DAO Treasury Management: The Ultimate Guide to Managing a DAO Treasury

Contents

Last updated on March 23rd, 2023 at 07:14 am

Decentralized Autonomous Organizations (DAOs) allow people to collaborate and run an organization using open-source code and network participants as governance. They are internet-native entities that operate without a central authority, making them decentralized, transparent, and globally accessible.

Despite being in its early stages, DAOs are present in various projects, ranging from DeFi protocols to venture capital funds and social media groups. Due to their decentralization, transparency, and global access, DAOs are a promising and innovative approach.

However, proper treasury management is crucial for the growth and sustainability of a DAO. It ensures that the use of funds aligns with the organization’s mission and objectives, leading to long-term success. On the other hand, inadequate treasury management can lead to the downfall of a DAO. As such, DAOs must prioritize treasury management and employ the necessary measures to ensure the efficient and effective use of funds.

In this article, we will explore the appropriate ways for DAOs to approach treasury management and the best practices necessary for the long-term success of a DAO.

An Overview of DAOs

DAOs operate by raising funds, generating revenue from their core business, compensating contributors for their efforts, and returning capital to investors. While they share some similarities with traditional business organizations, DAOs differ significantly in practice.

DAOs rely on smart contracts and blockchain technology to operate. They eliminate the need for governing bodies that control decision-making in traditional organizations, making them decentralized. Members of DAOs elect their leaders using various voting processes.

Despite being a relatively new idea, DAOs have already gained popularity and are being widely considered as potential alternatives to traditional organizations. Established DAOs currently hold billions of dollars in crypto assets stored in their treasuries.

What is a DAO Treasury?

The DAO treasury is a pool of funds for the organization’s ongoing growth and development. Members of the DAO rely on governance mechanisms to decide how to allocate the treasury funds.

Uniswap, a decentralized exchange with a popular DeFi solution, exemplifies the concept of a DAO treasury. The Uniswap DAO treasury contains nearly $2.3 billion, all of which take the form of UNI governance tokens. As a result, the Uniswap treasury fluctuates in a 1:1 ratio with the price of the UNI token.

Another example of a DAO treasury is Compound DAO, which holds almost $172 million in the form of COMP tokens, making up approximately 94% of the total. Like the UNI token, the COMP token experiences significant daily volatility.

DAOs could use native tokens to demonstrate a strong commitment to the organization’s shared goals. At the same time, native tokens can assist DAO treasuries in capitalizing on the benefits of price appreciation and organic DAO growth. On the other hand, a significant drop in the price of the native token could force a DAO into situations it hadn’t planned for.

How to Manage a DAO Treasury

Since DAOs are still relatively new, there are fewer established techniques for treasury management. In this section, we will discuss basic approaches that can help DAOs manage their funds to enable the organizations to reach their long-term goals.

Review the Key DAO Treasury Management Concepts

There are two critical principles for treasury management, and they apply to all types of organizations. They are:

Consider the Long Term: Due to the nature of their work, DAO managers frequently think in terms of cycles or sprints. The most successful DAOs establish a long-term community. The same should apply to how DAOs manage their treasuries.
Diversify Your Portfolio: This is important to hedge against risk and asset price volatility, which is very high in the crypto market.

Safely Store Your DAO Treasury

Almost all DAOs store their treasury in multisigs. Multisigs allow DAOs to transact collaboratively by providing the following benefits:

Security. Multisigwallets encrypt funds in a smart contract that can be verified on-chain. No funds are stored in the browser, and no wallet provider manages the private keys.
Teamwork. Multisigs allow users to form “shared ownership” over one company wallet. Wallet owners can grant other teammates access to their wallets.
Built-In Key Recovery. If a user loses their private key, other owners can help them regain their wallets by adding their new accounts to the multisig.

Gnosis Safe multisigs can be used for this purpose. It is the gold standard in treasury management. It stores over $100 billion worth of assets, and many people in the DAO space trust it.

Diversify Your Treasury Funds

At first glance, it appears natural for DAOs to keep a large portion of their treasury in native tokens, as some of the most prominent DAOs do. However, this is risky.

Suppose you only have your native token in your portfolio, and its value falls by 30% for whatever reason (such as marketing, management, a bear market, or competition). In that case, the value of your entire portfolio will fall by 30%. This is disastrous for any organization (decentralized or not), and DAOs must always be able to meet their financial obligations.

As a result, it is recommended that DAOs keep a portion of their treasury in less volatile currencies (such as stablecoins). Setting aside a certain amount of stablecoins is an excellent way for DAOs to avoid default and offset operational costs.

How DAOs Can Diversify their Treasury with Stablecoins

Over-the-Counter (OTC) Sales

OTC sales allow DAOs to exchange their tokens without going through secondary markets. This process can be carried out directly between the DAO and its community. Tokens can also be sold to institutional investors directly. This method allows DAOs to adhere to their vesting schedules while having the least impact on token prices.

DeFi-Financial Derivatives

DAOs can also diversify their treasuries by turning them into stablecoins using DeFi protocols like UMA’s range token, creating a collateralized debt position, or using protocols that generate income like Ribbon’s Treasury Vaults.

Market Selling

This means selling the DAO’s tokens at the best price available. Although this method is quick to implement, it may send negative signals to the stakeholders, especially if the DAO sells in large quantities. As a result, the token price may fall. DAOs are advised not to use this method.

Conditional Order Strategies

This is an advanced version of “at-market selling.” DAOs can use condition-based orders to determine the best time to sell their tokens.

Delegate Tasks to Your DAO’s Treasury Experts

While the democratic structure of DAOs is admirable, it can also slow down decision-making processes, especially when it comes to managing the treasury. To avoid this, it is important to delegate treasury-related matters to a committee comprising elected members selected based on their contributions and value to the DAO.

To ensure effective treasury management, DAOs should identify and empower members with expertise in market dynamics and financial management. The treasury committee can handle routine treasury tasks while consulting the community on significant matters. This approach can help streamline decision-making and improve the DAO’s financial health.

Earn the Trust of Your Community Through Financial Reporting

Financial reporting is the most powerful tool available to any organization. DAOs could put all the aforementioned processes into place, but they wouldn’t be effective without thorough financial reporting.

Hence, it is necessary that DAOs need to report to their communities regularly. A monthly or quarterly report will help DAOs’ contributors feel part of the project and earn trust in the DAO by providing the same visibility into the DAO’s finances.

Before voting, important events like token sales and mergers and acquisitions should be explained and shared in detail.

DAO Treasury Management Tools

If your DAO is struggling to manage its treasury, there are lots of tools available to simplify and ease treasury management. These tools can be used for all tasks ranging from diversification to reporting and everything in between and include the following:

Hedgey

Hedgey makes DAO plug-ins to help with things like diversification and yield, over-the-counter purchases, vesting, compensation, DAO-to-DAO token swaps, and complex options strategies.

Balancer

Balancer may not have as much overall liquidity as other protocols such as Curve or Uniswap, but it offers a unique feature by allowing for pools of up to eight assets. This makes it an ideal option for managing diversified treasuries. The term “balance” in Balancer refers to the method of maintaining a stable asset ratio within the pool.

For example, in a three-asset pool, there would always be sufficient $wBTC to swap for double the amount of $ETH or $DAI. This means that if the price of $wBTC increases relative to the other two assets, enough of it would be sold in exchange for a restorative amount of the other two assets.

Yearn

Yearn is a set-and-forget tool that offers yield-as-a-service (YaaS) through various back-end yield strategies. It accepts deposits in currencies like $USDC and $ETH, as well as blue chips like $LINK, $UNI, and $COMP, and various Curve LP tokens.

Weezi

Weezi is a DAO asset management CRM that allows DAOs to manage their funds across different treasuries and wallets. Set up your DAO and start voting when it’s time to add a new asset.

Multis

Multis‘ standard treasury management tools for DAOs include cross-chain monitoring, budgeting, payroll, cashflow visualization, and financial reporting.

Exponent

Exponent provides decentralized capital-as-a-service, allowing DAOs to manage their treasuries without handing over the keys to their cryptos. Their tools include risk monitoring and built-in alerts, allowing DAOs to stay ahead of exploits and threats.

Llama

Llama works with DAOs to develop tailored treasury allocation strategies, thereby offering a more personalized service.

In Conclusion

Effective DAO treasury management is centered on one fundamental principle: protecting against volatility. In this context, volatility refers to the frequency at which the net worth of assets in the treasury fluctuates.
If a DAO’s treasury experiences excessive volatility, setting and achieving long-term plans and goals that require resources can be challenging. This is because future resources become uncertain.
DAO treasuries play a crucial role in the organization as they are used to fund development, expand the network, uphold the organization’s values, and ensure long-term success. As DAOs become increasingly popular and learn from their mistakes, we can expect to see new best practices for managing their treasuries emerge.

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