TMC’s Proposed Allocations

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.

  • AnthiasLabs x XBTO: Their proposal did not provide adequate detail on stablecoin conversion, DAO alignment, or custody arrangements, which are critical to our objectives.

  • 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.

  • 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.

  • 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.

4 Likes

Hello thanks for the results. A couple of things:

Please consider doing 2 separate snapshot votes for stables and arb strategies. As it is setup now, people will likely get confused. Stable strategy: yes/no. Arb strategy: yes/no.

We obviously trust threesigma here as manager and risk advisor. But is extremely hard to have an opinionated vote not knowing the strategies and not knowing what risk parameters were not satisfied. Note that that while there is a brief description, the specific strategies are not publicly available (at least the links presented in this thread.

It also feel a bit odd that among all participants there was no feasible single side arb strategy available, when effectively even just depositing the arb in a yield protocol without borrowing any asset against it has a non zero apr (although, it introduces smart contract risk).

Note that this is not a critique. But as it is now, both votes would basically be blind votes here. Understanding that strategies might just be proprietary so not publicly available, better understanding the risks tied to the single side arb would at least help.

Thanks.

9 Likes

yeah agree with @JoJo! please do 2 separate offchain votes

6 Likes

Hi JoJo, Thanks for your detailed feedback.

We opted for a single combined vote to keep the decision process straightforward and cohesive.

Regarding the strategies. We’re working to provide more detailed information on the shortlisted candidates’ risk parameters and strategy specifics as soon as possible to support an informed vote.

Have a nice weekend!

1 Like

Just want to echo that this is important to get out on the forum prior to posting any vote.

As promised, here’s some additional clarity on our process and insights regarding both the stablecoin and ARB strategies:

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.


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.


ps. Will edit the original post with this information

1 Like

Thanks for the additional information!

While we certainly should take into account the TMC recommendation, there is an option to vote “YES” for the ARB strategy.

However, the delegates don’t have any information of what these strategies would be besides your summary. Is it possible to make it public, so the delegates can make a more informed decision?

2 Likes

Ok, but this isn’t providing a few of the details needed to vote on this. Where can we understand:

  • Protocol exposure for each
  • Fee structures for the providers selected
  • Summary of risks for each
  • Any guarantees or risk-sharing by the providers

Specifically, there is risk involved, and we need to understand it at a basic level. If it was simple as “deposit into Aave” we wouldn’t need to pay anyone to do it, so it’s obviously got some protocol and liquidity risks above the easy choice.

Also, we want to make sure we’re not just paying multiple providers to all do the same thing. But if the strategies are different from each other, then we should also have the option to vote on them separately if they present major differences in risk/reward.

We will be forced to vote against any allocation if a better level of disclosure can’t get us comfortable with it. Is there perhaps a document already in existence that walks us through these choices?

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 Compound, Dolomite, Fluid, Uniswap V3 12-20% 0.5% management
AvantGarde/MYSO AAVE V3, Compound 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.
3 Likes

Very helpful! Some follow up questions that will hopefully be the last from us:

  • Are any of these using leverage? These are deposit only?
  • If the latter, why would governance want to pay a performance fee, particularly when Gauntlet is offering to do it for free
  • What is the advantage to having the liquidation to stables be handled by each individually? Seems like race conditions and could be done by AF or a single service provider for orderly liquidation and then distributed

Thanks!

2 Likes

No, as far as providers have disclosed their strategies, none of them involve using leverage.

  1. Holding Strategy: Protocols will maintain the majority of holdings, only shifting higher on the risk curve when directed by the DAO. Since these funds are intended to cover expenses and pay service providers, we prefer to avoid unnecessary risk.
  2. Risk Diversification: To mitigate potential issues, like a provider underperforming or a black swan event triggering a flaw in their risk management strategy. We favor spreading risk across multiple providers rather than concentrating it in one area.

In addition to the core deployment on AAVE and Compound, various providers have offered:

  • Avantgarde:
    • Provide liquidity on stablecoin pools via AMMs like Univ3, Balancer V2, Curve, and Camelot.
    • Manage PT tokens on Pendle.
    • Deposit on platforms such as Fluid and Balancer V3.
  • Karapatkey:
    • Offer liquidity on ARB-USDC pairs across Uniswap, Camelot, Vertex, or GMX.
  • Gauntlet:
    • Whitelist vaults on Uniswap, Camelot, Compound, Euler, and Morpho.

Ultimately, any additional deployment will only proceed if the rewards justify the extra risks. The TMC remains conservative, ensuring that funds reserved for paying service providers are not exposed to unnecessary risk.

We don’t believe this will be an issue. Converting 15M ARB to stablecoins over a three-month period would mean liquidating approximately 84k ARB daily.

Over the past six months, an average of 11M worth of ARB has been sold per day on Uniswap pools to USDC and USDT, with the lowest daily sell volume being around 2M.

Dune

In any case, we believe that if their liquidation strategy is properly executed, it will have no noticeable impact on the market.

Additionally, by distributing ARB from the outset, providers can begin allocating it to their stable strategies making this process more seamless.

2 Likes

Thanks for the recommendations and the additional info. I have a few questions for you:

Since the recommendation is to not go through with the ARB allocation, would it make sense to increase the stablecoin allocation, if of course the DAO agrees? I’d assume that the conversion would probably require more time given the increased size to maintain slippage the same as projected with the 15M ARB, but would there be any other considerations for doing so?

If the DAO votes to not go through with the ARB allocation, and we do not simply add them to the stablecoin allocation, what other avenues do you have in mind? Also, is there any specific deadline after which the ARB would be returned to the DAO’s treasury if no conclusive strategy is reached?

To better understand; are there even any Arbitrum-native protocols that we could deploy the 15M ARB worth of stables in while also meting the grading criteria? If yes, was there any outreach from the TMC to them attempted?

What does ‘shifting higher on the risk curve’ mean in this context? Stablecoin yield on the protocols mentioned in the ‘Stablecoin Strategy’ table you shared are rather straightforward. Also, how do you envision the DAO ‘directing’ protocols to shift higher on the risk curve? As we’ve seen in the past, assigning responsibility for an action to the ‘DAO’ in general is the same with not assigning responsibility to anyone.

From the original proposal, my understanding is that it would be TMC’s responsibilities to serve as a check/balance on the strategies and notify the DAO (and probably seek consensus through a Snapshot) on what needs to happen. When OpCo is up and running, those responsibilities would be absorbed by it.

Is the above accurate?

1. Increasing the Stablecoin Allocation
Our current approach doesn’t call for increasing the stablecoin conversion beyond the 15M ARB allocation.

The original goal was to keep part of the treasury denominated in ARB, so reassigning additional funds isn’t really our prerogative. As it stands, we’re not looking to modify the allocation.


2. Alternative Avenues for ARB if Not Allocated
If the DAO votes NO on deploying ARB in on-chain strategies, our preference is to return those tokens to the treasury. Running another RFP in the near term could attract low-quality proposals unless market conditions improve and there are genuinely compelling ARB-only on-chain strategies available.


3. Arbitrum-Native Protocols for Stablecoin Deployment
To date, we’ve only received applications from providers like Winr and Myso—both operating as non-native protocols. No Arbitrum-native protocols have reached out or applied for this role. While everyone is welcome to submit proposals, we currently have no viable native options that meet our criteria.


4. “Shifting Higher on the Risk Curve” and DAO Direction
By “shifting higher on the risk curve,” we mean moving into strategies that could offer enhanced returns but come with increased risk exposures. For our stablecoin strategies, this isn’t the default plan. If any big shift was to be implemented a temperature check would be conducted with the DAO to seek its approval, ensuring it’s not just an undefined directive.


5. Roles of TMC and Future OpCo
Currently, the TMC (along with the GMC) is responsible for handling treasury management, monitoring strategies, and ensuring effective communication with the DAO. In the future, we envision the functions of the TMC and GMC rolling up into an OpCo once it is fully established and operationalized. Depending on the structure of the OpCo, for example, as a Cayman Islands Foundation entity, it could eventually serve as the custodian of these funds.

The groundwork being done by the TMC and GMC now will provide a detailed rubric on treasury management, budgeting, and transparency/reporting that can be refined and adopted by OpCo for more dedicated, ongoing management.

We would like to thank the TMC for their review and are excited about the opportunity to work with the Arbitrum Community.

We recognize that some community members have highlighted challenges in casting an informed vote on the single-side ARB strategy due to the lack of publicly available strategies (see link, link). As such, we would like to provide additional information to help the community better understand the strategy and address the points raised by the TMC.

The proposed ARB-only strategy is centered around covered calls—specifically, selling call options on ARB to generate immediate stablecoin income through the MYSO v3 deployment on Arbitrum. Importantly, there’s no off-chain funds movement (as suggested in the TMC feedback) but full on-chain transparency with regards to option settlement.

Below, we outline key aspects of the strategy to aid decision-making:

  1. Rationale for proposing covered calls
  2. Explanation of covered calls and their mechanics
  3. How we propose implementing a covered call strategy for the Arbitrum community
  4. Risks associated with covered calls and how we intend to manage them
  5. Steps to operationalize the strategy
  6. Feedback

1) Rationale for Proposing Covered Calls

We believe covered calls are a useful instrument for the Arbitrum treasury for the following reasons:

  • Yield Generation with ARB Alone: This approach does not require stablecoins or two-sided liquidity provisioning.
  • Volatility-Based Yield: Higher ARB volatility translates into higher option premiums, benefiting the treasury. Unlike lending yields (which depend on borrowing demand) or DEX fees (which require stimulating trading volume), covered call yield is purely volatility-driven.
  • Immediate Stablecoin Income: Yield is generated upfront and paid in stablecoins, without fluctuating APYs.
  • Retaining ARB Upside: ARB exposure is maintained up to the strike price, which can be tailored to community preferences. No ARB is sold at current prices.
  • Capital Efficiency: ARB is fully utilized without idle capital, unlike lending markets where utilization rates are typically below 100%.
  • On-Chain Execution: The strategy can be executed permissionlessly on-chain, settled natively on Arbitrum, without counterparty risk.

Given these benefits, we believe covered calls can help the Arbitrum treasury put otherwise idle ARB to work, generating stablecoin yield for the DAO while also introducing and showcasing on-chain structured products within the Arbitrum ecosystem through the MYSO v3 deployment on Arbitrum.

2) What Are Covered Calls and How Do They Work?

A covered call strategy involves holding an underlying token (ARB) while selling call options against it, generating upfront stablecoin income. The stablecoin income comes from trading firms bidding to acquire call options to engage in “gamma scalping”, capitalizing on price volatility in a market-neutral way.

A call option grants the buyer the right (but not the obligation) to purchase the underlying (=ARB) at a predetermined strike price (e.g., 1.2x the current price) within a set duration (e.g., 30 days). By selling this right, the DAO receives an upfront option premium.

Example:

  • Notional: 5M ARB (~$2.25M)
  • Strike Price: 130% of spot (~0.584)
  • Duration: 30 days
  • Indicative Option Premium: $60K USDC (~2.7% of notional, 32.8% APY)

Potential Outcomes:

  1. ARB Price ≤ 0.584 (Option Expires “Out-of-the-Money”) → Arbitrum retains the 5M ARB.
  2. ARB Price > 0.584 (Option Expires “In-the-Money”) → Arbitrum receives $2.92M USDC but does not get the ARB back.

One key point to highlight is that technically covered calls have less downside risk than holding ARB. For example, if ARB were to drop to zero, the DAO would still have received the premium, offering some downside protection compared to holding the token outright. The primary trade-off is the potential opportunity cost if ARB’s price rises above the strike price plus the premium.

3) Implementing a Covered Call Strategy for Arbitrum

To optimize yield generation while minimizing conversion risk, we propose setting strikes and expiries that balance:

  1. Maximum yield generation
  2. Minimal probability of options expiring in-the-money (to retain ARB upside)
  3. Shorter option durations (to enhance liquidity and minimize lock-ups)

Strike Selection and Expiry Optimization

We analyzed historical ARB return data to identify strike levels that would not have been exceeded in 95%, 90%, and 85% of historical cases. As expected, the results show that:

  • Higher strike prices lead to a lower conversion probability
  • Longer expiries require higher strike prices for the same probability

Given these strike prices, one can calculate indicative option premiums and the corresponding APYs that a covered call strategy would generate based on different strike and expiry combinations. The resulting indicative yields are illustrated in the plot below. For covered calls with expiries of up to 30 days (to optimize for liquidity), the annualized yields peak around the 23-day mark before leveling off. At this duration, the indicative yields are approximately 4% for low conversion probabilities, 13% for medium conversion probabilities, and 30% for higher conversion probabilities.

Using these strike levels, we can perform backtests by running covered call strategies across random starting points and comparing the results to a buy-and-hold strategy over the same backtesting period. Below is an illustrative example of executing such a strategy, starting in June 2024, with a 128% strike, 23-day duration, and a 0.8% premium.

The overall results are shown in the table below, comparing three covered call strategy variations on 5,000,000 ARB to a buy-and-hold approach over the same time period, which resulted in a final position value of $2.0M:

Avg. Final Position Max. final Position Min. Final Position Conversion Occurrence
148% strike, 23dte, 0.3% premium $3.5M $5.5M $2.0M 61.34%
128% strike, 23dte, 0.8% premium $3.4M $5.4 $2.0M 78.20%
116% strike, 23dte, 1.9% premium $3.2M $5.9 $2.1M 79.36%

Note: Yields are indicative and may vary depending on ARB volatility and market conditions at the time of execution. However, we have already validated liquidity supply to match with trading firms for notional amounts of up to ~$5M, offering similar premiums and yields.

4) Addressing Risks and Mitigation Strategies

We appreciate the TMC highlighting key risks associated with the ARB strategy in the forum and outline below how these risks can be effectively managed:

1. Smart Contract Risk

The strategy will be executed on-chain using the MYSO v3 protocol, which has been audited by Omniscia. As an additional precaution, the DAO could start with a smaller notional amount or shorter durations to test the implementation before scaling up.

2. Asset Risk (ARB Losing All Value)

A key advantage of covered calls is that they provide some downside protection compared to simply holding ARB. For example, if ARB were to drop to zero, the treasury would still retain the upfront premium from selling the call options, making this approach superior to holding ARB outright.

3. Counterparty Risk (No Trading Firm Willing to Buy Calls, Yield = 0%)

We have already validated liquidity supply with trading firms for notional amounts of up to $5M, ensuring there is consistent demand for ARB call options. Furthermore, higher ARB volatility increases option premiums, meaning the yield generation mechanism is not reliant on external borrowing demand or trading volume stimulation (as seen with lending or AMM-based yield strategies). Instead, yield is sustainably generated from ARB volatility itself.

4. Liquidity Risk (ARB Locked for the Duration of the Call Option)

To minimize liquidity lock-up risks, we propose:

  • Shorter tenors (e.g., 10-30 days) to enhance liquidity and allow frequent repricing.
  • Strike price selection based on historical data to reduce conversion probability while maximizing yield.
  • Potential early exit mechanisms via secondary market liquidity, allowing the treasury to unwind positions before expiry if necessary.

5. Potential Conversion Risk (ARB Converted to Stablecoins at Expiry)

If ARB surpasses the strike price, the DAO may miss out on additional upside. However, we mitigate this by:

  • Setting strike prices that balance risk and yield, ensuring conversions (if they occur) happen at favorable price levels.
  • Using historical ARB price data to determine strikes that minimize conversion risk while optimizing yield.
  • Retaining ARB exposure up to the strike price, meaning the treasury benefits from price appreciation up to that level.

6. Premium Fluctuations (Volatility-Driven Yield Variability)

While option premiums fluctuate with ARB’s volatility, this can be advantageous for the treasury. Higher volatility leads to higher option premiums, directly increasing yield potential. Unlike lending markets, which depend on borrowing demand, covered calls generate yield independently—only volatility matters.

7. Secondary Market Risk (If Calls Are Closed Before Expiry)

If the DAO chooses to unwind a covered call early, there is exposure to secondary market pricing dynamics. However, even in the unlikely scenario where a trading firm demands an unfair premium to buy back the call and close the position, the DAO can simply wait until expiry. This means the DAO is not strictly dependent on the secondary market and can “sit things out” if needed, maintaining control over execution.

5) Operationalizing the Strategy

To execute the strategy, the following steps would be taken for each option-writing cycle:

  1. Define strike price and duration based on market conditions and DAO preferences.
  2. Obtain tradeable quotes from trading firms and publish results (anonymized).
  3. Schedule execution with the selected trading firm and the TMC/Arbitrum Foundation.
  4. Execute trade using an off-chain signed quote.
  5. Lock ARB collateral in a segregated MYSO v3 escrow contract while receiving the stablecoin premium.
  6. At expiry: Either (a) reclaim ARB if the option expires out-of-the-money or (b) receive the conversion amount in stablecoins.
  7. Report on execution: We will provide periodic updates on premium earnings and option performance.

We hope this additional context helps the Arbitrum Community make an informed decision regarding the proposed ARB-only covered call strategy. We look forward to engaging with the community and answering any further questions!

3 Likes

We thank the TMC for the time and consideration dedicated to the proposed allocations.

In order for the community to have complete information, we’d like to address some concerns raised regarding the ARB allocation: 1/ lack of sufficient risk management and operational details, and 2/ low yield projections.

Regarding low yield projections, we agree with the TMC that non-options strategies currently yield low returns due to low stablecoin/ARB yield. However, it’s important to note that market conditions are unpredictable, and different strategies work for different market conditions.

For example, delta-neutral basis trading strategies that Ethena popularised during this market cycle are typically profitable in bullish periods when funding rates are elevated, but unprofitable in choppy or bearish periods when funding rates are depressed.

However, it is generally advisable to have an arsenal of strategies in place so that the Treasury is ready to capture the opportunity when it arises instead of ruling out deployment altogether.

Regarding the lack of sufficient risk management and operational details, we believe this mainly concerns the proposed options strategies. As there are no liquid, on-chain markets, OTC counterparties have to be sourced behind the hood. @Avantgarde already addressed key concerns with regard to the Covered Call strategies - we agree with their analysis and explanation, so we will not further elaborate on the details.

As for the other two strategies we proposed (1/ Lending-based strategies, 2/ Hybrid ARB-USDC strategies), they can be fully verified on-chain.

2 Likes

Thanks for putting this up, @threesigmaxyz.

@Avantgarde thanks for the detailed response to the questions on the ARB strategy risk. It makes us feel more comfortable considering that option as we would generally love to see ARB being put to work.

However, on this

Our only follow-up question is, would the “potential early exit mechanisms” account for a possible situation where the protocol is compromised? This is our major concern as Myro is the only protocol both you and Karpatkey would be utilizing.

Could all of the service providers please provide the following:

  • Past historical performance on this or similar strategies. If using backtesting (e.g. not your own performance record, please include a measurement window of not less than 3 years)

  • Your proposed benchmark. Please use whatever you consider the next-best as well as default investment (probably parking on Aave/Compound/similar)

  • Summarize what risks are higher/lower than the benchmarks (e.g. liquidity risk, msig risk, credit risk, counterparty risk)

  • What insurance do you carry, or what other legal or financial recourse would governance have if you lost the funds. Please cover both catastrophic performance and non-performance scenarios like funds getting stolen or stuck.

  • Are you willing to waive all fees if you underperform your benchmark?

Thanks! These will help voters make an informed decision.

1 Like

Sorry but as far as I know Winr has been historicall a native arbitrum protocol that now runs his own orbit chain settled on Arbitrum.

I would like to understand what was the opposition here, in the sense that at logical level Winr would be a native protocol, but maybe there is something i am not considering (ie: protocols on L3s, despite these being on the orbit stack and settling on arbitrum one, are not considered as native protocols).

Thank you for your feedback and follow-up question.

Yes, this early exit mechanism is generally available and can be used in such situations, as well as for urgent liquidity needs where waiting until expiry—even for short-dated options—is not desirable. Below we illustrate the process.

Trade Initiation:

At trade inception:

  • The Arbitrum treasury receives USDC from the highest-bidding trading firm, which is matched via OTC (MYSO provides transparent reporting on received (anonymized) bids, participating firms, and the winning bid).
  • The treasury pledges ARB into the escrow contract.
  • An option token is minted and transferred to the trading firm.

Note all of these transactions happen atomically (hence no counterparty risk).

Early Exit Mechanism:

  • The Arbitrum treasury buys back the option from the trading firm.
  • The treasury redeems the option token to reclaim ARB.

Note that again all of these transactions happen atomically (hence no counterparty risk). Moreover, MYSO can assist in coordinating this process to help minimise the time needed to unwind the trade.

General Remarks:

  • The settlement of the covered call via MYSO v3 is entirely on-chain and non-custodial—funds are never held by any custodian or trusted third party
  • Since this is an on-chain strategy, smart contract risk is inherent when using DeFi. However, the MYSO v3 contracts have been audited by Omniscia.
  • If Arbitrum prefers to settle covered calls off-chain via OTC desks rather than on-chain on Arbitrum, MYSO can also assist with this if helpful.
  • While unwinding a trade comes with coordination overhead and may require some time, it is important to note that it is also in the trading firm’s best interest to unwind the trade as quickly as possible if the contracts were to be compromised.
  • When launching the first covered call, the Arbitrum treasury can initially allocate a test notional amount with shorter durations (<14 days) to help both the treasury and the community familiarize themselves with the process.
  • We can also conduct a “test drill” for unwinding a trade before proceeding with the full ARB allocation.

I’m aligned with the TMC’s recommendation to approve the Stablecoin Allocation, as the strategies seem well thought out in terms of DAO alignment, returns, and risk management.

However, I have some concerns about the ARB Allocation. The lack of clear risk management, operational details, and low yield projections makes it difficult to justify supporting it at this stage. If we’re going to deploy ARB into yield strategies, we need to fully understand the risks, especially with single-sided strategies. Right now, it feels like we’re being asked to vote on incomplete information, which isn’t ideal.

I also agree with the feedback that two separate snapshot votes for stablecoins and ARB would help prevent confusion. Additionally, if there’s truly no feasible single-sided ARB strategy, perhaps we need to rethink whether ARB should be deployed this way at all rather than forcing it into suboptimal strategies.

1 Like