These days DAOs are holding billions of dollars in the treasuries, but do they really have access to it?
Let's check how they are managing the capital and what can be improved.
Thread 🧵
Let's check how they are managing the capital and what can be improved.
Thread 🧵
1/ I have been doing research and I came to know that most of the DAOs (I've checked >70 treasuries) keep all their treasury in the native tokens and do not implement any yield farming strategies.
2/ Billions of dollars are locked up and can not be allocated elsewhere. For example @Uniswap DAO has $2.3b in the treasury (lost another $300m by the time I have finished the thread) and it is stored 100% in $UNI.
3/ The treasury has decreased by $2b since Nov 2021 and if the market condition gets worse it will collapse further.
4/ @compoundfinance has lost over 60% of the treasury value in 6 months.
5/ While @synthetix_io DAO is holding 69% of the native token in the treasury and has implemented yield farming strategies, its treasury has grown by 25% in 3 months.
6/ Of course this is a non-representative sample and there are plenty of examples where DAOs with full exposure to the native token have grown in value as well, but the general trend is showing that more diversified treasuries perform better.
7/ What to do with the native token?
Obviously, a protocol should be the largest holder of native tokens for many reasons. Eventually it is showing that the community and team has a great faith in the success of the protocol and token itself.
Obviously, a protocol should be the largest holder of native tokens for many reasons. Eventually it is showing that the community and team has a great faith in the success of the protocol and token itself.
8/ Native tokens can be used for LP incentives, deployed to provide deep liquidity on the AMMs, paid out as a compensation to the contributors, etc.
9/ But what are the disadvantages of being exposed only to the native token?
As shown above, the value of the treasury represents the price action of the native token.
As shown above, the value of the treasury represents the price action of the native token.
During bear markets or due to bad fundamentals the price of the token might collapse thus the treasury will follow.
9/ Unfortunate events such as hacks, exploits, coding mistakes, etc might completely varnish the treasury value.
10/ Another disadvantage is that such a protocol doesn't have access to real money. If Uniswap decides to cash out 1% of the treasury on the market it will suffer from the 50% slippage. Besides that the holders will be at a huge loss as well.
11/ What are the ways to improve the situation?
We all know that most of the protocol tokens are farm and dump useless piece of digital code. DAOs are using it for governance and profit shares. There is nearly zero utility for the token outside the protocol.
We all know that most of the protocol tokens are farm and dump useless piece of digital code. DAOs are using it for governance and profit shares. There is nearly zero utility for the token outside the protocol.
12/ Even among protocol native token holders there are not so many active governance users. There is a project which is trying to solve this problem by building economic engines that will finance the governance activities.
13/ So the protocols need to find the ways to bring utility to their token, deploy the treasuries for yield farming and increase the revenue for token holders so it might increase the attractiveness of holding the protocol token for others.
14/ Probably one of the best examples of the token utilities among DAOs is $gOHM from @OlympusDAO with 16 different protocols accepting gOHM for farming, leveraging, option strategies and other use cases (full description would require a separate thread).
15/ After the protocol brought utility for its native token it is time to diversify the treasury. As we already know, protocols can not just sell a big chunk of native tokens and buy something else in return.
16/ So to decrease the share of the native tokens the protocol might seek for the partners with which they can perform exchange between their governance tokens with agreement not to dump it but use it for mutual benefit.
17/ Find outside investors and make an OTC deal with a long vesting period, so the tokens won't be dumped immediately and it won't cause price fall and the treasury will get other types of assets which can be deployed for farming.
18/ Issue bonds to get protocol owned liquidity which can be utilized for yield farming. Let the governance token holders receive a percentage of the revenues generated by DAO products and treasury management.
19/ Good example of the treasury management approach and revenue redistribution I have found in @PieDAO_DeFi
20/ All of these methods should be executed in a very accurate manner not to dilute the value of the governance token but to get diversified treasury which is farming yield, safe from the unwanted events and release the locked value of the treasury.
21/ Treasury management requires a team of skillful and knowledgeable people which will introduce and implement asset management guidelines focused on capital preservation and diversification.
22/ DAOs can recruit such people from the community, hire third party teams like @llamacommunity_ which is building economic infrastructure for DAOs or get proposals from other protocols to help with treasury management.
23/ By the way if someone wants to know more about @groprotocol I have recently made a thread about it:
24/ What is next?
This is completely up to the DAO community to decide what to do with the treasury, but I expect that in the near future big DAOs will hire a team of financial advisors / asset managers to run the treasury.
This is completely up to the DAO community to decide what to do with the treasury, but I expect that in the near future big DAOs will hire a team of financial advisors / asset managers to run the treasury.
25/ There will be a great demand for the companies which can offer professional management of the treasuries same as we can see in the real world finances. Smaller DAOs might not be able to afford such services so they will look for cheaper alternatives within the communities.
26/ If you liked this thread, I would love it if you could share it by retweeting the first tweet:
Thank you and stay safe!
Thank you and stay safe!
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