[RFC] Treasury Diversification

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1

Hop DAO should diversify it’s treasury to cover cash outlays and de-risk market movements.

Summary

Sell 50% of Hop DAO’s ARB holdings (837,007 ARB) for USDC. This should raise approximately $686k for Hop DAO at current prices (~$0.82).

Motivation

Hop DAO will need stablecoins to cover ongoing expenses. This sale would be an initial step toward the broader goal of treasury diversification.

Execution

Before an onchain vote, a deployment of the Hop Community Multisig should be deployed on Arbitrum. The onchain execution of the proposal will send a message through the Arbitrum messenger to trigger a transfer of the ARB currently in the Hop Treasury alias address to the Community Multisig. The Community Multisig can then complete the sale in a series of transactions.

Voting Options

  • Sell 50% of Hop DAO’s ARB holdings for USDC
  • No action
  • Abstain
2 Likes
2

I am 100% for this proposal, consistent with my comments last year and on the recent call. Funding ongoing expenses—especially dev costs—should be paramount, and selling off another protocol’s governance token to do so seems wise.

3

Thanks @cwhinfrey

  1. Can we see an analysis of the treasury burn rate averaged over 3 months and 12 months?
  2. Can we see a projection of the runway based on the above?
  3. Selling airdrops from key partners such as ARB sends a negative signal in the market and may deter future projects from allocating airdrops to the HOP DAO. Do you think there is a more value aligned way to utilize the ARB instead?
2 Likes
4

Hi @jengajojo, good questions. The DAO’s only current ongoing costs are the payments mentioned here. This would be the first time the DAO holds stablecoins and begins to establish it’s own runway but it would just be a start (roughly 6 months or so). Further treasury diversification like a sale of HOP likely makes sense in the near future.

On 3), I think it’s worth mentioning that to date, Hop DAO has spent about 10,000,000 HOP, or 1% of the total supply, on incentives on Arbitrum One and continues to allocate 812,000 HOP per month. Ultimately, the funds raised from this sale would go towards building better bridge infrastructure which would benefit their ecosystem as well as Hop.

1 Like
5

Thanks for the clarification @cwhinfrey

This is a relavant point. Is it possible to outline the roadmap for this infra development work?

6

Considering the need for stablecoins to fund expenses, I support this, although selling airdrops could send a negative signal to the ecosystem, this treasury management decision is justifiable.

7

Hey, it’s Bernard from w3s.

Really excited about this idea. It’s clear that the top priority for any DAO should be ensuring a sustainable runway so that developers can keep building. Looking at the historical burn rate, which sits at around 3 million HOP, it’s quite impressive to see that the runway is in fantastic shape, extending out to around 15 years (!). Even with the recent budget cut of 50%, the outlook remains very healthy. However, it’s important to keep in mind that the HOP price can be quite volatile, and this could potentially change the picture significantly in a few years.

Please find my 2 cents below, happy to discuss further.

Key advantages:

  • Moving a portion of the treasury into stablecoins (and possibly blue-chip assets or RWAs) creates a safety net for any market fluctuations. Successful cases like Lido and Badger show that others have shifted from a 100% native treasury to a more sustainable model.
  • It’s important to think about developers too. A 30% reduction in dollar income compared to the beginning of the year can be challenging for them and with the new proposal it’s going to be easier to budget for any new expenses.
  • Beyond these financial benefits, this proposal also makes sense operationally. Cheaper transaction costs are always a plus.

Open questions:

  1. Is there a specific reason for choosing exactly 50% ARB holding, or is this an arbitrary figure? According to Arbitrum governance, holding at least 1 million ARB is required to become a delegate. Holding 162,993 more ARB would enable the DAO to participate in Arbitrum Governance (Uniswap is a good example here). Would it make sense to consider 674,014 ARB instead?
  2. When it comes to managing the assets, are you planning to sell them directly on the market, or are you considering OTC deals?
  3. If the plan is to move all expenses to USDC once received, how do you intend to calculate these expenses when everything is currently denominated in HOP? What will be the conversion rate?
  4. The estimated runway of roughly 4-6 months with the new stablecoins allocation means there’s some time pressure to decide on the future treasury allocation. Do you have any preliminary plans in place for this?
1 Like
8

I fully support this proposal because selling Arb for stablecoins will be a more productive use of assets for the DAO. I believe Hop has been too conservative with its treasury and we need to invest further in the ongoing development and improvement of Hop Protocol, especially taking into account how other competitors are expanding their teams.

1 Like
9

I’ve been in favor of this diversification for a while, though would like to see some $ETH holdings in addition to stables in future.

Also, if I recall, most of the treasury is $HOP- so perhaps swapping some $ARB for stable coins would give some diversification and stability? Hyperinflation risk aside :grimacing:
Discord

Similarly keeping a good amount of $ARB in the treasury is itself diversification. We should inform the likes of defilama and tokenterminal about the new multisig addresses:

10

This is a sale of assets for expenses, which is fine, but I don’t think this should be characterized as treasury diversification. I do believe we need true treasury diversification, and if we were doing that, I think the current ARB amount is quite appropriate. In other words, if we didn’t need USDC for expenses, we likely wouldn’t be making this sale.

This seems extremely reasonable and has been completely overlooked. Unless someone else raises a good counterpoint, this is enough for me to vote No Action. That said, we obviously need the USDC so I would support a sale of 674,014 ARB while retaining Hop Ambassadors’ ability to engage in Arbitrum governance. If we are characterizing this as treasury diversification, the asset that should be diversified is HOP. I would also support including a sale of HOP for USDC in conjunction with this.

1 Like
11

Unless someone else raises a good counterpoint, this is enough for me to vote No Action. That said, we obviously need the USDC so I would support a sale of 674,014 ARB while retaining Hop Ambassadors’ ability to engage in Arbitrum governance.

I believe a reasonable counterpoint is that there is a less-tangible but very real cost of time and effort for the DAO participants and service providers to coordinate on actions like this and a smaller sale now might give less time to coordinate a more broad treasury diversification in the form of HOP sales, possibly more ARB sales, etc. This time and effort from all parties would allocate resources away from the core mission of Hop DAO in exchange for delegation in Arbitrum’s DAO. Allocating time to building and growth might result in exponentially more usage of the protocol and interest in the broader Hop ecosystem.

I would also support including a sale of HOP for USDC in conjunction with this.

In a similar vein to the above response, I think it is a tradeoff of time vs value. A sale of HOP from the DAO would likely require in long discussions with interested parties. As we’ve seen in other DAOs, these parties might want discounts to the market value of the token, shortened lockups, etc. These conversations require a lot of effort and coordination among all Hop DAO participants to come to a consensus. While this is healthy, it would take away from building out the protocol and broader ecosystem.

1 Like
12

What’s the fiscal impact of selling 674,014 ARB versus 837,007 ARB (50%)? How does that affect runway? Because I am agreeing with poops here and want this discussed a little further before voting one way or the other. The snapshot that just went up doesn’t include the 674,014 option, only 50% or bust. I think we at least need that to be included as an option.

2 Likes
13

I agree with @dybsy and @fourpoops here. I understand the DAO needs stables to pay expenses. This should have happened much earlier actually, but better late than never.

But if there is an advantage to selling 674,014 ARB why not do it? Would the amount of stables really be that different?

I would also like a 2nd option in the snapshot here.

Edit: Since there was no response and I don’t wanna forget/miss the snapshot I voted No action for now.

1 Like
14

Regarding items already discussed:

  • I’d be curious to hear from the ARB Ambassador’s on the 1 Million ARB limit to maintain delegate status. At first glance, I think it is fair to say the 50% sale is an arbitrary number so going down to just 674,014 ARB is not unreasonable. At least to maintain some flexibility as the Ambassador program moves forward. However, I also would be curious if they view this as important to the goal. I’m not sure if anyone is delegating to HOP at the moment? I’m not sure what we would necessarily be losing if that status is gone?
  • I saw mention of negative market signals. I understand the logic but I’m not entirely sure if the reaction would be that negative. Part of the Arbitrum airdrop was to reward projects for using the ecosystem, and some of the expectation I would imagine is to use that value to continue to build the project within Arbitrum moving forward. I guess what I’m saying here — there is a value balance here at play, at least in my mind. Does that ARB provide more value to Arbitrium’s L2 sitting as a governance token or being used to pay for continued development of the HOP product? A product that in turns brings more users to Arbitrum. I could make the argument that future airdrops and projects might view us using the airdrop to develop the project as a positive. “If we give them this value, they will spend it to grow our ecosystem”. Food for thought.

My add to this discussion: I would agree with those who mentioned that the discussion on Treasury Diversification should probably go deeper than selling one asset. With that in mind, I think the discussion should pivot more towards “what does a diverse treasury look like within HOP?” A guiderail of rules would probably add some stability to the treasury when we think about how this project is funded 1, 5, 10 years into the future. This should also give us the benefit of a more streamlined decision process.

I’d picture a basic set of treasury rules. Something like HOP should always at least be XX% (>50%, at minimum I’d say) of total assets. ETH should be XX%. We should always carry 12 months of planned expenses in stable coins. We should never allow a second asset be >XX% of total value. Rebalancing is done every 3 months. So on…

Edit: I forgot to add, for now I am voting “No Action”. As I would prefer to have the 1 Million ARB item commented on by Ambassadors before a decision is made. With the added caveat that I am 110% for this topic being fleshed out further.

3 Likes
15

@dybsy @fourpoops @lefterisjp @thegreg.eth @Bob-Rossi I think the option for 50% on the snapshot vote is valid. I don’t think there is a way to edit an existing vote or cancel it, so what do you think the best path forward would be? I’d guess an “HIP-38 amendment” snapshot that expands the options, but not totally sure. What do you think?

According to Arbitrum governance, holding at least 1 million ARB is required to become a delegate

@Bernard I spent a decent amount of time looking into Arbitrum’s governance and I’m not sure this is correct (though I could be wrong). My understanding, according to the constitution, is that 1 million tokens are needed to create a proposal on Tally, not to become a delegate. Also, 0.01% of the voting supply (63,567,281.43 ARB, from my calcualtions) is needed to create a proposal on Snapshot. A wallet with any number of tokens can participate in any part of Arbitrum governance except for the above mentioned actions. Please let me know if I am missing something though.

If that is true, then a sale of less than 50% could result in the ability to create a proposal on Tally. In a sale of any amount discussed, the DAO has the ability to create a proposal on Snapshot. In any outcome, Hop DAO has the ability the participate in all other parts of the Arbitrum DAO.

I think it is fair to say the 50% sale is an arbitrary number so going down to just 674,014 ARB is not unreasonable

I would not say this number is arbitrary, but that might not have been clear in the original post. It was calculated by looking at the possible DAO expenses for 6 months and working backwards to land on the 50% number. It is just a coincidence that the resulting number was ~50%.

But if there is an advantage to selling 674,014 ARB why not do it? Would the amount of stables really be that different?

The advantage of selling less would be the ability to create a proposal on Arbitrum’s Tally page and additional voting power in Arbitrum’s DAO. The advantage of selling more would be more diverse and stable funds in the Hop DAO to establish a base for Hop DAOs ongoing runway.

After having dove into Arbitrum’s governance a bit, I’d like to provide some observations that might help better value the holding of the tokens. All of these are my personal observations and my be wrong, so please let me know if so.

  • The Hop DAO has never voted on any of the Tally proposals or Snapshot proposals since owning the $ARB
  • The Hop DAO is not delegating any of the tokens they currently hold
  • The Hop DAO is not actively seeking delegation from other participants

With that said, I recognize all of those can change at any time and there is an ambassador program to help push it forward. :slight_smile:

Hope that all makes sense! I’m fully aligned with the community and just want to provide concrete data (as I understand it) so that we can have a more focused discussion.

2 Likes
16

As one of the Hop Ambassadors on Arbitrum (I can only speak for myself), the ambassador program is still going through iterations. On the last community call it was mentioned that an ambassador’s main responsibility is to be in the know of what’s going on in the respective ecosystem and see where integrations can be made with other protocols. While participating in governance on behalf of Hop is important and should take place, I believe Hop DAO’s liquidity and risk management is a priority in this specific case. I agree with other delegates that this shouldn’t be described as treasury diversification and I believe it should be described as risk management because the purpose of this proposal (to my knowledge) is to swap a volatile asset for a stable asset so the DAO is able to pay short-term obligations without diluting its treasury by selling HOP tokens.

1 Like
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@shanefontaine You are absolutely correct regarding the Arbitrum Constitution; indeed, it does stipulate that 1 million ARB is necessary to create on-chain proposals (I would have made the necessary edit to my initial message – thanks for catching that). This would enable Hop DAO to engage fully in governance. As highlighted by both @Bob-Rossi and @francom, the extended delegation power for Hop ambassadors could prove highly advantageous, particularly given Arbitrum’s substantial volume and its position among the top 5 bridges on the network.

That said, I also concur with @fourpoops sentiment that establishing a predictable runway should be a paramount concern for any DAO. In light of the current financial situation, I believe it would be prudent to place trust in the 50% allocation and shift the focus towards expediting the treasury diversification issue (which is a topic for another discussion).

18

After all of this discussion, I’m comfortable switching my vote in favor of the sale. In general, I favor action over inaction, and the downsides to this sale are small in the larger context of necessity. I hope we can continue this momentum and rethink the overall treasury situation, including moving towards protocol owned liquidity.

19

Appreciate the discussion so far. Just for reference, there was some additional discussion on the Hop Discord if anyone wants to check that out and reference it during in future conversations.

20

The below response reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking and ideation of the two.

Treasury diversification is essential for any DAO’s treasury that’s overly exposed to market movements, and as such we’ll be voting in favor of the proposal. However, we do concur that there should be a more holistic approach and long-term strategy for treasury diversification instead of making arbitrary sales when the need arises.

1 Like