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How to Manage a DAO's Treasury

Decentralized autonomous organizations (DAO) are member- owned communities with a completely flat organizational structure.

By nature, each member of a DAO has the same voice in all decisions, unlike the management hierarchies typical of centralized organizations. All DAO actions are completely decentralized (there is no one entity responsible for carrying them out) and transparent (all decisions are open and publicly recorded). These functions allow DAOs to be a fully democratic and easily accessible means of fulfilling a shared mission. And to achieve these objectives, the DAOs also controls a large capital reserve.

We have created The Ultimate Guide to DAOs to understand the complexities of DAO.

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How do DAOs work?

DAOs use smart contracts on a public blockchain to automatically and verifiably enforce organizational rules. DAOs also have a voting mechanism(also executed through smart contracts) to decide on such organizational parameters viz treasury spending, new partnership agreements, allocation of these funds etc.

Members of a DAO then submits proposals to amend these changes, and holders of governance tokens, also known as members of the DAO, can vote on them. Neither party can unilaterally change the objectives or rules of the DAO. These rules (on smart contracts) can only be updated or modified based on the majority vote of DAO members who hold government tokens.

The DAO structure should generally be designed in such a way that the holders of governance sheets benefit from the success and growth of the protocol to create incentives for voters to make good decisions.

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Significance of DAO Treasury

The DAO Treasury is a significant component of the DAO ecosystem because itcprovides the funding necessary to maintain and grow the DAO. The treasury is used to pay for things like employee salaries, marketing expenses, and other operational costs.

The treasury is also used to invest in new projects and initiatives that will help grow the DAO. For example, the treasury can be used to fund research and development for new products and services. The treasury is a key source of funding for the DAO,
and it is essential for the long-term success of the organization.

Statistical Evidence

Data from DeepDAO, a statistics platform for DAOs, shows that assets under management increased from around $380 million in January to a whopping $16 billion peak around mid-September.

In total, DAO treasuries cumulatively held more than $11 billion in cryptocurrency at the end of 2021—$4.2 billion belonging to BitDAO and Uniswap alone—despite the fact that it reduced by 28.1% after the top, as reported by Messari.

Source: https://twitter.com/MessariCrypto/status/1519056355054784513

By the end of the year 2021, we saw that the collective value held by DAOs was 40 times larger than it was at the beginning of that year. At that time, treasuries would have held approximately $275 million.

The treasury composition of the 15 largest DAOs, such as Aave, Synthetix, Maker, Yearn, and various others., included three distinct parts which were:

  • Native Asset
  • Deposit in other protocols
  • Other assets

How to Manage DAO Treasury?

The first thing to understand about DAOs is that they are not like traditional companies or organizations. They have no hierarchy, no managers, and no leaders. They could have hundreds and thousands of people participating in them.

Since every member has voting rights in the community, they must understand how the treasury will be managed — which is why we take a look at some solid ways to improvise and manage your DAO treasuries well:

Strong Fundamentals

No matter your organization type, there are three key concepts for treasury management:

Understand Your Risk Threshold

In order to make good decisions about the treasury and how you manage it, you need to understand your risk threshold: what you can afford to lose and can’t. This is especially important if you’re developing a new project and have little or no experience with creating DAOs.

The treasury not only acts as a buffer against attacks, but also as a tool for your organization to manage its funds. Which makes this an integral part of DAO.

Portfolio diversification is the first rule that should be respected to hedge against risk and asset price volatility, which in the case of crypto market, we all know is very high, which can be controlled with this:

Set up Processes

From web3 startups to DAOs, everyone needs to set up the right processes. Having processes in place will ensure that the future of your project isn’t in danger and the funds are safe.

If you are invested in some DeFi yield-generating strategies, make sure that:

  • There are regular accounting updates.
  • Regular checks on the protocol liquidity and market are being done in order to make sure that the funds are safe.
  • Ensuring that you book the profit whenever it's possible.

If you are managing your treasury for token diversification, make sure that:

  • You have your processes ready for swapping tokens. (amount, frequency, and the accounting of your transactions)
  • A fallback strategy in case some tokens fall too low for your comfort zone.
  • Regular price checks and valuations of your treasury

Use Secure Storage

In the DAO space, multisigs are used to store funds. Multisigs offer the advantages of locking your funds into a smart contract where all transactions can be verified on-chain. Teams can form shared ownership over one company wallet and invite others to give them access as well. In case of private key loss, other owners can help you retrieve access to the wallet by inviting your new account to the multisig. 

Over $100 billion in assets are stored securely on Gnosis Safes, and it’s widely trusted in the DAO Space.

Mesha is built on top of Gnosis safe multisig, the gold standard in Treasury Management. So you can get the security of having a Gnosis safe, but also the easy-to-use interface of mesha to create, trade securely, and hold digital assets on the Ethereum blockchain.

Don’t Be Too Aggressive

You need to make sure that the treasury is balanced across the entire organization and that all of the proposals are adequately funded. If you don’t do this, you’ll end up with a poorly-funded or unbalanced treasury that won’t be able to support itself through inflation.

The treasury is also something that is supposed to pay bills on your bad days and get you through them. If you get greedy and go overly aggressive by investing all your money in some meme coin or any other altcoin, the entire treasury will go down when the bear market hits, all your tokens starts dumping heavily and the DAO will end up losing money.

Choose the Right Tools

Treasury management software plays a significant role in managing your treasury. Hence ensuring that it meets all your requirements becomes important. When choosing a treasury management software, you should look out for the following:

Mesha has some Powerful Finance Tools for Web3 Teams:

Corporate expense cards

Allows you to issue cards to your team to pay in fiat, and pay back your balance in crypto. It’s the perfect expense management tool for web3 teams.

Analytics and Insights Dashboard

Easily see how much you spent, earned and more through a simple-to-use dashboard.

Transaction tracking

Easily find any transaction you’ve ever made.

Spending limits

Set up spending limits for different members.

DeFi

Optimize your treasury by earning yield on your idle cash.

TokenSwap

Easily swap tokens across all decentralized exchanges.

Review Your Strategy

Managing a DAO Treasury is a complex process. It requires a good understanding of the different functions and processes that go into it. You need to know what’s going on with your treasury at all times and make sure it’s always working properly.

You should also have a plan in place before you get started so that you know exactly how you’re going to manage your treasury and review it in rounds. If there are any gaps in your plan, you can fill them out as soon as possible. The sooner you start, the more time you’ll have to put into managing your DAO treasury successfully.

Get started with Mesha today.

Take a quick demo now.

Final Thoughts

The DevOps movement has revolutionized how companies manage their infrastructure, and DAOs are bringing that same level of sophistication to companies’ treasury operations. DAOs take the community-driven approach to governance and replace the top-down legacy models used in business with a new way of doing things.

The space is still young and unregulated, and there are very few tools that address their unique needs. There are still many questions to answer on how something like this would be implemented and the risks involved. Ultimately DAO members decide what is done with the treasury. In the future large DAOs can employ real financial managers to help protocols diversify intelligently and ensure they are well capitalized under all sorts of market environments.

For smaller DAO’s this may not be possible so hopefully, we as a community can come together and find the correct balance for DAO treasuries to protect both token holders and protocol itself.

If you are looking for the best treasury management solution for your Web3 project?
Speak with one of Mesha’s treasury experts for a quick demo.

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Disclaimer:

All the above information is for informational purposes and is not investment advice. Always DYOR (Do your own research).

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