By
Grace
October 17, 2022
4 Min Read
DAO treasury management is a key component of growing and sustaining a successful decentralized organization. The DAO treasury serves as the financial backbone of the organization, providing essential resources for operations, projects, and governance. Effective treasury management enables long-term business success and ensures that the organization’s funds are used according to its mission and objectives. Treasury refers to the pool of funds that a DAO manages, typically collected through token sales and used to finance the DAO's operations, initiatives, and goals. The DAO treasury acts as a collective pool of assets governed by the community, supporting organizational growth and operational activities. Proper management of the DAO's financial resources is crucial for ensuring sustainability and growth. At the same time, poor treasury management can lead to the complete destruction of a DAO. In this article, we’ll explain how DAO treasury management works and recommend how it should be approached.
DAOs raise funds, generate revenue from their core business, pay contributors for their work and provide returns to their investors. In a sense, they function a lot like a traditional business organization. But in reality, DAOs are much different.
A decentralized autonomous organization (DAO) is built on smart contracts and blockchain technology. This eliminates the need for governing bodies and operates without a central authority, which in the case of standard organizations have control over decision-making. DAOs are decentralized and governed by their members through different voting mechanisms. Governance mechanisms play a crucial role in ensuring transparency, strategic decision-making, and aligning the DAO's operations with its objectives. Token holders have governance rights and actively participate in the decision-making process.
Although a fairly new concept, DAOs have already gained popularity and are actively being explored as opportunity-rich alternatives to traditional organizations. There are many established decentralized organizations today, with billions of dollars worth of crypto assets locked in their DAO treasuries. Community engagement is essential for the functioning and legitimacy of DAOs.
DAOs have built-in treasuries that store the funds of the organization. The DAO's treasury is managed collectively by its members. DAO members can gain access to the treasury only after receiving the approval of other members. The treasury is held by the decentralized organization’s smart contract, meaning that it is defined by the rules and algorithms written in that smart contract. Treasury operations include both routine and strategic activities. Day to day operations are handled through established processes.
All decisions are made collectively, and major decisions typically require broader consensus and careful deliberation. Payments are executed automatically once the decision has been approved via the voting system.
The fact that DAOs are relatively new inevitably means that there are not as many tested and proven strategies for treasury management. Managing a DAO treasury is a complex task that requires specialized knowledge and careful planning. Risk management is a primary responsibility for DAOs, and identifying as well as mitigating associated risks is essential to protect assets. Efficient management is necessary to ensure the sustainability and growth of the organization. The treasury management process is a comprehensive approach that involves multiple strategies, including diversification, liquidity management, and governance.
To improve decision-making and oversight, DAOs often rely on dedicated management tools and risk management teams. Evaluating the track records of these tools and teams is important to ensure reliability and expertise. Understanding system limitations, such as gas fees and human error, is also crucial when managing DAO treasuries. Assessing estimated risk and being able to transparently assess potential threats allows DAOs to make informed choices. Initial capital allocation and risk assessment directly influence subsequent decisions regarding investments and operations.
Most DAOs are not specifically formed for treasury management, but may establish a dedicated treasury management committee to oversee these responsibilities. Effective treasury allocations and treasury allocation strategies are vital for optimizing returns and minimizing losses. Managing diversified treasuries presents challenges, but diversified treasuries help reduce exposure to any single asset or market event. Asset management practices play a key role in optimizing treasury performance and ensuring long-term success.
Focusing on a single investment can increase risk, so a diversified approach is generally preferred. Treasury management involves various tasks, such as managing cash flows, monitoring treasury performance, and ensuring sufficient liquidity to meet obligations. Considering real world assets and market conditions, such as a bull market, is important for informed decision-making. The use of decentralized capital and decentralized applications enables DAOs to maintain control and flexibility in their treasury operations.
Standard formula risk assessment methods, often used in traditional finance and with fiat currencies, can be adapted for DAO treasury management. Including assets like dao tokens and curve lp tokens in a diversified treasury can further enhance resilience. Funding projects is another important aspect, supporting the DAO's ecosystem and long-term vision. The unique aspects of dao's governance and management require collective decision-making and transparency. Finally, the influence of decentralized finance has introduced new tools and strategies, shaping the way DAOs approach treasury management today.
Most DAO treasuries are comprised predominantly of native tokens. This could be a cause for concern and is often considered a risky practice. Decreases in the price of the native token can dramatically influence the worth of the whole treasury. For some organizations, this could be destructive. Managing diversified treasuries and maintaining a stable ratio of assets is crucial to reduce risk and ensure long-term sustainability.
A more sound approach to DAO treasury management is to keep a portion of the treasury in less volatile currencies. For example, a recommended practice is to use stablecoins, but there are many different DAO treasury diversification strategies that can be explored. Including fiat currencies, DAO tokens, and Curve LP tokens as part of a diversified strategy can further enhance risk management and yield opportunities.
Effective asset management is essential for optimizing treasury allocations and ensuring that assets are deployed efficiently. Treasury allocation and treasury allocations should be tailored to balance risk and opportunity, leveraging specialized tools and strategies.
The benefits of diversified treasuries also include considering real world assets, which can provide additional stability and risk reduction for DAO portfolios.
Multisig wallets are often used for DAO treasury management. Although some of the more popular names in the space include Coinbase and Armory, there are many different multisig wallter solutions available today. They're digital wallets that require the use of at least two private keys for transaction approval, where each private key is held by a different DAO member. The treasury funds are highly secured and locked into a smart contract, where every transaction must receive multiple levels of approval.
Multisig wallets are highly recommended as they increase the security of DAO treasury management by ensuring that the organization's funds are not controlled by a single member.
The lack of intermediaries and official authorities in DAO-related processes often leads to concerns about transparency and spending. Although a single person cannot make independent financial decisions without the approval of other members, regular reporting regarding investments and achieving results is a must to create trust and encourage more individuals to take part in the DAO.
Some of the essential information that should be presented through reporting includes the long-term treasury strategy, the amount of Treasury stakes, the percentage gain, the length of the investment cycle, and others. Preparing financial statements as part of the reporting process is also crucial for effective financial planning and analysis. Access to such insights will make decision-making easier and more efficient for DAO contributors. Regular reporting also helps monitor and improve treasury performance by providing data for analysis, risk management, and optimization of the DAO's financial health.
DAO treasuries are a vital component of the organization as they are used to fund its development, expand its network, present its values, and sustain long-term success. As DAOs gain more popularity and acquire more experience, we’ll likely see new best practices take shape when it comes to DAO treasury management. These evolving best practices will guide subsequent decisions and improve treasury operations, ensuring that DAOs can effectively manage risks and maintain liquidity. Additionally, the growing importance of managing decentralized capital will shape the future of DAO treasuries, enabling more robust and flexible strategies for asset allocation and control.
