Abstract
The TMC has divided the partner selection into two groups: one for managing the stablecoin allocation—which covers converting ARB tokens to stablecoins and their ongoing management—and one for managing the ARB allocation for on-chain strategies.
Specifically, the plan is to convert 15M ARB into stablecoins and manage those on-chain, while the remaining 10M ARB is deployed on on-chain ARB-only strategies.
Further information on the TMC mandate can be found here: Tally | Arbitrum | Treasury Management V1.2
Shortlisted Proposals
Stablecoin Allocation (15M ARB Equivalent)
- Scope: This group covers the full process of converting ARB tokens to stablecoins and managing these assets for DAO liquidity needs.
Partner Selection:
- Karpatkey
- Avantgarde & Myso
- Gauntlet
Allocation Strategy: The stablecoin management responsibilities will be evenly split among the three partners with a 33/33/33 distribution, ensuring diversification and balanced risk exposure while meeting the conversion and liquidity objectives.
ARB Allocation (10M ARB)
- Scope: This group is focused exclusively on deploying 10M ARB tokens into on-chain strategies designed to generate yield while safeguarding the principal.
Partner Selection:
- Karpatkey
- Avantgarde & Myso
Allocation Strategy: The on-chain ARB strategy will be managed equally by the two partners using a 50/50 split. Their proposals leverage proven DeFi protocols and ecosystem synergies to maximize risk-adjusted returns while maintaining liquidity and principal protection.
TMC Recommendation
We recommend a vote of YES for the Stablecoin Allocation and NO for the ARB Allocation.
Our analysis shows that the stablecoin strategies presented by the selected partners meet our criteria for DAO alignment, returns, risk management, etc.
Whereas the current ARB proposals lack sufficient risk management and clear operational details—resulting in low yield projections—we believe it is prudent to sit out on this allocation for now.
Voting Outcomes
Please cast your vote on each allocation separately. Your options are as follows:
Stablecoin Strategy Allocation Vote:
- Yes: Proceed with converting 15M ARB into stablecoins and manage them via a 33/33/33 split among Karpatkey, Avantgarde & Myso, and Gauntlet.
- No: Do not execute the stablecoin strategy; retain current ARB holdings without conversion.
ARB Strategy Allocation Vote:
- Yes: Proceed with deploying 10M ARB into on-chain strategies, managed in a 50/50 split between Karpatkey and Avantgarde & Myso.
- No: Do not execute the on-chain strategy; hold the ARB tokens.
The four possible combined outcomes are:
- #1 YES, deploy the Stable Strategy /// YES deploy the ARB Strategy.
- #2 NO, do not deploy the Stable Strategy /// YES, deploy the ARB Strategy.
- #3 YES, deploy the Stable Strategy /// NO, do not deploy the ARB Strategy
- #4 NO, deploy the Stable Strategy /// NO, do not deploy the ARB Strategy
We recommend that the DAO votes for #3 YES, deploy the Stable Strategy /// NO, do not deploy the ARB Strategy.
The vote will be conducted via Ranked Choice Voting (RCV): Rank options; results use instant-runoff counting.
Note. The first vote corresponds to the Stablecoin Allocation and the second to the ARB Allocation.
Other Proposals
During our review process, we evaluated several proposals that ultimately did not meet the criteria, required further clarity, or didn’t align with DAO objectives.
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AnthiasLabs x XBTO: Their proposal did not provide adequate detail on stablecoin conversion, DAO alignment, or custody arrangements, which are critical to our objectives.
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August Digital: While proposing a single-sided AMM strategy for both ARB yield and ARB-to-USD conversion, the proposal provided minimal details. There was no evidence of existing ARB strategies or a dedicated vault, and the timeline for necessary audits—if smart contracts are involved—was not addressed. Moreover, the risk management section appeared generic, with much of the content seemingly repurposed from other contexts.
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Bracket Labs: The submission lacked clarity on key operational components, such as the choice of OTC counterparties or DEXes. Additionally, the rationale behind the 2% trading volume figure and the associated price impact considerations were not explained. Although a Stablecoin Vault is reportedly live, the lack of public transparency and reliance on historical yield figures from related funds (rather than the target vault) were significant concerns, compounded by high fee structures.
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WINR: The implementation details were insufficient, leading to concerns over the alignment of risk and reward.
24.02.2024 Edit – Further Clarification on Shortlisted Rationale
Stablecoin Strategies:
Providers like Karpatkey, Avantgarde/MYSO, and Gauntlet stood out due to their provided backtests, clear execution plans, compensation structure, and risk management frameworks.
We have high confidence in their ability to execute the conversion of 15M ARB into stablecoins with minimal slippage and market impact.
As well as deploy these assets in well-established, low-risk protocols—aligned with the intended use of funds. The shortlisted proposals target an average yield of 8% to 12% under varying market conditions while primarily holding USDC and USDT.
This is why we’re recommending a YES vote on the stablecoin allocation.
24.02.2024 Edit V2
Below is a summary of the strategies, including fees and expected returns. Please refer to the tables for full details and note the associated risks outlined below.
Note that strategies might share the same general risks, and differences in returns may come down to how effectively the providers optimize yield under varying market conditions.
There are no guarantees or risk-sharing by the providers. As described below, fees are based on the allocation of assets to each provider and/or their performance.
Note that for the Arbitrum Strategy, while both applicants use Myso they have wildly different reported return profiles (hence different risk profiles).
Stablecoin Strategy
| Stablecoin Strategy | Protocols Used | Exp. Returns | Fees |
|---|---|---|---|
| Gauntlet | AAVE V3 | 8% | Free |
| Karpatkey | Uniswap v3, Camelot v3, Balancer v2/v3, GMX, Aave v3, Compound v3, Fluid, Vertex (Perps), Pendle (Yield) | 12-20% | 0.5% management |
| AvantGarde/MYSO | AAVE V3, Compound (core), Pendle, Fluid, and Uni v3 (satellite) | 5-15% | 0.5% / 10% management/performance |
Arbitrum Strategy
| Arbitrum Strategy | Protocols Used | Exp. Returns | Fees |
|---|---|---|---|
| Karpatkey | Myso | 7-20% | 0.5% mgnt |
| Avantgarde/MYSO | Myso | 30%+ | 15% perf |
Key Risks
Stablecoin Strategy
- Stablecoin Risk: The possibility of a stablecoin depegging.
- Smart Contract Risk: Exposure to potential hacks of the protocols used by each provider.
- Liquidity Risk: Funds may become locked if the lending rate reaches 100%.
- Optimization Risk: The provider’s optimization might not perform as intended or may fail to beat the benchmark.
- Custody Risk: Since the Foundation remains the custodian, custody risk is effectively transferred to the Foundation.
Arbitrum Strategy
- Smart Contract Risk: Inherent risk of the protocol being compromised.
- Asset Risk: ARB could lose all value.
- Counterparty Risk: If no counterparty is found, the strategy’s yield could drop to 0%.
- Liquidity Risk: Liquidity is locked for the duration of the call (30 days for monthly, 7 days for weekly).
- Covered Call Risks:
- Potential Conversion Risk: If the strike price is reached, the ARB allocation may convert into stablecoins (see “Managing Potential Conversions”).
- Premium Fluctuations: Option premiums vary based on ARB’s volatility.
- Secondary Market Risk: If a covered call isn’t held to expiry, exposure to secondary market prices may result as the matched trading firm buys back the call.
ARB Strategies:
When it comes to the ARB proposals, our review was less encouraging. Although there are some promising elements—for instance, Karpatkey and Avantgarde/MYSO show potential—the ARB strategies did not meet our strict criteria for transparency and risk mitigation. Our internal grading highlighted significant concerns:
- Lack of Transparency: Key operational details—such as ARB option liquidity, allocation splits, and execution mechanisms—were either insufficiently detailed or not publicly verifiable, particularly for strategies involving off-chain fund movements.
- Inadequate Risk Management: Given recent security breaches and governance failures across the industry, we believe that preserving the DAO’s capital is a priority. Without a clear risk framework, moving forward with these strategies would introduce unnecessary exposure.
- Trade-Offs vs. Returns: The proposed strategies projected yields between 7% and 30%, depending on the strike price and maturity of options sold, and if the options are sold. If no counterparty is found the options strategy would yield a 0% return. Lending-based strategies offered minimal returns, around 0.16% per year which, even at our maximum allocation, would generate only $10,000–$12,000 annually at current prices. Given the scale of the allocation ($7.5M), these returns do not justify the associated risks.
Given these trade-offs, we believe the risk is not justified for an allocation of $7.5M worth of assets. Until proposals can deliver fully detailed strategies that meet our risk-adjusted return standards, it’s prudent to vote NO for the ARB allocation.
Arbitrum Alignment Consideration:
A key criterion for evaluating submissions was alignment with Arbitrum. While most strategies will be executed on the Arbitrum network, not all will involve Arbitrum native protocols.
There are multiple reasons for this but the main ones are the absence of proposals by Arbitrum native protocols and the fact that most liquidity on Arbitrum is on non-native protocols, making it difficult to allocate a large amount of stablecoin while retaining a competitive yield.
Given the dearth of sufficient proposals, our recommendation is to do nothing rather than something not justifiable from a risk-reward perspective.
Edit 06.03.2025 V3
Further Clarification on the Shortlisted Rationale
TMC Clarification on ARB Strategy Decision
Hello everyone,
First, we want to sincerely thank the teams at @avantgarde, @karpatkey, and Myso for taking the time to discuss their proposals in greater detail with us. We appreciate your proactive approach and the thoughtful contributions you have made, both privately and in the forum.
Below, we provide additional context on our recommendation to defer active deployment of the ARB allocation at this time, along with feedback on each proposal’s approach and risk management.
Overall Rationale for the “Hold ARB” Recommendation
Risk and Transparency
While both teams have made significant efforts, the operational details for the ARB strategies, such as liquidity for options, counterparty arrangements, and daily/weekly execution, remain unclear. Given the large ARB allocation, this uncertainty makes us cautious.
Yield versus Complexity
The proposed yields for ARB strategies vary widely, ranging from near zero (for example, simple lending) to around 30% (for example, covered calls). However, the higher-yield strategies depend on liquidity or counterparties that may not be scalable, and the lower-yield approaches (for example, 0.16% on Aave) do not justify the additional complexity and risk.
Asset Manager Selection Considerations
It’s important to note that selecting an asset manager for alpha generation typically requires a multi-year to decade-long track record across multiple market regimes, a challenging standard, even in traditional finance. Therefore, if the core ARB strategy cannot stand on its own merits, claims of expertise should not serve as the primary selection criteria.
Prudent Governance
Our mandate is to protect the DAO’s treasury. Rather than forcing a strategy with an uncertain risk and reward profile, we prefer to hold ARB until more robust proposals/strategies emerge. This is a postponement rather than a permanent refusal, and we remain open to future improvements.
Feedback on Karpatkey’s Proposal
Stablecoin Strategy
We appreciate Karpatkey’s detailed Risk Management Plan, which includes non-custodial architecture (Safe + Zodiac Roles Modifier), protocol whitelisting (Aave, Compound, Dolomite, Fluid, etc.), and clear maximum exposure thresholds (e.g., no more than 20–25% per protocol).
The yield estimates of ~8–12% for stablecoins appear realistic, and Karpatkey’s track record in managing other DAO treasuries (Gnosis, ENS, etc.) is well-documented.
ARB-Only Strategy
Karpatkey proposes covered calls (via Myso) and deposit/borrow loops. While these ideas are valid in principle, the TMC remains concerned about the practical scalability of the options component (liquidity, strike selection, and counterparty discovery at large ARB notional sizes).
The lending-based approach offers minimal yield (~0.16% to ~4%), which does not justify the operational overhead or the added smart contract risk compared to simply holding ARB in a wallet. The covered-call approach is also sensitive to ARB price and carries risk in case of price appreciation as the cost of reimbursing the loan could exceed the value of the stablecoins used for farming. The backtest is based on a period of constant ARB price depreciation and therefore may not fully reflect this risk.
Although Karpatkey mentions having advanced monitoring systems to respond promptly to adverse market conditions, we lack sufficient visibility into these tools to confidently recommend this approach to the DAO.
Feedback on Avantgarde’s Proposal
Stablecoin Strategy
The Risk Management section shared by Avantgarde (and MYSO) highlights position-sizing constraints, lockup safeguards, and a diversified stablecoin approach. We especially appreciate the plan’s clarity on monitoring liquidity needs and the ability for the DAO to recall funds if necessary.
Expected returns of 5–15% are in line with typical DeFi yields, and the approach includes established protocols such as Aave, Compound, and Uniswap.
ARB-Only Strategy
Similar to Karpatkey, Avantgarde’s ARB strategy also leans heavily on covered calls (via Myso) for yield generation. Although the theoretical upside is attractive, we lack sufficient real-world liquidity data for large ARB notional amounts. In addition to the conversion risk, the strategy presents a risk in case of a sharp ARB price increase (which again may not be accurately accounted for in backtests done over a period of relatively constant price depreciation). For instance, vaults on Ribbon and Premia also rely on selling covered calls and have recently incurred losses despite both vaults having widely different strategies, following sharp increases in the price of the underlying assets:
We value the team’s willingness to iterate on strike selection and maturity dates, but given current market conditions, we do not see a clear, low-risk path to consistent yields above simple “hold” alternatives.
Reminder of Grading Criteria
Our evaluation of proposals was based on the following key factors:
- 25% – Experience & Track Record: Demonstrated ability to manage treasury assets securely and effectively.
- 25% – Risk Management: Strength and clarity of risk mitigation measures under diverse market conditions.
- 15% – Alignment with DAO Goals: Consistency with the DAO’s growth objectives and ecosystem utility enhancement.
- 15% – Expected Returns: Realistic yield projections and sound risk-adjusted performance metrics.
- 20% – Transparency & Reporting: Commitment to regular, clear reporting and continuous performance monitoring.
Timelines & Next Steps
We will move forward with a vote on Snapshot next Thursday, February 27, 2025.
Phase 1 – ARB Conversion & Stablecoin Management (15M ARB)
IF YES, the Stablecoin strategy is deployed:
- Initiate a three‑month phase to convert 15M ARB into stablecoins.
- Proceed with the deployment of low‑risk, yield‑bearing strategies for the converted stablecoins, with regular performance and risk reporting.
IF NO, the Stablecoin strategy is not deployed:
Retain the current ARB holdings without conversion.
No further actions will be taken regarding stablecoin management until a new decision is reached.
Phase 2 – ARB On-Chain Strategy Deployment (10M ARB)
IF YES, the ARB strategy is deployed:
- Deploy the 10M ARB into on-chain strategies.
- Despite going against the TMC recommendation, we will commit to establishing a set of safe parameters for running the strategy.
IF NO, the ARB strategy is not deployed:
- Hold the ARB tokens without deploying them into on-chain strategies.
- 3 months post Snapshot the RFP process will be held again.
Additional Next Steps for Both Allocations
Three months after the managers have been elected, publish a comprehensive report detailing the performance and management outcomes and re-evaluate the allocation strategy for potential adjustments.
