By
Grace
October 17, 2022
4 Min Read
DAO treasury management is a key component of growing and sustaining a successful decentralized organization. Effective treasury management enables long-term business success and ensures that the organization’s funds are used according to its mission and objectives. 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.
Decentralized autonomous organizations are built on smart contracts and blockchain technology. This eliminates the need for governing bodies, which in the case of standard organizations have control over decision-making. DAOs are decentralized and governed by their members through different voting mechanisms.
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.
DAOs have built-in treasuries that store the funds of the organization. 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.
All decisions are made collectively and 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. Still, there are a few basic approaches that can help DAOs manage their funds in a way that works in favor of the ultimate goals of the organization.
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. 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.
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. Access to such insights will make decision-making easier and more efficient for DAO contributors.
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.
