Original Author: twinFin

Original translation: Shaun@DAOrayaki.org

Original title: The State of Treasury Management for DAOs

secondary title

DAO treasury distribution status

According to DeepDAO data, as of Halloween 2022, the treasury of the top 10 DAOs ($8.6 billion) accounted for 77% of the total treasury ($11.2 billion). The rest are held by nearly 5,000 other DAOs.

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Pictured is Messari, April 2022

Stablecoins and blue-chip tokens are the most common assets held by DAOs, yet on average, 85% of a DAO treasury is held in a single asset, primarily the native governance token. Stablecoins account for only 23%. (The following data and charts are from Chainalysis report, June 2022)

While more than half of DAOs are involved in staking or mining yields, only 4.3% of the entire treasury is accumulating yields. This is an ironic trend considering that DAOs govern the yield-generating protocols themselves.

Gnosis is an exception, allocating more than 80% of funds to earn yield. More than half of DAO asset returns (53%) come from Gnosis. (Side note: Karpatkey has been managing its fund for the past two years - see their weekly review) Liquidity provisioning (61% of total value) and lending (25%) are the most common practices generating yield.

A Messari report found that mid-sized DAOs are more inclined to use their native tokens than the top 15 DAOs, noting that this may be due to changes in financial practices over time and the introduction of new approaches to diversification.

The above is the distribution of DAO finances, what are the unique challenges of DAO treasury management, and what are DAOs doing to solve these problems?

Unique challenges of DAO treasury management

1. Market volatility and fiscal sustainability

80% of DAOs rely entirely on their native tokens, and only 4% of total assets are used to generate income. Crypto, like other early-stage markets, is known for its volatility. So, what happens in a downturn? When all capital markets freeze, DAOs are busy paying their bills, let alone investing in the ecosystem.

"DAOs with over $1 million in assets have an average annualized volatility of 82%, compared to 69% for Bitcoin" （Chainalysis）。

Still, diversification is difficult for any DAO; after all, selling one's own tokens would send a bad signal to the market and ultimately negatively affect one's own price as the largest token holder.

2. Governance

Through native governance tokens, governance rights and financial rights are combined into one. So, unlike corporations, DAOs have to worry about asset management tied to their cap table.

Take YamDAO as an example for DAO-specific combinations of governance and funding attacks that are prone to occur in a cyclical crypto world. Last July, $YAM had a fully diluted market capitalization of approximately $2.3 million, while $YAM holders controlled $3.1 million worth of its treasury bonds.

Therefore, the attacker prepared 200 ETH (approximately $240,000 at the time), purchased YAM/ETH SLP tokens, created and voted for the malicious proposal (#26). This proposal looks like the last proposal (#25) implemented recently, but its code would make the attacker's own wallet address the administrator of the YAM treasury ($3.1 million). Its voting power exceeds the proposal threshold and successful quorum.

The Yam governance process requires proposers to maintain voting rights until the end of the voting process. However, the attacker sold ETH’s YAM position immediately after the proposal, which allowed the community to cancel the proposal. Additionally, the Ethereum community notified the 3-of-5 multisig’s Yam Finance Guardian that they could veto the proposal before execution if it proceeded.

attack"attack"Happened within the community to request a YAM redemption from the Yam treasury. Shortly after the attack, the snapshot proposal for the treasury to be redeemed at $0.25 per term (then $0.12) was voted on"in favor of"be opposed to"be opposed to". However, this redemption program recently resurfaced in October 2022. The core team once again made a proposal to ban the proposer and it was voted on the chain"in favor of"。

Interestingly, the Yam Finance team is itself a treasury management service provider, and according to OpenOrgs, its proposed sushiHOUSE accounts for 16% of Sushi DAO's treasury. sushiHOUSE was proposed and passed for redemption last July.

In addition, although decentralized governance has a habit of asking everything, not every token holder is an expert in treasury management, nor is it interested in the specific situation of the treasury. A long tradition of voter apathy in decentralized governance continues to impede financial decision-making.

Gitcoin, for example, formed a working group with Llama on treasury diversification in January 2022, when 99% of the treasury was held in its native token, GTC. However, the actual proposal to sell GTC for USDC to fund its working group was voted on in July 2022, and the GTC token price dropped 59% in the process (from $6.93 to $2.82). (Messari Report)

So how should a DAO manage its treasury?

DAO Fund Management Guide

Let's start by reviewing what industry professionals recommend.

First, Aragon emphasizes risk management and diversification of assets (Stables, L1s, Staking and LPs, App tokens, etc.) and membership (collective intelligence). Bankless suggests owning some stablecoins and demonstrates different ways to diversify your investment in stablecoins.

Bankless's comparison of FAANG+M cash portfolio, cash ratio = cash / current liabilities | quick ratio = (cash + marketable securities + accounts receivable) / current liabilities

Hasu compares native tokens held in treasuries to “licensed but unissued shares” that are not counted as assets on a company’s balance sheet. These unissued shares constitute no purchasing power, and DAOs are supposed to be "non-cyclical traders of their own tokens" to maximize long-term token value.

Karpatkey pointed out that the "decentralized everything movement" has hindered the progress of financial management; technical decision-making should not be subject to democracy. The authors propose a funding execution framework in which only the DAO itself votes on the overall strategy and determines the scope of the funding team. Within parameters dictated by the entire community, a small team of experts should make day-to-day decisions and execute them.

So what is the DAO doing to manage the treasury?

Treasury diversification has been a hotly debated topic for some time, with each DAO taking its own approach to implementing it. From Lido and Paradigm to FWB and a16z, strategic partnerships are among the popular options.

DAO to DAO (D2D) swaps can be found in Incentive Aligned DAOs. TempleDAO is the largest DAO holder of FRAX, and the Frax community decided to conduct a D2D exchange of its governance tokens TEMPLE and FXS.

OlympusDAO is also a large holder of FRX and has done OHM<>Exchange of FXS. But not all D2D swap proposals pass, as in LOBI<>As seen in FXS.

Sometimes, native token holders take a portion of the staking rewards and put them in the treasury, as Kanpai proposed with Sushi. The proposal was written on behalf of one of its investors, Blockchain Capital, and the community implemented it earlier this year.

While a media DAO like Bankless can use its own treasury to manage the treasury, it may be more difficult for a DeFi protocol DAO with a multi-million dollar treasury to do so. Top DeFi DAOs like Aave, Compound, Sushi, and Maker have adopted treasury management services like Gauntlet and Llama.

For example, Gauntlet is a financial modeling platform that de-risks DAO treasuries and optimizes capital efficiency. They built a risk management dashboard (COMP example) and updated risk parameters such as borrowing/supply caps (Aave proposal) on behalf of the community. Gauntlet recently launched Aera, a rewards-based financial management system for DAOs.

Hedgy Finance is "DAO Treasury's Financial Infrastructure" with Escrowless OTC and DAO to DAO Swaps. Vested compensation, tokenized compensation bundled into the OTC contract, represented on-chain as an NFT (time lock), can be found in examples from DAOhaus and Shapeshift.

It's also a good strategy to have keen observers in your community. Messari’s report on Optimistic Governance explains how there is “double spending” by governance funds and partner funds. Some projects were funded by both and it was suggested to determine the scope of both funds. Some other points brought up are 1) over 60% of the total funding goes to LP rewards and 2) the varying participation records of the protocol politicians.

Outlook:

In Vitalik's recent article on DAOs, it is pointed out that DAOs should "learn more from political science than from corporate governance", because what we are looking for in DAOs is not to maximize profits, but to maintain the integrity of the entire ecosystem. Stable and resilient.

How can we guarantee the survival of the ecosystem or each DAO without sacrificing sovereignty? Treasury management is one of the main pillars, and more experiments and iterations are expected in the future.