DeFi era: how the DAO treasury conducts asset management

In the past ten years, the Internet has greatly changed the nature of our work, which has not been possible by any technology in human history. People sit at home, collaborate remotely with a group of anonymous people, and lead a decent life, which was unheard of in the past. Ever since I was young, I have always heard that San Francisco is a paradise for ordinary people seeking opportunities. Since 2017, I have seen this trend shifting to the blockchain industry. We have discussed many times how on-chain reputation will play an increasingly important role in facilitating agreement cooperation. However, in order to facilitate the regulation of the resources of these agreements, we need infrastructure to facilitate decision-making and resource allocation. This is the origin of DAO.

DAO is essentially a “headless” organization (that is, an organization without leader control) that runs based on instructions given by the code and is managed through on-chain interaction. The traditional corporate governance model can be implemented entirely on the chain. Nowadays, DAO is widely used in all on-chain interactions that require coordination, from buying NFTs (such as PleasrDAO) to venture capital (such as Metacartel and SyndicateDAO). In other words, DAO is a blockchain native module that redirects resources based on demand, subverting people’s traditional concept of how to build and operate institutions to achieve equal ownership and transparent governance. This article will not discuss the impact of DAO on culture in depth. If you want to understand DAO in more depth, I recommend reading this article on the history of DAO before its birth.

DeFi “unicorns” lead the new trend

DeFi era: how the DAO treasury conducts asset management

The lock-up amount of the top 12 DAO treasury (unit: USD)

The enthusiasm of the open market means that the DeFi agreement will reach a billion-dollar valuation much faster. In the field of digital assets, most teams will reserve a portion of the liquidity supply for themselves. How much to keep is a variable, depending on the nature of the company, between 10% and 20% are possible. If a team reaches a multi-billion dollar valuation, it must find new ways to distribute the new wealth and increase the return of the agreement. In many cases, these tokens are locked in the DAO and managed by the community.

The DAO that manages the agreement treasury has a special status.

  1. Selling assets in the open market may send a bearish signal, causing asset prices to plummet. Some DeFi agreements will privately sign sale and purchase agreements with venture capital institutions to avoid this risk. However, this approach may run counter to the spirit of community governance.
  2. Another approach is to publicly announce the voting status of the community. However, this can cause great confusion, and Sushi is a lesson for the past. The community may not be able to reach a consensus within the effective time to reach an agreement.

More importantly, many large organizations prefer to purchase assets from the open market in order to avoid scrutiny. Therefore, the wealth of some large DAO treasury is mainly concentrated in a few types of assets, resulting in directional risk exposure. The figure below shows the distribution ratio of mainstream DAO treasury (unit: USD).

DeFi era: how the DAO treasury conducts asset management

Data source: 

Due to the strong cyclicality of the cryptocurrency market, the DAO treasury needs to count its assets on a regular basis. Selling assets in a bull market allows the DAO treasury team to operate for a longer period of time and has sufficient resources to make strategic acquisitions when the market drops. In this article, we outline the funding allocation plan of the university endowment fund, and then evaluate some solutions on how the DAO treasury hedges risks. In this respect, the DAO Treasury is the same as the University Endowment Fund. The goals of both are to achieve long-term and stable development and ensure that there are sufficient funds for operation and deployment in a bear market.

DeFi era: how the DAO treasury conducts asset management

Liquid assets account for a large proportion of university endowment funds: Taking Yale University’s endowment fund allocation in 2020 as an example, bonds + cash + absolute return products account for up to 31% . In terms of design, the endowment foundation reserves part of the funds for the allocation of risk-free assets to avoid insufficient liquidity during the economic crisis. In this way, the endowment fund can hold assets such as equity and venture capital for a long time and enjoy compound interest returns. If inflation is the mortal enemy of endowment funds, then the market downturn is the mortal enemy of the DAO Treasury. As mentioned above, the assets held by the DAO Treasury are mainly composed of protocol tokens. It is a good thing to be able to capture value from the growth of the agreement, but there are also drawbacks, because market turbulence can affect cash flow or cause high opportunity costs due to spending expansion, economic exploitation or hacking. Many protocols have native tokens to rely on. If they do not rely solely on native tokens, they can better manage this risk. Let’s take a look at Uniswap, the number one DAO treasury .

DeFi era: how the DAO treasury conducts asset management

The dollar value of the Uniswap treasury 

Since the currency price has hit a new high in the past two months and has been falling all the way down, the dollar value of the UNI Treasury has shrunk by more than 50%. As the market began to recover, UNI Treasury recovered some of its losses. Such violent market volatility can be called a nightmare for fund managers, highlighting the need to improve the asset allocation of treasury. If the treasury concentrates all its wealth on tokens and ignores risk management, the protocol can hardly survive the long winter of the cryptocurrency industry. The project needs to turn the treasury into its own competitive advantage, rather than relying solely on initial financing. We have studied in depth some potential solutions to treasury liquidity problems and trade-offs.


Scenario : Treasury sells covered call options to finance put options during periods of severe market volatility, or simply buys put options to hedge the risk of falling prices.

Put options and call options are both financial instruments. The former bet that the price of an asset will fall within a certain period of time in the future, and the latter bet that the price will rise. Selling covered call options means that while holding the underlying asset, the treasury sells the right to purchase the asset at a price higher than the current price (that is, a call option). If the price of the underlying asset rises, the sale of call options will not cause significant losses to the agreed treasury. If you want to learn more about covered call options, please read this article or watch this funny video. The premium earned from selling call options can be used to pay the premium for buying put options. This effectively offset the cost of the treasury’s purchase of put options.

In an ideal situation, the agreement would purchase put options to hedge against part of the treasury risk. If the price of the assets held by the agreement decreases, it will bring profits to the agreement. In addition, this move actually sets a lower price limit. Once the price falls below this price, the agreement will convert the underlying asset into a stable currency instead of continuing to hold the underlying asset. The problem is that the on-chain liquidity of options may not be sufficient to enable transactions of this scale. Assuming that the agreement wants to hedge the risk of at least 10% of the assets in the treasury, then the Uniswap treasury alone needs to hedge more than $100 million in assets. Let’s compare Opyn, the option agreement on the head chain, with a total lock-up amount of US$82 million. It can be seen that the on-chain market does not have enough liquidity to execute hedging transactions in a capital-efficient manner. The reason why we consider on-chain options trading platform is because DAO treasury is likely to avoid off-chain management. However, compared with centralized platforms, the prices of on-chain platforms are prohibitive. In order to achieve cost-effectiveness, the volume of on-chain options trading must increase substantially. Another problem is that this may lead to rollover put options—purchasing put options again when the expiration date is approaching to extend the period of risk hedging—becomes a recurring cost. As the field of on-chain options trading matures, this will become an alternative solution to help the treasury effectively manage risks while ensuring complete transparency (one of DAO’s values).

Stablecoins and indices

Scenario : The treasury holds stable coins, diversified index funds and other on-chain structured income products as sources of operating funds to avoid selling assets at low prices when the market is down.

Regarding how to ensure the long-term operation of the treasury, a proposal that has been discussed in detail is to invest in a variety of stable coins. The proposal may not be supported because it means that the agreement will sell native tokens. Although index funds are not as good as stablecoins in terms of value preservation, they are a better risk hedging method than holding a single token. More importantly, DAO can choose different sectors to invest in according to the functions of the agreement to ensure appropriate diversification. Interestingly, there are now index funds that can contribute to this trend. As we mentioned in a previous article, diversified sector index funds can be fully realized on the chain. The agreement can entrust a market maker to conduct transactions at a preset fee, that is, gradually convert part of the assets of the DAO treasury into other assets at the exchange rate proposed by the individual market maker. In this way, the agreement can purchase the constituent tokens of the index at a more favorable price.


Scenario : The treasury uses its assets as collateral to obtain operating funds through on-chain lending, without the need to sell tokens in advance.

The protocol can borrow funds from on-chain lenders to pay for operating costs, without the need to sell any native tokens. This can save the network from selling assets in the short term. If deployed as expected, the funds will have a positive impact, and even if the tokens are sold later, the loan can be repaid well. The underlying logic here is that if one really believes that the native token of a certain protocol will increase in price, it is natural and reasonable to use it to pledge loans. The problem is the pledge rate. If a lending agreement (or a venture capital institution) finds that asset prices have fallen, there are good reasons to sell tokens and maintain the pledge rate at the necessary level. More importantly, if the agreement is hacked and asset prices plummet, lenders will face the risk of loss. The agreement can also use off-chain lending to generate revenue. DAO can liquidate part of the assets of its treasury into stable coins and provide them for loans to projects such as Centrifuge. This requires the DAO to liquidate some tokens.

Range Token

Scenario : Treasury uses range token

Special mention should be made of the range token of the UMA protocol here. During the recent Sushi token sale proposal, some people proposed it as a solution. I strongly recommend that you read this article to understand what a range token is. A range token is a debt instrument endorsed by the agreement treasury, which sells the right to purchase the underlying asset within a certain price range, rather than converting the original asset into a stable currency. For details, you can read this blog post.

The range token allows DAO to pledge its native tokens for loans. At maturity, if the borrower does not repay the debt, the holder of the range token will receive an equivalent pledge (primary token) as compensation (the specific amount depends on the settlement price of the native token). For example, if the native token is settled at a price of 25 USD, 100 USDC debt will be settled in 4 native tokens (100/25).

This can avoid the agreement to sell tokens at low prices and choose to settle in U.S. dollars when necessary. However, this requires investors with a specific risk appetite. For example, if the price of the token drops so that the pledge is insufficient, the risk is borne by the investor. Similarly, if the transaction price is higher than the preset range, the agreement will miss the increased profit. At present, the range token is a complex tool that may take some time to adapt to the market, but it is one of many innovative attempts to help the DAO treasury manage risks. (I know this is a bit puzzling. I will ask other people on the team to write a clearer article as soon as possible.)

Where to go?

According to conservative estimates, there will be at least US$10 billion worth of treasury assets seeking management in the next six months. The infrastructure for the best asset management is still under development. Centralized service providers have gradually become aware of this opportunity, and startups are also taking advantage of this narrative. Since the decision-making of large capital pools cannot be separated from large-scale coordination, we still have a way to go before efficient management. We believe that there will be professional agreement fund managers in the next few quarters. They are well versed in the complex centralized financial field and aim to connect it with the decentralized financial field. At the same time, the community and protocol developers will continue to introduce new financial tools like UMA’s range token to promote the transformation of the financial industry. In addition, there is another possibility that the fund manager runs the investment portfolio entirely on the chain. In the following articles, we will delve into how hedge funds or venture funds operate on the chain. At present, we can only say that the agreement treasury is still a sleeping behemoth, waiting for someone to wake up and control it to promote the development of the financial industry. If you are building related projects, please send an email to me or join our Telegram group chat.


Posted by:CoinYuppie,Reprinted with attribution to:
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