DAOs wrestle with how to winterize their war chests

Decentralized autonomous organizations have learned the hard way that they can't live on their own tokens alone.

Crypto winter saw the value of their treasuries – which the groups typically use to pay salaries and cover other operational expenses – slashed by about a third. Partly to blame for the downturn is a lack of diversification in those coffers, as most DAOs typically rely almost exclusively on their own native coins.

But also at fault is the very decentralized nature of the organizations themselves. As DAOs rethink the management of their treasuries and consider moving away from their own tokens, they’re finding out that coming to consensus on exactly how to do so isn’t exactly easy.

“This is an inherent obstacle most, if not all, DAOs face," said Jacob Blish, head of business development at DeFi protocol Lido Finance. "The community views governance token sales as ‘losing faith’ in the protocol."

DAOs, which typically make decisions via blockchain-based community votes, had reached unprecedented levels of popularity and wealth before the crash. Their combined treasuries peaked at $13.2 billion in November 2021, according to financial aggregator site DeepDAO. By June, that number had plunged to $8.5 billion.

Another significant decline in crypto prices would see those treasuries drop even further, putting their futures at risk. Many such projects fell by the wayside after the crash from 2018 to 2020, but groups like MakerDAO, Opensea, and Uniswap that survived have since gone on to become mainstays of the crypto space.

Time to diversify

Uniswap is the biggest decentralized exchange and has the largest DAO treasury. Still, its $2.3 billion horde is almost half the $4.3 billion it had stashed away at the beginning of the year, DeepDAO figures show. Lido Finance, meanwhile, held $752 million in its treasury at the beginning of this year. It’s worth less than half that now.

Data from DeepDAO

Aside from the massive losses, the two DAOs have something else in common: their treasuries are not diversified. Uniswap’s reserve is 100% denominated in its UNI native token and Lido DAO (LDO) tokens account for about 88% of that DAO’s treasury funds.

They’re by no means alone. According to DeepDAO, there are 60 projects with treasuries worth at least $10 million. Of these, 40 have treasuries whose value is more than 80% denominated in the DAO’s native token. 

The reason for such allegiance is two-fold. It can help to show the team’s commitment to the protocol and its community. It also limits selling pressure on the token since DAOs are unlikely to liquidate a huge portion of their holdings.

But, as they learned when winter started setting in, it makes the treasuries much less resilient to downturns in token prices.

Trying something different

BitDAO, the second largest DAO treasury, is an outlier. It holds 35% of its treasury in its native token BIT, 27% in ETH, 17% in stablecoins and a variety of other coins make up the remainder.

Its treasury is different because BitDAO is different. Rather than a DeFi project, BitDAO provides funding for its network of partners. The organization has invested in the likes of Game7 and zkDAO — the former is a blockchain gaming ecosystem project while the latter is an organization that wants to drive adoption for Ethereum scaling technology zKsync.

According to Jacob Cantele, head of product strategy at BitDAO's Windranger Labs, the decentralized nature of the DAO's treasury is necessary to ensure the growth of all ecosystem partners.

"BitDAO has pursued a fractal growth model where we are building together with other projects in the ecosystem,” Cantele said. “The diversified treasury represents our commitment to continue building in a way that benefits the most projects in the ecosystem.”

But if DAOs aren’t diversified by virtue of their business model, getting there organically can be difficult. Many of them don’t even have agreed-upon management procedures in place. Any decision for a DAO is a complicated process that usually involves lengthy community debates, followed by a vote among governance holders.

Recently, Tornado Cash DAO tried to diversify its $122 million treasury only to see the community vote against a proposal. If the vote had passed, the DAO would have sold 50,000 of its vested native tokens for at least $486,000 worth of ETH. Tornado Cash has since been sanctioned by the US Treasury and the DAO's community forum is no longer accessible online.

Turn and face the strange

Other DAOs still have big treasury management proposals on the table.

Fei Protocol has attempted to manage its treasury. The stablecoin project recently voted to liquidate $2.2 million worth of tokens, including Curve, Aave and Convex, from its $28 million reserves. Fei exchanged these coins for DAI stablecoins.

MakerDAO, the DAO behind the DAI stablecoin, has taken a different approach to the management of its $47 million treasury. Instead of exchanging tokens for stablecoins, the DAO has pivoted to mainstream investment options like government bonds. It voted in June to invest $500 million into US Treasury bills and bonds.

According to Lido’s Blish, DAOs are coming to terms with the need to hold a cache of stablecoins, which can serve as a non-volatile capital base for maintaining DAO overheads.

Lido Finance currently has two treasury management proposals on the table. One calls calls for the sale of 10,000 ETH ($15 million) from the treasury’s ether holdings for stablecoins. The other for the sale of 20 million LDO tokens ($14.5 million), also for stablecoins. Voting on the latter proposal is currently underway.

“We are actively exploring a few things in parallel,” said Blish. "Our current priority is to guarantee security for the DAO and its members for at least 2 years and reserving the current headcount to continue with execution.”