Understanding DAO and DAO Treasury
Decentralized autonomous organizations (DAO) are member-owned communities with a completely flat organizational structure.
We have created The Ultimate Guide to DAOs to understand the complexities of DAO.
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.
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.
Significance of DAO Treasury
The DAO Treasury is a significant component of the DAO ecosystem because it provides 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.
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.
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:
1. Strong Fundamentals
No matter your organization type, there are three key concepts for treasury management:
Outline Your Goals
The first step in managing your DAO Treasury is to decide what you want to achieve. What is your goal? Are you looking to invest in projects that are aligned with your values? Are you looking to diversify your holdings? Are you looking to optimize your yield earning strategies? Or are you looking to hedge against volatility and risk in the tokens your treasury has? Whatever your goals, it’s important that they are specific and measurable. Once you’ve decided on the right goals, break them down into smaller steps that can be tracked.
For example, if one of your goals is to diversify your portfolio with more venture capital investments, then it might make sense to build a portfolio of several different companies with different aims and values. If another goal is to grow your portfolio over time, then it might make sense to invest in companies with similar business models but different market caps and growth rates.
Once you’ve set up these goals, break them down into small steps that can be tracked on a weekly or monthly basis (e.g., “Invest $10k in XYZ Corp” or “Add XYZ Corp to my portfolio”). This will allow you to measure whether or not you’re achieving success with each goal individually.
The treasury is an integral part of an effective DAO. The treasury, which provides the financial basis for the DAO, should exist in perpetuity unless it is dissolved by the participants.
A responsible DAO structure should provide for the long-term security of the treasury, including its spending and funding. If a treasury is dissolved, any remaining funds should be allocated for the benefit of the DAO, its participants, or its community, or donated to a charitable cause.
Exceeding Inflows to Outflows
In the long run, revenue generated from the protocol and treasury returns should exceed spending.
2. 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:
Use Native Token
A native token is a cryptocurrency that is used within a specific application or ecosystem. The native token must have value, as it cannot be used to purchase anything outside of the application or ecosystem. For example, Binance Coin (BNB) has been used to pay for trading fees on the Binance exchange platform since it was launched in 2017.
The use of native tokens can increase demand for an asset, which can drive up the price and make the token more valuable. In addition to increasing demand, using a native token allows users to own part of the application or ecosystem’s assets. This gives them access to future financial returns from those assets — which could be higher than what they would receive from holding other types of cryptocurrencies.
Incorporate Stable Coins
Stablecoins are cryptocurrencies whose values are pegged to the U.S. dollar and other major currencies, as opposed to being freely traded on various exchanges. Stablecoins are typically issued by a blockchain startup that is backed by a trusted entity, such as an investment firm or an investment bank.
Incorporating stable coins into your portfolio will give you access to assets that can be used for hedging against fluctuations in the market and provide downside protection when markets decline.
Stablecoins also allow users to make payments and transfer funds without worrying about exchange rates or price volatility. The most popular stable coins are Tether (USDT), TrueUSD (TUSD), Binance USD (BUSD), and Gemini Dollar (GUSD).
Diversification has long been the cornerstone of investment success. It’s important to consider diversification in the context of DAO’s Treasury management because there are many different ways to invest and the odds of a return on a single token are low.
In order to diversify your tokens and minimize risk, you should consider buying other tokens that are related to the same underlying platform. These tokens can also be used as collateral for your DAO in contingencies.
For example, if you invested in a token that is related to the Ethereum platform, then you could easily use it in your treasury because these tokens are part of the ecosystem and will have a high value.
Strategic partnerships helps diversify the DAO treasury by providing a way for members to profit from De-Fi protocols while retaining the ability to vote on governance proposals using element finance’s voting vaults.
For example: Aave has partnered with MakerDAO. This is an interesting and exciting development for the DAO, as the two entities will be working together to create a unique ecosystem that is beneficial for both parties. In order to gain voting power in the MakerDAO ecosystem, Aave may be interested in acquiring MKR tokens primarily to have a voice in governance decisions with their strategic partner.
3. 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
4. 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.
5. 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.
6. 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:
- Security: Security is a big concern for any business, and it’s important to have software that is secure and has privacy features as well. The best software should be able to give you peace of mind that your data and funds are safe from hackers.
- Features: When it comes to choosing treasury management software, the features are what will make or break your decision. If you’re unsure, think about your goals for using the software.
- Access to DeFi and Exchanges: The best software platform will provide seamless integration with the exchange and DeFi platforms. This will make your job easier by providing you with all the information in a single place. You can view, manage and monitor all your funds in one place without having to visit multiple websites or apps on a daily basis. You can also see whether the funds are being used properly or not, what is the status of each transaction and much more.
- Fees: The fees of a treasury management software are the expenses that you need to pay in order to use the software. In other words, these are the fees you’ll pay every time you make a transaction.
- Ease of Use: The most important thing to consider when choosing a treasury management software is its ease of use.The best way to determine if a software is easy enough for your team is by looking at reviews from other users. If the reviews are positive, then it’s likely that the software will work well for your company as well.
- Customer Support: Make sure that the company or software provider has a good customer support team. This is essential because it will help you out in case of any technical issues or queries related to the application.
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.
Get started with Mesha today. Take a quick demo now.
7. 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.
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 – Contact us.
Disclaimer – All the above information is for informational purposes and is not investment advice. Always DYOR (Do your own research).