Amid the ongoing crypto bear market, many promising DAOs have collapsed or lost tremendous value due to insufficient treasury management. While decentralized autonomous organizations (DAOs) offer a powerful new organizational model, failure to prudently structure and diversify the treasury asset mix jeopardizes sustainability, especially in times of volatility.
Given the prevalent treasury structure of most DAOs, I must say that a significant percentage of these groups were already doomed to fail even before they started.
To put things in perspective, less than 265 out of the over 2,400 decentralized organizations being tracked by DeepDAO have a treasury size of more than $50,000. A look at the top 10 DAOs by treasury size also reveals that eight out of ten of these organizations held over 90% of their treasury assets in their native token.
DAOs are Reliant on Crypto
Most early-stage DAOs fund their organizations predominantly through cryptocurrencies like ETH and BTC. This creates exposure to crypto market cycles. When prices decline, it can be devastating with the following impacts:
- Grants and budgets defined in USD must be covered by fewer crypto assets and initiatives generally get underfunded. Decentraland DAO, for instance, recently approved a proposal to halt its grants program until the price of MANA stabilizes.
- Member staking rewards and incentives fall as crypto revenues drop. This translates to a decline in contributor momentum. Let’s face it, people will naturally chase the bag and they’ll simply leave if there’s no more money to be made.
- Holdings meant to sustain operations for years shrink in terms of usable dollars. I’ve personally seen this happen in several DAOs where runways shorten drastically. A perfect example in this regard is ShapeShift’s $1 million USDC loan request from the Fox Foundation to extend its runway by an additional five to six months.
The bottom line is that without prudent asset diversification, DAOs live and die by crypto markets. This hampers durability.
Impact of the 2022 Bear Market
The 2022 bear market illuminated many DAOs’ overexposure. Numerous DAOs reduced grants or halted funding programs as holdings shrank. Some DAOs like Terraform Labs lost billions in value as founding crypto LUNA collapsed.
Protocol DAOs dependent on protocol fee revenues saw budgets crippled alongside declining crypto activity. Many early Web3 companies constrained hiring and budgets after raising funds in crypto now far below ICO prices. Crypto-denominated staking and rewards became far less compelling as asset values tumbled.
This demonstrated the existential risks crypto-only treasuries introduce for DAO longevity.
Mitigating Crypto Exposure Through Asset Diversification
Rather than hold all or most of their value in seemingly worthless native tokens that are tied to the price of Bitcoin, I suggest that DAO treasuries hold diversified assets including:
Stablecoins – USD-pegged crypto assets insulate from volatility like USDC or DAI.
Short-term bonds – Liquid bond ETFs balance risk and return beyond crypto.
Real estate – Tokenized property or REITs add real-world hard assets.
Traditional equities – Holding public company shares hedges crypto downturns.
Commodities – Gold or other diversifying commodities act as an inflation hedge.
Revenue companies – Building or acquiring companies with consistent cash flows.
IP rights – Owning profitable intellectual property like patents and media rights.
Crafting a portfolio of uncorrelated assets supports stability across market environments.
Challenges With Diversification
To be fair to DAO communities, diversifying their treasuries is easier said than done. Some of the challenges builders may face include:
- High friction converting crypto into traditional assets adds costs.
- Tax complexity increases with diversified holdings.
- Community members may prefer speculative crypto over prudent but mundane portfolios.
- Maintaining professional treasury management requires expertise beyond just governance.
- Decentralizing portfolio management brings coordination inefficiencies.
- On-chain governance is not designed for nuanced treasury oversight.
Bridging these gaps warrants adopting institutional best practices selectively.
Sustainable DAO Funding Models
Beyond treasuries, prudent DAOs also cultivate diverse revenue streams like:
- Protocol fees – Owning and governing crypto protocols earning activity fees.
- Service revenue – Earning consistent income from DAO-provided digital services.
- Contractor revenue – Consulting and auditing services provided by expert DAO talent.
- Licensing – Charging for rights to proprietary content, data, and intellectual property.
- Royalties – Collecting royalties and carrying interest from funded projects.
- Token vesting – Gradually vesting and selling tokens earned from development work.
Regular revenues stabilize budgets outside volatile markets and lower reliance on winning new grants and donations.
The Path for Maturing DAO Treasuries
As DAOs evolve, three treasury stages emerge:
1. Crypto-centric
Early DAOs rely almost entirely on crypto like ETH, BTC, and their native tokens vulnerable to market swings.
2. Diversified reserves
Assets mix lower-risk income streams like bonds and revenue companies to hedge volatility.
3. Professionalized management
For large DAOs, autonomous treasury organizations form with fiduciary obligations to steward assets.
This progression follows the roadmap of major institutions developing prudent financial management.
Conclusion
Inattention to treasury risk and diversification severely hampers DAO lifespans, especially amid volatile crypto markets. However, following institutional best practices around asset allocation, revenue mix, and professional stewardship offer a path to maturity. Prudent financial safeguards give DAOs the durability to persist as stewarding organizations beyond fleeting speculative manias. With proactive treasury governance, DAOs can flourish into sustainable communities delivering value for members over the long term.
