We are proposing the launch of the ARCx Growth Allocation I, a $250k capital allocation program that will seek to maximize risk-adjusted returns for the treasury and help ARCx hone its processes and philosophy around capital allocation. We would like to share our proposal and receive feedback from the community.
As of June 9, 2021, the ARCx treasury is valued at approximately $10.8 million. $7.1 million (or 66%) is in USDC and $3.8 million (or 34%) is in ARC Governance tokens (ARCx). Additionally, ARCx controls a team multisig wallet containing approximately $856k in USDC ($595k) and ARCx ($261k).
Given that the treasury has a large portion of its assets in stablecoins (USDC), the treasury has a sufficient cushion for the protocol to continue funding operations even if its ARCx token were to suddenly drop in price. The team multisig wallet should also cover critical operating expenses.
ARCx Growth Allocation I is the first of potentially multiple ARCx growth allocation vehicles to effectively deploy the treasury. We propose starting with a max treasury budget of $250k for AGA I allocated to investments that maximize ARCx’s treasury returns for given risk levels. ARCx can conduct small, calculated risks with its treasury in ways that a billion dollar treasury cannot. These allocations can help hone our process for capital allocation and treasury decision making.
AGA I will be focused on allocating capital to the most attractive risk-adjusted opportunities while capping absolute risk to the overall ARCx treasury. AGA II could focus on strategic investments to ensure that ARCx v3’s reputation system is integrated with the top DeFi protocols. AGA III could focus on early-stage investments that are building on ARCx or strategic investments in on-chain reputation protocols.
Examples of AGAs include:
- Allocating to managers on on-chain asset management platforms (Enzyme, dHedge)
- Token swaps with DAOs that are mutually aligned with ARCx
- Using ARCx’s treasury as an LP in different protocols
- Investing in 1-2 projects building on ARCx
- Buying indices such as DPI
- Depositing USDC in Yearn to mint yUSD
Effective treasury management should do the following:
- Serve the protocol’s needs and improve its competitive positioning
- Grow the treasury
- Ensure survival irrespective of market conditions
It is important for ARCx’s treasury to be able to pay critical expenses. We want to keep AGA I simple and effective. We do not want to take too much risk or invest too much capital.
However, we want to ensure that ARCx’s treasury has processes set in place for capital allocation while it is still relatively small. It is more difficult to get capital allocation processes and decisions right when the treasury is at $1 billion. We hope that AGA I is the first step towards refining ARCx’s treasury allocations. ARCx should push forward the standards for treasury management and capital allocation.
In this proposal, we outline one such AGA: allocating $50k to purchase stETH and the DeFi Pulse Index (DPI). $25k will be allocated to stETH and $25k will be allocated to DPI.
As members of and believers in the long term growth of the Ethereum ecosystem, we propose a $25k allocation to stETH. At the time of this writing, ETH prices are down over 40% from all time highs ($4,382/ETH). Now is an attractive time to put some of ARCx’s USDC to work. Rather than holding ETH itself, we propose allocating to stETH, which will allow us to earn yield on top of our ETH.
stETH is a token representing ETH staked in the Lido protocol, a pooled staking service for ETH 2.0. stETH retains the liquidity benefits of ETH while allowing the depositor to earn yield on their staked ETH. Today, the APY on stETH is 6.0%.
Depositors to the Lido pool receive 1 stETH for each ETH staked. stETH balances are updated daily to reflect any staking rewards the pool has earned. stETH can be sold at any time, and there are no lock ups or restrictions around the sale of stETH.
stETH provides ARCx exposure to ETH along with attractive yields (currently 6.0%) and reasonable fees (10% rewards fee). Further, Lido is a proven project with strong governance that has been running since December 2020 without any major incidents. Using Lido as our staking service will also further ARCx’s relationship with Lido DAO and represents a mutually beneficial partnership.
stETH is straightforward and easy to purchase. By allocating a modest amount to stETH today, we can optimize our processes for allocating capital in the future, when any inefficiencies and mistakes would be much costlier to the treasury.
Purchasing stETH is not without risk.
- Smart contract security - Lido’s code could contain a vulnerability or bug.
- ETH 2.0 technical risk - ETH 2.0 is still under development and may contain errors.
- ETH 2.0 adoption risk - ETH 2.0 may not reach required levels of adoption.
- DAO key management risk - ETH staked through Lido is held across multiple accounts backed by a multi-sig threshold to minimize custody risk. Funds could become locked if a certain number of signatories lose keys, are hacked, or go rogue.
- Slashing risk - ETH 2.0 faces staking penalties for failing to validate transactions. Lido mitigates this risk by diversifying across validators and purchasing slashing insurance.
- stETH price risk - stETH could trade lower than its inherent value due to withdrawal restrictions on Lido that make arbitrage impossible.
|Liquidity||Liquidate at any time|
|Total ETH Staked||466,242 ETH|
|Staking Rewards Fee||10%|
|Smart Contract Audits||Quantstamp, Sigma Prime|
**Source: Dune Analytics as of June 9, 2021
The DeFi Pulse Index is a market cap-weighted index developed by The Index Coop that tracks the performance of assets in the decentralized finance space. DPI seeks to track the performance of tokens in DeFi whose projects have significant usage and show a commitment to ongoing maintenance and development.
DPI is currently down over 40% from its all time high in mid-May. We believe that now is a great time to put ARCx’s treasury to work by allocating to the secularly growing collection of assets held in DPI. An allocation to DPI demonstrates ARCx’s conviction in the long term success of the sector and presents an opportunity to capture the value generated by the sector as it grows.
DPI also represents an easy way to further diversify ARCx’s treasury while at the same time keeping the portfolio as simple as possible. DPI will allow ARCx to get exposure to 14 DeFi tokens under one line item that can be easily monitored.
Index Coop, the index’s manager, is a highly reputable DAO with strong community engagement. Index Coop produces monthly index updates that will allow us to easily monitor the index and DeFi ecosystem.
DPI has a formal framework for evaluating both tokens and projects for inclusion within the index.
- Must be available on Ethereum blockchain.
- Must be associated with a decentralized finance protocol or dapp listed on DeFi Pulse.
- Must not be considered a security by the corresponding authorities across different jurisdictions
- Must be a bearer instrument. None of the following will be included in the index: Wrapped tokens. Tokenized derivatives. Synthetic assets. Tokens that are tied to physical assets. Tokens that represent claims on other tokens.
- Must be possible to reasonably predict the token’s supply over the next five years. At least 7.5% of the five year supply must be currently circulating. The token’s economics must not have locking, minting or other patterns that would significantly disadvantage passive holders.
- The project must be widely considered to be building a useful protocol or product. Projects focused on competitive trading/holding, having Ponzi characteristics, or projects that exist primarily for entertainment, will not be included.
- The project’s protocol must have significant usage.
- The protocol or product must have been launched at least 180 days before being able to qualify to be included in the index.
- The protocol or project must not be insolvent.
DPI is rebalanced monthly to reflect changes in token circulating supply, to add or remove tokens to the index, and to cap exposure to a single token at 25% of the index.
|Number of Holdings||14|
|Largest Holding||UNI - 25.4%|
As of June 9, 2021
|Correlation to ETH||0.77|
|Correlation to BTC||0.54|
|Upside Capture of ETH||86.1%|
|Downside Capture of ETH||92.6%|
|Upside Capture of BTC||88.9%|
|Downside Capture of BTC||73.5%|
Above stats through May 31, 2021
|Discount to NAV||~1.4%|
As of June 9, 2021
Llama provides treasury management as a service for DAOs and protocols. We will work with the ARCx community to oversee the broader treasury strategy, as well as the diligence and implementation of ARCx Growth Allocations. We will also evaluate treasury related proposals made by ARCx community members and offer our feedback.
This proposal states the purpose of ARCx Growth Allocations and outlines the first AGA to deploy ARCx’s treasury productively. We hope to seek feedback on the idea of AGAs, this particular AGA (adding stETH and DPI), and ideas for other AGAs to deploy ARCx’s treasury.