How to manage a DAO treasury? — Evaluating risk
As with any asset management, the fundamental rule of DAO treasury management is to avoid losing money. This seems both tough and apparent, but it’s crucial to emphasize since it will assist the DAO make all of its following decisions. Fortunately, DAO treasury administration is the duty of all DAO members as a whole and need not be the job of a single person. The speculative frenzy of a bull market, however, makes it more important for a few sane people to make and remark on recommendations in order to keep everyone in their place. Every investment involves some level of risk. This indicates that risk control is the DAO’s main concern when it comes to its treasury. Four components may be identified here: expertise, acknowledgment of risk, risk calculation, and execution.
Expertise: Does the DAO wish to handle all investment decisions internally or outsource them to professional services firms or decentralized apps (dApps)?
Almost invariably, the latter will be the response to this. Unless a DAO has been created particularly for that goal, it is almost hard to mimic the experience and track records of specialized management tools and teams, and even then, there is no substitute for actual on-the-job experience. This makes it unlikely for a DAO to attempt to evaluate and carry out every investment, especially given that the risk of failure by those tools and teams may be reduced with insurance on platforms like InsureDAO.
Acknowledgement of risk: Humans tend to focus on the positive aspects of a possible investment opportunity and avoid examining the hazards involved. DAOs are only as human as its members, hence its decisions for each investment’s risk tolerances should be the mutual levels for every member in that DAO. Eventually, risk is not be ignored, but no one is forced to take the risk that they don’t want to.
Risk Calculation:
A standard formula used by insurance companies is:
Risk = Probability of Loss * Loss
Although estimating the likelihood of a loss is a vast subject in and of itself, risk management teams inside DAOs can use a few engineering and financial methodologies as fundamental safeguards: FMEA, VaR, etc.
Execution: Another important subject in the business and financial realms is execution risk. There are a few things to consider in the context of DAOs:
Talent: Make sure DAO’s members are the personnel with the knowledge and experience to investigate and implement treasury allocations or collaborate with partners and apps that can perform these tasks effectively.
High signal-to-noise ratio: Even with the best of intentions, every decision will be sluggish and your DAO won’t be able to accurately evaluate and carry out its treasury allocation policy if the benefits and drawbacks of every proposal are lost in disorganized Discord threads. Pickle Finance found a solution by electing a smaller, more focused treasury management committee that runs its day-to-day business independently and involves the community only when making significant choices.
Systems: Regardless of the systems you employ to store and manage your treasury, it is crucial to do and record test runs of each operation that will be performed, taking into consideration system constraints, gas costs, and human error.
In the next article, we will reveal what is a worthy membership and how a DAO should be structured to get the most worthy one for each member. Stay tuned!!
