Arbitrum Stable Treasury Endowment Program
TL;DR : This proposal aims to support the budding RWA ecosystem on Arbitrum by diversifying 35 million ARB from our treasury into assets that are stable in value with minimal volatility, liquid in conversion and provide yield uncorrelated to crypto markets that is at least commensurate with the so called "risk free rate of return" of US Treasuries (hereby called ‘stable RWAs’)
This proposal is a trial run for a larger investment policy of the ArbitrumDAO treasury, both in
- Creating a legal and infrastructural pipeline that future diversification proposals can take guidance from and
- Proof of concept that we can diversify our treasury in a way that supports ecosystem growth
This is NOT a grant; it is an investment that Arbitrum governance can exercise control over and recall, subject to agreed-upon conditions with successful applicants.
Overview
The Stable Treasury Endowment Program (STEP) is the first proposal floated by the Treasury WG before the DAO. We are targeting stable RWAs backed by t-bills or money market instruments as the 1st step towards larger treasury diversification for several reasons
- Our conversations with RWA protocols on Arbitrum indicate that they do not want grants so much as legitimate customers of their product. Another way of looking at STEP is as an ecosystem growth program for the RWA vertical on Arbitrum, with the added advantage that it’s in the form of an investment we earn yield from and can recall at anytime, rather than a grant. More generally, stable RWAs have an attractive risk-reward ratio for Arbitrum in terms of sectors we should be nurturing. The total US treasury market is over $20 trillion, some of which is expected to come onchain to satisfy demand from wealthy investors. As the home of De-Fi, we should not cede space to Base or Mantle that have their own RWA support programs.
- The stable coins we use today in De-Fi are mostly backed by t-bill RWAs. Creating our own exposure can increase capital efficiency and mitigate risk. Although protocols on Arbitrum and governance might wish to hold stable RWAs, they are limited by having to conduct due diligence on providers they can trust. This proposal creates a qualified committee that evaluates applicants and prepares an Assessment Report on them, providing a roster of vetted service providers that anyone can use for investing assets into RWAs on Arbitrum.
In conclusion, we expect that lessons learned from implementation of this proposal can pave the way for a new form of an ecosystem support program, where the ArbitrumDAO supports projects not with grants but purchases of financial products built on our chain that also diversify our treasury holdings.
Timeline and Procedure
- Snapshot temperature check (COMPLETE)
- Screening committee publishes RFP with specific information requested from applicants and minimum criteria they must satisfy to be considered (COMPLETE)
- Onchain Tally vote (March 20th to April 3rd)
- Receive applications from service providers (submission window April 5th to May 5th );
- Committee reviews each application, and where needed, conduct additional due diligence and research (May 5th to June 5th)
- Snapshot vote for approval of recommended allocations between service providers (June 20th)
Additional Considerations
- The Arbitrum foundation will act as the legal entity and face the service provider during the KYC process. They shall also hold any tokens/NFTs received in exchange of investments and have authority to withdraw assets from the service provider should any risks be discovered; however an explanation for the same shall be posted on the forum within 3 days of taking such an action. They will also periodically sweep interest earned from these assets to our treasury. Fire Drills will be periodically conducted to test solvency and clear out any AML delays in returning investments
- Interest earned from RWAs will be swept to our treasury for increasing our bridged USDC holdings (currently at 10 cents). For reference, $20 million in t-bills currently returns roughly $1 million in annual interest. Delay of more than 60 days in returning interest earned will result in liquidation of an investment from a service provider.
- Proposals to utilize interest earned will follow the same process as requesting funds from the treasury
- The committee will comprise of 6 members: Karpatkey, GFX Labs Steakhouse Financial, Nethermind and North Lake Legal, & the Treasury WG acting as facilitator and tie-breaking vote
- Karpatkey is a DeFi-native organisation specialising in professional DAO finance through industry-leading research and tooling since 2020. We’ve been working with GnosisDAO, Balancer, ENS, CoW Protocol, and Lido on financial planning, operations, and strategy, diversifying their treasuries into sustainable portfolios of DeFi investments designed to support DAOs in executing their missions.
- GFX Labs is the leading provider of professional governance services in DeFi. We are most known for our extensive past and present contributions at Uniswap, MakerDAO, Compound, and Optimism. GFX focuses on operational improvements and improving organizational quality and structure, with strong relevant experience in real-world asset onboarding and stablecoins.
- Steakhouse Financial is the leading CFO-as-a-service consulting company for DAOs. We specialize in stablecoins and RWAs. Our team has been merging TradFi and DeFi for years – our team met as contributors to the Strategic Finance Core Unit at MakerDAO. We’ve contributed extensively to asset-liability management research and structuring MakerDAOs RWA portfolio, including its exposure to treasuries. We specialize in deep due-diligence reports of tokenized issuers and publish the leading research report and Dune dashboards covering the space https://dune.com/steakhouse/tokenized-securities
- Nethermind is a blockchain research and software engineering company empowering enterprises and developers worldwide to work with and build upon decentralized systems. Our work touches every part of the Web3 ecosystem, from fundamental cryptography research to security, node infrastructure, DeFi, and application-layer protocol development. We have a team of over 220, with more than 180 engineers on board. Nethermind is a key contributor to the development of Ethereum, with our execution client representing over a quarter of all synced nodes. Additionally, we actively build the Starknet ecosystem and support our institutional and enterprise partners in advanced blockchain, digital assets, and decentralized finance (DeFi) fields.
- North Lakes Legal is a law firm at the leading edge of bridging decentralized finance, DAOs and Real World Assets. North Lakes Legal implemented the standards for the initial high-profile real- world asset (“RWA”) financings in the DeFi space. Christian Petersen is the principal of North Lakes Legal and has 26 years of cross border project and structured finance experience. In support of Maker DAO, North Lakes Legal has structured, negotiated, and implemented the following:
- Société Generale – DAI 40 million, tokenized French covered bonds
- Huntingdon Valley Bank – DAI 100 million vault to acquire RWA loan participations
- BlockTower Credit – DAI 150 million vault utilizing Tinlake for various RWAs
- Monetalis Clydesdale – DAI 500 million to acquire U.S. treasury ETF
- Most recently, North Lakes Legal advised Ondo Finance in the development, structuring and launch of Ondo USDY.
- Arbitrum Treasury WG as a facilitating, nonvoting member except in case of a tie.
- The Assessment Report prepared by the committee will contain a recommended division of the sanctioned amount between service providers, which the DAO can approve or reject via Snapshot vote. Other details in the Assessment Report include schedule for returning interest, relationship with Arbitrum (debtor or custodian), maturation period of asset, legal structure (bankruptcy remote assessment), solvency, Arbitrum alignment, turnaround time for returning investment, transparency level (proof of reserves/read only access to accounts), and fees charged.
- 300,000 ARB for implementation of this proposal; unused funds returned to treasury
Anticipated expenditures include
- 150,000 ARB between 6 committee members (25k ARB per committee member is equivalent to the LTIPP Grants Council members)
- 50,000 ARB to the Arbitrum Foundation for payment of outside legal counsel
- 100,000 ARB for additional due diligence required by the committee and to program manager for management oversight and monitoring of selected providers.
Candidates for STEP Program Manager will be selected by a vote of the procurement committee, valid for a period of one year, after which they need to return to the DAO for a vote on paying their retainer fees. In case they do not get approval and there is no program manager overseeing our investments, the Arbitrum Foundation will liquidate and return assets to the treasury
Duties of the program manager in the pre-allocation phase, for which we received a quotation of $1000 per application, include:
- Receiving applications from service providers
- Conduct a first pass on applications received; filter out incomplete applications or those not fitting the RFP
- After the committee reviews valid applications and shortlists eligible providers, prepare an assessment report on each provider that allows for easy comparison between them
Post allocation duties, for which we received a quotation of $100,000 per year plus $15k for every selected provider, include;
1. Cashflow & Accrual Monitoring: Enable the Arbitrum Foundation to easily ensure that the Arbitrum Treasury receives timely payments or accruals. If payments are delayed or incongruent with stated rates, Arbitrum can take appropriate action (e.g. inquiry, divestment, etc). Specific functionality includes:
- Initial capital contribution and redemption tracking
- Track and notify interest accrual or payment amounts for each investment
- Ensure expected interest accrual or payment frequencies match service providers’ documentation
2. Underlying Asset Monitoring: Validate that service providers are investing in expected underlying assets and risk exposures. If nonstandard assets are being included in a provider’s portfolio, Arbitrum will be informed and can take appropriate action.
- Report on service providers’ underlying assets and reserves
- Provide portfolio statistics and risk analytics
- Report % of product AUM that pertains to Arbitrum’s investment
3. Operations & Counterparty Monitoring: Aggregates nonquantitative information to regularly inform Arbitrum of key structural information and material document changes and administer redemption tests.
- Collate service provider financial and audit reports
- Track underlying service provider changes (e.g. custodian or broker changes, change in 3rd party auditors)
- Track material changes in provider terms
- Administer Redemption Tests (i.e. “Fire Drills”) to test for provider redemption timeliness.
- Communication with the DAO on the governance forum for questions pertaining to the program
- Any other duties that may arise which are necessary for success
7. Eligibility is determined by the RFP below
Request For Proposals: Arbitrum Treasury Diversification (STEP 1)
Table of contents
- Summary and Arbitrum info
· Introduction
· Requester background
- Description
· Asset information
· Oversight
· Scope of service/Criteria
- RFP process overview
· RFP timeline
· Participants
- Questionnaire
· Applicant information
· Primary contact
· Key information
· Background information
· Plan design
· Performance reporting
· Pricing
· Smart contract/architecture
- Supplementary
Summary and Arbitrum info
Introduction
Arbitrum governance is seeking proposals from qualified applicants for the purposes of diversifying the governance treasury and supporting ecosystem growth.
The purpose of the RFP is to identify products that provide trading volume and depth (i.e., liquidity), are stable in value, produce income for governance independent of crypto market volatility, offer transparency, and can potentially see use in developing a nascent “real-world assets” sector on Arbitrum chains.
Applicants whose products meet certain quality thresholds will be presented to ARB holders and their delegates for possible asset allocation. All final asset allocation decisions rest with ARB holders and their representatives. This RFP is intended to both collect relevant information for the committee and also to recommend allocations for tokenholders to vote upon.
Requester background
Arbitrum governance maintains and upgrades the Arbitrum technology stack, upon which are built multiple blockchains, including the largest Layer 2 on Ethereum, with more than $2.8b in assets onchain.
Description
Asset information
This program is intended to convert 35,000,000 ARB into stable, liquid and yield earning assets. The dollar notional amount of this investment is subject to market volatility, but at the time of February 9, 2024, is valued at approximately $66,000,000. These assets do not have a specific futured obligation or liability they are matched against. The Arbitrum Foundation, a Cayman Islands legal entity, will be the transacting counterparty.
Oversight
The committee is comprised of 6 members including GFX Labs, Steakhouse Financial, Karpatkey, Nethermind, and North Lakes Legal. The Arbitrum Treasury & Sustainability Working Group also serves as a non-voting member of the committee, except in the case of ties.
All members are required to recuse themselves for any application in which they have a monetary interest, direct or indirect.
The Arbitrum Treasury & Sustainability Working Group leads this process, and answers to stakeholders within Arbitrum governance.
Scope of service/criteria
Please include the following as part of your proposal:
Sample or template investment contract and the governing instrument (credit agreement, partnership agreement, etc.).
Investment selection, monitoring, and reporting plan.
Compliance requirements. Be specific about requirements you anticipate from Arbitrum governance.
RFP process overview
RFP Timeline
RFP published : March 15
Submissions open : April 1
Submissions deadline : May 1
Finalists announced : June 1
ARB holders vote on proposed allocation : June 15
Participants
This RFP will be open to all applicants with a stable, liquid and yield earning product. The screening committee will review all submissions and announce allocation between finalists for ARB tokenholders to vote upon.
After receiving applications, the committee will prepare an allocation policy for distribution to applicants and recommend a split between them. The DAO will then vote on whether to approve the split or not.
Questionnaire
Applicant information
Name
Address (Headquarters)
City, State, Postal Code
Country
Website
Primary contact
Name
Title
Country
Email, Telegram, Forum, & other methods of contact
Key Information
Expected Yield
Expected Maturity
Underlying asset
Minimum/Maximum transaction size
Current AUM for product
Current AUM for issuer
Volume of transactions LTM
Source of first-loss capital
Basics and background
- How will this investment improve Arbitrum’s RWA ecosystem?
- Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.
- Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.
- Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.
- Describe any conflicts of interest for your entity and key personnel.
- Insurance coverages, guarantees, and backstops
Name of insurer or guarantor
Per incident coverage
Aggregate coverage
- Historical tracking error in your proposed product, or similar to that being proposed
Product
2024 YTD
2023
2022
2021
- Brief reason for above tracking error
- Please describe any experience your firm has in working with decentralized organizational structures
- What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?
- How many of these assets held are present on Arbitrum One, if any?
Plan design
- Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.
Do investors have any shareholder, investor, creditor or similar rights?
- Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.
- Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.
How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?
Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?
- Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.
- Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.
- Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.
- What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?
- Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.
- If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.
- Does the product rely on any derivative product (swaps,OTC agreements?
- List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties
- Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?
Performance reporting
- What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.
- Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.
- Who provides the performance reports in respect of the underlying assets?
- Describe any formal audit process and timing of such audits.
Pricing
- Provide a copy of your standard contract, or one similar to what is being proposed here.
- Fee summary: Inclusive of the full scope of services requested.
Product
Fee schedule
If asset based
Fee calculation for our plan if asset based
Annual fee if flat fee
Any other fees (including redemption or minting fees)
- Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)
Smart Contract/Architecture
- How many audits have you had and name of auditors?
Please provide a copy of reports.
- Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?
- Is the product present on several chains? Are there any cross chain interactions?
- Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem
- How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?
- Is there any custom logic required for your RWA token? If so please give any details.
Supplementary
- Please attach any further information or documents you feel would help the screening committee or ARB tokenholders make an informed decision.
