DAOs (Decentralized Autonomous Organizations) are a new web3 innovation that have revolutionised the way we think about organisational structures and governance. By leveraging blockchain technology and smart contracts, DAOs enable decentralised ownership and decision-making through community voting mechanisms.
However, one of the biggest challenges faced by DAOs is managing treasuries efficiently and professionally.
This was highlighted last week when USDC lost its 1:1 peg, along with several other high-profile stablecoins. Since many DAOs keep their treasuries in stablecoins, this poses a significant risk to treasuries and ultimately the perpetuity of DAOs themselves.
In fact, the USDC de-peg is an indicative example of an even bigger problem: many DAOs still manage their treasuries in a convoluted manner, which makes it hard to react quickly when it is critical to do so.
There is a better way for DAOs to unlock the full potential of treasury management. Enzyme offers a sophisticated interface and innovative tooling that simplifies the presentation and interaction with DAOs and DAO stakeholders.
In this blog post, we’ll explore the challenges faced by DAOs when it comes to treasury management, and discuss how Enzyme can help overcome these challenges.
DAOs typically suffer from a slow and inefficient governance process
The governance process in DAOs is one of the most critical components of their operations. It’s the mechanism that enables collective decision-making, allowing token holders to have a say in the management of the protocol. However, as the crypto space has grown and evolved, so too have the challenges facing DAOs, particularly when it comes to treasury management.
One of the most significant challenges facing DAOs today is their slow and inefficient governance process when it comes to decisions that require quick and agile turn around times. Traditional voting mechanisms, which require a vote for every transaction, can lead to long delays in decision-making and make it difficult for DAOs to respond quickly to changing market conditions.
This is particularly true when it comes to managing risk. For example, if a DAO is relying on a stablecoin as a store of value, the depegging of that stablecoin can have serious implications for the DAO’s financial health.
ENS DAO recently experienced this first-hand when USDC lost its 1:1 peg. While the DAO’s members flagged the issue immediately and asked all the right questions, the underlying structure of the DAO itself limited the team’s ability to respond to the situation quickly.
As the conversation shows, ENS DAO was essentially stuck with a ~9 day time-lock from decision to execution. In the case of a de-peg, that time could be the deciding factor between getting out unscathed and suffering some very unwanted consequences.
We raise this point not to disparage ENS DAO — far from it. Rather, ENS DAO’s interest in the topic and willingness to address the situation shows a unique understanding of the topic. The DAO’s inability to act, not from a lack of willingness but because of the inherent structure of the DAO itself, shows in unequivocal terms why this is a serious issue for DAOs across the broader DeFi and web3 ecosystem.
Enzyme as a trustless solution for efficient DAO decision-making
To overcome this challenge, DAOs can leverage treasury management solutions that enable them to manage their funds in a more agile and efficient manner while remaining completely trustless. The only solution we know of today that enables trustless active management is Enzyme.
Every time a new asset or protocol is added to Enzyme, the engineering team carefully considers all the different ways a manager can misappropriate funds from it (intentionally or unintentionally). We then build custom protections against those and have these contracts rigorously audited and carefully documented. This assures that there is always a completely trustless way to manage funds for a DAO without worrying about the misappropriation of funds.
Last but not least, Enzyme’s custom policies and permissions enable a DAO to enforce rules and restrictions for the manager’s actions, such as the protocols and assets they can interact with, the size of trades they can make, and most importantly an automated stop loss which removes permission from the delegated manager if they incur a certain amount of slippage and/or trading loss.
These policies are encoded in the Enzyme Vault’s smart contract architecture which automate the process of risk management for the DAO and remove trust assumptions. Again, they’re all audited, carefully documented and come with an easy interface.
In short, enzyme’s smart contracts enforce that a DAO can delegate active management to a specialised party trustlessly and force them to act within a specific set of rules without needing to oversee every detail.
The importance of speed and efficiency in DAO decision-making
One of the key features of Enzyme that makes it an ideal solution for DAO treasury management is the ability for the Vault owner to delegate one or managers to manage assets on behalf of the Vault owner. This feature enables DAOs to outsource day-to-day management of their treasury to a manager that has been whitelisted and approved by the DAO. The DAO can remove any delegated traders quickly by triggering a vote to do so if it is required.
By using Enzyme’s delegated trading feature, DAOs can benefit from the increased speed and efficiency that comes with professional management. This is particularly important in the fast-paced world of DeFi, where market conditions can change rapidly and decisions need to be made quickly in order to capitalise on opportunities and manage risks.
Delegated trading is crucial for DAOs that want to retain self-custody of funds but hand over day-to-day treasury management for enhanced efficiencies and speed. With delegated trading, DAOs can benefit from the expertise of hiring a professional treasury manager while retaining complete control over their assets. This ensures that funds are always safe and secure, and that trading strategies are aligned with their long-term goals and risk tolerance.
Automated accounting, reporting and transparency
Beyond the core functionality of trustless asset management, Enzyme Vault contracts and the dApp used to access them also ship with a wide variety of convenience features. They give the protocol tools and characteristics that can save DAO operations substantial time and money, operating in a completely trustless manner.
In terms of accounting, Vaults always know how much of which assets they hold, and each asset in the Enzyme asset universe has a price feed (currently provided by Chainlink). Given these two facts, a Vault always knows the gross asset value of its holdings and can calculate a share price that’s accurate to the minute.
You can generate an automated report at any time that is fed by on-chain data pipelines, which rely on Enzyme’s seven subgraphs. These subgraphs track events emitted by every action taken on a Vault. This entire process is automated and trustless, meaning you don’t need to rely on a third-party to verify whether a report is genuine or accurate.
The net result is that Vault managers can digest and interpret the transactions executed in the Vault in a human-readable way. You don’t need to trust a third-party, since the data is fed directly from on-chain events. In short, this guarantees trustless and accurate reporting.
The two features above are combined in the Enzyme web app to show stakeholders exactly what’s happening with the assets in the Vault on a real-time basis. This will soon be programmatically accessible via a unified API, allowing stakeholders to build tools to slice and dice and display the data however they might choose.
Why does treasury expertise matter for DAOs?
A DAO treasury that isn’t managed professionally and efficiently risks compromising an entire project’s lifespan.
As such, we strongly believe in the need to manage treasuries efficiently and professionally with tooling that enables them to maintain their core values. The values which matter to us are:
- Security: No custodial or counterparty risk
- Trustless delegation: Controlled access to professional(s) with smart contract protections against misappropriation of assets
- Efficient: Flexibility to respond to changing market conditions without having to pass DAO thresholds.
- Automated reporting: Total transparency into the trading activity, accounting, and fees without needing to trust any centralised party in generating them.
As recent events have shown, a slow and outdated governance process puts DAOs at real risk. It doesn’t have to be that way.
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If you share some of these values and are looking to outsource treasury management, Avantgarde is at the intersection of protocol development and treasury management. We can work collaboratively with you to manage balance sheets in a safe and transparent manner.
Reach out at info@avantgarde.finance to learn more.
