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The State of Treasury Management for DAOs

#15 Governance Series

Treasury management is the practice of stewarding a project’s resources over time (a16z). Sounds mission-critical for all DAOs! Then, what does a DAO treasury look like, how are DAOs doing, and what are some areas of improvement?

Let’s first look at the snapshot of DAO treasury as of Halloween 2022. Data from DeepDAO shows that the top10 DAOs’ treasury($8.6B) makes up 77% of the total treasury($11.2B). The rest is held between almost five thousand other DAOs.

A report (May 2022) from Autonolas shows us a noteworthy trend regarding treasury diversification and capital efficiency. Native tokens constitute most holdings, and yet only a fraction is utilized. Out of 65 DAOs with treasuries over $10M (61 at the moment of this article, Oct 2022) that they studied, 40 have a single asset that makes up more than 80% of the total treasury value.

Stablecoins and bluechip tokens are the most common asset held by DAOs, yet on average, 85% of DAO treasuries are stored in a single asset, predominantly the native governance token. Stablecoins make up only 23%. (Data and chart below from Chainalysis Report, June 2022)

DAOs and crypto they held
DAOs and crypto they held

Although more than half of the DAOs participate in yield generation, only 4.3% of the entire treasury is accruing yield. This is an ironic trend considering that what the DAOs are governing is the yield-generating protocol itself.

Gnosis is an exception, allocating more than 80% of its treasury to earn yield. More than half of the DAO assets earning yield (53%) is from Gnosis. (Sidenote: Karpatkey has been managing its fund for the last two years — See their weekly review) Liquidity provision (61% of total value) and lending (25%) is the most common practice for generating yield.

A Messari report has found a tendency for midsize DAOs to utilize their native token more than the top 15 DAOs, stating that it may be due to the change of treasury practice over time and new diversification methods introduced.

Now that we know what DAO treasuries look like, what are some unique challenges of DAO treasury management, and what are DAOs doing to address these issues? Let’s find out!

Unique Challenges of DAO Treasury Management

1. Market volatility and Treasury Sustainability

80% of DAOs rely solely on their native token, with only 4% of total assets used to gain yield. Crypto, as with any other market in its early stages, has a reputation for its volatility. So what happens in the downturn? When all the capital markets freeze, DAOs are busy trying to pay their bills and contributors, let alone invest in the ecosystem.

The average DAO with assets over $1 million has an annualized volatility of 82%, versus 69% for Bitcoin”(Chainalysis).

Nonetheless, diversification is hard for any DAO; after all, selling its own token would send a bad signal to the market and ultimately negatively impact its own price as the biggest token holder.

2. Governance

With native governance tokens, governance rights and financial rights are bound into one. So unlike corporations, DAOs have to worry about asset management bundled with its cap table.

Let’s look at YamDAO for a DAO specific mix of governance & treasury attack that can easily happen in the cyclical crypto world. While in the bear market, last July, the fully diluted market cap of $YAM was around $2.3M, while its treasury, of which the $YAM holders have control, was valued at $3.1M.
So an attacker prepared 200 ETH(around $0.24M at that time), bought YAM/ETH SLP tokens, and created and voted for a malicious proposal (#26). The proposal looks just like the last proposal(#25) that was recently executed, but its code would instead make the attacker’s own wallet address the admin of the YAM treasury ($3.1M). Its voting power exceeded both proposal thresholds and success quorum.
Yam governance process requires the proposer to maintain the voting power until the voting process ends. Yet the attacker sold the YAM position for ETH right after the proposal was made, which made it possible for the community to cancel the proposal. Also, the Yam Finance Guardian of 3-of-5 multisig was notified by the Ethereum community and could veto the proposal before execution, if the proposal proceeded.
Yet the story was just at its beginning. Now the “attack” is happening within the community to claim YAM redemptions against the Yam treasury. Shortly after the attack, the snapshot proposal to make the treasury redeemable at $0.25 per YAM ($0.12 at that time) was voted “Yes”. Then the core team put up a re-Vote proposal that voted “No”. However, this redemption plan resurfaced recently in October 2022. The core team again made a proposal to ban the proposers, and was voted “Yes” onchain.
Interestingly, Yam Finance team itself is a treasury management service provider, and its proposed sushiHOUSE accounts for 16% of the Sushi DAO’s treasury according to OpenOrgs. sushiHOUSE was proposed and passed to be redeemed last July.

Also, while decentralized governance has a habit of asking everyone about everything, not every token holder is an expert in treasury management nor is interested in its specificities. The long tradition of voter apathy in decentralized governance pulls a constant brake on financial decisions.

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

Then how should a DAO manage its treasury?

DAO Treasury Management Guidelines

Well, let’s look into the suggestions from the industry. First, Aragon emphasizes risk management and diversification of assets (Stables, L1s, Staking and LP, App tokens etc.) and membership (collective intelligence).

Bankless suggests having 2–3 year runway worth of stables, showing different ways to diversify into stablecoins.

Hasu compares native tokens in the treasury to the “authorized yet unissued shares” that do not count as assets in the company’s balance sheet. These unissued shares do not make up the purchasing power, and DAOs should become an “acyclical trader of its own token” to maximize the long-term token value.

Karpatkey points out that the “decentralize everything movement” deters progress in treasury management; technical decisions should not be subject to democracy. The author proposes a framework of treasury execution where only the DAO itself casts a vote on the overall strategy and decides the scope of the treasury team. Within the parameters prescribed by the entire community, a small team of experts should make daily decisions and execute them.

So what are DAOs doing to manage their treasury?

Treasury Diversification has been a shining keyword in the scene for some time now, and each DAO has taken its own approach to implementing it. Strategic partnerships are among the popular options, from Lido with Paradigm to FWB with a16z.

DAO-to-DAO (D2D) swaps can be found among incentive-aligned DAOs. TempleDAO was the largest DAO holder of FRAX, and the Frax community decided to do D2D swap of TEMPLE and FXS, its governance token.

OlympusDAO was also a big holder of FRX and did OHM<>FXS swap. Not all D2D swap proposals pass the bar, though, as seen in the LOBI<>FXS.

Sometimes the native token holders fork out a part of their staking reward to be held in the treasury, as in the case of Kanpai proposal for Sushi. The proposal was written on behalf of Blockchain Capital, one of its investors, and the community implemented it in 2022.

While media DAOs like Bankless can manage the treasury with their own Treasury Department, it can be harder for DeFi protocol DAOs with millions of dollars in their treasury to do so. Top DeFi DAOs like Aave, Compound, Sushi and Maker employ treasury management services like Gauntlet and Llama.

For example, Gauntlet is a financial modelling platform that mitigates risk and optimizes capital efficiency for the DAO treasury. They built a Risk Management Dashboard (COMP example) and they update risk parameters such as borrow/supply cap on behalf of the community (Aave proposal). Gauntlet recently launched Aera, a rewards-based treasury management system for DAOs.

Hedgy Finance is a ‘financial infrastructure for DAO treasuries’, with Escrowless OTC and DAO to DAO Swaps. Vesting compensation, token compensation that is bundled into an OTC contract, represented on-chain as an NFT (time locked) can be found in the example of DAOhaus and Shapeshift.

Having a keen-eyed observer in the community is also a good strategy. Messari report on Optimism Governance explains how there is a ‘double-spending’ in the Governance Fund and the Partner Fund. A few projects received funding from both, and defining the scope of both funds was advised. Some other points raised were 1) more than 60% of the total fund went to LP rewards and 2) the different participation records of the protocol politicians.

Parting Thoughts

In Vitalik’s post on DAOs, he notes that DAOs should “learn more from political science than from corporate governance” because what we look for in DAOs is not profit maximization; the challenge is about keeping the whole ecosystem stable and resilient without the centralized, efficiency-over-all-else type of entities.

How can we guarantee the survival of the ecosystem, or each DAO, without sacrificing sovereignty? Treasury management is definitely one of the main pillars, and we expect many experiments and iterations ahead of us. StableLab supports DAOs with treasury management modelling, governance delegation, advisory and ops. Feel free to reach out.

Stay tuned for more on our Governance Research!

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