The market is in deep bear, and many DAOs and their contributors are beginning to wonder if they can survive this long crypto winter.
In order to understand the health of DAOs, this article provides a basic framework. Whether you’re an investor, contributor, or user, everyone can view DAO funding information using tools like Dune Analytics. We monitor and track the financial health of the DAO organization through dashboards to determine which projects are built for sustainability and long-term success.
The Importance of DAO Treasury Analysis
DAOs are organizations that use tokens to incentivize specific behaviors. People often work for DAOs in exchange for DAO governance tokens or other native cryptocurrencies such as MATIC and ETH. All DAOs that offer compensation of any kind require a vault, and without a vault, DAOs cannot pay contributors or fund projects. Unless the DAO has missionary-like contributors, the protocol is difficult to launch.
This is why understanding DAO treasuries is critical to determining their positioning in the crypto economy:
- Does the DAO have enough stablecoins? If not, in order to continue operations, they will sell governance tokens and dilute the stake in the hands of the holders.
- Does the DAO hold a small amount of governance tokens? If so, they have less power to vote for initiatives critical to growth.
Sometimes the DAO treasury can be difficult to identify because assets may be spread across multiple contract addresses, for example Uniswap has five treasury addresses according to openorgs.info.
The health of the DAO treasury is not just as important to investors as it is to users and contributors. This article will provide some of the tools used to analyze the DAO treasury, and highlight some details to be aware of when analyzing the DAO’s health.
Identify treasury assets
DAO assets can be divided into four components:
- DAO governance token
- Blockchain’s native token
- Tokens of other partners
DAO governance token
DAO governance tokens provide liquidity, voting and investment, and governance tokens are often used to incentivize users to participate in the protocol. Like equity in an early stage startup, the DAO owns a lot of tokens, and if the DAO holds some other assets, those assets can often be exchanged for start-up capital to pay contributors.
Governance tokens are usually highly liquid, and if the token unlocking volume is very high, contributors often choose to sell their tokens in exchange for stablecoins. Unless there is an equally powerful mechanism to increase demand, as supply increases, holders will sell before prices fall further.
Taking BANK as an example, the transaction volume in the past year:
More detailed market volume, taking the past 30 days as an example:
DAO Tokens shall be considered the cryptographic equivalent of shares and discounted as DAO assets. DAOs can issue new tokens or change contracts, but just like businesses don’t list stocks as assets on their balance sheets, DAOs shouldn’t list governance tokens.
Take the famous Uniswap protocol, which has a large amount of assets but no token diversity. The vast majority of Uniswap’s $2 billion treasury assets are UNI tokens, and their financial health can be clearly seen by discounting UNI tokens (~14.7) and unvested UNI tokens ($790 million):
Solid pink represents vested UNI tokens, striped pink represents unvested tokens
In the event of a market downturn or some kind of hack that causes projects to desperately need large sums of money, the DAO’s sale of governance tokens will dilute the share of existing holders and create significant downward pressure on prices. Most DEXs do not have enough liquidity to face the dumping of a large number of tokens. In a new mental model for DeFi Treasuries, Hasu states:
Imagine Uniswap trying to sell 2% of the funds, when the trade is executed through 1inch, the order will be routed to many on-chain and off-chain markets, affecting the UNI price by nearly 80%.
DAO treasuries better not just hold their governance tokens.
The second most common asset in the DAO treasury is stablecoins, which include stablecoins such as DAI, FRAX, USDT, and USDC, which typically maintain a 1:1 exchange rate with the U.S. dollar.
Since crypto-native assets are very volatile and have huge price fluctuations, including bitcoin and ethereum, which are also subject to market volatility and trading like risk assets, holding stablecoins can help reduce Treasury volatility.
The DAO should keep at least a certain amount of stablecoins in the treasury to pay contributors and hedge market risk.
Maker, for example, amassed a net gain of $7 million from 2018 to 2020. As required by the agreement, Maker uses these assets to buy and burn MKR tokens. But the crypto market plummeted on Black Thursday (March 12, 2020) when Maker failed to liquidate underwater positions due to network congestion, resulting in a loss of 3 million DAI.
If they hold 7 million DAI at this point and use it to pay off bad debts, Maker will be left with $1 million, plus another $3 million in stablecoins, and the supply of MKR tokens will not change at all.
Or to put it another way, the assets held by Maker could have added an additional $4 million in value.
If the DAO is to survive in the years to come, it must survive bear markets and black swan events. DAOs can’t just rely on governance tokens to defend against risk, otherwise there will be a worst-case bottom selling of tokens and a best-case top buying back these tokens. It is desirable to hold stablecoins to reduce treasury risk.
Note: The choice of stablecoins is also critical, if UST was held during the decoupling event (May 7th), then by May 9th these tokens would have lost 65% in value, compared to 95% at the time of writing .
Blockchain native tokens
There are also on-chain native assets in the DAO treasury, which are used to pay gas fees for network transactions. Most tokens run on Ethereum and Polygon, so these on-chain DAOs hold ETH and MATIC respectively.
It makes sense to hold some of these assets when network fees become prohibitively expensive. Although these assets are not the same as DAO tokens, these assets are usually highly correlated, so for the stability of the treasury assets, the purchase of blockchain-native assets should usually be done through an average dollar cost.
Strategic Token Swap
Another area of concern are other DAO tokens in the treasury, which represent partnerships between DAOs and grant each other voting rights in the governance process of each other.
One of the most strategic partners is Maker and Aave working together to implement the DAI Direct Deposit Module (3DM). This module allows Maker to deposit liquidity directly into Aave’s DAI pool. Maker then influences the supply of DAI to stabilize lending rates, making it more attractive to borrowers.
The effect has been significant, with the DAI variable borrowing rate having stabilized in the 1.7% to 3.8% range on Aave since its launch in November 2021, while the results of stabilizing the borrowing rate have been similar.
In the process, Maker earns AAVE tokens as part of the Aave Liquidity Staking Rewards program, giving Maker a say in Aave’s governance process. DAOs can also spend additional funds to buy governance tokens from other DAOs, and if there is enough stake, the impact could be far-reaching.
In theory, they’re also a way of keeping each other’s funds safe, and if you dump my tokens, I’ll dump yours too. Governance token swaps increase collaborative communication among contributors and can foster better collaboration in the spirit of open source development.
sustainable financial planning
In order to be financially sustainable, the DAO should earn more than it spends. This means that we need to analyze the inflow and outflow of token funds.
Reviewing the DAO’s financial reports is a good way to determine the DAO’s financial health. Take , for example, the revenue, expenses, and operating margin shown in Yearn’s quarterly report :
As can be seen from the report, Yearn’s gross profit has grown after 2020, as have compensation and administrative costs. Many DAOs publish their financial reports so that contributors, users, and investors can better understand the DAO organization.
These reports will contain more than pure data, including the breakdown of spending, the purpose of spending, the token recovery protocol, and upcoming decision-making changes to the protocol. Yearn noted in a recent report that their biggest cash outlay goes to developers who oversee and manage Yearn’s vault. But they also mentioned the desire to move away from compensation for managers and instead build a profit-sharing model for all DAO contributors. In addition, Yearn records their assets and liabilities.
But human intervention can lead to errors in these statements. Another approach is to create a dashboard of real-time blockchain data. For example, Maker has a dashboard dedicated to showing real-time profit and loss data.
DAOs should be clear about their earnings from fees and other investments. General asset inflows can take many forms:
- agreement fee
- Community member purchases
- Staking reward
Researchers can use the Maker Dashboard to find out how Maker categorizes revenue. Dune SQL is publicly available and users can view their accounts for themselves.
Dashboards can hold various revenue data specific to the protocol itself. For example, Maker has a surplus buffer used to calculate the income generated by the stability fee.
They broke down monthly interest income by asset class:
Through the dashboard, the revenue of different products can be identified. As shown in the above dashboard, Maker has several segmented revenue streams, including peg stable modules, real-world assets, and liquidations. Dune is a useful tool, but requires some knowledge of SQL.
Often outflow details can be found not only in the DAO’s treasury, but also in governance proposals and financial reports. The overall cost includes salary payments, profit sharing, safety audits or grants.
Like traditional finance, we usually focus on the following issues:
- What is the burn rate of the DAO?
- How much was spent and where was the money spent?
- How does spending increase or decrease?
- Will this spending have a positive impact on the DAO’s long-term roadmap?
Some DAOs use funds for multiple projects and let these teams spend the funds at will, so identifying and categorizing DAO spending can be difficult. In order to accurately identify DAO spending, one needs to pay close attention to the DAO’s governance recommendations, identify transactions in the treasury, and review financial statements in a timely manner.
Explore the DAO treasury
The ENS treasury holds most of the ENS tokens, but also a considerable amount of ETH, which users must pay in ETH to purchase ENS domains.
Most of the Lido treasury is funded in the governance token LDO, and as a liquid collateral derivatives provider, they also hold a considerable amount of ETH. At the same time, Lido’s assets are more diversified, and DAI is the third largest holding asset.
MakerDAO also has a large amount of governance token MKR, but does not show stablecoins such as USDC and DAI held in the peg stable module (PSM). Understanding how each product affects the total holdings of the protocol is also an additional concern for analysts.
While BANK accounts for 80% of the DAO treasury, the overall is more diverse than the example above. However, the Banklss treasury does not hold stablecoins. If there is a black swan event, the purchasing power of BanklessDAO to maintain the project will drop significantly.
Rook’s top five holdings have no more than 30% share and have an incredibly diverse treasury that will allow Rook to survive a market downturn or a black swan event.
Investors, contributors, and users can see the health of an organization’s finances through the DAO treasury, but caution is still needed, some DAOs have income from various projects, as well as some expenditures that are good for long-term growth, but they are not in balance Table summary notes.
When doing financial planning, keep in mind asset diversification, if the DAO governance token is highly correlated with other assets in the treasury, it will be negatively affected by market movements. DAOs can hold liquidity tokens to generate income.
DAO managers can use tools like Yearn, Balancer, and Llama to better manage and diversify their treasuries. In the world of open finance, everyone can look at the balance sheet to better understand the progress of the project.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-to-analyze-daos-financial-health-from-the-dao-treasury/
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