[Non-Constitutional] Treasury Management v1.2

Description

This description has been heavily shortened due to character limits. Please refer to the forums for the full proposal. https://forum.arbitrum.foundation/t/non-constitutional-treasury-management-v1-2/26967

ATTENTION: AFTER ~1 MONTH OF COMMUNITY FEEDBACK AND COMMITTEE MEMBER VETTING, THIS PROPOSAL HAS BEEN RENAMED FROM V1.1 TO V1.2 AFTER BEING UPDATED. PLEASE REVIEW THOROUGHLY AS OF OCTOBER 30, 2024.

Abstract

On September 12th, Entropy hosted a preliminary treasury working group call (recordings available here) in an effort to align all of the different parties within the DAO on the optimal path forward when it comes to managing the different sections of the DAO’s balance sheet. I.e., chain profits (ETH) and tokens that have been authorized for spend but have not entered circulation yet (ARB). The primary points of contention were around ARB diversification, the need for a DAO budget before the conversation on treasury management continues forward, whether the DAO needs active treasury managers at all, infrastructure selection, and details around a treasury committee’s implementation, e.g., how many individuals/entities, are they DAO-elected or appointed, when should we target to have this committee stood up, etc. From our perspective, we did gain consensus that the DAO’s profits (ETH) in the treasury should be turned productive and that a treasury management committee of some sort should be established. However, even on these two points that most people seem to be in favor of, specific details need to be ironed out for actionable strategies to be implemented.

We believe that we have come up with a fair compromise between all of the various perspectives on these identified issues, all of which stem from the information gathered during the working group calls and conversations with delegates. The compromise suggested herein will, in our opinion, enable the DAO to move forward and initiate the required operational standards for optimizing the use of idle tokens in the treasury. Based on the feedback received on the call on September 25th (link to recording here) where we presented the overarching ideas herein, we feel confident that this proposal aligns well with the treasury managers, infrastructure providers, and overall DAO sentiment towards treasury management. We are eager to gather more feedback from the community and continue iterating so this initiative can move forward.

Key Issues Treasury Management can Solve Today

1. Service Provider Shortfalls: DAO-funded programs as well as service providers that have proved valuable to the DAO (the ARDC, Steakhouse’s services as a part of STEP, etc.) have run into the problem of having dollar-denominated contracts and not enough ARB to meet the agreed upon rate for services rendered.
2. Flexible & Metrics-Driven Capital Deployment: The DAO is reliant on RWAs/Treasuries for passive yield on dollars, but has no mechanism for reallocating to onchain strategies as we enter a global rate cutting regime that could make onchain yields more attractive. The DAO also currently lacks the ability to frictionlessly assess the returns and underlying risks of comparative liquid market investments, how much of/when ARB in the treasury should be diversified, and how to optimize operating cash-like reserves.
3. Reinvesting Sequencer Revenue: The DAO has neglected to do anything productive with its ETH holdings, which could provide the DAO leverage to fuel growth and partnerships alongside yield—consistent with the DAO’s growth-first mindset.

The Proposed Solution

TL;DR

• Establish two token management tracks (Treasury and Growth) with their own 3-seat committees. Treasury Management will focus on passive yield via ARB-only onchain strategies on Arbitrum One and create a cash-like reserve alongside a management strategy to cover service provider shortfalls. Growth Management will focus on strategic partnerships by exclusively reinvesting the DAO’s ETH holdings into “ETH-backed strategies”. ETH-backed strategies are defined as opportunities that earn yield on ETH or ETH-pegged assets, with high guarantees of returning the underlying deployed to the DAO treasury at a certain point in the future.
  • Treasury Management (TM): 10M ARB for ARB-only onchain strategies + 15M ARB converted to stables or other cash-like holdings to serve as a pilot for the DAO’s “checking account”.
  • Growth Management (GM): 7,500 ETH allotted (about 75% of the DAOs ETH after BoLD bootstrapping), but all spend must be DAO-approved on a case-by-case basis.

Suggested Treasury Management Committee (TMC) Members:

• Austin Campbell:
  • With a multi-decade background in trading, financial risk management, and structuring, Austin Campbell is regarded as a leading expert in the field of tokenized assets, stablecoins, and crypto risk management. Austin has run trading desks at JP Morgan and Citigroup, been the head of portfolio management and chief risk officer at Paxos, and is currently the CEO of WSPN USA, a stablecoin issuer. Austin also teaches blockchain courses at NYU Stern school of business, speaks frequently on podcasts, to the media, and at regulatory events, and testified in front of Congress on stablecoins in 2023.
  • Austin believes that treasury management in the crypto space should focus on principal protection, liquidity to ensure smooth operations, and risk-adjusted return, in that order. Austin has helped with previous efforts in this space when at Paxos, including the inclusion of USDP into the PSM for MakerDAO, as well as partnering with protocols to ensure strong economic design and stability when integrating stablecoins and real assets. A robust RFP process, a rigorous set of standards for anyone managing treasury assets, and programs for monitoring performance, activities, and conflicts are things that Austin believes are mandatory for effective treasury programs.

Austin will be paid based on 20K USDC per milestone reached.

• Three Sigma:
  • As seasoned experts in the DeFi ecosystem, Three Sigma is uniquely positioned to add significant value to Arbitrum's Treasury Management Council (TMC). With vast experience in risk assessment and advisory services, Three Sigma is equipped to collaboratively design and execute a transparent Request for Proposal (RFP) process for treasury managers. These RFPs will strategically identify managers aligned with the DAO's objectives—such as converting ARB to stablecoins, optimizing fund deployment, and managing whitelisted ARB strategies.
  • Three Sigma's commitment extends beyond process design, as they will serve as vigilant overseers of treasury management strategies, proactively flagging any questionable activities to the DAO. Drawing from extensive experience in helping teams design protocols with risk in mind, they uphold the principle: "Don't trust, verify." Three Sigma will develop a robust methodology focused on risk-adjusted returns, evaluate service provider performance, and deliver quarterly reports to the DAO forum. These reports will offer transparent insights into performance metrics, stablecoin balances, and strategic recommendations for asset liquidation or replenishment. Leveraging their deep understanding of DeFi markets, risk management, and governance, Three Sigma aims to drive optimal outcomes for the Arbitrum DAO, safeguarding the community's assets with unwavering accountability.

Three Sigma will be paid based on 20K USDC per milestone reached.

• Make Markets:
  • A bespoke consulting agency focused on liquidity strategy design and optimization for asset issuers, Make Markets brings deep crypto-native technical expertise to Arbitrum's Treasury Management Council through its principals fiddyresearch, a core contributor to Curve DAO, and benny, a seasoned DeFi builder, analytics specialist and contributor to Curve DAO. We combine practical DeFi protocol engineering experience with extensive knowledge of smart contract security, on-chain data analysis and decentralized market mechanics. Their technical background enables them to assess smart contract risk and economic security considerations when reviewing strategy proposals for managers. They will also leverage our analytics capabilities and familiarity with on-chain data to provide data-driven reporting to the DAO.
  • Make Markets believes that the TMC's success depends on establishing robust, standardized processes for evaluating and monitoring treasury managers. Their goal is to implement systematic approaches that ensure fair selection, efficient oversight, and clear performance assessment across all treasury activities. They aim to establish consistent and transparent processes that will serve the DAO over the long term and ensure accountability to the community.

Make Markets will be paid based on 20K USDC per milestone reached.

Suggested Growth Management Committee (GMC) Members:

• Entropy Advisors
  • Entropy Advisors will be waiving payment.
• Callen from Wintermute
  • Callen will be paid based on 20K USDC per milestone reached.
• Llama Risk
  • Llama Risk will be paid based on 20K USDC per milestone reached.