DAO Treasury: Entire Focus On Native Token Holdings Represents Significant Risk

Decentralization Autonomous Organizations (DAOs) will be the companies of the future and every company needs robust treasury management. However, a common practice amongst most DAO Treasury systems highlights significant risk to their ability to continue functioning effectively during turbulent times or in bear markets. The issue is most of them keep their entire funds in their own tokens, don’t diversify and have no mechanism in place to prepare for crisis situations.

What’s the problem? The native tokens are generally valueless governance tokens, which allow the token holders a right and usually vote to participate in the DAOs governance. Their value is strongly tied to the community’s perception of the benefits they can extract from the protocol, to the cash flow generated through yield in some cases and promise of more tokens upon staking them, in the protocol itself. They are, as a result, highly volatile and their value can fluctuate dramatically.

DAO Treasury Balances - Messari Crypto
DAO Treasury Balances – Messari Crypto

Messari Crypto researcher Mr Roberto notes that it’s good for rewarding the community, but it becomes a problem, if DAOs want to continue funding it’s own components or invest in new ventures, during those times when the market is down. Even small to moderate corrections in the markets can mean disastrous loss of value for the DAO Treasury systems. The data shows exactly that. Nearly all of them maintain entire balances in their own tokens, except for minor deviations.

Only API3 DAO, Yearn and Alchemix have very minor DAO treasury holdings in other tokens (ETH, BTC, Stable coins), but the rest of the top protocols maintain a 100% native token treasury. As a result, the assets under management (AUM) figure of these protocols have dropped by nearly 50%, as the value of the native tokens collapsed with the recent general decline in the market.

Moving forward, the DAO Treasury system need to employ better measures of fund management, by diversifying and spreading the risk across. They need to consider taking community controlled allocations in Bitcoin, Ethereum and Stable coins, assets which hedge against decline and don’t fall as much, when the going gets tough. So, the DAO workings can be funded without problems.

DAO Treasury
DAO Treasury© Cryptoticker

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