As a researcher with a background in banking and a keen interest in DeFi, I can’t help but notice the alarming state of DAO treasuries reported by onchain analytics. Having spent years at HSBC and served as treasury director for a unicorn startup, I’ve learned that diversification is key to financial stability, especially during market downturns.
Onchain analytics do not lie when they show us a very unhealthy state of DAO treasuries. It was reported that the collective value of DAO treasuries increased by more than $20 billion between November 2023 and March 2024. Optimism’s DAO treasury led the charts, managing around $7.9 billion in assets, followed closely by Arbitrum DAO with $6.9 billion. It’s not a coincidence that this significant uptick of value managed by DAOs was in alignment with the collective spike of the overall cryptocurrency market. And that’s not actually good news.
It’s significant to note that many on-chain treasuries predominantly store cryptocurrencies, often exclusively. A recent study by Avantgarde revealed that around 65% of the top 25 Decentralized Autonomous Organizations (DAOs) have over 90% of their treasury value in their native token. Analogously, Chainalysis reported back in 2022 that about 85% of DAO on-chain treasuries are kept in a single asset. In cases where the native token is not held, it’s common for DAOs to keep their funds in Bitcoin (BTC), Ethereum (ETH), and other alternative cryptocurrencies instead.
In simpler terms, when the decisions about managing the treasury in a Decentralized Autonomous Organization (DAO) are made through internal voting, these votes may be biased towards investments with high returns (APY) and popular projects (what’s hot), while overlooking the significant risks associated. This can lead DAOs to take on excessive risk during market downturns, which in turn makes it difficult for them to cover their operational costs that are managed using fiat currencies.
The importance of financial planning
When a Decentralized Autonomous Organization (DAO) has most of its resources in cryptocurrency, but spends on operations using traditional fiat currencies, it creates a challenging conundrum for predicting when to convert the crypto to pay these costs. Overreliance on its own native asset can be risky for any DAO, as the volatile nature of the crypto market might precipitate the organization’s financial failure at any moment. Managing finances becomes progressively harder due to this volatility, making long-term planning particularly tough.
It’s evident that Decentralized Autonomous Organizations (DAOs) should be more proactive in selecting treasury managers, or a Chief Financial Officer (CFO), capable of making prudent decisions, not just reacting to situations as they arise. The constant occurrence of security breaches underscores the fact that relying on a single large token is unsustainable. To foster growth in the treasury, DAOs should adopt strategies that minimize risk and prioritize longevity. Forward-thinking CFOs could help achieve this objective.
Obviously, fiat isn’t the permanent solution; it’s counterintuitive and could be seen as a backward step in the name of security. Yet, a degree of diversification is undeniably needed. At the most basic level, it’s risk management 101. So, is it time to look to TradFi for inspiration? Assets with crypto-uncorrelated yield could clearly circumvent bearish landmines and hack attacks. While decentralized ideals are, of course, imperative to strive toward, there’s also the argument that web3 is no longer a degen playground that has to avoid long-term products for the sake of pride.
Prudent financial management requires equal emphasis on risk mitigation and profit growth, alongside adherence to sound principles. It’s crucial to prioritize the long-term health of our ecosystem over immediate gains. As the digital economy expands, particularly in the realm of cryptocurrencies, forward-thinking treasury managers should explore diversifying their reserves and actively deploying assets for optimal returns.
Crypto-uncorrelated assets (RWAs) to the rescue
One argument is that the most straightforward option for DAOs that want to mitigate risk but maintain a blockchain-based treasury is to diversify with stablecoins. Stablecoins offer efficient liquidity management that ensures solvency in the case of a market crash or crypto winter. Frictionless conversion into fiat currency would also simplify the process of paying operational costs.
A new trend is unfolding, as several significant Decentralized Autonomous Organizations (DAOs), including Arbitrum, are now investing large sums into tokenized treasuries. Notable examples include Ondo’s USDY, Blackrock’s BUIDL, Cogito’s TFUND, and OpenEden’s TBILL, which have shown promising results. This trend in the RWA (Rights-Issued Assets) market is being fueled by the growing influence of institutional values within web3. By adhering more closely to fundamental analysis principles, tokenized assets can help DAOs avoid the unpredictable fluctuations tied to sentiment while maintaining on-chain treasury value. By sticking with proven products, RWAs offer opportunities for strategic treasury management and foresight.
Path to DAO longevity
Opponents could propose that DAO funds shouldn’t solely rely on traditional finance tools for diversification; instead, they might explore other options. While established crypto assets can potentially decrease volatility, the truth is that tokenized real-world assets, such as stablecoins, offer immediate safety for projects aiming to create lasting products, providing a more secure foundation.
As an analyst, I recognize the gravity of our mission: ensuring the long-term success of our projects. It’s crucial that we diversify our on-chain capital, a straightforward yet essential strategy. The evolution of crypto is undeniable, with its use cases broadening every day. Therefore, it would be shortsighted for managers of Decentralized Autonomous Organizations (DAO) not to adapt their treasury management strategies accordingly as new on-chain products emerge.
Cloris Chen is the CEO of Cogito Finance, a DeFi platform offering institutional-grade investment products by tokenizing fixed-income assets and equities. Cloris combines a banking background with hands-on DeFi experience. She spent six years at HSBC and served as treasury director for a unicorn startup.
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2024-09-13 14:18