive funds through customizable vaults. Aera vaults can hold stablecoins, native tokens, and other cryptocurrencies, with their objective functions tailored to each DAO’s needs. Guardians leverage off-chain logic to automate rebalancing decisions, ensuring the vaults meet their objectives across various market scenarios and time horizons. Gauntlet will be the initial Guardian for the Aera vault operating under the direction of karpatkey and the DAO Oversight Committee.

About DAO Oversight Committee

We recommend creating a 3-member DAO Oversight Committee via a 1 week application period with a 5 day Snapshot vote. This committee will serve as a layer for checks and balances between the STMG and the DAO, and would be responsible for:

  • Coalescing the DAO Treasury Mandate and setting the guardrails for the treasury vaults and tools.

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

  • Facilitating governance procedure for capital recall process if the execution of the treasury management strategy diverges from the stated treasury mandate.

Committee members should be evaluated based on the following criteria:

  • Familiarity with prudent treasury management strategies

  • Level of engagement and activity in ArbitrumDAO to effectively act as DAO advocate

  • On-chain literacy to verify the accuracy of treasury reporting

IV. Deployment Initiatives

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Treasury deployment can be broadly categorized by liquidity profile: liquid and illiquid. Liquid deployment varies from low-risk ‘cash-equivalent’ investments (staking, lending/borrowing, liquidity provisions), to higher-risk, strategic investments such as treasury swaps. Illiquid deployment is largely strategic in nature, and includes venture investments and M&A activities. As an example Alphabet has ~28% of its total assets in cash and other marketable securities, and ~8% of its total assets in non-marketable securities (including those invested by GV and CapitalG).

Strategic Treasury Management Group will focus on non-custodial, liquid deployment of Treasury to achieve synergy with pre-existing illiquid deployment discussions surrounding the Gaming Catalyst Program, Arbitrum Ventures Initiative, and Arbitrum M&A Working Group.

We are asking the DAO to allocate 250M ARB for the first tranche of the Arbitrum Strategic Treasury Management Initiative, in order to bolster the Arbitrum treasury’s sustainability and strategic ecosystem deployment; based on the success of the initial deployment, size of the allocation can be increased via a future proposal.

The DAO Oversight Committee will be responsible for facilitating DAO governance process for recalling any deployed funds; whether for DAO financial requirements, poor performance by the Strategic Treasury Management Group, or any other reason.

Allocations & Monitoring

The specific strategies will be selected by the Strategic Treasury Management Group with guidance from the DAO Oversight Committee, providing an additional level of accountability and transparency.

Initial Targets

1. Yield Optimization Program (80%)

  • Deployment Strategies: Low-risk DeFi yield farming strategies, including staking, lending/borrowing, delta-neutral liquidity provisioning, cash-and-carry strategies

  • Purpose: help deliver base-line yield for Arbitrum treasury, and help fund DAO’s operations and initiatives.

  • Performance metrics: APY, volatility (portfolio, yield); benchmarked against other DAO treasuries.

2. DAO Owned Liquidity Program (20%)

  • Deployment Strategies: Arbitrum-native LP strategies. Potential venues include, but are not limited to, GMX, Camelot, Aave, Uniswap, Radiant, Vertex, Silo, and more.

  • Purpose: increase ARB on-chain liquidity; potentially bootstrap liquidity in conjunction with programs like LTIPP and STIP.

  • Performance metrics: ARB on-chain liquidity.

V. Non-Deployment Initiatives

Treasury Statement (“TS”)

  • TS helps serve as a living document for the DAO to guide and contextualize its treasury decisions based on its needs and priorities. It also helps the DAO hold service providers accountable for the Treasury.

  • The DAO Oversight Committee will work with the STMG to set the TS.

Financial Planning and Reporting

  • Monthly Strategic Treasury Management Group reports, outlining strategies and performance. Updates will be shared via both live town hall meetings and governance forum updates.

  • Real-time dashboards to track treasury performance, portfolio allocations, ecosystem performance and Arbitrum’s financial health. These dashboards will include both Dune Dashboards maintained by karpatkey and Aera dashboards maintained by Aera Finance.

VI. Strategic Treasury Management Group Operating Model

Asset safety: Who oversees custody of assets?

  • The DAO will retain full ownership of the assets and can withdraw at any time.

  • The Strategic Treasury Management Group will serve as executor of treasury management strategies, deploying assets to a set of strategies pre-approved by the DAO. The Group will not have withdrawal rights to the SAFE.

Asset safety: Who oversees deployment of assets?

  • Role-based access controls will be pre-approved by the DAO Oversight Committee prior to deployment of assets, so only pre-approved transactions can be undertaken.

  • Strategic Treasury Deployment Group dissolution rights

  • DAO can shut down the structure and the group at any point in time via the standard Arbitrum governance process.

  • The DAO Oversight Committee can call for dissolution of the Treasury Management Group via standard governance process, citing its reasons, at any time, if they see a divergence from the DAO treasury mandate.

How large should the liquid treasury management AUM be?

  • In practicality, there is a full spectrum of DAOs (100% deployment into liquid assets to 0% treasury utilization) when it comes to Treasury Management. Comparable traditional Web2 companies hold 25-40% of total assets in liquid financial instruments (cash, cash-equivalents, and marketable securities, and accounts receivables) vs. 0-10% in illiquid investments (heavily erring towards the lower bound). Alphabet is the best example of a Web2 company with heavy emphasis on private investments, and they hold 39% of assets in liquid financial instruments vs. 8% in illiquid financial instruments. On Arbitrum, there is currently a total ask of $1.2B - $1.4B of deployment into illiquids (Gaming Catalyst Fund 135m ARB, M&A Unit $100-250m in ARB, Arbitrum Ventures Initiative $1bn in ARB). Simple comps with Alphabet will suggest liquid allocation in buckets of 690M ARB (on GCP alone) to 1.3B ARB (GCP + M&A). Starting with 250M ARB is a first step towards this portfolio composition.

  • Some comparable structures in the traditional Web2 market are:

  • Alphabet: 5.1x liquid financial instruments to illiquid financial instruments (28% of total assets in cash, cash equivalents, and marketable securities + 12% in accounts receivables vs. 8% in non-marketable securities (including ventures, M&A, etc.). Alphabet is the most active top tech company when it comes to private investments.

  • Microsoft: 16.2x (27% of total assets in cash, cash equivalents, and short-term investments + 12% accounts receivables vs. 2% in equity investments)

  • Amazon: 184.4x (16% of total assets in cash, cash equivalents, and short-term investments + 10% in accounts receivable vs. 0.1% in equity investments in private companies)

Performance: How to measure performance?

  • Performance for the Strategic Treasury Management will be prepared and presented to the DAO on a periodic reporting basis (see “Reporting”). Performance should include both financial metrics and strategic (ecosystem) metrics.

  • The DAO Oversight Committee will closely track performance and execution of the treasury strategy to ensure accuracy and accountability.

Reporting: How does reporting to the DAO work?

  • Monthly update reports covering performance of treasury, and asset deployment breakdown

  • Strategic Treasury Management Group will hold regular town hall meetings, updating the DAO

  • The DAO Oversight Committee will ensure all reporting is accurate with performance.

Program Size and Expenses

  • Initial tranche: 250M ARB

  • Program operations: 1% management fees, no performance fees

  • DAO Oversight Committee Members (x3): 5k ARB per month

Rationale for the fund size: First tranche of 250M ARB, will allow the DAO to explore strategic treasury deployment, and cement treasury management framework. For the financial year ending Feb’24, DAO’s expenses were ~$97M ($94M for ecosystem development expenses comprising of STIP + DIS, $3M for grants program expenses, comprising of Plurality Labs Grants Program, Questbook Grants Program, and Rarible Protocol), so this will enable the DAO to ensure 2 years of runway is properly managed.

VII. Steps Forward

Strategising and execution of Strategic Treasury Management of Arbitrum treasury is crucial for long-term sustainability of the DAO and for ecosystem alignment. We would like to encourage all feedback to the proposal and the topic of treasury management in general.

We look forward to your feedback and advancing this further!

VIII. Appendix: Motivations in-Depth

Motivation #1: Long-term sustainability

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More than 98% of Arbitrum’s treasury is currently in the DAO’s native token (ARB). A simple portfolio analysis shows the following:

  • Historical daily return of ARB has been -0.11%

  • Daily standard deviation value of 4.4%

  • 95% value-at-risk (%) of -7.1% i.e. in any given day, there is 5% chance of portfolio losing 7.1% of its value

The sheer size of the DAO Treasury can give the illusion that spending can be indefinitely funded. During the latest ‘22-’23 bear market, many L1 / L2 tokens saw ~90% drawdowns (e.g. $SOL dropped from $250 at its peak to $10, $AVAX dropped from $125 at its peak to $9). Many had to downsize their operations and some even shut down, but the well-prepared ones were able to continue incentivising and growing the ecosystem, as they managed to raise significant amounts of money (fiat, stablecoin) during the bull market. Although it is only natural that the DAO be wholly invested in the success of the ecosystem, it also needs to ensure prudent risk management, and diversify in order to ensure sustainability over extended periods of market volatility. A standard practice is ensuring 1.5 to 2 years of runway.

Maintaining runways is even more important in cases of deficit spending, as is the case with ArbitrumDAO. For the year ending February 2024, the DAO had an annual gap of -$61M due to its high annual spend rate on grants and incentives ($97M; also worth noting these numbers do not yet include STIP Bridge and LTIPP) vs. net network revenue of ~$21M. There are a few concomitant problems:

  1. Reduction in principal of the Treasury.

  2. Large selling pressure in ARB: grantees most likely need stablecoins to fund their operations, and may sell ARB in a non-optimal manner with high(er) price impact. This historically has manifested in two ways:

a. Protocols receive large grants for incentives (STIP, LTIPP, etc.) to be disbursed at the same time, protocol users look to realize their boosted yield relatively immediately, large amounts of ARB is sold at the same time leading to large amount of selling pressure indiscriminate of market conditions.

b. Contributors receive grants to cover operations denominated in USD. These contributors often either pay a market maker a large fee to swap the tokens at a set price, take on market risk, or take slippage from selling large amounts of ARB when liquidity is not optimal.

It’s also worth highlighting that while the DAO has several illiquid initiatives, including Gaming Catalyst Program (passed Tally), M&A Unit (in-discussion), and Arbitrum Ventures Initiative (in-discussion), there are currently no non-custodial liquid initiatives under way. Traditional web2 companies usually have a much larger deployment to liquid holdings/investments vis-a-vis illiquids, given the need for liquidity and yield generation.

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Motivation #2: Fostering the Arbitrum Ecosystem

One of Arbitrum’s competitive advantages is its liquidity and reputation as a DeFi-friendly chain. As many other L1 and L2 ecosystem’s begin utilizing their treasuries to bolster onchain activity, it is important to evaluate the balance between renting and owning liquidity.

Currently, Arbitrum is primarily spending its treasury on the following:

  1. Incentive programs to foster user/liquidity acquisition and can attract builders (Cons: liquidity and users tend to be mercenary, and non-sticky)

  2. Exploring strategic, illiquid investment initiatives to foster Arbitrum’s suite of builders and technology (Cons: Takes a relatively long period of time to come to fruition, and requires largely unexplored legal structure for the DAO to make such investments)

Beyond these two strategies, the Arbitrum DAO should begin deploying the DAO treasury for Protocol-Owned Liquidity. This will allow the DAO to:

  1. Maintain strong liquidity regardless of market conditions or incentive spending

  2. Generate some LP yield

  3. Recall the tokens for other purposes in the future

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Appendix IX. Architecture for Treasury Management

Architecture for Strategic Treasury Management Tooling

We aim to define and implement a robust architecture for strategic treasury management. This architecture enables non-custodial treasury management, incorporating role-based access controls preapproved by the community enabling treasury diversification and yield optimization. This system will ensure the ArbitrumDAO retains full control over fund retrieval and permission management, facilitated through Safe multi-sig, and treasury deployment aligns with the stipulations of this proposal. Separate proposal, outlining tooling architecture and set of permissions granted to the Strategic Treasury Management, will be put forward to the DAO.

Safe + Zodiac Roles Modifier Module

Safe is the account abstraction leader on Ethereum and EVM, and it has the most secure smart wallet infrastructure and platform. It is estimated that 6.3M Safe wallets have been deployed, protecting $91Bn in different crypto assets. ArbitrumDAO has an extensive track record of using Safe accounts for different purposes, spanning from committees to deployers of Arbitrum contracts.

Zodiac Roles Modifier is a Safe module that allows the owners of an address to grant role-based permissions for specific actions that can only be carried out within approved contracts and functions. The Roles module allows the owner of a Safe (called Avatar) to create a role for a particular address (named Manager) that is then authorised to run specific operations (presets). This module is configurable, allowing full customisation of the target, method, and parameters to be used.

Through a combination of Safe and Zodiac Module, ownership and custody of the funds do not need to be altered vis-a-vis any previous setup since a Safe can inherit the type of ownership any previous solution had. As a result, the owner of the Safe has complete control, including movements of assets, installing modules, and granting permissions via the Roles Modifier.

To configure the Roles Modifier, a group of actions called “permissions policy” is configured simultaneously and aggregates all the critical actions needed to manage a specific strategy. For example, to allocate liquidity to a DEX pool, a permissions policy may include approving the transfer of assets, depositing and withdrawing liquidity, and claiming interest. In a single transaction, the Avatar can delegate all future responsibility for managing that specific strategy to a Treasury Manager. For Roles Modifier, an action must have a specified target and method. It may also enforce thresholds and values on the parameters used and limit how often a specific action may be used.

karpatkey currently uses the Safe and Zodiac Roles Modifier module to manage treasury for DAOs including Gnosis, Aave, ENS and Balancer, as well as its own treasury.

Aera

Aera is a solution for optimizing DAO funds autonomously and on-chain. For most DAOs, treasury funds (e.g., reserves, treasuries, safety modules, backstops) are not actively managed or adjusted based on market conditions. For DAOs, this can lead to an inability to maintain runway, cover liabilities, and benefit from growth in the market. Traditional institutions can allocate funds to more nimble managers who make day-to-day decisions, but DAOs face numerous challenges with this model including governance and creating strong incentive alignment with external managers.

Aera provides DAOs with a one-stop solution for managing onchain treasury, grant, and incentive funds efficiently and transparently. The Aera protocol consists of vaults, which are constructed on a per-protocol basis and can hold a combination of stablecoins, native tokens, and other cryptocurrencies. Each DAO determines the objective function of the vault and is highly customizable ranging from simply keeping fund proportions in line with marketcaps, to sophisticated liquidity strategies to support your ecosystem’s growth. Vaults are automatically rebalanced by Guardians who support the DAO’s objective function leveraging offchain logic to power onchain rebalancing decisions. This ensures that the vault objective is met across a wide range of market scenarios and time horizons.

Aera integrations include Uniswap, Aave, Compound, Bebop, and other onchain venues. Integrations with Camelot, Radiant, Silo, and more on the way. Aera is currently utilized by Compound DAO, Threshold DAO, Questbook (for Arbitrum grant management), Seamless, and more.

Below is an image of how Aera works.

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  • Quantify Risk Mitigation: While mentioning implementation risks, the proposal could benefit from elaborating on specific risk mitigation strategies for each identified risk

    • How will achieving these outcomes make Arbitrum more sustainable?
    • How will they drive ecosystem growth?
    • How will they benefit ARB holders?
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Interesting proposal, great job.

The targets are 100% on-chain correct?

Also, are there any pathways to explore off-chain holdings or multi-chain programs (assuming this is all meant to be native)?

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@karpatkey, I was really glad to read this extensive proposal.

Maturing the treasury management and budgeting discussion in the DAO is critical and this proposal seems to address a core part of the puzzle with good timing!

It addresses a number of concerns we had to consider as part of the AVI working group in terms of treasury management and liquidity. it does feel more appropriate for this to be handled more horizontally in the DAO, rather than by too many individual groups doing sub-optimally timed ARB liquidations. Or at least we should be able to agree on a common policy.

I also really like the benchmarking with Web2 companies. It’s interesting to consider to what extent we’re looking to do the same thing though. While platforms like Arbitrum are far from the financial performance in their core business model compared to the likes of Google and might be more appropriate to look at them as earlier stage ventures. Be it of a very different nature. Initiatives like the GCP might be looked in a way more akin a big strategic move towards PMF with a new business model (e.g. Apple launching the iPhone and AppStore), rather than what Google Ventures does for Google presently.

While I think important to the mental model we need to develop, the above points don’t deny the merit of this proposal, but rather acknowledge it.

I want to touch on a couple of the considerations that are very current for AVI, hopefully without going on a tangent too much:


1. how much of the total treasury should be allocated to venture?
Indeed in our exploratory analysis we anchored the number of $1B. At time of writing the price of Arb was over $2.00 hence the suggested amount in ARB was 500m, which is significantly lower % wise allocation than the 1.3B ARB outlined in the document here. Furthermore we carry an embedded assumption that over the 5+ year period explored, the average price would go above this rate, thus further minimising the proportion of the treasury going to this category.

For me it is still an open question how much in total should be allocated to venture and this is not only related to available resources, but also to the volume and quality of investment opportunities. Making a fixed mandate to deploy too much, could be as harmful as deploying too little.

Given the ranges we’re discussing it’s irrelevant to the argument made with this proposal for the allocation of 250m in liquid assets, which on first glance seems well supported regardless.


2. how to setup the first stage of investments on a shorter timeline to support solutions for the RnDAO, EVM Capital, Outlier Ventures, Elixir and some other proposals that have been raised our way, while the longer term treasury strategy matures

If we take the GCP aside as a standalone strategic bet and want to maintain good distribution based on the suggested benchmarks - it seems that the 250m proposed here suggest it’s appropriate to start with $50m initially for illiquid investments via Venture and M&A.

I want to stress again that I’m not fully convinced that the analogy holds completely, as DAOs in many ways currently use grants to support activities that would normally go in direct and administrative expenses with Web2 orgs and we are exploring how to optimise that in novel ways, among other things.

Really keen to see what delegates think here and integrate this proposal with the general DAO budgeting and treasury management discussion.

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You are right @lino, Pivotal aspect of the DAO’s growth: treasury management and budgeting. The timing is nothing short of perfect, and the proposal’s emphasis on coordinated ARB liquidations and a unified policy resonates deeply with the challenges we’ve encountered within the AVI working group.The benchmarking against dotcom boom & bust companies provides a novel perspective, encouraging us to perceive platforms like Arbitrum as nascent ventures. Initiatives such as the GCP can be regarded as strategic maneuvers akin to the big 7’s launch, rather than the current operations of The Bay Ventures. This mental model highlights the significance of this proposal and prompts us to acknowledge the subtleties of our distinctive position.

Key Considerations for AVI

The proposed allocation of ARB was notably lower percentage-wise compared to the outlined figure. We also anticipated that the market cap would evolve, further reducing the proportion of the treasury allocated to this category. The question of the appropriate venture allocation remains open. It’s not solely about available resources but also the abundance and caliber of investment opportunities. A rigid mandate to deploy excessive funds could be as detrimental as deploying too little. The proposal for the allocation of 250M in liquid assets appears well-founded, striking an equilibrium between resource availability and investment opportunities.To bolster solutions for RnDAO, EVM Capital, Outlier Ventures, Elixir, and other proposals, we must establish the initial stage of investments on a shorter timeline, concurrently blending it with the mid to long-term treasury strategy. Excluding GCP as a standalone strategic bet, the allocation for initial illiquid investments via Venture and M&A seems fitting. However, we should consider that DAOs frequently utilize grants to support activities that would generate increased volume. A versatile and responsive mandate may be optimal to refine this innovative approach.By integrating multi-layered DAO budgeting and treasury management discussions, we can harness delegates’ insights and refinements. The capacity to engage both native DAO members as part-time, short-term, or long-term contributors and trusted individuals with full dedication to specific roles, while mitigating conflicts of interest, is crucial.@Englandzz_Curia raised a crucial point about defining KPIs and success metrics. If delegates concur on the proposal’s direction, we should collectively outline these outcomes on the forum and agree on a process for periodic review and adjustment. This will facilitate objective judgment of success later and ensure that the DAO remains on course to attain its objectives.While @JoJo’s apprehensions about centralization and potential negative precedents are valid, the team has apparently contemplated these issues in terms of incentives, checks, and balances. With suitable management practices, swift approval of this proposal could significantly benefit Arbitrum, demonstrating a dedication to transparency, accountability, and SEC-friendly practices, thereby reducing future legal fees.

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We are overall extremely supportive of this proposal. Treasury diversification is integral to Arbitrum’s longevity. If we enter a bear market tomorrow and the treasury is all ARB while the DAO has USD-denominated costs, we could be negatively encumbered and forced to sell ARB at depressed prices. We believe Gauntlet and Karpatkey are highly valuable partners and are happy to see that Aera has agreed to waive all fees.

One thing we would like to note is that we are aware in the ENS DAO, Karpatkey’s fee is 0.50%, so we would like to get a better explanation as to why the fee will be higher for Arbitrum. It seems the scope of the ENS positions that can be put on is more narrow, so we assume this is why the fee is set higher for Arbitrum. Perhaps exploring a flat fixed fee structure would make sense, particularly if the DAO expects to allocate more funds to this initiative in the future. Overall, 1% does seem a bit high, and we believe 0.5% would allow the DAO to move forward with this more rapidly. If this is not possible, we’d like to see more justification around the 1%.

We are very happy to see this initiative in the forum as it is an important step aligned with Entropy’s vision to achieve sustainable and durable operations for Arbitrum DAO.

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Was wondering when @karpatkey would come with this proposal in arbitrum. Took some time but is finally here.

The proposal is complex but also, as it is presented, very high level despite being detailed.

Let’s start with the main goal: we need, indeed, treasury diversification, through initiatives like GCP, M&A, Ventures, which will bring us non liquid and potentially crypto uncorrelated asset. We also need to have a diversification for correlated crypto asset to avoid concentration’s risks.
This, just to state that the goal of the initiative is something that we need.

I have a few question on the first details provided:

  1. Why 250m arbs? I am failing to understand this statement:

From what we have here, looks like the idea is: since we spent around $97M in a year, with 250m arb which are currently more or less (less, actually) that $97M*2, we ensure 2 years of runaway. I don’t think is necessarily the case: while there could/should be more upside in crypto, unless all of the 250m are converted in uncorrelated assets, which means stables, we can’t ensure that we will have this guaranteed pocket of capital to spend for the next 2 years. And this is not to criticise the amount, i think is ok-ish to start with 250m, but would like to either see if i missed something, or avoid providing a target that could not be achieved. Again: if this relies on a very active management with uncorrelated asset, all that i wrote is likely untrue.

  1. what is the timeline of this program? the way is framed, this would be a potentially first tranche if the DAO votes for it and after it has more appetite for it. I guess the question is about if you have, in mind, a timeline for a second tranche, knowing that this decision will be market dependent, and knowing that there is a partial involvement from people of the DAO through this oversight committee
  2. for the “Yield Optimization Program”: would they all be on-chain strategies?
  3. DAO pol: this is likely one of the most interesting part because it can allow the treasury to be weaponized, the depth of liquidity across our chain to be better and produce yield. Is the plan to mostly deploy liquidity in coin/arb type of pools, or also non arb ones? Assuming LP would be not necessarily in V2 for efficiency reasons, is the plan to manage them through the aera vault? Is there an appetite to utilize liquidity managers/protocols that we have currently in arbitrum? Would also the idea be to take effectively the yield out and convert it in assets that are not arb?
  4. For the DAO pol: how do silo/radiant/aave fit in this? Makes me think for liquidity program in here we might be including also lending. Or maybe this set of list would just have to go in the previous point of the yield optimization program and was a typo
  5. in general, how active will the management be? And, to be clear: to me “active management” here means, mostly, allocation in volatile crypto assets (ie: arb, eth, btc, etc) vs non volatile one (ie: stables). I’m ok with an answer that is both “not too much” or an answer that says “we have capacity and plan to do it but don’t want to specifically disclose plans”. But I would like to understand specifically what type of management this is.

Finally, would like to share the experience that we had in questbook with Aera vault. They are a very good instrument, which on one side gives you the ability to remove friction of the management of assets through safe (which is PAINFUL), on the other gives you certain security safety like constrains in interaction only with certain contracts and protocols. We definitely need more of these instruments, and I like what Gauntlet created.

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Without delving into the details (such as the amount of ARB to deploy or the proposed fees), I really like the direction of this proposal.

One thing I would like to see is the integration of this proposal with the rest of the DAO’s initiatives. I see the role of treasury manager, not for a specific allocation, but for the DAO, establishing north stars with particular mandates.

You identify the necessary revenue to sustain the current expenses. Now, let’s imagine your proposal is approved, and you start deploying the capital and achieving those revenues. However, the DAO continues to approve high budgets for expenses, making it unsustainable all over again.

What I mean by this is that, in my opinion, the role of the treasury manager should take on a more general and long-term position within the DAO. This includes identifying the DAO’s needs and providing a professional opinion on each proposal that involves an expense, specifically regarding its sustainability.

In the past, you had already raised the need to determine the medium and short-term objectives and align them with the principles outlined in the Arbitrum constitution:

I believe that discussion is key before proceeding with this significant diversification.

Of course, all things (treasury management, objectives, and diversification) could be all objects of this proposal.

But first, I would like the discussion around what are the DAO’s short, mid, and long-term objectives and then a guarantee that the person executing this significant diversification will have a voice and an opinion on the rest of the future expenses so that the delegates can understand how spending proposals impact the treasury and its sustainability.

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While working through the details and coming up with more thorough questions, what is the case for authorizing such a large amount of ARB prior to program inception? Why 250m vs 50m or 500m?

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Shouldn’t this be addressed by the budgeting work for the Dao?
I know what you mean here but I think this, and others, strategic initiatives should.just go through and eventually be adjusted in round 2 or down the line to respect a bigger plan.

Also don’t necessarily think is karpatkey/gauntlet job to necessarily address the above, on the contrary it could be better to have a party that is not involved in other key initiatives to avoid conflicts.

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Thanks to @karpatkey, @Aera, and @gauntlet for bringing this proposal forward. Our team strongly supports it, as we believe that a non-custodial and strategic treasury management program will make the DAO more resilient and sustainable, enabling it to withstand changing market conditions and continue to operate effectively even in a bear market.

Regarding the proposed management fee, we are curious if a hybrid fee structure (lower management fee combined with a performance fee) was considered to better align the parties involved. While we recognize that this approach could have potential drawbacks, was there any discussion about this option instead of the proposed fee?

Lastly, given the volatility of $ARB, would you be willing to compensate the Oversight Committee with a USD normalized amount rather than ARB?

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Thanks for the questions Yoan!

  • Achieving the outlined outcomes will make Arbitrum more sustainable by ensuring a prudent and diversified approach to treasury management. By implementing a strategy that includes risk-adjusted investments and liquidity management, Arbitrum can create a more stable financial foundation. This approach reduces the dependency on single revenue streams and mitigates risks associated with market volatility. Additionally, a well-managed treasury can support ongoing development, maintenance, and operational costs, ensuring long-term sustainability and resilience against economic downturns.

  • ASTMG will use resources to seed liquidity natively within Arbitrum. It is prudential to initially deploy assets in a conservative and risk-aware manner, with focus on capital preservation. The concomitant deeper liquidity will help Arbitrum to cement its position as the DeFi chain, attracting activities and presenting itself as a competitive alternative to CeFi venues. After successful iteration of conservative deployment, ASTMG hopes to expand upon more ecosystem-focused liquidity seeding, potentially in conjunction with existing working groups within ArbitrumDAO that focus on ecosystem growth.

  • ARB has been suffering from underperformance vis-a-vis ETH. Continuous unlocks and spending have dampened sentiments around the token. We believe this proposal could serve 2 main purposes for ARB holders: 1/ actual sustainable treasury management, 2/ messaging DAO’s maturity and commitment towards fiscal responsibility; in conjunction with parallel, adjacent discussions such as DAO Budget and Revenue and OpCo, the DAO will be on better track towards sustainability and alleviate concerns with regards to large experimental spendings, which could boost confidence in ARB.

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Yes, the targets are 100% on-chain and non-custodial. We do not plan to explore off-chain holdings or multi-chain programme in the initial phase of the execution; multi-chain programme can potentially be explored as long as assets are managed in a non-custodial manner (and can leverage proposed architecture such as SAFE wallet), but would obviously need to offer significantly better value proposition (vs. native Arbitrum deployment). On the other hand, off-chain holdings cannot allow for non-custodial solution, so it is most likely that we’ll not explore off-chain holdings.

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ENS DAO has used Karpatkey as a treasury manager for almost two years and I can speak to the consistency of their presence and quality of their deliverables.

In all the time since they were chosen as treasury manager, I don’t believe kpk has ever missed a weekly metagov meeting, making themselves very available and informed. Additionally, kpk is always striving to do more for ENS DAO. They build helpful DAO analytics dashboards and incorporate suggested changes timely, even on things outside the scope of the original engagement.

I’m in support of the initiative on the basis of my experience with the quality teams involved.

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Given the poor state of ARB onchain liquidity that was uncovered in yours and Aera’s report, how would you approach diversification of the 250 million ARB if all of the conversion is done onchain?

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When you say this will allow the group to manage 2 years of runway, does this mean expenditures (such as for APDC or other committee led programs) would come from this kitty? Or is it just a benchmark agains the amount that should be stored in the endowment at any given time?

We’ve discovered that treasury diversification should go hand in hand with ecosystem growth, as we saw with the STEP program where we also grew the RWA ecosystem in addition to diversifying. Do you have specific ideas for how the endowment can create the vibrant community? How will Protocol Owned Liquidity bolster ecosystem growth? What mechanisms will be taken to ensure that yield is streamed back to the treasury and not just reinvested by the endowment? What are some of the products that will be used in the process of doing treasury diversification?

Overall, I would also like to see expanded duties by the treasury manager such as serving as a clearinghouse for grantees to easily liquidate ARB received in grant; producing research relevant to Arbitrums treasury; and steering committees for proposals to the DAO that grow the ecosystem while diversifying the treasury, such as STEP and token swaps. On that note, would the present program interface at all with STEP and other diversification+ ecosystem growth programs, or would those remain complementary but separate?

[quote=“karpatkey, post:1, topic:25301”]

Just wanted to point out the GCP is offering $30k per year to council members, would suggest possibly keeping compensation similar so there is a standard we eventually align on. Is there a reason to keep this amount in ARB and not dollar value like the GCP has?

Great job overall, glad to see this finally out!

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It’s great to see that important and respected ecosystem players like Karpatkey and Gauntlet are working towards the sustainability of Arbitrum’s treasury.

Overall this proposal seems to tackle several of the current issues at Arbitrum. We must strive to ensure the DAO’s long-term solvency, have discussions about ARB liquidity and pricing, and be more efficient in disbursing funds. It’s not only about being responsible but also about the message we send as a DAO to the market, it goes beyond the size of the main treasury or whether we are in a Bear or Bull market (both of which have been mentioned on several occasions as " motivations" for spending or not spending funds).

Having said this, we would like to provide some feedback:

We note that you have mentioned a negative gap of 61M but based on subsequent data the gap would be 76M, is there something we’re not seeing?

This worries us a little, we see it difficult to achieve this goal at current prices if the DAO allocates 58% of the treasury to illiquid assets as shown in the screenshot you attached.

We have noticed that there is little discussion of the financial viability of initiatives or their impact on the overall composition of the treasury, an indication that a global vision of the treasury and the various proposals that emerge is lacking. This underpins the need for “specialized actors” to ensure that a healthy and viable asset mix is maintained.

Assuming that we end up spending $1.4B in illiquid investments, this would leave less than 20% of the current treasury as “availabilities” excluding the $250M requested in this proposal:

It would be interesting to provide the STMG with some authority to act as managers/consultants (especially when discussing proposals involving large investments/erogations). Certain limits could be set on ARB distribution by field of interest to give an example, not only to preserve the desired asset mix in the treasury but also to ensure that each branch of interest for the DAO can reasonably obtain the necessary funding.

We have seen in other DAOs that when providing incentives, protocols are asked as a condition to incentivize pools that contain the governance token. Despite the (realistic) mention that liquidity is usually mercenary, but when it comes to providing liquidity to governance tokens, it generally responds to holders seeking to lower the opportunity cost of holding capital tied to that asset, so this approach perfectly meets two needs: high stickiness of TVL and greater market depth for ARB.

It would be positive if certain task forces such as the STMG were involved in the implementation of such incentive programs.

Considering that there is already a program that seeks to diversify the treasury into RWA and that Karpatkey is part of the Screening committee, it would be interesting to see how these two initiatives can generate synergies. We see STEP not only as a diversification strategy but also as a source of yield, so we believe the two initiatives are strongly linked.

With that said, we want to highlight that we strongly support a solution that moves in this direction.

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We find the proposed initative to be a well-crafted and highly beneficial proposal for addressing the current, critical and long-terms needs of the ArbitrumDAO. The outlined approach to treasury management is comprehensive and demonstrates a good balance of foresight and prudence in enhancing the longevity, viability and sustainability of the ecosystem, while not straying further away from its ethos and values.

The proposal’s emphasis on diversification and yield optimization is particularly important. By moving away from the current over-reliance on ARB tokens and implementing professional treasury management strategies, Arbitrum will stand to benefit by the significant reduction of its exposure to market volatility while generating sustainable yields. This approach not only safeguards the DAO’s financial health but also ensures a more stable foundation for ongoing operations and future growth initiatives.

The creation of a DAO Owned Liquidity Program also shows a strategic understanding of Arbitrum’s position in the increasingly competitive L2 landscape. By deepening ARB on-chain liquidity and attracting builders to the ecosystem, the outlined program has the potential to strengthen Arbitrum’s market position and increasingly foster, cultivate and nurture a growing and active community of users, builders and developers, which is of essence.

The onchain deployment of funds makes the pursued resource allocation strategies transparent and easily monitorable, which is appealing. That, combined with the non-custodial nature of the proposed management structure makes the proposal particularly strong and difficult to argue against. By maintaining the DAO’s ultimate control over funds while leveraging professional management expertise, the proposal strikes a really good balance between maintaining the ethos of decentralization, efficient resource allocation and meaningful risk reduction.

Overall, we are supportive of this proposal, as it represent a thoughtful and strategic approach to addressing Arbitrum’s current treasury management challenges.

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Hey, I’m definitely voting yes for @karpatkey’s proposal.
I believe they are on our top priority should be maximizing returns while ensuring the long-term health and growth of the Arbitrum ecosystem. It’s all about finding that sweet spot between being financially responsible and making strategic investments in our ecosystem.
So, what does that mean in practice? For me, it comes down to four key goals:
First, we need to protect our capital and grow it sustainably. That means minimizing risk and seeking out opportunities for steady returns. I’m talking about optimizing for risk-adjusted returns, not just chasing the highest APY ever. We should also set strict limits on how much we’re willing to lose in a given timeframe, and stress test our portfolio to make sure it can handle market volatility.
Second, we need to invest in our ecosystem in a way that benefits Arbitrum and its users. That means deploying capital in protocols that align with our vision and have the potential to generate revenue for the DAO.
Third, while it’s not the only thing that matters, our treasury management decisions should ultimately help increase the value of the ARB token. That might mean exploring strategic buybacks or finding ways to capture value from the growth of our ecosystem and redirect it to ARB holders.
Finally, transparency and accountability are key. Regular reports on our performance and risk management practices, and using on-chain tools to give everyone visibility into what we’re doing.
If we can get all of this right, I think we can set a new standard for responsible and effective DAO treasury management, and drive sustainable growth for both our treasury and the broader Arbitrum ecosystem. That’s why I’m voting yes for @karpatkey’s proposal

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There were some thoughtful questions/feedback with regards to fees that we would like to address.

Fees are dependent on the scope and complexity of the mandate (as this would naturally determine the level of work required). A relatively narrow, well-defined scope and simple deployment would warrant lower fees, while a broader scope and complex mandate would require more resources and thus higher fees. 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.

As @404DAO asked about, we did explore the management fee + performance fee structure but given that 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 (with no performance fee) better aligns treasury manager with the DAO, and allows the treasury manager to be more risk-aware (vs. simplistic return optimisation).

As @swmartin pointed out, we do believe that as AUM scales, it would be more suitable to explore a fixed fee structure that would allow ArbitrumDAO to cap expenses regarding treasury management.

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