DAO Treasury Management: Why it is Important and Methods of Diversification
Why treasury management is important in DAOs?
SCALE and SURVIVAL!
Crucial for the longevity of the organization = financial fuel for the future development & growth = to fund operations of the organization to fulfill the stated mission of the group
How do DAOs employ capital in their respective treasuries?
LP subsidies, M&A, token buybacks, protocol development, compensation for contributors and etc.
Biggest problems DAOs face today regarding treasury management?
Diversification and Liquidity Provisioning
But, also reaching a consensus on how strategically manage millions (and sometimes billions) of dollars.
🚨 We need to remember that the ledger of token ownership, the balance of the DAO’s treasury wallet, and the participation of stakeholders' voting process are recorded on public blockchains 🚨
Type of DAO Treasuries
Type A: Concentrated DAO treasuries = most assets are in the form of the DAO’s native token
Example #1: Uniswap DAO, ~$2.8B, 100% of the native $UNI governance token forming part of the treasury (= Uniswap’s treasury fluctuates essentially 1:1 with the price of the $UNI token)
Example #2: Compound (decentralized money market protocol), ~$150M, ~94% in $COMP
Benefits?
DAO holding native tokens act as a signal to stakeholders that the organization has a strong conviction in its mission, allowing the DAO treasury to capture the upside from potential price appreciation + organic growth of the DAO (especially if they are community-owned protocol like UNI and COMP).
Risks?
Volatility! 👀
If prices of the native tokens drop = DAO operations might slow down = difficulty in keeping up with expenses
ex) In the peak 2021 bull-run, Uniswap’s treasury was ~$5B…that’s almost a 50% drop
What needs to (or could) be done?
Reduce the unsystematic risk of the treasury, manage a predictable budget for subgroups (working groups and grant committees), paying contributors with fiat/stables non-native tokens.
Also, DAOs can provide stablecoin liquidity to DeFi protocols and reap the liquidity provisioning rewards. (But, this also is exposed to stablecoin’s idiosyncratic risk; de-pegging/devaluation, smart contract failure)
i.e. Uniswap provides liquidity on v3 stablecoin pools to deepen liquidity and earn transaction fees.
How to diversify?
> (Additional) Token Sales
Public Sales in DEXs: a DAO can go to a DEX like Uniswap and convert its native tokens into the assets it wishes to diversify into at a spot price
Public Sales in OTC & Market Makers: market makers (ie. Wintermute & Alameda Research) can help execute traders in a more efficient manner, potentially avoiding the price impact of a public sale. Market makers receive a fee in exchange
Public Sales in Batch Auctions: batch auctions like Gnosis Auction and Fireblocks allow all participants to receive the same uniform price by matching the limited orders of buyers and sellers, grouping individual orders, and executing them simultaneously. Auctions executed on-chain and are resistant to insider trading problems
Private Sales: tokens sold to private investors at a discounted price. Private sales will dilute the current stakeholders’ ownership but private investors could be valuable for the growth of the DAO.
> Operating Income/ Revenue
DeFi protocols like Yearn Finance charge a 20% performance fee deducted from the generated yield, and a 2% management fee from their vaults. These fees which flow directly to the Yearn treasury can easily be collected in other assets like stables or blue chip crypto assets (Bitcoin and Eth)
> Raising Debt
Similar to traditional corporations, DAOs can raise debt. However, most DAOs only have their own native assets to put up as collateral.
Risks: this usually leads the lender to require heavy over-collaterization, in the event of adverse market conditions leading the collateral to dip in value, which could lead to liquidation.
Treasury diversification tools such as UMA Protocol allows DAOs to diversify their treasury without exposing themselves to the risks of over-collaterization of their native token and discount of their native token price when selling to private investors. Project token + call options collateral.
> Liquidity Mining Incentives
DAOs can take advantage of other protocols' liquidity mining incentives by using assets in their treasuries to provide liquidity on other protocols and reap the liquidity provision rewards.
However, DAOs could be exposed to mercenary ‘yield farmers’ so we are seeing new projects/ DeFi products being built to attract DAO as clients of their products:
Liquidity as a Service: example of Fei Protocol and Ondo Finance. The service utilizes Ondo’s liquidity vaults to accept native tokens from DAOs. Then Fei Protocol matched that deposit made by the DAO native tokens with newly minted FEI (the stablecoin supported by Fei protocol and DAI) for a new liquidity pair in DEXs. This way, the liquidity that a DAO can now use doubles. Risks: zero protection from impermanent loss.
Protocol-owned liquidity/ protocol-controlled value/ protocol-controlled assets: example of Olympus Pro creating a bond marketplace that utilized Olympus DAO’s bonding mechanism. Benefits are: DAOs don’t have to worry about LPs dumping tokens, can unlock new revenue streams by capturing liquidity provider fees, and because most of the liquidity is owned by the protocol itself the risk of slippage goes down
> Lending native tokens for interest
Examples: Element Finance (fixed yield) & Lido
Rule of thumb: should ensure having stablecoins at least 2–3 years of operating expenses
Some good resources to refer to if you are contemplating DAO treasury management:
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