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The Case for DAO Treasury Diversification | by Weeze | The Index Coop | Nov, 2021

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The Case for DAO Treasury Diversification | by Weeze | The Index Coop | Nov, 2021

Decentralized Autonomous Organizations (DAOs) are a newly-evolved organizational structure that does away with the traditional hierarchical management framework and empowers contributors of all backgrounds and skills. While these DAOs in the crypto ecosystem are still in their infancy or baby years of life, many have already amassed significant treasury balances, in some cases hundreds of millions of dollars. In this article, we’ll take a look at what these treasuries are holding, the purpose of the treasuries, and some suggestions DAO treasuries should consider to best serve their communities.

Because wallet addresses and their holdings are transparent on a public ledger, anyone can view the holdings of DAO treasuries in real-time. You don’t need to wait for quarterly reports issued by a corporation to know what is on their balance sheet. The website OpenOrgs.info provides a summary of the largest DAO treasuries. From that data, we can see a common theme emerge: many treasuries are heavily (90%+) or solely (100%) compromised of their native token.

Source: OpenOrgs.info

As a DAO, the concept of holding your native token in the treasury makes sense. The community has a strong belief in the underlying project and conviction that the native token will appreciate over time. But should the native token be the only holding or is there a case for diversification? We’ll get to that, but first let’s take a step back and look at the big picture: what ultimately is the goal of the treasury fund?

In the simplest sense, the treasury funds the operations of the DAO. This includes expenses such as community contribution compensation, marketing activities, event funding, liquidity incentive programs, etc. A DAO treasury should have a plan to reliably fund expenses for two to three years in advance. Bear markets happen and a well-managed, diversified treasury could very well be the difference between DAOs that survive the eventual downturns and those that do not.

DAOs need to proactively prepare by diversifying their treasury to ensure they can fund their operations and achieve their protocol objectives. If a DAO is only holding their native token and a negative event occurs such as a protocol hack, bear market, regulatory action, etc., the negative event is exacerbated given that the native token will have in all likelihood already sunk in value. This is occurring right when the treasury needs the native token value the most to stay afloat, risking the DAOs health and survival. Think of the diversified portion of the treasury as the true reserves that could be sold first thing when needed. There is a risk/benefit analysis that DAOs should weigh when considering treasury diversification as it’s much more prudent to diversify at a time of strength as opposed to a time of weakness.

There is no one size fits all model to achieve a diversified treasury. Diversification should be planned based on the treasury’s expected annual outflows, liquidity needs, and risk-return of assets. But here are some examples of holdings that could be considered:

  • Native token
  • Stablecoins (DAI, USDC, etc)
  • Blue chip crypto assets (BTC, ETC)
  • Indexes (BED, DPI, DEFI+L)

Some of the key features that make Index Coop products attractive for treasuries are:

  • Simplicity — Instead of diversification with a self-managed portfolio of tokens, an index allows you to transact and manage a single token position. All of the complexities of portfolio rebalancing are done automatically.
  • Transparency — Fees per product are transparent and upfront. In addition, the index inclusion, exclusion, and rebalancing rules are defined and documented.
  • Methodology — Index Coop partners with knowledgeable and credible methodologists such as DeFi Pulse in the case of $DPI, and Bankless DAO in the case of $BED to define the composition and parameters for the index products.

And many well-known DAOs are making the move to diversify with Index Coop products:

Source: https://twitter.com/Crypto_Texan/status/1452705228747313153

Additionally, FEI Protocol invested $10,000,000 into $DPI with their Protocol Controlled Value (PCV). So the question to consider: Is your DAO treasury also taking the necessary steps to properly diversify?

The purpose of most DAOs is to manage and govern their protocol in perpetuity. DAO treasuries, therefore, need to be capitalized in a way that not only ensures their ongoing operations can continue but also lets them invest in future growth. Treasury diversification will provide increased stability and better guarantee multi-year funding for the DAO’s activities.

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