Decoding Safe: Analyzing Multi-Signature Wallets and Exploring DAO Treasury Management
This research article is brought to you by ThePASS team. ThePASS is a pioneering DAO aggregator and search engine that plays a pivotal role in providing insights and analysis for DAOs.
Intro
With the development of decentralized autonomous organizations (DAOs), they are given more and more roles and expectations. Amidst this growth, asset management emerges as a critical concern. As DAOs continue to evolve, the handling of assets, be it FTs or NFTs, necessitates efficient wallet solutions.
The first and foremost challenge is asset security. Due to the complexity of DAO structures, vulnerabilities arise from both technical aspects and inherent design. Consequently, safeguarding DAO asset management gains paramount importance.
Beyond security, scalability of asset management is pivotal. The seamless integration with various ecosystem applications dictates the extent to which asset management paradigms can be executed, directly impacting the realization of DAO organizational functions.
Considering these factors, multi-signature mechanisms have emerged as the favored approach for on-chain asset management within DAOs. This article investigates the present landscape of DAO treasuries, commencing with an in-depth exploration of Safe (prev. Gnosis Safe), the current preeminent tool for managing DAO treasuries.
Overview of Safe
Smart Contract Account
Currently, Ethereum supports two types of accounts (you can also call them wallets).
- Externally Owned Accounts (EOA): accounts controlled by private keys, most wallets currently belong to this category, e.g., Metamask.
- Smart Contract Accounts: accounts accessed and controlled through the smart contract code(not the private key); this model allows almost unlimited expanded functionality.
Typically, most on-chain users are accustomed to using EOA, which puts funds at risk of theft if the private key is compromised. The Ethereum externally owned accounts (EOA) had a monthly activity of 5 million in July 2023, whereas the smart contract accounts only had 10,000, showing a significant difference of 500 times.
Moreover, EOA prove less than optimal for managing crypto assets within a multi-person organization (eg. DAOs). Granting each individual independent access to funds risks centralizing power and creating a single point of failure. Should one intentionally or inadvertently expose the private key, the funds could vanish irreversibly.
Smart wallets, however, take advantage of Contract Account functionality — they manage funds via coded instructions that establish who can access them, under what conditions, and more. Thanks to the versatility of smart contracts, in addition to breaking user reliance on private keys, smart wallets offer advantageous new features and provide a user experience similar to traditional financial (TradFi) service apps. Some features provided by different smart wallets include:
- Multi-signature: Two or more users can approve a transaction for improved security. Smart wallets can also enable multi-sig transactions to be authorized offline to save users time.
- Amount limits: A transaction amount limit can be set to help reduce the chance of an expensive user error and to help prevent an attacker from emptying a wallet in one transaction.
- Whitelisting: Users can specify that transfers be made only to known addresses, which helps prevent phishing incidents.
- Bundled transactions: For convenience, perform multiple calls to interact with the Dapp in a single “bundled” transaction.
- Emergency freeze: In the event of a lost or stolen device, accounts can be locked to ensure the safety of funds.
- Account recovery: Various account recovery options (e.g., social recovery) help eliminate the huge risk of losing private keys & mnemonics.
- etc.
Multi-signature
Among these features, the most straightforward to implement and crucial for addressing DAOs’ urgent requirements is the multi-signature. Multi-signature wallets provide another layer of security by giving DAOs the opportunity to create “shared ownership” over one wallet (as opposed to the founder holding a private key).
Multi-signature involves the participation of multiple branch accounts in managing the funds of a primary account. Prior to executing any transaction, consensus is required from all branch accounts engaged in overseeing the multi-signature wallet. These branch accounts collectively constitute the wallet’s owners.
Transactions are only authorized when a predetermined number of owners within the smart contract jointly validate them. This multi-signature wallet effectively thwarts potential malicious activities by a single node (such as management or asset handlers) during public fund management. It also mitigates the risk of asset loss due to mishandling of wallet secret key management.
Safe
In 2018, Gnosis introduced the open source on-chain multi-signature wallet solution, Gnosis Safe. This solution underwent a split and reorganization in 2022, resulting in the birth of Safe.
Safe’s implementation of multi-party fund co-management resonates with the ethos of DAOs. In DAOs, decisions are typically subjected to member votes before being executed by a core team of signatories. Prominent DAOs like BitDAO have adopted Safe as a pivotal financial management tool.
The subsequent chart offers a comparative overview of Safe vis-à-vis other cryptocurrency wallets.
Data Analysis
Following an intensive 5-year evolution, Safe has transcended its origins on Ethereum, spanning across Layer1 and Layer2 solutions, and has extended its support to encompass a multitude of mainstream EVM-compatible smart contract platforms. The cumulative outcome of this expansion manifests in the creation of over 4.3 million Safe accounts, responsible for orchestrating a staggering tally of 16.8 million transactions. Notably, each address boasts an average of 4 transactions.
Together, these addresses hold a staggering $50 billion worth of assets. If Safe were to adopt a centralized exchange (CEX) model, such a staggering accumulation would surpass OKX, making it the second-largest exchange behind Binance. Alternatively, if considering Safe as a US bank, it would stand as the 45th largest bank, outshining the other 4,799 banks.
All chains
When it comes to assets across blockchains, Ethereum commands roughly 60% of the total value, followed by Optimism, Polygon, and Avalanche, each accounting for around 10% of the overall capitalization. The majority of funds are concentrated in ERC-20 tokens rather than native tokens (such as ETH, BNB, etc.).
Zooming in on Safe addresses across various chains, a striking 85% of these addresses emerge from Polygon and Optimism. The influx of new Safe addresses has exhibited a persistent upward trajectory since the onset of summer 2020 (DeFi summer). Notably, Polygon experienced a surge of explosive proportions commencing in late 2022. In a similar vein, Optimism bore witness to its own surge in June 2023.
Part of this surge may be attributed to Worldcoin’s launch and adoption. World app beta was on Polygon, but in June 2023 they prompted old users to migrate to Optimism. Worldcoin’s choice of Safe is influenced by its user-friendly Web2-like interface, which eases crypto adoption, catering to users with little prior exposure to cryptocurrencies. This strategic move enhances accessibility and usability in the crypto space.
Monthly active addresses exhibit a similar pattern of fluctuation akin to new addresses, with Polygon exhibiting explosive growth and commanding a dominant share since late 2022. Excluding Polygon, active addresses across alternative chains demonstrate a consistent upward trend, hovering around 30k since the culmination of 2022, notably with Ethereum and Arbitrum at the helm.
Transaction counts follow the trajectory of new and active addresses. Prior to 2022, Gnosis chains lead in transactions. However, the narrative alters in 2022, as Ethereum and Polygon transactions surge. Post August 2022, Safe’s transaction majority shifts to Polygon, Gnosis, and Optimism due to their lower gas fees.
The proportion of transactions involving Safe addresses across various chains has exhibited a consistent upward trend. Presently, a remarkable 0.6% of ALL transactions conducted on Ethereum, Polygon, Optimism, and Arbitrum are attributed to Safe addresses.
In contrast to transaction counts, the dominance of transaction volume in Ethereum is primarily due to the concentration of assets on that platform. Notably, the peak in transaction volume diverged from the trends observed in transaction counts and active addresses. This peak occurred in November 2021 and gradually subsided thereafter. However, both transaction counts and active addresses continued to rise as previously mentioned. This discrepancy is partly influenced by the substantial decline in token prices following the peak. This trend indicates that Safe users remained actively engaged in trading even during periods of declining token prices.
Ethereum
Ethereum reigns supreme as the primary smart contract platform, hosting significant transactional and funding activities, including those of the mainstream DAO treasury. In this context, our focus shifts to the role of Safe within the Ethereum ecosystem. Safe addresses on Ethereum collectively house nearly $30B in assets (excluding NFTs), comprising $3.4B in ETH and a substantial $26.3B in ERC20 tokens. These figures encompass more than half of the total assets held by all Safe addresses across different chains.
These substantial assets are held across approximately 162k addresses, resulting in a cumulative count of 1.5 million transactions. The average transaction count per address stands at 10. Both new and active addresses were about 10K last month.
New Safe addresses on Ethereum have shown a consistent rise since the DeFi summer in 2020. The peak for new addresses occurred in July 2022, reaching around 12k, but saw a subsequent decline during a period of crypto market turbulence and changes. However, starting from June 2023, there has been a renewed surge in new addresses. Safe’s distinctive product appeal continues to draw in fresh users, even amid challenging external circumstances.
Alongside the monthly influx of new addresses, the count of active addresses has been steadily accumulating. Active addresses reached their highest point in September 2022, hitting approximately 15k. Despite a decrease in the monthly count of new addresses, which highlights Safe’s user loyalty, the active address count has remained steady at around 10k since then.
Transaction counts and active addresses share a parallel trajectory, steadily climbing since the summer of 2020 and hitting a pinnacle in September 2022, sustaining levels beyond 60k. Conversely, the peak transaction volume materialized in November 2021.
Polygon
Polygon, as the blockchain with the highest number of Safe addresses and transactions, deserves a closer examination. The Safe addresses on Polygon collectively hold over $6.3 billion in assets (excluding NFTs), with the majority being ERC-20 tokens. These assets constitute more than 12% of the total Safe address assets across all blockchains, placing Polygon behind only Ethereum and Optimism in this regard.
These tokens reside in about 2.4 million addresses on Polygon, resulting in 7.4 million transactions. On average, each address has 3 transactions, fewer than Ethereum’s 10. Most addresses (87%) have only conducted 1–5 transactions. Last month, around 170k new addresses were added, with over 475k active addresses, marking a tenfold increase compared to Ethereum.
Unlike Ethereum, the growth of new Safe addresses on Polygon hasn’t been steady. It experienced a sudden surge starting in October 2022, with an average monthly increase of 200,000 addresses, which continues to this day. This growth can be largely attributed to Worldcoin. Alongside this monthly address growth, active addresses have been steadily accumulating, reaching around 470,000 in the previous month.
The monthly transaction volume and the number of active addresses have exhibited a synchronized trend, experiencing a sudden explosive growth since October 2022. In contrast, the peak transaction volume occurred in early 2022, after which it consistently remained around $200 million.
DAOs
Activity
We have selected prominent DAOs that manage treasuries using Safe on the Ethereum as our analytical samples, utilizing data provided by ThePass. It’s worth noting that while the treasuries of most mainstream DAOs are indeed on Ethereum, not all DAOs employ Safe for treasury management. Even DAOs using Safe might have additional addresses — which could be either Safe or not. However, we strongly believe that, for security considerations, utilizing multisig wallets will likely become the standard for financial management within the realm of DAOs.
The Pass extends its coverage to the majority of DAOs, with around 3.40k on the Ethereum network alone, holding a combined treasury of approximately $16B. Among these, there are 700+ DAOs utilizing Safe, comprising a total of 800+ Safe addresses. Some DAOs opt for multiple addresses to bolster flexibility and security.
The number of signers threshold in these multi-sigs is primarily concentrated within the range of 1 to 3, with 87.5% falling within the 1–3 threshold category. However, having too few signers for a DAO’s treasury multi-sig may imply risks of centralization and single points of failure.
Since early 2020, there has been a consistent monthly increase in new DAO addresses adopting the Safe. This trend peaked in the latter half of 2021 and gradually tapered off starting from April 2022. This growth in new Safe addresses has been accompanied by a cumulative surge in active addresses, underscoring the sustained engagement of the majority of these addresses after their creation.
Treasury
Within just 800+ DAOs’ Safe addresses, an impressive sum of nearly $7 billion in assets is held (excluding NFTs). This nearly accounts for one-seventh of all funds stored in Safe addresses across the Ethereum. This substantial pool comprises $6.265 billion in ERC-20 tokens and $677 million in ETH.
When ranking DAO treasuries by size, it becomes evident that the upper echelon is dominated by DeFi projects. In terms of asset distribution among DAO treasuries, those with less than $1 million represent over 70% of the surveyed DAOs. A striking example is BitDAO, whose treasury alone holds a substantial $2.17 billion, accounting for more than 30% of the total DAO treasury assets surveyed, showcasing a notable concentration effect at the top.
Different types of DAOs require varying scales of funding to achieve their diverse objectives.
Ranked fourth, Crypto Relief is a community-operated fund dedicated to providing aid during the Covid crisis. In comparison to ambitious projects like BitDAO, focused on building Layer2 solutions, DeFi protocols such as Frax Finance and Synthetix require relatively smaller funding.
With the exception of BitDAO, which derives steady income from Bybit, the majority of DAOs possess ERC-20 assets surpassing their ETH holdings. This suggests that most DAO treasuries are predominantly composed of their own governance tokens. However, an overconcentration of these tokens could potentially introduce risks of an unhealthy balance sheet.
The assets within these treasuries, both in terms of the number of DAOs and the cumulative amounts, have experienced rapid growth since the beginning of 2021. In the early months of 2021, the most influential DAO was 1inch, overseeing a significant capital of nearly $10 billion.
In October 2021, prominent DAOs like YGG and BitDAO contributed significantly to the substantial surge in DAO treasury assets, which gradually tapered off at the start of 2022. Presently, the assets of nearly all DAOs have undergone a substantial contraction compared to their peak, plummeting by almost four-fifths from around $40 billion at the beginning of 2022. This decline is predominantly attributed to the decrease in the price of their own governance tokens.
Holding large sums of the native token means that price changes can affect the treasury value massively. Failing to compose a treasury in a low-risk manner opens up the possibility of sharp value change in the portfolio when volatility hits.
Summary
DAOs have disrupted top-down legacy models used in business for a more community-driven and ideological way of operating. The downside to this is that the space is still young, unregulated, and there are very few tools that address their unique needs. When it comes to managing treasury, there are few guidelines. DAO treasuries management needs to be increasingly standardized and transparent. We believe there will be more and more practical and open source tools to help DAO participants better reach their goals and stay safe.
Safe is a secure and scalable asset management platform that over $60 billion in assets are stored securely on. Safe is moving closer to the gold standard. The tools are primed, and what lies ahead is the call for ingenuity from DAO participants. We’ve witnessed vulnerabilities arising from excessive reliance on governance tokens within treasuries. A considerable journey remains before us.
