TMC’s Proposed Allocations

DAO Programs & Initiatives Treasury Mgmt v1.2 - TM Track (ARB and Stables)
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Hi @threesigmaxyz @karpatkey y @Avantgarde

First, thank you for all the information you have provided so far. We understand that this is not an easy task, especially when it involves interacting with such a large DAO like Arbitrum for decision-making.

To be honest, this alone does not seem like a sufficient reason to justify paying fees on simple strategies such as depositing into AAVE/Compound, especially considering that the APY estimated by Gauntlet is similar to what Avantgarde’s proposed strategy offers.

In fact, while it would be necessary to analyze the risks and benefits of rotating to some of these options, they seem more attractive than simply depositing into AAVE, given that a management fee is being paid.

For example, providing liquidity on Camelot would have the added benefit of supporting native Arbitrum protocols. Additionally, having more than one SP managing concentrated liquidity AMMs like Univ3 could provide a useful reference to evaluate which SP is managing the position most effectively.

In summary, regardless of the strategy to be applied, we would like to see a bit more complexity if the DAO is going to allocate resources to pay fees to an SP, provided that risk remains reasonable.

We appreciate the analysis provided on options. If we are going to take a conservative stance, then priority must be given to the second point—“Minimal probability of options expiring in-the-money (to retain ARB upside).” Otherwise, the strategy becomes more akin to diversifying into stablecoins rather than generating a yield on ARB holdings.

We understand that this approach will result in lower premiums, but given the high volatility of the asset, there should still be enough room to generate significant premiums.

We also believe that minimizing the chances of conversion is the best approach to ensuring the highest possible avg final position value, as demonstrated here:

We know that the decision to apply an AUM fee versus a performance-based fee depends on the team, but could you analyze the pros and cons of both structures?

Regarding call options, if the goal is to maximize the final position size by retaining as much of ARB’s upside potential as possible, it seems counterproductive to charge a performance fee based on the premiums obtained from selling options.

Our reasoning is that in the latter case, the incentive would be to maximize the premium, which may not align with the stated objective of avoiding conversions to stablecoins.

To clarify—if the intention is to avoid strike price conversions, then the SP should follow a strategy where the probability of hitting the strike price is as low as possible and this would conflict with a performance fee based on premiums earned.

We agree that the optimal approach would be to have a pre-approved set of strategies ready for execution when market conditions become favorable.

We suggest incorporating viable alternatives that can be implemented when conditions are optimal. This would eliminate friction and remove the need for a Snapshot vote every time a strategy adjustment is required.

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22

Is strange that we can’t find a way to deploy single side arb. I would like for the committee to re-review again the application, we have plenty of protocols in our ecosystem that allows for the usage of Arb as collateral, and unless we have degen application seems impossible that there is nothing viable for us.
What message would we send if the DAO is not able to deploy the arb native token in arbitrum protocols for yield?

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Thank you @GFXlabs @SEEDGov @TodayInDeFi for your engagement with the proposal.

We’d like to begin by clarifying a few key points based on the ongoing discussion. Further below, you’ll also find some backtesting for both the stablecoin and ARB-only strategy, as well as answers to GFX’s remaining questions further below (which we’ve coordinated together with @karpatkey), and lastly clarification on the incentive alignment of having a performance fee for the ARB strategy.

  • Meaningful Yield Targets: We recognize the concerns about “low yield projections” for the ARB-only strategy, but covered calls offer a compelling yield opportunity that would surpass current lending returns. More importantly, the yield potential is not set in stone—parameters such as strike prices and expiries which determine the final APY can be adjusted to align with the TMC’s or community’s preferences. In our proposal, we conservatively estimated target yields in the range of 5-12% APY, factoring in current market conditions and a low probability of conversion. However, depending on market conditions the strategy has the potential to generate even higher yields.

  • Balancing Yield and Conversion Risk: Our approach to structuring the ARB-only strategy using covered calls was not arbitrary—it was designed to balance yield generation with minimal conversion probability into stablecoins. We derived suitable strike prices and expiries using historical ARB returns to help the treasury optimize for a favorable risk/reward balance.

  • Tradeoff Between Yield and Conversion Risk: Higher target yields require either lower strike prices or longer durations, which increases the probability of ARB being converted into stablecoins. Conversely, more conservative parameters reduce the yield but also decrease conversion risk. This is a fundamental tradeoff in covered call strategies.

  • Conversion Does Not Necessarily Mean Underperformance: Importantly, converting into stablecoins does not necessarily mean that a covered call strategy will underperform relative to a benchmark like lending. In fact, backtesting covered calls versus lending over the longest available time frame, as suggested by GFX Labs, shows that the final NAV from writing calls would have outperformed lending—even in cases where a conversion occurred (see details further below).

  • Handling Conversions (if at all): In the event of a conversion, the stablecoin proceeds can be strategically deployed to reacquire ARB through direct spot purchases or by using cash-secured puts. The latter approach enables the treasury to execute an “option wheel” strategy, where calls are initially sold on ARB, as mentioned in our original proposal. Should ARB’s price decline below a designated strike price, the treasury would reacquire ARB at lower prices, effectively defending ARB’s price while maintaining yield generation.

  • Customizable Strategy for the Community: This tradeoff is not set in stone—the parameters can be tailored to the community’s preferences. If the community prefers a more conservative approach with lower conversion risk, strikes and expiries can be adjusted accordingly. Similarly, if the goal is to prioritize higher yield, a different balance can be chosen.

  • Comparing Covered Calls to Single-Sided Liquidity Provision: AMM/DEX liquidity provisioning has also been suggested as an alternative strategy for generating yield on ARB. However, it is important to recognize that this strategy can also lead to conversion.I.e., in single-sided liquidity provisioning using ARB, if ARB prices increase, the LP position will gradually convert into stablecoins as ARB is sold at higher prices. While this process is typically referred to as “impermanent loss” in the context of liquidity provisioning, it is functionally similar to the conversion mechanics of covered calls. Nonetheless it seems that covered calls have been perceived as riskier or misaligned, even though both strategies share the same potential for conversions. It is worth highlighting this parallel to ensure a fair evaluation of covered calls as a yield-generating mechanism for ARB.

Stablecoin Strategy

Lending protocols on Arbitrum has not existed in a meaningful sense before 2023. As a reference, USDC markets on Aave v3 & Compound v3 have seen an average of 6% since July 2023.

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Base APR (excluding rewards) on these markets have broadly converged across Mainnet and Arbitrum so one method to bootstrap a historical backtest is to use longer term historical lending rates from Mainnet.

Extending the history to include USDC, USDT, and DAI markets across Aave, Compound, and Maker shows that rates have oscillated from lows of 2% (during the depths of the bear market and zero interest rate regime in 2022) to highs of 15%+. Given the fast moving nature of the lending ecosystem, we would caution against attempts to forecast with precision the exact level of rates that will prevail over the course of the future holding period. However, this historical range can help give some context with which to frame expected returns. One significant development since the start of the historical data in the chart below is the the interest rate environment and the growing number of channels through weak t-bill yields are transmitted on-chain - this may provide a floor to DeFi lending yields going forward where they may have previously fallen below the fed funds rate when the market was fully decoupled.

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For some comparison, you can see the chart below which shows the aggregate APR on the portfolio holdings of our DeFi Yield Fund (which utilises similar assets/protocols as those included in our proposal) versus that on Aave USDC (Mainnet).

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ARB-only Strategy

Note that the ARB TGE took place on April 23, 2023. As of today (March 3, 2025), the maximum available time frame for backtesting is 713 days (~1.9 years). Therefore, we conducted a backtest spanning this period, simulating one of the previously discussed example parameterizations: continuously writing call options with 23 days to expiry, a 128% strike price, and a minimum option premium of 0.8% per period (equivalent to a 12.7% APY).

The initial position was set at 5M ARB (roughly $2,000,000 as of March 5th), and we compared the strategy’s performance to a benchmark of lending 5M ARB at an average market yield of 0.3% APY.

The final NAVs are as follows:

Strategy Final NAV
Covered Call $5,603,942
Lending $2,551,499

Below, we illustrate the strategy’s performance, including strike prices, conversions over time, and the NAV evolution of both the strategy and the benchmark. A Google spreadsheet with the associated results is also available here.

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For the ARB-only strategy, as requested, we used ARB DeFi lending with an average rate of 0.3% APY as the benchmark.

As for the stablecoin part, we are open to using the Aave or Compound rate as a purely notional comparison and for estimating a range of expected returns. However, we would caution against codifying them as formal benchmarks since the prevailing Aave & Compound rates do not in themselves represent the return of a “default investment” - supply rates represent the return at the current level of utilization of the lending market, but they fall in a deterministic fashion as more capital is lent (and the utilization is decreased). The ex ante rate is not achievable when actually deploying a large amount of stablecoins into a market.

Risk Covered Call Lending
Liquidity Risk Funds can be withdrawn early via the early exit mechanism (as outlined in a previous post). Funds can be withdrawn immediately; however, there is potentially bad debt risk.
Multisig Risk Same Same
Credit / Counterparty Risk None, as no tokens are loaned, and the option premium is received upfront. The risk is low; however, there is potentially bad debt risk.

We are happy to explore insurance solutions if desired. However, please note that obtaining insurance would incur additional costs and require additional time for planning and implementation. Furthermore, as far as we know no traditional insurers offer any cover for crypto-related financial services. There might be DeFi-native or tier 3/4 insurers that can provide some cover, but this would require further evaluation in terms of quality/credibility of the cover and the size of the premium required.

We see the risk of underperformance as very minimal, and don’t believe waiving fee is remotely close to an industry standard nor a reasonable expectation. Even if we were to waive fees given how extremely unlikely it is for the ARB-strategy to underperform the 0.3% lending benchmark, this benchmark may come to change at a later date, which we believe would put us in an unfair position.

On stablecoins, we echo the points made in the section on proposed benchmarks that the ex ante rate is not achievable when actually deploying a large amount of stablecoins into a market and therefore should not be used as a formal benchmark from a contractual perspective.

Since the performance fee is based on premiums earned rather than ARB conversions, there is a clear incentive alignment to set strikes and expiries in a way that minimizes conversions and allows the strategy to continue over a longer period through rolling covered calls. This aligns the treasury’s interest in maximizing covered call yields with maintaining as much upside as possible, as opposed to a one-time conversion, which would immediately halt fee generation.

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You should see this as paying someone to ensure that parameter changes, DAO changes, or liquidity crunches do not negatively impact the stablecoin allocation.

Let’s remember that stablecoins will be used to pay for services; therefore, the goal isn’t to maximize yield but to earn some yield while staying safe.

LP’ing might look like a straightforward strategy that boosts the benefits for the community, but it carries the risk (“risk”) of diluting the community’s yields. For example, there’s around $1.5M in the USDC-USDT pool on Camelot, and we could likely dilute the yield to between one-tenth and one-fourth at the current liquidity and fee levels.

We didn’t want the service providers to feel uncomfortable with the compensation structure, therefore, this was an open point for them. In short,

  • Performance-based: Providers stand to earn significantly if the strategies generate strong profits; otherwise, providers rewards remain low while yield is also low.
  • Upfront/Management: This approach offers a predictable, capped cost, providing clear budgeting and cost control. The con is that if providers underperform, we would overpay them.

Effective risk management means we want to establish a solid foundation of practices moving forward—simply approving things and moving ahead for the sake of it is not going to cut it. We believe the risk:reward ratio simply isn’t there at this point.

TMC’s recommendation is not to deploy the ARB into the ARB strategies at this time. Unless the majority of votes decide that this strategy should be pursued. The TMC will commit to monitoring and overseeing the strategies implemented by service providers.

You are right and your point is completely valid. However, checking a data aggregator like defillama (https://defillama.com/yields?token=ARB&chain=Arbitrum), you can see how challenging it truly is to deploy 15M ARB coins with the condition of the strategy being fully on-chain and single-sided (ARB-only).

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25

Hey @Avantgarde and @threesigmaxyz thanks both for your fast replies!!

And Gauntlet will do all this for free?

Our point is that if the strategy is similar, the justification provided for diversifying into several suppliers does not seem to be enough.

This justification is reasonable, but what prevents Avantgarde from developing strategies in Fluid and Uniswap V3, given that they have already presented them as alternatives and considering that Karpatkey will be utilizing both?

You are right about this, we had not considered that if the conversion takes place, you will be “forced” to buy back ARBs if you want to continue executing the strategy and getting fees from the premiums, so it is still wise to prioritize a low probability of occurrence strategy. Otherwise, it would be bread for today, but hunger for tomorrow. Thanks for this clarification!!

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While Gauntlet offers services at no additional cost, we believe that engaging Karpatkey and Avantgarde adds distinct and complementary value. In our opinion as part of TMC this signals our commitment to supporting sustainable business model and high-quality services, rather than relying solely on providers funded through other means.

Wanted to touch that their approaches help diversify risk on both the service provider and protocol deployment sides, as each provider whitelists different protocols. This prevents us from overconcentrating our efforts and capital in one system and safeguards the DAO’s interests.

Effective risk management is critical to ensuring we don’t compromise our objectives. Establish the groundwork to scale this initiative in the future.

Additionally their compensation structure is quite fair, especially compared to more traditional finance models that usually ask for a 2/20% split for management and performance.

Ultimately, it comes down to each service provider’s approach to integrating the protocols into their systems.

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That reasoning is completely skewed, you can’t just assume that volume/fees would stay the same if you add more TVL, that’s the whole point, it doesn’t rely on emissions: the more TVL you add, the more volume you capture, the more fees you generate…

On such a pool and at those TVL levels there would be near 0 (if any) dilution on fees – and potentially even an increase depending on how liquidity’s provided – aside for the additional grail incentives which is only a tiny fraction of the APRs and can easily be adjusted.

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Complementary to @Avantgarde’s detailed response, we’d like to provide additional insights into our strategy and share key historical data points from our backtesting.

On-Chain Strategies

Our framework is designed to optimise risk-adjusted returns for the Arbitrum Community through diversified, on-chain investments, prioritising liquidity, stability, and transparency. Based on this approach, we have selected and tested the following blue-chip assets and protocols.

Whitelisted Assets

  • Stablecoins: USDT, USDC, DAI/USDS, chosen for their market cap, liquidity, and track record. Diversification mitigates counterparty risk (depeg).
  • Tokenized RWA: US Treasuries via ArbitrumDAO’s STEP (e.g., BUIDL, USDY, USTB, USDM, TBILL, blB01). Not included in the active portfolio but serves as a hedge against stablecoin instability.

Whitelisted Protocols

  • DEXs & Lending/Borrowing: Uniswap v3, Camelot v3, Balancer v2/v3, GMX, Aave v3, Compound v3, Fluid.
  • Options & Perpetuals: Myso Finance (Options), Vertex (Perps), Pendle (Yield). Risks include hacks, exploits, and mispricing (we won’t expand on Myso, as @Avantgarde has already covered this comprehensively).

The data below reflects historical performance up to January 31st (submission date).

ARB-Only Asset Transformation Strategy Backtesting

Complementing the Options & Perpetual Strategies, we’ve designed a mechanism to transform ARB, into a yield-generating asset (stablecoins) using ARB as collateral on blue-chip lending protocols. ARB is deposited as collateral, borrowed against, and swapped for stablecoins, which are then supplied to liquidity pools to earn yield. Profitability hinges on stablecoin yield exceeding the net interest paid on ARB. Liquidation risk is minimal, with active monitoring of interest rate fluctuations.

This strategy has been backtested using 2024 data, with Aave V3 as the primary protocol.

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Results:

  • Invested ARB: 5M
  • APY (2024): 3.72%
  • 60D APY: 4.81%

Stablecoin Strategy Backtesting

Yield optimisation involves dynamically rebalancing across whitelisted assets, protocols, and pools based on yield fluctuations, volatility, risk assessment, and rebalancing costs. Automated proprietary tools facilitate continuous monitoring and execution. Active management ensures capital efficiency while maintaining adherence to the risk management framework.

This strategy has been backtested using 2024 data, mainly rebalancing assets on Uniswap V3, Aave V3, Compound, and Fluid.

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Results:

  • Average Invested Capital from Available Treasury: 95.45%*
  • APY (2024): 12.36%
  • 60D APY: 17.65%

*Risk management thresholds prevent excessive allocation to liquidity pools or overexposure to specific protocols, optimising capital utilisation while preserving flexibility.

Risk Management & Mitigation

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In addition to @Avantgarde’s points, we’d like to share additional elements to consider regarding other questions raised by the community.

Insurance Considerations

To our knowledge, few credible insurers offer coverage for crypto-related financial services, particularly ARB tokens. While some DeFi-native or lower-tier providers may offer solutions, their credibility, coverage quality, and often high premium costs require further evaluation.

We have simulated coverage on Nexus Mutual and obtained the following pricing:

  • Supported Assets: Currently limited to USDC, cbBTC, and ETH.
  • Availability: Most simulations resulted in “insufficient capacity to generate a quote.” Nexus Mutual allows users to request additional capacity via their contact form.

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Service Provider fee considerations

Below are a few considerations:

  • although the program’s current scale is limited, the DAO should establish a framework that is both scalable and sustainable;
  • similar initiatives within the DAO already include compensation for service providers and committee members. Such a structure ensures long-term sustainability;
  • after accounting for fees, the anticipated returns for the DAO remain positive.

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As some delegates have asked in dms about the protocols used for our stablecoin strategy, we just want to correct some misinformation and clarify that, as per our proposal, we’ll be using core allocations to Aave and Compound (highest capacity, most battle tested) as well as satellite positions to other protocols such as Pendle, Fluid, and Uni v3, pending market conditions and if the risk/reward makes sense. See below for examples:

  • Stable-stable liquidity pools on Uniswap V3, Balancer V2, Curve, and Camelot V3
  • Other USD pegged tokens such as USDX, where futures basis and funding rates improve the return profile of the portfolio.
  • Fixed yield principal tokens on Pendle, where we have clear sight of upcoming DAO liquidity requirements and a fixed yield could benefit the portfolio, such as in a falling yield environment.
  • Other smaller protocols such as Fluid and Balancer v3, where rewards are significant enough to compensate for any additional risks.
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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:

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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.

Next Steps — DAO VOTING

Stablecoin Allocation 15M

  • Yes: Proceed with converting 15M ARB into stablecoins and manage them via a 33/33/33 split among Karpatkey, Avantgarde & Myso, and Gauntlet. Therefore 5M ARB is allocated to each provider.

  • No: Do not execute the stablecoin strategy; retain current ARB holdings without conversion.

ARB Allocation

  • Yes: Proceed with deploying 10M ARB into on-chain strategies, managed in a 50/50 split between Karpatkey and Avantgarde & Myso. Therefore 5M ARB is allocated to each provider.

  • No: Do not execute the on-chain strategy; hold the ARB tokens.

Paths Based on DAO Voting Outcomes

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.

Although Avantgarde, Karpatkey, and Myso present compelling reasons to consider deploying the ARB strategy we still stand by our recommendation. If the DAO votes in favor of deploying the ARB strategy. We commit to working with providers to establish a set of safe parameters for running the strategy.

If the DAO votes against ARB, we will re-run the RFP process 3-months after the end of this Snapshot and commit to finding a balance that makes us comfortable with the proposals.

Ongoing Communication

We will continue to publish regular updates and remain open to further discussions with the DAO and the providers.

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We’d likewise wish to extend an extra thank you to Pablo from the TMC for his time and allowing us to shed some more light on the ARB strategy.

As a final response, we’d like to address the latest feedback and some of the misconceptions that seem to persist:

  • re “…Liquidity for options”: We would like to reiterate that we have already validated liquidity for at least $5M ARB, with the potential for even more. This has been communicated both in our submitted proposal as well as in this forum thread (see for example here). The assumption that liquidity constraints hinder execution does not accurately reflect the actual conditions of the ARB only strategy.

  • re “…counterparty arrangements”: It is in our own interest to seek the highest possible yields, as a higher premium directly results in a higher performance fee. At the same time, we carefully select strikes and expiries to minimize conversion risk, ensuring the ability to roll over positions and generate sustainable fees over a longer period rather than a one-off outcome (as previously detailed at the bottom of this reply).

  • re “…daily/weekly execution”: As outlined both in our proposal and previous posts in the forum (here), we have provided specific, backtested parameterizations that optimize for yield, low conversion risk, and maximum liquidity. Our latest recommendation—23 days to expiry and a 128% strike—has been clearly stated and explained (again, here). The notion that execution remains unclear does not accurately reflect the comprehensive details we have provided.

  • re “…Liquidity and scalability concerns”: We want to highlight once more that the assumption that high-yield strategies depend on liquidity or counterparties that may not be scalable is incorrect. As stated multiple times (e.g. here), liquidity for covered calls has been validated up to at least $5M ARB, potentially more.
  • re “…Supporting ARB’s on-chain usage”: Rather than dismissing viable strategies outright, we believe it is important to actively foster the usage of ARB in a way that aligns with the original RFP request—to generate ARB yield on-chain and activating idle treasury assets. Given Arbitrum’s role as a central hub for DeFi, we think actively deploying ARB rather than dismissing on-chain yield strategies would send a more positive signal, especially when these strategies are settled natively on Arbitrum.

  • re “…empowering informed decision-making”: While we respect the TMC’s cautious approach, we believe that prudent governance should empower the community to make informed decisions rather than preemptively exclude viable strategies. The DAO has the flexibility to allocate funds incrementally, monitor performance, and optimize parameters over time instead of defaulting to inaction.

  • A more proactive alternative: Instead of fully postponing this decision, a more constructive approach could be to allow a smaller test allocation of ARB. This would provide an opportunity to work with new yield sources, collect real-world experience, and scale up or scale down the strategy gradually, rather than rejecting it outright before testing its practical viability.

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32

For the two proposed strats on Arbitrum, both offer unique benefits and potential concerns, some thoughts:

Stablecoin Allocation Strategy:

  • Liquidity and Stability: Converting ARB tokens into stablecoins provides the DAO with a stable asset base, reducing exposure to ARB’s price volatility which ensures predictable funding for ongoing operations and initiatives.
  • Diversification of Management: By distributing the stablecoin management equally among three partners—Karpatkey, Avantgarde & Myso, and Gauntlet—the DAO benefits from diversified risk exposure and leverages varied expertise in asset management.

Concerns:

  • Execution Risk: The process of converting a large volume of ARB tokens into stablecoins needs to have proper slippage and swapping constraints
  • Counterparty Risk: Entrusting external partners with asset management introduces its own level of risk that is hard to quantify

ARB Allocation Strategy

  • Ecosystem Engagement: Deploying ARB tokens into on-chain strategies can enhance engagement within the Arbitrum ecosystem, potentially increasing the utility and demand for ARB
  • Yield Generation: Strategically investing ARB tokens into yield-generating protocols can provide the DAO with additional revenue streams, contributing to the treasury’s growth.

Concerns:

  • Risk Management: The current ARB proposals lack sufficient risk management and clear operational details, leading to low yield projections as highlighted in the proposal. This uncertainty poses a risk to the principal investment.
  • Market Volatility: Big one, and pretty straight forward

Overall, we are leaning towards trialing both and deciding down the road which one to expand more upon.

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33

Thank you for the detailed information on the strategies.
Despite the fact that TMC recommends not to use the ARB strategy, it seems to me that it can benefit DAO:

  1. Under favorable conditions of the strategy, where the ARB will not increase significantly in price, we get a good premium in stablecoins. This is a plus.

  2. Under unfavorable conditions of the strategy, where the ARB will sharply increase in price, all ARB will flow into stablecoins. If the price is (for example) 30% higher, then in fact this is a conversion to stables higher in price than it was done in the stablecoin strategy. This means that this strategy can bring DAO more profit in stables than the strategy of stablecoins themselves.
    Yes, we will not save the ARB, but within this strategy we can add the use of put options to restore ARB at an acceptable price.

Therefore, it seems to me that it is worth using the ARB strategy, albeit with a different initial amount (you can use 1/10 of the volume for the first month) and adjust the strategy based on the results of the first trial period.

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Thanks to the TMC and all involved parties for the effort dedicated to proposing and reviewing these treasury strategies.

We appreciate the TMC’s analysis and recommendations, which are clearly focused on risk reduction and conservatism. This is a prudent stance given the scale of the proposed allocations.

Regarding the Arbitrum strategies, we understand the TMC’s concerns and their rationale for recommending against them. The low yields of non-options strategies and the risk profile of options-based strategies are all factors that should not be ignored.

However, we find the information provided by @Karpatkey and @Avantgarde to be transparent and thorough, particularly regarding the covered-call strategies. The backtesting, historical data, and supporting arguments are compelling. The proposed execution mechanisms and risk mitigation strategies (including strike price optimization and shorter tenors) appear robust and well thought out.

The strategy provides a pretty good downside protection in terms of securing the premiums even if the price of ARB reduces further, and only the upside is capped because of the strike price. Though we would prefer a scenario where strike price conversion doesn’t occur, from a much broader perspective, the DAO treasury anyways has enough ARB to benefit from that upward price movement.

We believe the TMC, by exercising its oversight role, can collaborate with treasury providers to monitor strategy implementation and ensure strict adherence to the steps outlined in the proposals and this discussion.

When this proposal goes to a vote, we will vote YES for both the Stable and ARB strategies.

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LobbyFi’s rationale on the price and making the voting power available for sale for this proposal

We observe this proposal as one profiting the DAO in a broader sense and see multiple parties that may profit from it directly marginally. For this reason, the community auction will be enabled.

Relying on the estimates mentioned in the proposal, the instant buy will be calculated based on following positions:

  • Karpatkey is charging 0.5% on 5M ARB (~4,618 ETH) for the stablecoin strategy, and another 0.5% on 5M ARB (~4.618 ETH) for the ARB strategy as a management fee → ~9,235 ETH in sum
  • AvantGarde/MYSO is charging 0.5% as a management fee on 5M ARB and 10% on potential return of 10% of that sum as a performance fee (estimated return 5-15%, taking 10% as an average) (~13.853 ETH) for the stablecoin strategy. For the ARB strategy, they are willing to charge 15% on 30% projected return on 5M ARB (~41.558 ETH) → ~55.411 ETH in sum

(For the calculations above, the ARB/ETH rate that is used is 0.0001847)

The cummalative fee of Karpatkey, Avantgarde and MYSO is to lie at some 65 ETH. LobbyFi will charge 1% of that as the instant buy price.

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It is a little frustrating to see this poll structured like it is.

  1. These could be multiple polls. At least one for stablecoins and at least one for ARB. There’s no obvious reason to combine them in this format. This was pointed out by several delegates previously, at least @JoJo and @paulofonseca. It’s disappointing to see this unorthodox bundling.

  2. The ARB side of the vote is not symmetrical to the stablecoin side of the vote. The stablecoin side is whether to accept/reject the recommendations of the TMC. Meanwhile, the ARB side presents choices that we are under the impress are not recommended by TMC. This is confusing, especially since stablecoin strategies not recommended by TMC are not on the ballot at all.

  3. The stablecoin strategies probably should not be bundled. While we understand the precedent, like with STEP, on a bundled slate with a simple yes/no vote, this is different from STEP. STEP focused on assets that all fundamentally had very similar risk-reward on the underlying asset, with most of the differences being in how the wrappers were structured. Those really did require the STEP committee to sit down and dig into the nuance, because “eyeballing” the assets wouldn’t have identified most of the differences. Here, however, the risk appetite, projected returns, and expenses of the strategies have significant differences – differences that are also to a large extent obvious to delegates. It feels like these should be unbundled, so that delegates can support the strategies they support without having to also support strategies they feel are too conservative or too risk seeking.

Our advice would be to break this down into at least two different polls, so that a clear signal can be given from delegates.

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Since we believe it’s important to set the right expectations and strive to overdeliver rather than overpromise, we want to point out that the TMC seems to have mistaken the expected yield on our ARB strategy: nowhere have we said to expect +30% yield on the ARB strategy, as cited in the TMC’s original post which @lobbyfi once again refers back to in the post above. While a covered call strategy certainly has the potential to achieve such yields and more, we cited 12% in the suggestion we gave above, while including even more conservative estimates in our proposal of 5-12% with minimal conversion probability. This doesn’t mean that we don’t think we can beat that or at least average close to the upper bound of that range.

We appreciate the TMC’s diligence in evaluating the proposals and raising concerns about the covered call strategy. However, we believe the comparison to Premia and Ribbon vaults is flawed for a number of reasons which raises the question of how relevant they are to our proposed strategy. We’d argue not very, because:

  • The Premia vault’s lack of transparency on strikes and expiries makes it hard to tie back to our strategy and compare without knowing the specifics.

  • The Ribbon vaults use different underlying assets (WBTC and ETH), making their performance less relevant to an ARB-focused strategy.

It’s like saying active portfolio management doesn’t make sense because you found one portfolio manager who’s underperforming. To disprove the validity of a strategy, the specific examples used should closely resemble the strategy in question.

In this case, the similarities are limited:

  • Strike/Expiry: No alignment
  • Underlying Asset: No alignment
  • Covered Call Utilization: Yes, this is the primary similarity

Therefore, we believe these strategies aren’t as similar as they’re being framed. While caution is warranted, dismissing the covered call strategy based on these examples seems premature.

Ultimately, the decision lies with the community. However, we urge everyone to consider the nuances of this comparison and weigh the potential benefits of the proposed strategy alongside the risks, which have been addressed here, here and here.

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Greetings, Arbitrum DAO community!

We have followed the discussions and progress with governance on Arbitrum ecosystem over the last year, we at Discere are excited to finally activley contribute to this pivotal discussion on treasury management. Our aim is to offer a balanced, risk-aware perspective that respects the innovative proposals from Karpatkey, Avantgarde, and Myso, while highlighting key considerations for the DAO’s endowment-like treasury. Below, we address the ARB strategy’s options component and the stablecoin strategy’s returns, focusing on critical risks and opportunities. (Please do let us know whether we may have missed/missunderstood anyone perspective)

ARB Strategy: Covered Calls and Options Risks
The ARB allocation proposals involve selling covered calls via Myso, targeting yields of 7-30%. This approach creatively leverages ARB’s volatility without liquidating holdings, but it introduces complexities that require careful evaluation, especially for a treasury prioritizing capital preservation.

  • Gap Risk Concerns
    The backtests assume stable or declining ARB prices from June 2024, yet sudden price surges—termed gap risk—could force conversions to stablecoins at unfavorable rates. Historical losses in vaults like Ribbon and Premia during price spikes illustrate this vulnerability. While selecting strike prices based on historical non-exceedance (e.g., 95%) offers some protection, it doesn’t fully eliminate the risk. We recommend requesting stress tests simulating a 50-100% ARB price surge over 7-30 days to evaluate impacts on conversion rates and net asset value. We share GFX Labs’ emphasis on transparency in risk management, as their concerns about undisclosed risks resonate with our call for stress testing gap scenarios.

  • Collateral and Margining Challenges
    In a liquidity crisis, collateral supporting margin requirements could become illiquid, triggering sales at depressed prices—a phenomenon known as wrong-way risk. Avantgarde’s on-chain settlement and ARB escrow mitigate counterparty risk, but the early exit mechanism depends on secondary market liquidity, which could dry up in a downturn. Karpatkey’s borrowing loops further amplify leverage risk if rates spike. We suggest clarifying collateral standards (e.g., overcollateralization ratios) and modeling an 80% liquidity drop scenario to ensure resilience. Our recommendation for clarity on collateral standards aligns with GFX Labs’ call for detailed risk disclosures, reflecting a shared commitment to operational transparency.

  • Cost of Margining in Options Strategies
    Concern: Margining costs can erode the projected 7-30% yields, especially if collateral requirements or borrowing rates spike during market stress—an oversight neither provider fully addresses. I.e. IRR = Return - Cost of Capital (Cost of Margining req)

    In DeFi, this becomes the opportunity cost of locking collateral that could otherwise earn returns.

    • Denominations: For covered calls on ARB:

      • If ARB is the collateral (same as the option’s underlying token), the cost is the forgone appreciation of ARB itself—no additional borrowing rate applies unless leverage is introduced.

      • If another token like ETH/Stablecoin is used, costs hinge on ETH/Stablecoin ’s demand
        volatility and borrowing rates, which differ from ARB’s dynamics.

    • Historical Differences: ARB and ETH exhibit distinct volatility profiles. ETH borrowing rates on AAVE have historically spiked—e.g., exceeding 50% APY during 2022 market stress—while ARB’s rates depend on its own lending markets, which are less mature and potentially more volatile.

    • Margin Spikes: During crises, borrowing rates for collateral (e.g., ETH) can surge, increasing costs dramatically. For instance, a 50% APY spike on ETH collateral could turn a 15% yield into a net loss, eating into returns. ARB collateral avoids borrowing costs but ties up capital that might appreciate, a trade-off not quantified by providers. Can you hedge via fixed rate borrowing for instance?
      Recommendation: Disclose collateral type (ARB or ETH) and model net returns under borrowing rate spikes (e.g., 10-50% APY) to reveal true profitability. We agree with cp0x’s cautious approach, as their suggestion for a smaller test allocation complements our recommendation to model net returns under stress, ensuring a prudent evaluation of the strategy’s viability.

  • Oracle Risk Exposure
    Options pricing relies heavily on oracles, and any manipulation or failure could misprice strikes, leading to losses. Unlike traditional finance, which employs multiple feeds and safeguards, the proposals lack detail on oracle dependencies or backups. We recommend mandating transparency on oracle sources and requiring contingency plans, such as pausing trades during discrepancies.Our call for transparency on oracle sources aligns with the broader community’s emphasis on operational clarity, as voiced by GFX Labs and others, reflecting a shared concern for risk mitigation.

  • Underlying Pricing Assumptions
    Covered call premiums hinge on ARB’s implied volatility, which the backtests assume remains stable. However, crypto markets often exhibit extreme volatility spikes, risking underpriced premiums and overstated yields. We suggest adopting a jump-diffusion pricing model to account for these tail risks and sharing volatility assumptions for community review.
    Alignment: We share the TMC’s skepticism of the backtests’ assumptions, as both our analyses recognize that stable volatility is unlikely in crypto markets, potentially inflating yield projections.

  • Alignment with Endowment Goals
    Endowments prioritize steady growth and capital preservation, whereas covered calls cap upside and introduce loss potential—potentially clashing with these objectives. The TMC’s concerns are valid, as historical meltdowns (e.g., LTCM’s 1998 volatility shorting collapse) illustrate how options strategies can unravel when tail risks materialize. While a 30% APY is attractive, the potential for 0% yield (no counterparties) or principal loss (smart contract hacks) remains. We recommend a cautious 1M ARB pilot, tracking NAV against holding ARB, and setting a 5% APY hurdle rate before fees to align with endowment principles. We fully agree with the TMC’s caution, as the endowment’s mandate for safety and predictability makes the ARB strategy’s risks difficult to justify without rigorous testing.

  • Need for Robust Risk Management
    The proposals emphasize yield but overlook critical risk metrics like DV01 (volatility sensitivity) or gamma (delta rate of change). Endowment treasuries require clear risk limits, such as maximum drawdown or Value at Risk (VaR). The TMC’s call for transparency is crucial. We suggest implementing DV01 and gamma tracking with clear thresholds (e.g., $10M loss per 1% volatility shift) to enhance oversight. We echo the TMC’s demand for transparency and risk management, as endowment treasuries must prioritize defined risk limits over speculative yield.

Stablecoin Strategy: High Returns and Crypto Risk

The stablecoin strategy targets 8-20% APY across Gauntlet (8%, AAVE V3), Karpatkey (12-20%, multiple protocols), and Avantgarde (5-15%, mixed protocols). These returns are compelling but unusually high for a low-risk allocation, prompting a deeper look at their sustainability and risks.

  • Sustainability of Returns
    Such elevated yields raise questions about their longevity—are they driven by sustainable economics or hidden risks like leverage? Providers cite deposits in AAVE, Compound, and liquidity pools without leverage, yet Karpatkey’s 20% APY evokes Terra Luna’s unsustainable 20% yields before its 2022 collapse. We recommend stress testing these returns under adverse scenarios, like a 50% liquidity drop, to verify their durability.We share GFX Labs’ concerns about the source of these high yields, as their questions about potential leverage or hidden risks align with our call for stress testing to ensure sustainability.

  • Crypto-Specific Vulnerabilities
    Beyond traditional risks, this strategy faces smart contract failures, hacks, and stablecoin depegging—threats absent in conventional markets. Diversification across protocols helps, but historical failures like Terra Luna underscore their severity. We suggest capping exposure per protocol at 25% and requiring quarterly smart contract audits to bolster security. The TMC’s acknowledgment of these risks aligns with our view that diversification alone may not suffice, necessitating further safeguards like exposure caps and audits.

  • Limited Track Record
    While providers mention proven track records, specific audited performance data remains scarce. Karpatkey is the only organization for which we could find unaudited past performance data. Our reading of Karpatkey’s past performance, based on GnosisDAO as it provided the most data, indicates that their strategy yielded a 0.23% return (denominated in ETH, as the initial investment was primarily in ETH) for FY 2024. However, we note that these figures lack multi-year context and thus hard to judge; Moreover, audited records are absent across all providers. Traditional endowments typically require 3-5 years of audited performance history. Therefore, we recommend requesting 3-year audited performance records (real or backtested) benchmarked against platforms like AAVE, accompanied by audited reports to ensure credibility. We concur with the TMC’s emphasis on transparency, as the absence of audited, multi-year data limits confidence in the providers’ claims.

Strategic Recommendation

For an endowment, safety and predictability are paramount. The stablecoin strategy better aligns with these goals, offering liquidity and moderate yield with manageable risks. The ARB strategy, while innovative, introduces volatility and complexity that could jeopardize capital. We recommend:

  • Voting YES on the stablecoin allocation with added safeguards (e.g., diversification, stress tests)
  • NO on the ARB allocation, though a small pilot could test its viability. We would urge providers to refine these approaches, perhaps by developing risk dashboards or exploring future yield opportunities.

Closing Thoughts

We deeply value the creativity of these proposals and the community’s engagement, including the thoughtful contributions from GFX Labs, cp0x, Areta, and others. We look forward to collaborating with all stakeholders to refine these approaches and contribute to our shared financial future!

Many Thanks,
Discere

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Had to cool off for a couple of days before being able to provide a proper feedback.

I am voting as suggested by threesigma in the following way.

But this vote is not an endorsement of what was done so far, and comes from the believe that we need to increase the speed of execution from 0.1 miles for hours to 0.15 miles per hours.

Let me break down the proposal.

The Good

The stablecoin strategy are likely good. I am ok in dividing in equal parts in all the 3 parts. I am also ok in karp and avantgard charging a management fee: in the shortlist of protocols i see for both univ3 and camelot v3. Makes me think there is a management of liquidity in a v3 range that might change over time, or at least be manually assessed, since there is no mention of a third party ALM. Managing liquidity is not trivial, and stable pools are all beside stable despite the name.
I am expecting this portion of the strategy to be not only succesfull in yield but useful for the check account of the dao and i am also happy to have avantgard and karpatkey to have a more active role operationally wise in our dao, with gauntlet also consolidating it.

The Bad

The fact that we can’t come up with a proper arb strategy is, to be blunt, quite bad. We all know that, as asset, has only value toward governance; is not not spread enough to be an hub of liquidity (and this maybe can change in future), we don’t have staking out yet so is not a collateral good ebough. This is a quite obvious.
But the fact that, as a dao, we can’t find a way to properly utilize arb at minimal risk and minimal yield for us speaks loud about the state of the ecosystem. I will go back to this but it shows that 1) we need to prepare programs that are more tailored to what we can effectively do in our ecosystem 2) we need to improve the state of arb as a token, in term of utility.

The Ugly

I am honestly still puzzled why the vote was not separated between stable and arb strategy: there was more than 1 suggestion, and if someone has a strong feeling against the current arb approach rule wise it would have to potentially stop even the stable part of the program to push, for example, for a change in rules. This choiche was not only imho quite straightforward but also suggested by some delegates.


Between this proposal, and the GMC, is pretty clear that while both the committees and organizer were well intended, there were issues regarding the risk approach and the availability of options on the table.
We had a very good opportunity to not only create yield for the dao, but also increase the usage of arbitrum native protocols as a signal to external parties that yes, the dao sustains aligned and native protocols. This will be true only in part and applies both here and to the eth side of the treasury.

My STRONG expectation is that, once we move forward with the stable here, and the eth in gmc, we create right away a second proposal in which

  • the risk parameters, while tight, should be commisurated to be able to take risk in protocols that allows us as a collective to use intensively the most important arbitrum protocols. Is not about to retrofit / tailor fit, is about being realistic on what we can do today in our chain
  • the financial goals should be such that, if we can’t find a “good enough” source of yield for single side arb, we can instead pair arb with other assets, such as eth or stables, to provide for example liquidity in v2/v3 pools or as collateral for perps
  • the operations of the committee should be such that, if there is a protocol/vault potentially deemed useful, it can work directly with the protocol operator, to both adjust the application and even tweak if needed some parameters of the vaults in case there is the possibility (which is not there most of the time but asking has 0 cost in life).


I want to stress one final concept. Is relative easy to quantify financial risk of deploying capital here or there in term of projected yield based on market conditions.
What is not apparent, most of the time, is the risk we incur as a DAO by not supporting the stakeholder protocols of our ecosystem. If, as a dao, we don’t promote their utilization by being the first customer on the line, why should we expect others to come to us in the first place?


Note: i have been quite harsh in the judgment above. This is not against single components of the committee or entropy: we have crafted on paper an idea, and this idea has been carried forward while in part being very risk adverse and in part sticking to what we voted for. Which, on paper, is totally fine, and I am sure the committee had to evaluate ton of applications with some (several? most?) not even written in the proper way risk wise. But we need to start pushing toward the last mile here, be proactive, understand how to go toward the goal we want and do the legwork we maybe didn’t expect we had to do. So my harshness is not about badly judging this initiative or the participatns, is in reality just a way to stimulate everybody to be in war mode.

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I’ll be voting ‘yes’ on both strategies. Converting a portion to stablecoins reduces DAO risk and ensures reliable funding. Meanwhile deploying ARB supports its potential utility and keeps us aligned with long-term ecosystem growth on Arbitrum, which I see as a great benefit long-term.

The point that was made that the Arbitrum Foundation ought to especially target Arbitrum-borne protocols, at least to some extent, resonates with me. It always leaves me with an icky feeling when giant chain-agnostic protocols, without particular loyalty to any particular chain, draws the majority of funding like this while “the locals” get passed over. It should be the other way around, whenever possible and practical.

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