Abstract
This vote authorizes transfer of another 35 million ARB to the STEP multisig for the next edition of the Stable Treasury Endowment Program (STEP), to diversify Arbitrum DAOs treasury into real world assets that are stable in value, liquid in conversion and have yield uncorrelated to crypto markets. The goal of the STEP program is treasury diversification along with ecosystem growth for Real World Asset (RWA) protocols on Arbitrum.
Motivation
This proposal kickstarts the second edition of the Stable Treasury Endowment Program, which aims to grow the RWA ecosystem (many of the top protocols do not need grants so much as AUM for their product) while simultaneously diversifying our treasury into stable, liquid and yield-generating assets (the volatility of the ARB token has highlighted the need for prudent diversification).
The RWA sector is growing at leaps and bounds with much room to grow even further considering the US treasury market by itself is $20 trillion. Arbitrum has grown from only $100k of RWAs in the beginning of 2024 to around $150 million today! Only 18% of this volume has come from the DAO itself through STEP 1, with the remaining TVL growing via organic means. To stay on top of this competitive sector, we need reliability and consistency in the programs we run for this vertical.
At the same time, we have seen increasing interest in treasury diversification initiatives across Arbitrum DAO. STEP follows 3 clear principles in dealing with service providers proposing to help with Arbitrum treasury diversification;
- Directly own the process of selecting stable assets providing yield rather than delegating to a treasury manager (no point paying 1% AUM for them to hold low-risk assets on our behalf).
The STEP program is an example of how this can take place: an RFP under which projects apply with their product; a committee to review applicants; a program manager to monitor selected products
- Diversify the treasury in a manner that also promotes ecosystem growth, by conducting a highly competitive and rigorous process where the legitimacy of Arbitrum DAO selecting a provider is as valuable as the business they get
Accordingly, have projects directly apply in a competitive process on our forum if they want us to diversify into their product and be ratified in some way through a vote, not privately approach a treasury manager to get included
- Take advantage of rising markets to steadily build up an endowment that can cover ARB DAO expenses from yield earned.
Passage of this proposal will bring our endowment near the $100 million mark: $30 million from STEP 1, ~$15-25 million from the treasury management initiative and now STEP 2
Rationale
In mid-2024, Arbitrum DAO diversified $30 million into stable, liquid & yield generating RWAs. A comprehensive RFP process was undertake, where the DAO received 33 applications from RWA issuers, of which 16 were shortlisted and 6 were finally selected for allocations: Securitize BUIDL ($9.57 million), Ondo USDY ($5.22 million), Superstate USTB ($5.22 million), Mountain USDM ($3.48 million), OpenEden TBill ($3.48 million), and Backed Finance bIB01 ($3.48 million). These allocations helped us diversify the treasury into dollar denominated assets, got selected providers to launch on Arbitrum and are expected to generate a yield of roughly $875k for our treasury (live dashboard to track yield here)
The 1st program narrowly targeted low-risk and liquid instruments (primarily US treasury bills and money market instruments). STEP 2 will have a similar scope of products. We explored other markets but see biggest benefit in Arbitrum doubling down on the same instruments as STEP 1 and exploring other RWA sectors after they have had time to mature. After all, 99% of RWAs on Arbitrum are still U.S. Treasuries
Overall, this proposal aims to achieve 3 broad objectives;
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Show that Arbitrum has a plan for the RWA vertical and projects in this sector should build on our chain, by building a regular cadence to the STEP program as the flagship program for RWA support
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Let the DAO directly own stable RWAs through a competitive selection process for providers, instead of paying 1% AUM to treasury managers for selecting and holding low risk assets on our behalf. Use yield from the products to cover operational expenses by sweeping it as USDC to the ARB DAO treasury.
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Provision funds ahead of time for optimal execution and take advantage of tailwinds when they arise for diversifying the treasury. Building up an endowment will let us weather even bear markets from an abundance mindset.
Specifications
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We will transfer 35 million ARB to the same foundation managed wallet (0xe41d54471EfA03eFF6365795f60545F3cAF7C97e) used in the initial STEP program
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The foundation will at their discretion liquidate the ARB and once complete, announce the average conversion price on the forum
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Service providers who applied in STEP 1 will have to simply communicate what has changed in their product. Ample feedback was provided to all applicants, so if they have not managed to address the concerns we do not need to re-review applicants. New applications will be reviewed fresh. The RFP will be similar as STEP 1 with some modifications that will be included in the tally vote.
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The committee may at their discretion review investments made in STEP 1 and propose re-allocations from providers selected in the earlier edition. High preference will be given to providers that already have their RWA product launched on Arbitrum.
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The selection committee will be same as last time with one major change: Entropy will replace Steakhouse Financial who will not be a voting member due to also being the STEP program manager.
So the committee will be composed of @GFXlabs , @northlakeslegal , @Nethermind , @Entropy and @karpatkey , with the Arbitrum Treasury and Sustainability Group led by myself as non-voting facilitating member (except in case of tie) to communicate with service providers, the DAO and the foundation.
- Funds are allocated to selected providers after ratification by the DAO
Steps to Implement
- A snapshot vote approving in principle a STEP 2 for first half of 2025
- A tally vote with the RFP service providers can apply under that authorizes transfer of funds from the treasury to the Foundation STEP multisig
- Call for applications from service providers
- Committee review of applications
- DAO approval of committee recommendations
Timeline
Forum Discussion: September-December
January: Snapshot vote
February: Tally vote completion
March: Call for Applications
April: Committee Review
May: DAO Ratification
Overall Cost
Diversification budget: 35 million ARB, same as STEP 1
Implementation budget: 125k ARB
Similar to STEP 1, a rate of 25k ARB x 5 committee members (GFX, Northlake, Nethermind, Karpatkey and Arbitrum T&S WG as facilitating member; Entropy to waive compensation)
10k ARB will be given upon completion of work and the remaining 15k ARB will be vested over 3 years although it can be delegated for voting power.
Rough budget estimates
50 applications
2 hours for 25 applications with few updates.
6 hours for remaining 25 new products/drastic changes.
Total: 200 hours.
Another 20 or so hours for all the deliberation, selections, allocation decisions we have within the committee.
Average rate of $100-$150/hr would be between 25-33K, downsized to 25k ARB (10k on completion and 15k over 3 years)
STEP has developed a reputation of having a ton of due diligence. We think this is a good flag to hold high, since the benefits from being a STEP recipient go beyond just the amounts we allocate to also the legitimacy of passing heavy scrutiny by our committee. Service providers have also expressed appreciation on the feedback they got on their product, which in many cases led to different design decisions by their team.
