Introducing ARCx Growth Allocation I: Deploy Treasury Productively

Authors: @schlabach and @HelloShreyas from Llama, which provides treasury management as a service for DAOs and protocols.

Summary

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.

ARCx Treasury Overview

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.

Introducing ARCx Growth Allocation I (AGA I)

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

Purpose

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.

AGA I.I

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.

stETH: Overview

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.

Why 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.

Risks

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.

stETH Summary

APY 6.0%
Liquidity Liquidate at any time
Total ETH Staked 466,242 ETH
Unique Depositors 6,059**
Staking Rewards Fee 10%
Insurance Unslashed Finance
Smart Contract Audits Quantstamp, Sigma Prime

**Source: Dune Analytics as of June 9, 2021

DeFi Pulse Index (DPI) Overview:

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.

Why DPI?

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 Inclusion Criteria

DPI has a formal framework for evaluating both tokens and projects for inclusion within the index.

Token Criteria:

  • 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.

Project Criteria:

  • 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 Reweighting

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.

Current DPI Holdings

Token Weight
UNI 25.4%
AAVE 20.2%
MKR 14.1%
COMP 9.0%
SUSHI 8.2%
SNX 7.9%
YFI 6.9%
REN 2.1%
KNC 2.0%
LRC 1.9%
BAL 1.3%
CREAM 0.6%
FARM 0.2%
MTA 0.1%

DPI Key Statistics

Number of Holdings 14
Largest Holding UNI - 25.4%

As of June 9, 2021

Cumulative Return 226.7%
Annualized Volatility 131%
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

Market Cap $156m
24h Volume $4.1m
Current Supply 441,022
Streaming Fee 0.95%
Discount to NAV ~1.4%

As of June 9, 2021

About Llama

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.

@schlabach and @HelloShreyas are both ARCx community members and governance token holders.

Conclusion

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.

4 Likes

Strongly support! Great write-up

Assuming we have weathered a major market downturn, I’m all for ‘risk-on’ diversification at this point.

+1 DPI … DeFi Summer 2.0 incoming!!

Will the stETH be matched with ETH in curve (or convex or yearn) pools for even more yield?

Thanks!

This is an awesome idea and something that we want to explore down the road. For now though, we want to keep things as simple as possible. Our processes will improve with each new AGA and we’ll be better at doing things like what you mention here.

1 Like

This is a well thought out and forward thinking proposal that I am in full support of. I particularly like the process of starting small and staying nimble.
The choice of assets are great and help to align the DAO with strong partners who have very innovative products in the DeFi space.
Thank you for taking the effort for going into such detail.

2 Likes

Hi all, we’ve put this up on Snapshot! Voting ends June 22

https://snapshot.org/#/arcx.eth/proposal/QmYfPC6zHuNJcYk9TKVoX1dSwQdKBomj6Eh2BdDaEnmvqz

I’d like to get @kerman take on why ARCx accepted USDC (stablecoins) over ETH or other risky assets. There’s probably a good reason why we should keep the treasury in stables (e.g. paying people, services, etc). Stablecoins on Convex or Polygon’s Curve instance will return double digit yields for the foreseeable future, and have no price volatility risk.

I personally would not advise using LIDO due to centralization risk (they’re validators as a service) and because ETH2.0 is not complete for withdrawals. There is too much protocol development risk and access to the full amount of ETH liquidity should take precedent for the treasury. My perspective is to take advantage of high yield DeFi opportunities now.

Sorry for the last minute question, but where can I find information about Llama? Do you charge any fees?

If ARCx were to use Llama, would the DAO be entitled to any governance tokens?

@schlabach are you a ARCx token holder?

Treasury funds should be invested with a risk averse mindset and not profit maximising. I suggest capital preservation be the underlying principle here.

Echoing @acedabook, if stablecoin yields are already giving a better risk-adjusted return, why go down the riskier path of stETH (@ 6% APY) or DPI. Just because a market has gone down ~40% doesn’t mean it won’t go down further; catching a falling knife is a dangerous game.

If the DAO/community should still insist on going down this path, setting a timeframe of how long to hold and liquidate is important factor here like any investment, of which nothing has been proposed.

Also, one thing that comes up in my mind is taxation? What are the implications from any yield/capital gains?

I suggest giving this proposal abit more time to be discussed fully by the community and stakeholders. Voting close by 23rd June is a little rushed in my opinion. Perhaps a 2-week period?

1 Like

Also, can you please show us some of the Treasury management work you’ve done historically with other DAOs? Or evidence of some sort of track record with successful deployment of assets in the past?

I’ve trawled through your twitter feed from the link you had put up (https://twitter.com/llamacommunity_), but it’s hard to get a grasp of the set of expertise here.

Pardon my skepticism, but just proposing some due diligence here.

1 Like

Actually might be good to get a quick preso/community call from the Llama team on this

Hi @acedabook and @risk_reward - definitely hear you and appreciate your feedback on this. We’ve redacted the Snapshot for now so that we can leave some more time for community discussion.

We’ll come back to the points you raised here in a bit but wanted to let everyone know that we’ve paused the vote first.

2 Likes

Thank you for your feedback, @acedabook.

I’d like to get @kerman take on why ARCx accepted USDC (stablecoins) over ETH or other risky assets. There’s probably a good reason why we should keep the treasury in stables (e.g. paying people, services, etc). Stablecoins on Convex or Polygon’s Curve instance will return double digit yields for the foreseeable future, and have no price volatility risk.

The treasury wallet has just over $7 million in USDC as well as 6.1 million ARCx tokens (approximately $3.6 million at $0.59/ARCx). Meanwhile, the team multisig wallet contains almost $600k in USDC and 425k ARCx (approximately $250k). The team multisig wallet has sufficient runway to pay for current operating expenses. AGA I is only 2.35% of the total ARCx treasury, so quite small. The idea is to evolve capital allocation experiments so ARCx is at a competitive edge versus other DAO treasuries. Buying ETH (only 0.23% of total treasury) is a relatively low risk allocation for the treasury.

Allocating to yield earning stablecoins and allocating to stETH aren’t mutually exclusive! This is only the first proposal part of AGA I. If you are interested, we would love to work with you to draft a second proposal to allocate a portion of AGA I to yield earning stablecoins.

I personally would not advise using LIDO due to centralization risk (they’re validators as a service) and because ETH2.0 is not complete for withdrawals. There is too much protocol development risk and access to the full amount of ETH liquidity should take precedent for the treasury. My perspective is to take advantage of high yield DeFi opportunities now.

This is a fair point that we considered before making this proposal. The Lido team is committed to decentralizing as soon as possible and becomin a trustless staking derivative layer for ETH 2.0. Risk still exists, as with any position. But we don’t think it is an outsized risk given the position size ($25k), the return potential, and the commitment from the Lido team to become a trustless staking derivative layer. While this need not guide our decision making, other DAOs such as Nexus Mutual have also done diligence and added sizable portions of stETH.

Sorry for the last minute question, but where can I find information about Llama?

Llama DAO provides treasury management as a service for DAOs and DeFi protocols. Here is some of the work we have done / are doing:

  • Uniswap: treasury diversification strategy
  • Gitcoin: developed a strategic asset allocation for treasury, designed plan to liquidate AKITA from treasury
  • Aave: developing Investment Policy Statement, treasury vision, risk framework, treasury strategies, and financial statements (income statement, balance sheet, cash flow statement)
  • FWB: developed operating model to project treasury runway, prepared budget, prepared income statement and cash flow statement
  • PoolTogether: developing Investment Policy Statement, treasury vision, risk framework, treasury strategies, and financial statements (income statement, balance sheet, cash flow statement)

Llama consists of 20+ of the top people in DAO treasury management. Our contributors have expertise in asset management, risk analysis, investment research, accounting, software development, and data analysis.

Here are the profiles of Llama members:

  • Investment team at $19B endowment

  • Oversaw $4B+ high networth asset management book

  • Head of Index Coop treasury working committee (example)

  • Head of Index Coop Investment Committee (example)

  • Lead of Aave Grants DAO (proposal)

  • Contributors to Aave treasury strategy (example)

  • Contributors to Sushiswap treasury strategy (example)

Our members have written many of the popular pieces on DAO treasury management (1, 2, 3, 4). We were featured in CoinDesk’s article on DAO treasury management.

We focus deeply on working with DAO communities / governance to see how the treasury can be used to further the needs of the protocol.

If ARCx were to use Llama, would the DAO be entitled to any governance tokens?

That is a possibility but we have not finalized any plans for a Llama token yet. What we can share is that we expect this relationship to be positive sum. We hope to give back sufficient value to the ARCx community and treasury.

@schlabach are you a ARCx token holder?

Yes, @HelloShreyas and I are both ARCx token holders.

[edited for formatting]

3 Likes

Appreciate your feedback, @risk_reward.

If the DAO/community should still insist on going down this path, setting a timeframe of how long to hold and liquidate is important factor here like any investment, of which nothing has been proposed.

We see this allocation to stETH and DPI as a long term investment. Having worked at a $19B fund, I think it’s better to not provide a timeline for exit because that caps upside, especially in technology oriented investments. I would approach it similar to a liquid, late stage venture-style investment - understand the case for it, the risks involved, and constantly re-evaluate whether the thesis is true. It’s difficult to predict where the prices of stETH and DeFi will be in the near term, but as a core part of the DeFi ecosystem, we want ARCx to have exposure to these assets. We think of treasuries in terms of multi-year timeline, however, we will re-evaluate the risks involved periodically. I would view stETH and DPI as core bets on DeFi unless we identify risks in these assets that do not justify the position.

Regarding your comment about catching a falling knife - yes, it is definitely possible for stETH and DPI to fall further from where they are today. Volatility is high and these are new allocations for ARCx, which is why we’ve limited the size to $50k. Given that this is a small portion of the treasury wallet (0.46%), the max loss to the treasury is capped at a relatively small amount.

We also plan to propose holding other assets (e.g. yield earning stablecoins as @acedabook suggested) as part of AGA I. We would love to work with you and @acedabook to propose additional, value additive strategies for the treasury.

I suggest giving this proposal abit more time to be discussed fully by the community and stakeholders. Voting close by 23rd June is a little rushed in my opinion. Perhaps a 2-week period?

Voting period was 5 days to keep it consistent with the other proposals. However, we would love to incorporate community feedback. We’ve redacted the Snapshot proposal temporarily so that we can leave some more time for community discussion.

Also, can you please show us some of the Treasury management work you’ve done historically with other DAOs? Or evidence of some sort of track record with successful deployment of assets in the past?

As @schlabach mentioned in the previous response, I’ve included some of the things Llama has worked on below. Note that there isn’t a track record yet because DAOs haven’t done much with their treasuries yet! We were among the earliest in the space pushing for DAOs to productively deploy their treasury to further the needs of the protocol.

Llama DAO provides treasury management as a service for DAOs and DeFi protocols. Here is some of the work we have done / are doing:

  • Uniswap: treasury diversification strategy
  • Gitcoin: developed a strategic asset allocation for treasury, designed plan to liquidate AKITA from treasury
  • Aave: developing Investment Policy Statement, treasury vision, risk framework, treasury strategies, and financial statements (income statement, balance sheet, cash flow statement)
  • FWB: developed operating model to project treasury runway, prepared budget, prepared income statement and cash flow statement
  • PoolTogether: developing Investment Policy Statement, treasury vision, risk framework, treasury strategies, and financial statements (income statement, balance sheet, cash flow statement)

Llama consists of 20+ of the top people in DAO treasury management. Our contributors have expertise in asset management, risk analysis, investment research, accounting, software development, and data analysis.

Here are the profiles of Llama members:

  • Investment team at $19B endowment

  • Oversaw $4B+ high networth asset management book

  • Head of Index Coop treasury working committee (example)

  • Head of Index Coop Investment Committee (example)

  • Lead of Aave Grants DAO (proposal)

  • Contributors to Aave treasury strategy (example)

  • Contributors to Sushiswap treasury strategy (example)

Our members have written many of the popular pieces on DAO treasury management (1, 2, 3, 4). We were featured in CoinDesk’s article on DAO treasury management.

We focus deeply on working with DAO communities / governance to see how the treasury can be used to further the needs of the protocol.

Also, one thing that comes up in my mind is taxation? What are the implications from any yield/capital gains?

There is no legal clarity about various issues surrounding DAOs, including things like taxes and employee contracts. We recommend holding 10% of AGA I (~$25,000) as a tax reserve for potential capital gains. If needed and if regulatory clarity emerges later, we may need to tap into the broader ARCx treasury to cover taxes. Note that while this is a precaution that we recommend, other DAO treasuries have not done this. As it stands today, taxes are an unclear issue across DAO treasuries. I lead Aave Grants DAO and we have funded a research group to focus on this effort. Uniswap’s DeFi legal defense fund also hopes to get more clarity on legal/tax issues for DAOs.

2 Likes

Thanks for the description - I like how it’s framed as a proof of concept, as it’s only a small treasury allocation. How long would we let this initial investment and allo strategy go before reevaluating/making changes?

How often and what kind of reporting/updates does Llama provide?

Hey @acedabook,

We see AGA I as investments that we will deploy over ~6 months and hold for the long-term (several years) unless there are significant changes to the fundamentals / risks of these positions. We will review AGA I positions at least once a month with the ARCx community. We will do a thorough review of the effectiveness of AGA I after 6 months.

We plan to start doing updates on a monthly basis. Reports will contain performance updates, key metrics, and brief commentary. We will run the report by you and the rest of the community to see if there are additional things you’d like to see incorporated.

1 Like

Gotcha. As soon as you guys have a sample report, that would be helpful! And I assume there’s plans for a dashboard down the road too?

1 Like

Yes, we’ll definitely share once we have some sample reports! Would love to get a dashboard up too at some point so it’s as transparent and easily accessible to the community as possible.

Thanks for the great feedback @acedabook @risk_reward. The answers provided by @HelloShreyas @schlabach are pretty in-line with our thinking given it’s a result of many conversations we’ve had with the Llama team. We’re going to be setting up a Treasury Working Group where hopefully we can start sharing more thinking around how this is progressing but also getting this live as a snapshot proposal.

If you have any outstanding questions please do let us know so we can address them before going live with this snapshot proposal next week :slight_smile:

1 Like

Also just to reply on your comments here @acedabook. The main reason why we raised in stables is to guarantee the runway of the project. We’re now in an incredibly strong position where we can build for multiple year regardless of the token price and liquidity.

3 Likes

Hi guys,

Shubi here as a Metanaut community member here at mStable. You might have heard of us via the allocation of the DPI and our MTA token, but having read through your proposal, I would like to suggest that you also consider the mStable platform and ecosystem as a possible avenue to deploy and diversify your treasury more productively moving forward, perhaps even as a joint endevaour between the mStableDAO and ARCx.

mStable is a capital-efficient AMM with low-slippage swaps for stablecoins and BTC. It produces mAssets – robust meta-stablecoins with a focus on safety and a high native interest rate.

We offer several products in our ecosystem, but I’d like to highlight Save here for you guys (only 2 links allowed for new members, so you have to use the first link to get there :)). mStable’s Save is a high yielding, dependable savings accounts powered by the mStable AMM. Interest is generated for Save users from lending markets, AMM fees and other integrations in DeFi.

We previously had successful collaborations with other protocols, such as dHEDGE, and I think this could be something worth exploring further together.

This might also open up the avenue of potential further mutually beneficial conversations around integrations and collaborations, and interested to hear your stance on this overall.

Very happy to see more protocols moving forward and taking the next steps in diversifying their treasury more broadly, and I wish you all the success with this project moving forward!

Hi @Shubiwubi thanks for the comment! Could you send me a DM so we can connect on this?

1 Like