DAO Tokyo — Investment Strategy and Portfolio Management

The second panel of DAO Tokyo centered around investment strategies and portfolio management for Decentralized Autonomous Organizations (DAOs), specifically focusing on how to manage DAO treasuries. The discussion explores various aspects of DAO management, including risk profiles, compensation structures, security concerns, and legal and tax implications.

Panelists

Panelists, from left to right: Arisa, Coltron, Dominika, Maika

• Arisa Toyosaki: Co-founder and CEO of Cega, a DeFi structured investment solution using exotic options to generate yield with minimal market risk.
• Coltron: Governance Lead at karpatkey, a company specializing in on-chain asset management, particularly non-custodial asset management. karpatkey works with various DAOs, including GnosisDAO, ENS, Balancer, and Compound.
• Dominika Stobiecka: Co-founder of Toku, a company providing token compensation, employment, and compliance solutions for the crypto space. Toku works with a variety of organizations, from centralized crypto companies to DAOs and foundations.
• Maika Isogawa: Co-founder and CEO of Webacy, a company building tools and services for security and risk management in the crypto space, with a focus on DAO safety and compliance.

Key Takeaways

1. Intention Over Strategy: While selecting investment strategies is important, understanding the DAO’s intentions and long-term goals is crucial. Service providers need a clear understanding of the DAO’s objectives to effectively manage its treasury.
2. Risk Profile Alignment: The risk profile for treasury management should be tailored to the specific DAO and its maturity level. Younger DAOs might take on more risk, while older, larger DAOs may opt for more conservative strategies.
3. Importance of Framework: DAOs should establish clear frameworks, including investment policy statements and RFP processes, to facilitate communication and collaboration with service providers.
4. Compensation Structures: Compensation structures are a significant portion of a DAO’s operational budget. Aligning compensation with long-term objectives and considering the implications for tax and legal compliance is crucial.
5. Security Considerations: Security risks for DAOs primarily involve access to the treasury and potential manipulation in governance voting. Tools like multi-sig wallets and rigorous Sybil resistance mechanisms are essential for mitigating these risks.
6. Emergence of Service Providers: The DAO landscape is maturing, with specialized service providers emerging to handle treasury management, legal compliance, and other operational aspects.
7. Sustainability and Compliance: Long-term sustainability requires DAOs to adopt compliant practices. Engaging with experts and service providers in areas like tax and legal compliance is crucial for avoiding potential regulatory issues.

Highlights

Coltron emphasizes the importance of understanding the DAO’s intentions before focusing on specific strategies. He highlights the need for clear frameworks and communication between DAOs and service providers, referencing ENS as an example of a DAO that effectively used an RFP process and transparent mandates for engaging service providers.

Coltron explains that while karpatkey historically favored low-yield, risk-averse strategies focused on capital preservation, they are now seeing a growing appetite for higher yields in the current market. However, he stresses that determining the risk profile should be a collaborative effort between the DAO and the service provider, aligning with the DAO’s specific goals and risk tolerance.

Arisa points out a significant problem in the DeFi ecosystem: the limited range of yield options, often characterized by either high risk (e.g., meme coins, perpetual contracts) or low returns (e.g., staking in Lido, becoming a validator). She suggests DAOs should explore and diversify into options that bridge this gap, achieving reasonable returns while minimizing risk exposure.

Expanding on this, Arisa introduces the concept of portfolio optimization, drawing parallels to traditional finance principles. She references the book “A Random Walk Down Wall Street,” which advocates for age-based risk allocation. Younger investors with a longer time horizon can afford to take on more risk, while older investors should prioritize capital preservation. Arisa applies this analogy to DAOs, suggesting younger DAOs might allocate more to blue-chip assets like Ethereum and ride the market growth, while more mature DAOs should work with partners like karpatkey to create sophisticated, diversified portfolios.

Dominika tackles the question of compensation structures she has observed. Before diving into specific structures, she highlights the importance of establishing a budget and aligning compensation with the DAO’s long-term objectives. She cautions against the temptation to spend recklessly on contributor compensation, emphasizing the need for measurable outcomes and a clear understanding of the DAO’s financial limitations.

Dominika outlines various compensation models she has encountered:

• Project-Based: Short-term engagements with contributors for specific tasks, often through governance proposals or RFP processes. This model requires clear objectives and KPIs to measure contributor performance.
• Ad-Hoc: Bounty programs for smaller tasks, attracting contributors who might work for multiple DAOs simultaneously.
• Full-Time: A growing trend driven by the maturation of the DAO space, with contributors seeking full-time employment within a DAO. This model necessitates addressing legal and tax considerations for contributors, such as visa requirements and tax obligations.

Dominika underscores the importance of transparency and clarity for both DAOs and contributors regarding compensation plans and long-term sustainability. She observes a shift towards professionalization of services, with DAOs increasingly engaging service providers with specific expertise instead of individual contributors.

Arisa adds that setting up a DAO from a regulatory and operational standpoint is complex, making the service provider model particularly attractive for new DAOs. She also brings up the concern of security within DAOs, prompting Maika to elaborate on security risks.

Maika identifies two primary security concerns:

• Access to Treasury: Unauthorized access to the DAO’s funds, often due to compromised private keys. Multi-sig wallets offer a robust solution for managing access and mitigating this risk.
• Governance Voting Manipulation: Potential for malicious actors to influence voting outcomes through Sybil attacks. Sybil resistance mechanisms and robust identity verification within the DAO’s governance system are essential for addressing this threat.

Coltron shares his experience with karpatkey’s interactions with various DAOs, noting a recent discussion about AI delegates participating in governance voting. He expresses both intrigue and concern about the potential implications of AI involvement in DAO governance.

Maika reveals that many DAO treasury management decisions are made through governance votes, prompting a discussion about whether DAOs should adopt a riskier or safer approach in the current crypto environment.

Arisa recommends starting with safer alternatives, comparing them to bonds in a traditional portfolio. She suggests allocating a larger portion (60–70%) to safer assets like tokenized US Treasuries or Lido staking, and diversifying the remaining 30% into options with higher potential returns but also higher risk.

Coltron observes that many DAOs currently lean towards less risky strategies, driven by the need to protect funds crucial for protocol development and operations. He acknowledges the correlation between risk and yield and encourages DAOs to establish investment policy statements to ensure clear communication and alignment on risk tolerance.

Arisa points out a prevalent practice among DAOs: focusing on delta-neutral strategies to avoid market risk entirely. She argues that while delta-neutral strategies can be beneficial, a moderate level of market risk can be acceptable and even desirable, especially considering the potential for higher returns. She contends that accepting a small amount of market risk can significantly enhance yield and differentiate a DAO’s performance compared to other funds.

The discussion shifts to the practicalities of managing taxes for DAOs involved in various investment positions. Maika brings up the complexities of tax compliance for DAOs and their contributors.

Dominika responds by emphasizing the importance of the DAO’s legal structure in determining tax implications. She explains the spectrum of legal structures:

• Unstructured DAOs: Operate without any formal legal entity, potentially facing higher liability risks and regulatory scrutiny.
• Structured DAOs: Utilize a combination of legal entities, such as foundations, development companies, and separate legal wrappers, to compartmentalize liability and streamline tax compliance.

Dominika advises DAOs to prioritize legal compliance and choose structures that align with their long-term goals and risk appetite. She highlights the importance of engaging with service providers specializing in DAO legal frameworks and tax compliance.

The conversation ends with a note of gratitude from Maika, acknowledging the value of companies like Toku working in the DAO space to handle the complex legal and tax aspects, allowing other builders to focus on developing innovative protocols and fostering community growth. The panel expresses optimism for the future of DAOs, urging attendees to build sustainably and responsibly.

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