Most DAOs pride themselves on adhering to the principles of decentralisation. So why aren’t more of them using decentralised infrastructures in their day-to-day treasury management activities?
Despite the fact that DAO treasuries now hold more than $11 billion in value, It’s widely accepted that most DAOs are not actively managing their treasuries. With 3.9 million governance token holders and nearly 700,00 active votes and proposals, the existing governance model makes the process of treasury management time-consuming, cumbersome and ineffective.
Recently, we stumbled across a treasury management proposal that would have taken weeks to approve and then quickly became obsolete because of how rapidly market conditions changed. What then? Another proposal to change the strategy and then another several weeks to pass it through governance just for the proposal to become obsolete again?
This got us thinking about how important it is for DAOs to react quickly, stay nimble and pivot to daily fluctuations in the market. The good news is that the technology does exist for DAOs to actively manage treasuries and delegate control over this function without compromising on any of their fundamental values.
Decentralisation is slow… and that’s a good thing!
First, let’s set the scene and take a look at why DAOs have favoured passive over active treasury management.
It’s no secret that the DAO governance process tends to be quite slow. Since active treasury management requires the flexibility to act quickly to changing market conditions, this has been difficult (or even prohibitive) for many DAOs to effectively implement.
For example, typically the DAO governance process begins when someone makes a proposal; next, there is a lengthy debate on the forums until the proposal is potentially refined (c. 2 weeks then, a temperature check on snapshot (c. 1 week) and finally an official vote with token stakeholders (c. 1 week).
While the time required to pass proposals can be lengthy, this is a generally good thing: it allows for a healthy debate and ensures that checks and balances are in place.
Setting the right financial objectives is key.
When it comes to treasury management, we’d argue that setting the right financial objectives for a DAO is key. The objectives should aim to achieve the following:
1. Consolidated visibility into costs and establishing the right amount of stable coins to hold for sufficient operational runway and project sustainability
2. Effective payments for payroll, vendors, expenses etc.
3. Objectives set for active treasury management (eg. earning yield on native token, raising cash for strategic acquisitions, etc)
4. A process that delegates payments and treasury management functions to one or more experts whilst ensuring the DAO can:
- Retain ultimate authority and control
- Ensure full transparency (by viewing the portfolio, any activity undertaken and assess 24/7 performance)
- Ability to limit fraud and/or bad actors from misappropriating funds
Objective-setting lends itself well to slower governance because objectives don’t need to change very often if set properly in the first place. However, this is not the case for execution of the objectives.
Executing financial objectives needs to be quick.
Let’s consider two examples to illustrate the need for DAOs to quickly and efficiently execute financial objectives.
If you are repeatedly paying salaries late because the DAO is too slow to reach consensus, your contributors will eventually get fed up and abandon you.
If your DAO approves a specific treasury management strategy that is yielding 15% APY at a particular point in time, then it’s important that you can react quickly to changing market conditions (eg. the news of a hack, insolvency or yields suddenly falling to zero).
So how do you achieve this without compromising on the “D’ in DAO?
As the name suggests, decentralisation is a fundamental value proposition that a DAO must uphold to ensure its continuity. When it comes to financial management, these principles center around on-chain transparency and trustlessness (ie. the prevention of fraud or misappropriation of assets).
Here are a few tools that can help you delegate financial decisions to specialists whilst still achieving these objectives:
Consolidated visibility into costs and operational runway
- Tools like Cryptio can help aggregate transactions for easier accounting
- Services like Llama and Messari can help with reporting
Effective payments for payroll, vendors, expenses etc.
- Tools like Coinshift (built on Safe) allow you to make mass payouts, give spending limits to specific people, label transactions and receive real time notifications
- Tools like Superfluid help with the automation of recurring payments such as salaries
Active Treasury Management
- Tools like Enzyme enable DAOs to confidently delegate treasury management to a specialist individual or team in a completely transparent and trustless way
- A delegated manager can react quickly to changing situations within a certain number of pre-approved constraints (eg. approved protocols, asset universe, tolerated trading slippage, etc)
- Stakeholders meanwhile have full transparency with access to a real-time reporting dashboard that includes all on-chain activity since inception
In conclusion, harness speed without compromising on decentralisation.
In the current market environment it’s becoming increasingly important to set clear financial objectives. However, acting on them often requires specialists who must be empowered to act (and react) quickly. Thanks to new technologies, it’s now possible to do this whilst retaining the underlying principles of decentralisation.
This is especially important for DAO treasury management, since a perceived inability to delegate this function to one or more experts whilst still adhering to decentralised working practices has caused many DAOs to stay reticent.
However, with the introduction of tools like Enzyme, DAOs can leverage the protocol’s infrastructure and programmable risk management features to a) solve the speed dilemma (ie. the time required to approve certain actions), b) ensure that the treasury manager acts in accordance with the DAO’s wider strategy and c) harness the benefits (earn yield, diversify treasuries to mitigate risk, etc) that come with active treasury management.
We are Avantgarde. The technologists, analysts and catalysts of on-chain asset management, optimised with the tools and expertise that put your imagination in control.
As the core contributor to the Enzyme protocol, we utilise our experience in both DeFi and traditional finance to build products and services on top of Enzyme, the DeFi Operating System.
Our goal is pure value creation that is simple, efficient, secure and future proofed. We enable investors, asset managers, businesses and DAOs to maximise operational, administrative and financial efficiencies when managing their assets.
Through a combination of boundless thinking and unprecedented rigour, we help our clients achieve radical impact — whatever the mandate.
This is how we untether the norms to DeFi Gravity:
- Treasury Managers: We work collaboratively with corporate treasury managers to strategically and transparently earn higher yields that are in line with risk profiles and investment policies.
- DAOs: We help DAOs manage crypto balance sheets in a safe and transparent manner while still taking full advantage of the rapid pace of innovation and iteration of new financial primitives.
- Asset Managers: From investor management to strategy automation, Avantgarde provides tools and services to optimise the on-chain asset management experience.
- Investors: We build slick, seamless products that elevate the experience of DeFi while making it simple, easy and safe for investors to access the best that DeFi has to offer.