Tokenized RWAs: The Investment DAOs Can't Afford to Ignore

Tokenized RWAs are coming to DeFi to provide sustainable yields

Published in

Umoja Protocol

8 min readApr 15, 2023

The TLDR? DAOs have terribly diversified treasuries and are increasingly relying on tokenized real-world assets to monetize their collateral.

Globally, decentralized autonomous organizations, or “DAOs” command approximately $28B (at this time of this writing) across their treasuries. The news of Silvergate, Signature Bank, Silicon Valley Bank, First Republic, and Credit Suisse collapses have increased the collective value of DAO treasury holdings by 83% within the last few days in Q1 FY23 alone.

But how long will this bullish trend last?

We think the more important question should be: “Are DAOs leveraging sustainable treasury strategies that won’t fail at the whim of the secondary crypto market?” If not all DAOs, at least the top 10 DAOs by Assets under management (AUM), who control over 80% of all DAO assets.

Why?

No bull market nor bear market ever lasts, and currently, most DAOs have one major problem plaguing their treasuries. DAO treasuries are woefully un-diversified.

DAOs Diversification Problem

Approximately 75% of the average DAO’s AUM by value is usually in the DAO’s native token. Initially, this makes sense because most DAOs are usually attached to a protocol or network. Therefore, they are responsible for economically stimulating (and incentivizing) their communities to take actions that can grow that DAO’s ecosystem (and, ideally, their AUM in the long term).

The problem is usually that core team members and early investors still hold unvested tokens due over time. These allocations can range from 10% to 40% of the project’s initial token supply (particularly if that token supply is fixed).

In such situations, the vast majority of the DAO’s treasury is the project’s unvested token holdings and its reserve token budget for community grants & growth.

However, is holding such a high percentage of native tokens, particularly when the project has established a multimillion-dollar secondary market liquidity, prudent?

Let us answer that for you — NO!

The current strategy of pre-allocating the vast majority of a project’s circulating token supply and locking up that supply just doesn’t cut it. It can put the project, as a whole, in economic jeopardy based on massive factors outside of the DAO’s control. Such factors include:

Regulation
Major 3rd-Party Liquidity Events

Let’s dive into both real quick.

Regulation? — Yeah… It’s coming.

A massive wave of regulation could put out the kindling fires of an upcoming bull-run real fast. Unfortunately, the United States is setting the regulatory tone for the West, with the SEC regulating by enforcement.

We have failures of big projects like FTX, Terra/Luna, influencer NFT rug-pulls, and multiple hundred-million-dollar exploits to thank for this.

The bad news is that it is not only in the United States. The contagion of overreaction without consideration has spread across the G7 countries. They are all vying for tighter crypto regulation.

While regulation isn’t exactly a bad thing if done correctly, it can quickly become terrible news for DAOs. It could very well mean the end of their entire treasury if the law defines ‘utility’ and ‘governance’ tokens not to align with the current functionality of the project’s native token.

Imagine if Uniswap’s $UNI token was deemed a security! It would immediately wipe out $2.4B worth of value from an already bleeding secondary market, effectively emptying their entire AUM.

This regulatory pressure is forcing DAOs to formalize informal, digital sub-committees into legal structures. Although this introduces increasing liability to DAOs, and their core operators, failure to do so can be will likely be met with a subpoena for projects that are too big to ignore — if not from the SEC, from another regulator abroad.

Is this to spread FUD? No. It’s being realistic about the regulatory uncertainties that exist which threaten the economic security of some of Web3’s largest infrastructure providers.

Don’t bury your head in the sand with trivial tweets — shit is getting real, real quick.

Major 3rd-Party Liquidity Events

The second factor that can alter DAO AUM instantaneously is a major, 3rd-party liquidity event or (”M3LE”). Yes, I just made up that acronym. Let’s roll with it.

What are M3LEs?

M3LEs are secondary market liquidity events within the traditional and/or cryptocurrency sectors that can radically affect the value of digital assets and cause Black Swan events.

Why not equivocate M3LEs to Black Swan events, you want to ask?

Because M3LEs cause Black Swans. Besides, the term “Black Swan” make such events seem uncommon. Which is not true; Black swans have happened more than 6 times in the last 3 years since the start of the COVID-19 pandemic.

Time for a naming convention rebrand — M3LE!

The M3LE cycle is simple:

Major actor(s) facilitates a major transaction.
The transaction causes the actor(s) or another major actor(s) to become insolvent.
News of actor insolvency creates widespread FUD across the market.
Retail and institutional investors alike divest from digital assets back to fiat en masse.
Digital asset market prices tank and the bear market begins.

A perfect example of an M3LE event is the Terra Luna collapse. The TLDR:

“Wallet A” (likely Jane Street) swaps $85M UST for USDC.
UST collapses in response to transaction trigger.
FUD of UST collapse, causing the market to withdraw capital from LUNA.
Luna collapses due to FUD around UST collapse (institutional investors caught on first).
Crypto markets lose approximately $60B

DAO treasuries are particularly affected by Step 5 of the M3LE cycle. Since the vast majority of DAO treasuries derive their value from their own native asset(s). Therefore, sharp secondary market price changes can change treasury holdings by billions in a few minutes.

This is a diversification problem, and taking refuge in governance tokens of other, high total value locked (TVL) projects is not the solution.

Get to the point. Enter Real-World Assets

It’s clear that governance tokens aren’t strong enough assets (i.e., stable, provide sustainable yield, have strong regulatory footing) for DAOs to invest the lion’s share of their treasuries into.

Even if treasuries vest governance token holdings into yield-generating protocols such as Aave, Compound, or Curve, the overall strategy is not sustainable. That is because traditional DeFi yields are largely based on token emissions (i.e., crypto inflation), not pragmatism (e.g., APY generated from real-world lending).

Fact: Token emission-based yields are unsustainable because they only work when digital asset prices are going up. Period. Deal with it.

In search of longer-lasting yields, many DeFi protocols have begun to tokenize real-world assets, and DAOs have, likewise, started investing in such assets.

What are real-world assets?

Real-world assets (RWAs) are tangible assets or financial primitives with the potential to serve as collateral in the DeFi industry (Blockworks). Examples of RWAs are the following:

Cash
Metal (gold, silver, etc.)
Real estate
Corporate debt
Insurance
Salaries and invoices
Consumer goods
Credit notes
Royalties, etc.

RWAs make up a majority of global financial value. For instance, the fixed-income debt market is worth an estimated $127 trillion. The total value of the global real estate is approximately $362 trillion, and gold has an $11 trillion market capitalization (Blockworks).

Ironically, some of crypto’s most liquid assets are already real-world assets, with fiat-collateralized stablecoins such as USDC and USDT commanding a collective $116B market cap. Stablecoins make up 97% of the tokenized RWA market.

With a largely untapped DeFi RWA market, some projects’ tokenized RWA market cap could reach a staggering $16 trillion by 2030 alone.

Can Stablecoins Solve the Diversification Problem?

Most DAOs are already invested in stablecoins, but the highest liquidity stablecoins are just tokenized US Dollars at the end of the day. They don’t naturally generate yield on their own.

More importantly, every major stablecoin (USDC, USDT, and DAI) is gravely susceptible to cryptocurrency devaluation and TradFi insolvency risk. Examples of these instances include:

So, what is the solution?

DAOs can greatly de-risk their treasuries by investing free-floating capital into recurring revenue-generating RWAs (e.g., tokenized bonds).

Market leaders like Maker have already started doing this, with just 12% of RWA exposure generating 60% of the protocol’s annualized revenue. Note that Maker is the only profitable DeFi protocol in existence at the time of this writing.

Particularly shrewd DAO treasury committees will go a step further and diversify their bond-based RWA exposure. They can do this across Western and emerging markets to further protect against macroeconomic market cycles (like what we’re currently seeing with climaxing fed. rates in the U.S. treasuries market, which will soon give way to popularized emerging market debt).

Bonus: What about Governance Balance?

But, you may be thinking — “DAOs CAN’T divest from their native tokens or they risk a loss of governance and incentive control.”

Yes, that is true. Divesting from your own governance token increases the likelihood that cash-rich stakeholders could take over the DAO’s decision-making entirely. But this is only the case if the DAO continues to use the 1-token 1-vote policy that has monopolized governance in the crypto world.

Additionally, unless the DAO’s network/protocol produces token emissions, it would become harder to incentivize community participants in the DAO’s native token.

However, this does not mean there’s “a loss of governance and incentive control.”

Let me explain.

DAOs could temporarily divest from their native tokens on fixed, vesting token allocations (e.g., their reserve treasury for community funding or the core team & investor vesting allocations) and repurchase those allocations at a later date. Doing this will help the DAO:

monetize vesting token allocations (as they can’t be distributed anyway);
greatly reduce treasury risk, and
open the door for generated RWA yields to be distributed to community token holders (as proposed by Maker’s Sam MacPherson). This will, in turn, increase the market value of the native token.

As for the weakened governance influence, here is what I think:

DAOs should centralize token-based governance anyway by hoarding massive native token balances, and;
The 1-token 1-vote policy is plutocratic and inherently centralizes community governance toward venture capital firms & other institutional investors (e.g., a16z BUSD vote).

Likely, it’s better for protocols to adopt participation-based voting (i.e., social credit), as is the Umoja protocol.

Final Thoughts

The bottomline is that DAOs have a diversification problem that can compound into a big problem in the future. The problem is that the current model of token vesting and holding a high percentage of native tokens in treasury opens room for more worries in the future.

This model can’t simply stand the test of government regulations and major 3rd party liquidity events (M3LEs). Therefore, there is a need for DAOs to start diversifying their treasury.

This is where RWAs come in handy. RWAs are tangible assets that can serve as stable collaterals in the crypto space. Not only are they tangible, but they also make up most of the global financial value. And no, stablecoins can’t stand in as RWAs. Not only are they susceptible to market run and devaluation, but they also don’t generate yields on their own.