DAO Treasury

Decentralized Autonomous Organizations (DAOs) are an emergent phenomenon in cryptocurrencies that have the means to disrupt the way organizations, businesses, and individuals participate in society. Initially, DAOs were strictly a means to achieve consensus. They began as somewhat benign insofar as communities would form around a meme, idea, or cause to vote on proposals. Increasingly, DAOs are manifesting in all shapes and sizes. There is an increasing focus on business models that generate revenue to purchase their DAO token, which provides constant buy pressure for the DAO token. DAOification is replacing existing business models. Cash flow instead redirects into a DAO token rather than profits and revenue being distributed at the will of a centralized managing entity. Blockchain technology facilitates this transition out of traditional business models and is ironically not yet widely understood in the cryptocurrency community. The value of revenue accumulating in a DAO Treasury and implications for those staking in the DAO is not widely understood.

TREASURY TYPES

While the implications of DAO treasuries are not particularly tangible in the real world at this stage of implementation, there are several existing examples of DAO treasuries that leverage cryptographic assets.

OHM AND STRONG BLOCK FORKS

Olympus DAO ($OHM) and Strong Blocks ($STRONG) are concepts that may fall under the umbrella of “DeFi 2.0.”. These deviations from the “DeFi 1.0” model involve investors providing liquidity to receive a shared allocation of pre-mined assets.

$OHM gives investors a share of treasury revenue realized through the sale of bonds that cannot be redeemed for a set period, in this case, two weeks. The capital raised from the sale of bonds goes directly into the $OHM treasury, which is utilized to buy back the $OHM token. Treasury inflows outpace emissions by design. For this reason, staking $OHM gives a considerable Annualized Percentage Rate (APR) return to investors. However, the utilization of the treasury appears limited by design to sustaining the protocol and implementing a price floor for the $OHM token. There are many $OHM forks, most of which quickly find that bond issuance is in a negative ROI territory, making such an activity unviable from an investor’s perspective to supply the treasury. For more information, please refer to Olympus DAO FAQs and Docs.

$STRONG follows a similar model. However, investors are instead required to purchase nodes that generate a sizeable return. Nodes can only be purchased with the $STRONG token. New users entering node staking invariably drive the price of $STRONG, and those receiving $STRONG rewards are likely to compound their earnings into purchasing more nodes. The result is $STRONG being removed from circulation. However, the issue with this model is that it rewards early investors off the back of new node owners entering the market. Should participants decide to no longer compound their earnings and no new liquidity enters the protocol, concerns about sustainability and ongoing viability may arise. There have been many forks of $STRONG across different chains, and many have failed to sustain price appreciation in what investors often refer to as a “soft rug-pull”. For more information, please refer to Strong Block FAQs.

TOMB FINANCE DAO TREASURY

Our view is that TOMB Finance is a “DeFi 2.0” concept that almost resembles “DeFi 3.0.” through the utilization of the DAO treasury to intervene with the protocol. When market conditions become unfavourable, the $TOMB token may lose peg to $FTM and enter a contraction epoch.

A moment must be given to praise TOMB Finance for implementing a seigniorage model that is accessible to regular investors and challenges the standards of monetary policy.

When peg goes below 1, the TOMB treasury is purchasing $TBONDS with $TOMB reserves. Bonds are held until the peg is back above 1.05, whereby positive deviation from the peg leads to a greater redemption of $TOMB when exchanged for $TBONDS.

When peg transitions from a contraction epoch to an expansion epoch, the treasury is replenished with $TOMB required to pay the debt from $TBOND redemptions.

Once the debt epoch concludes, and the peg is above 1.05, emissions of $TOMB resume.

For more information on the mechanics of TOMB Finance, please refer to Tomb Docs.

DECENTRALIZED CAPITAL FUNDS

Recently, the emergence of decentralized asset management treasuries has added fervour to running definitions of DeFi. Some have referred to these asset management models as DeFi 3.0. The design of these protocols involves the sale of a DAO token. The proceeds from initial sales form the starting capital of a treasury. Revenue generated from the utilization of the treasury often purchases the DAO governance token native to its treasury. By purchasing the DAO token with income accrued from treasury activities, it is removed from circulation and burned to increase the floor price of the DAO token.

USE CASES FOR DAO TREASURIES

The discovery of new use cases for DAO treasuries is ongoing, and the concept is capturing the attention of those that value decentralization, sustainability, and equality of opportunity.

PROTOCOL INSURANCE

When treasury assets generate revenue outside of the DAO, it accumulates a war chest used at the discretion of DAO signatories or fulfillment of community proposals. When invested in the DAO, sustainability and price appreciation are mutually desirable for all relevant parties.

REPLACING TRADITIONAL BUSINESS STRUCTURES (‘DAOIFICATION’)

DAOification is a fascinating phenomenon in the real-world economy, unbeknown to many cryptocurrency investors, with coverage on the concept only now emerging. Businesses recognize the frustration of investors around the opaqueness of investment activities. Shareholders in a business or company are subject to proposals put forward by in-house corporates. While they have a vote, they have limited creative control in the submission of proposals to dictate a future direction for the organization.

DAOification is exciting and disrupts human organization at every possible level. You can have a direct stake in a small business that you care about or frequent as a customer for the first time. As a customer and an investor, purchases through a DAOified business strengthen their investments’ resilience.

FUNDING FOR START-UPS AND SEED INVESTMENTS

DAOs enable an entirely novel and direct way to seek start-up funds. In exchange for a token that gives investors a share in a treasury activity, they provide the starting capital for a business or investment fund. Revenue received by the DAO treasury in the beginning phases can supply its liquidity. The depth of a liquidity pool determines the potential trade volume and market capitalization of a DAO token. Furthermore, businesses that embrace DAOification can operate in isolated, permissioned, and closed markets. Effectively, their token value can become somewhat isolated to broader market forces, depending upon the asset used to collateralize the token. On the flipside, DAOified businesses can choose to market and seek funding from all over the world.

Raising funds through token sales that form the basis of a treasury gives start-up projects the financial resources required to pursue their business goals. Seed investments often need initial starting capital to develop their products and remunerate contributors. Depending on the business’s strategy, they can also fund marketing to increase awareness of their product.

IDLE ASSET UTILIZATION IN YIELD GENERATING INSTRUMENTS

Revenue generating treasury assets has formed the basis of the transition toward “DeFi 3.0.”. Treasuries very often have underutilized or unutilized assets. There has been a paradigm shift toward raising funds for a DAO treasury utilized in yield generating instruments. Typically, these instruments are of the “DeFi 1.0.” variety. Staking idle treasury stablecoins in Aave for a steady low-risk return is one example that can extend to higher-risk investments in “DeFi 2.0.”, products such as $OHM and $STRONG. This concept emerged from the perceived complexities of the average investor not being educated enough to manage the risks and pursue nuanced opportunities in DeFi. The alternative solution to this narrative of ‘complexity being a barrier to entry is to have users purchase a token that will appreciate from a treasury that allocates its revenue to their native DAO token. This concept has evolved along with the additional products and features emerging on DeFi protocols. Many managed DeFi protocols continue to experiment with added elements of risk. A typical approach is for a DAO treasury to utilize idle assets by allocating them according to risk. High-risk DeFi plays that offer greater returns may use a smaller portion of the treasury, whereas low-risk DeFi plays may receive a greater allocation of idle assets.

DEMOCRATIZING ACCESS TO ALGO-TRADING INSTRUMENTS

When investors begin participating in decentralized exchanges (DEXs) and financial instruments, they often encounter the presence of algorithmic-trading (algo-trading) bots. Based on the nature of liquidity in decentralized environments, many arbitrage opportunities occur not only across blockchains but across different liquidity pool Masterchef contracts. For example, you could purchase $BNB for $500USD on Pancakeswap (PCS), but notice $BNB may be for sale on 1Inch for $520 USD. This price difference would incentivize investors to purchase for less on PCS to sell for more on 1Inch. Profits made from these price differences across marketplaces are known as arbitrage. Arbitrage is often executed manually, but if you happen to have access to an arbitrage bot, you can automate arbitrage trades across liquidity pools before an average investor can manually capitulate on the opportunity.

Furthermore, bots have evolved into novel functions, such as ‘snipe-launch bots’ that can front-run investors upon the launch of a token on a given blockchain. These bots are often heavily funded and trade on behalf of “whales”.

Recognizing the inequity in this phenomenon and that algo-trade bots are not going away, what would happen if you democratized an algo-trade bot’s utility?

DAO Treasuries can level the playing field by utilizing algo-trade bots as profits go straight back to investors in the form of token buybacks. Typically, market dominance is reserved for whales, and DAOs distribute this power among a collective of average investors.

PORTFOLIO MANAGEMENT: CORE HOLDINGS AND RISK-OFF HEDGES

DAOs are sovereign entities with their own collective set of values, and some treasuries will build a portfolio that reflects these shared values. If the DAO values decentralization, it may invest in assets such as Ethereum and Bitcoin. If the DAO believes that DeFi will take off, they may diversify the treasury into various DeFi protocol assets. If the DAO believes in NFTs, they may build an investment thesis around a particular class or type of NFT.

But what happens when there is a market-wide correction? The treasury needs to risk-off assets and down-trade the market to maintain the DAOs equity. Decentralized investment funds are just beginning to emerge with the primary goal of growing the value of the treasury with non-native and stable assets. If properly managed, the DAO treasury will reduce risk before a 20%+ market-wide correction.

These risk-off hedges may include bonds, physical assets (gold, precious metals, real estate, etc), and stablecoins.

DAO TREASURY AS AN INDEX FUND

A compelling use case for a DAO is as an index fund. As mentioned above, some DAOs are often characterized by shared values amongst their constituents. An excellent example of an index fund powered by a DAO treasury is Merit Circle ($MC). For more information, please refer to the fundamental analysis on Merit Circle.