Treasury management is a practice of long-term management of project resources (a16z). Sounds crucial for all DAOs. So, what is the current situation of the DAO’s treasury under the bear market, how to deal with the bear market environment, and how to further optimize. DAOrayaki compiled and reported on The State of Treasury Management for DAOs.
Status quo of DAO treasury distribution
According to DeepDAO, as of Halloween 2022, the top 10 DAOs have 77% of their treasury ($8.6 billion) accounting for 77% of the total treasury ($11.2 billion). The rest is held by nearly 5,000 other DAOs.
A report by Autonolas (May 2022) revealed a notable trend regarding treasury diversification and capital efficiency: native tokens make up the majority of holdings, but only a small fraction are used. In this study, of the 65 DAOs with treasury exceeding $10 million (61 at the time of publication, October 2022), 40 DAOs have a single asset accounting for more than 80% of the total value of the treasury.
Pictured here is Messari, April 2022
Stablecoins and blue-chip tokens are the most common assets held by DAOs, yet on average, 85% of DAO coffers are stored in a single asset, mostly native governance tokens. Stablecoins account for only 23%. (The following data and chart are from the Chainalysis report, June 2022)
Although more than half of DAOs participate in staking or mining proceeds, only 4.3% of the entire treasury is accumulating earnings. This is an ironic trend considering that the DAO manages the protocols themselves that generate revenue.
An exception is Gnosis, which allocates more than 80% of its funds to earn earnings. More than half of DAO asset gains (53%) come from Gnosis. (Side note: Karpatkey has been managing its fund for the past two years – see their weekly reviews) Liquidity provision (61% of total value) and loans (25%) are the most common practices for generating yield.
A report by Messari found that mid-sized DAOs are more inclined to use their native tokens than the top 15, noting that this may be due to changes in financial practices over time and the introduction of new diversification methods.
The above is the distribution of DAO finances, what are the unique challenges of treasury management in DAOs, and what is the DAO doing to solve them?
The unique challenges of DAO treasury management
1. Market volatility and fiscal sustainability
80% of DAOs rely entirely on their native tokens, and only 4% of total assets are used for earnings. Crypto, like other early-stage markets, is known for its volatility. So, what happens in a downturn? When all the capital markets are frozen, DAOs are busy paying bills, let alone investing in ecosystems.
“DAOs with assets over $1 million have an average annualized volatility of 82%, compared to 69% for Bitcoin” (Chainalysis).
Still, diversification is difficult for any DAO; After all, selling your own token sends a bad signal to the market and ultimately negatively affects your own price as the largest token holder.
Through the native governance token, governance rights and financial rights are combined into one. So, unlike corporations, DAOs have to worry about asset management tied to their cap tables.
Take YamDAO as an example to learn about DAO-specific combinations of governance and funding attacks that can easily occur in the cyclical crypto world. Last July, $YAM’s fully diluted market capitalization was about $2.3 million, while the value of its Treasury bonds controlled by $YAM holders was $3.1 million.
So, the attackers prepared 200 ETH (about $240,000 at the time), purchased YAM/ETH SLP tokens, created and voted for a malicious proposal (#26). The proposal looks just like the last recently executed proposal (#25), but its code would make the attacker’s own wallet address the administrator of the YAM treasury ($3.1 million). Its voting power exceeded the proposal threshold and successful quorum.
The YAMA governance process requires the proposer to maintain voting rights until the voting process is over. However, the attackers sold ETH’s YAM position immediately after the proposal was made, which allowed the community to cancel the proposal. In addition, the Ethereum community notified Yam Finance Guardian of 3-of-5 multisig that if the proposal proceeds, they can veto it before execution.
However, the story is just beginning. Now, the “attack” is happening within the community demanding a YAM redemption of the Yam treasury. Shortly after the attack, the proposal to have the Treasury redeem at $0.25 per term ($0.12 at the time) was voted “yes”. The core team then came up with a proposal for a re-vote, which was “against”. However, this redemption plan recently resurfaced in October 2022. The core team again made a proposal to ban the proposers and was voted “yes” on the chain.
Interestingly, the Yam Finance team is a treasury management service provider itself, with its proposed sushiHOUSE accounting for 16% of Sushi DAO’s treasury, according to OpenOrgs. SushiHOUSE was proposed and redeemed in July last year.
In addition, although decentralized governance has a habit of asking everything, not every token holder is an expert in treasury management and is not interested in the specifics of treasury. The long tradition of voter apathy in decentralized governance continues to hamper financial decision-making.
For example, Gitcoin formed a working group with Llama on treasury diversification in January 2022, when 99% of the treasury was in its native token, GTC. However, the actual proposal to sell GTC in exchange for USDC to fund its working group was voted on in July 2022, and the GTC token price fell by 59% in the process (from $6.93 to $2.82). (Messari Report)
How should a DAO manage its treasury?
DAO Money Management Guide
Let’s start by reviewing what industry professionals recommend.
First, Aragon emphasizes risk management and diversification for assets (Stables, L1s, Staking and LPs, App tokens, etc.) and membership (collective intelligence). Bankless recommends owning a certain stablecoin and shows different ways to diversify your investment in stablecoins.
Bankless’s comparison of FAANG+M cash portfolio, cash ratio = cash / current liabilities| quick ratio = (cash + marketable securities + accounts receivable) / current liabilities
Hasu compares native tokens in the treasury with “authorized but unissued shares” that are not counted as assets on the company’s balance sheet. These unissued shares do not constitute purchasing power, and DAOs should become “non-cyclical traders of their own tokens” to maximize long-term token value.
Karpatkey points out that the “decentralization of everything movement” has hindered progress in financial management; Technical decision-making should not be held hostage to democracy. The authors propose a funding execution framework in which only the DAO itself votes on the overall strategy and determines the scope of the funding team. Within parameters defined by the entire community, a small team of experts should make day-to-day decisions and execute them.
The DAO currently manages the treasury
Treasury diversification has been a hotly debated topic for some time, and each DAO has taken its own approach to implementing it. From Lido and Paradigm to FWB and a16z, strategic partnerships are one of the popular options.
DAO to DAO (D2D) exchanges can be found in stimulus-aligned DAOs. TempleDAO is the largest DAO holder of FRAX, and the Frax community has decided to make a D2D swap for its governance tokens, TEMPLE and FXS.
OlympusDAO is also a large holder of FRX and did an exchange of OHM <>FXS. But not all D2D swap proposals make it through, as seen in LOBI<>FXS.
Sometimes, native token holders take out a portion of the staking rewards and put them in the treasury, as Kanpai did with Sushi. The proposal was written in the name of one of its investors, Blockchain Capital, and the community implemented it earlier this year.
While media DAOs like Bankless can manage their own treasury with their own fiscal departments, it can be difficult to do so for a multimillion-dollar DeFi protocol DAO. Top DeFi DAOs like Aave, Compound, Sushi, and Maker employ treasury management services like Gauntlet and Llama.
For example, Gauntlet is a financial modeling platform that reduces risk in the DAO pool and optimizes capital efficiency. They built a risk management dashboard (COMP example) and updated risk parameters such as borrowing/supply caps (Aave proposal) on behalf of the community. Gauntlet recently launched Aera, a reward-based financial management system for DAOs.
Hedgy Finance is the “financial infrastructure of the DAO treasury” with Escrowless OTC and DAO to DAO Swaps. Attribution compensation, token compensation bundled into OTC contracts, represented on-chain as NFTs (time locks), can be found in the DAOhaus and Shapeshift examples.
Having keen observers in the community is also a good strategy. Messari’s report on optimistic governance explains how there is “double spending” between governance funds and partnership funds. A number of projects received funding from both, and it was suggested that the scope of the two funds be determined. Some other points raised were 1) more than 60% of the total funds for LP rewards and 2) different participation records of protocol politicians.
In Vitalik’s recent article on DAOs, it was pointed out that DAOs should “learn more from political science than from corporate governance” because what we are looking for in DAOs is not profit maximization, but to keep the entire ecosystem stable and resilient.
How can we guarantee the survival of the ecosystem or each DAO without sacrificing sovereignty? Treasury management is one of the main pillars, and more experimentation and iteration are expected in the future.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/this-article-understands-the-current-situation-of-treasury-management-of-daos-under-the-bear-market/
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