DAO Treasury: Entire Focus On Native Token Holdings Represents Significant Risk

Decentralization Autonomous Organizations (DAOs) will be the companies of the future and every company needs robust treasury management. However, a common practice amongst most DAO Treasury systems highlights the significant risk to their ability to continue functioning effectively during turbulent times or in bear markets. The issue is most of them keep their entire funds in their own tokens. They also don’t diversify and have no mechanism in place to prepare for crisis situations.

DAO treasuries are in an extremely fragile state.

While holding a large stake in their native token is beneficial to reward the community, it may prove detrimental in turbulent markets.

h/t @masonnystrom https://t.co/fhMaf3hyRS pic.twitter.com/SHq0GNWJls

What’s the problem? The native tokens are generally valueless governance tokens, which allow the token holders to vote and participate in governance. Their value is strongly tied to how much the project makes money and has good cash flow. They are, as a result, highly volatile and their value can fluctuate dramatically.

Messari Crypto researcher Mr. Roberto notes that it’s good for rewarding the community. But it becomes a problem if DAOs want to continue funding their own components when the market is down. Even small to moderate corrections in the markets can mean disastrous loss of value for the DAO Treasury systems. The data shows exactly that. Nearly all of them maintain entire balances in their own tokens, except for minor deviations.

The recent market crash showed this is the case.

Since mid-May, total AUM controlled by DAO's collapsed by nearly 50%, a number that could've been much lower if risk was spread out more evenly across stables or other governance tokens. pic.twitter.com/3SdypQEipW

Only API3 DAO, Yearn, and Alchemix have very minor DAO treasury holdings in other tokens (ETH, BTC, Stable coins), but the rest of the top protocols maintain a 100% native token treasury. As a result, the assets under management (AUM) figure of these protocols have dropped by nearly 50%, as the value of the native tokens collapsed with the recent general decline in the market.

Moving forward, the DAO Treasury system needs to employ better measures of fund management, by diversifying and spreading the risk across. They need to consider taking community-controlled allocations in Bitcoin, Ethereum, and Stable coins, assets that hedge against decline and don’t fall as much, when the going gets tough. So, the DAO workings can be funded without problems.