Team 17 - Arbitrum DAO Treasury Diversifying Through RWA Assets

Track Names: RWA & DAO Budget

Challange Statement: Challange Statement Document

Members: Caner Budak & İsmail Emin Erdoğdu

Team Lead: Caner Budak

Pitch: Loom & Pitch Deck

Arbitrum DAO Treasury Diversifying Through RWA Assets

Abstract

Arbitrum DAO has taken steps toward diversifying its treasury and is currently voting on a proposal to invest in RWA assets with a low-risk profile. This proposal aims to further diversify the Arbitrum DAO treasury by including medium and high-risk profile assets, thereby reducing its dependence on the crypto-native asset, ARB.

Motivation

As of July 6th, we have observed that the Arbitrum DAO treasury consists of a total of 3,164,180,268 ARB and 13,943 ETH. This means that the Arbitrum DAO treasury is 97.9% dependent on ARB, a crypto-native asset. To prevent the DAO treasury from being affected by the inherent volatility of crypto-native assets, it is necessary to diversify the treasury. During this diversification, choosing products that provide real-world yields is ideal for reducing the treasury’s exposure to the price dynamics of the crypto market. Therefore, we should diversify the Arbitrum treasury through RWAs

Source: Arbiscan | ARB Wallet & ETH Wallet

Rationale

In a report prepared by karpatkey in January 2024, the value of the Arbitrum DAO treasury was stated to be $6,464,800,485. Nearly six months later, it is observed that the current value of the Arbitrum treasury has declined to $2,005,233,114. To ensure the sustainable development of the Arbitrum ecosystem and to continue providing incentives to various public goods, protocols, and users in the future as well as in the present, it is necessary to diversify the assets in the treasury. The graph below shows the value of the treasury over time.


Source: deepdao.io

Specifications

The Arbitrum community has shown significant interest in RWAs, motivated by the need to diversify their heavily skewed portfolio. Emphasizing the importance of diversification, it is crucial to focus on investing in low-risk asset classes within RWAs.

For asset diversification that the Arbitrum Treasury could undertake in the near future, RWAs are significant as a yield/revenue tool outside the dynamics of the crypto market. RWAs offer a risk-manageable approach with different financial instruments, allow for diversification within the same asset class, enable both liquid and illiquid strategies, and provide a realistic risk environment for a long-term runway. Therefore, they could play an important role within the Arbitrum treasury.

Low Risk RWA Yield Strategies:

Stablecoins, US Treasury Bills and US Government Securities

1% of the Arbitrum Treasury will be allocated to protocol-based stablecoins, US Treasury Bills, and US Government Securities as the first step towards implementation and long-term sustainability of the Arbitrum Treasury.

Starting with a bearish yield expectation of 4-5% APY, timelines can be determined based on the chosen method. For the integration of RWA diversification within the long-term strategy of the Arbitrum Treasury, the following can be achieved:

  • More flexible implementation
  • As non-custodial as possible
  • Meeting current needs

Referring to the previous proposal,

  • Securitize BUIDL - 11 million
  • Ondo USDY - 6 million
  • Superstate USTB - 6 million
  • Mountain USDM - 4 million
  • OpenEden TBill - 4 million
  • Backed Finance bIB01 - 4 million

Source: rwa.xyz

Medium Risk RWA Yield Strategies:

Tokenized Private Credits

One of the emerging RWA approaches in DeFi is tokenized private credits, which actively offer annual interest returns ranging from 7% to 17% for various credit needs. As an implementation pathway, additional due diligence can be conducted on the methods established by teams such as Goldfinch and Untangled. This will help minimize risk and prevent investments that seem 'too good to be true”.

High Risk RWA Yield Strategies:

Tokenized Micro Credits & Real Estate & Stocks & Carbon Credits

Stocks

Mostly, tokens created pegged through Backed Finance are matched one-to-one with the assets they are backed by. Currently, the total value of tokenized stocks is quite low, at around $4.48M. Therefore, these highly risky and trust-dependent assets fall within the high-risk profile category.

Real Estate

Many projects aim to tokenize assets in the real estate sector to enable investments by multiple participants. The most prominent among these projects are CitaDAO and Alta. In this proposal, the decision on which intermediary project to work with and the associated risks will be determined based on the research report to be prepared in the near future.

Carbon Credits

Toucan tokenizes CO2 Removal Certificates bidirectionally through various bridges. This provides investment opportunities aligned with the emerging Carbon Zero mission. Given that it is a still-maturing sector with new applications, the risk profile is quite high. Toucan has tokenized 21,890,661 carbon credits to date.

Steps to Implement

  • To implement the project, risk analyses of the previously mentioned RWA yield strategies must be conducted. Detailed reports should be created on the risks and returns of RWA yield options categorized into three different levels: low, medium, and high risk. A public grant ($25K in ARB) should be established for this purpose, and the most competent research companies and organizations applying for the grant should be selected through on-chain voting.
  • At the end of June, voting is underway on a recommendation by the STEP Committee to allocate $35M to low-risk assets, which are primarily composed of U.S. Treasury Bills, U.S. Government Securities, and the U.S. Dollar. This vote is currently receiving overwhelming support.
  • If this vote is approved, $35M will be allocated to low-risk RWA products. This proposal aims to diversify the treasury by also allocating funds to medium- and high-risk RWA assets.
  • Assuming $35M is allocated to low-risk assets, it is planned to enter a trial phase by allocating $15M to medium-risk assets and $5M to high-risk assets. If the targeted yields are successfully achieved with the allocated assets, another vote will be conducted to increase these amounts.
  • The STEP Committee is expected to ensure the necessary organization of the program by working with relevant individuals in Legal Compliance and Partnerships. Partnerships need to be established with the providers of RWA assets identified through research. Additionally, throughout these processes, the Arbitrum Foundation and the STEP Committee should work closely together to determine whether the Arbitrum DAO can be recognized as a legal entity.

Timeline

  • Milestone 1 (Research)

Share the grant program publicly on the Arbitrum Forum. Allow 2 weeks for researchers to apply to the program. Allocate 1 week for the STEP Committee to assess the qualifications of the applicants. Conduct a 1-week voting period for those who pass the qualification check. Considering potential delays, a total time frame of 5-6 weeks is required.

Allow 4 weeks for the winning team to complete the research. In total, 9-10 weeks are needed.

  • Milestone 2 (Legal Compliance)

During these collaborations, depending on whether Arbitrum DAO has a legal entity or not, the Arbitrum Foundation may need to enter into some agreements.

The STEP Committee will be responsible for examining the legal obligations necessary for this proposal. Since this committee is already managing the grant related to low-risk assets, they will also handle this task.

  • Milestone 3 (Business Development and Partnership)

When investing in RWA assets with Medium and High-Risk Profiles, the size of permissionless pools can be small and thus fully occupied. The Arbitrum DAO should form partnerships with intermediary projects for investing in RWA assets, enabling investments to be made directly through these partnerships.

Partnership negotiations will be conducted by the STEP Committee on behalf of the Arbitrum DAO and are expected to take approximately 2-3 weeks.

  • Milestone 4 (Medium Risk Profile Integration)

Using the obtained research report, collaborate with projects that have a medium-risk profile and transfer the targeted $15M to RWA assets, sending them to the treasury’s wallet address.

A time frame of 2-3 weeks is required for collaboration with two different organizations.

  • Milestone 5 (High Risk Profile Integration)

If there are no issues encountered during the diversification of the treasury with medium-risk assets, the planned $5M should also be transferred to high-risk assets. Additionally, the acquired RWA assets should be sent to the treasury’s wallet address.

Similar to Milestone 4, a time frame of 2-3 weeks is required.

Overall Cost

  • Research
    • $25K equivalent in ARB
  • Medium Risk Profile RWA Assets Diversification
    • $15M equivalent in ARB
  • High Risk Profile RWA Assets Diversification
    • $5M equivalent in ARB
  • STEP Committee
    • $5K equivalent in ARB per member ($25K total)
  • Total Cost: $20.05M equivalent in ARB
4 Likes

I see some issues with repurposing the STEP committee for other programs - they agreed to serve with a specific mandate, which is fulfilled now that recommendations are made.

We also paid them 25k ARB (~15k USD), so the amounts proposed of $5k will certainly be insufficient for the work required in going through detailed applications.

It would also be nice to have actual examples or interviews with service providers that are medium risk and high risk who would apply to the program if it was approved. for example before STEP was passed we actually interviewed close to 10 tbill RWA providers to gauge interest in the program and fine tune it based on their expertise and needs.

Also, i don’t see the need for a separate entity for the DAO. We used the Arbitrum Foundation and that is fully sufficient for our purposes, without the significant overhead in standing up something on our own. They also took care of legal compliance, so that the committee could zero in on the work of actually selecting providers which is a task in itself.

Hope these are helpful comments!

2 Likes

Thank you for spending time on our proposal. We prepared that proposal in the governance hackathon and it was kinda Proof of Concept.

We didn’t know that, it’s a great info.

again thanks for your comments and caring our proposal behalf of hackathon <33

2 Likes