DAO treasuries, the backbone of many decentralized autonomous organizations, are facing increasing risks due to their over-reliance on cryptocurrencies. On-chain analytics reveal that while the collective value of DAO treasuries surged by more than $20 billion between November 2023 and March 2024, the sustainability of such growth remains questionable.
The rise in DAO treasury values has been closely tied to the cryptocurrency market’s overall spike during that period. Optimism’s DAO led the charge, managing assets worth approximately $7.9 billion, while Arbitrum DAO followed closely with $6.9 billion. However, experts are raising concerns over this trend.
A report by Avantgarde highlights that nearly two-thirds of the 25 largest DAOs hold more than 90% of their treasury value in their native tokens. Similarly, Chainalysis noted in 2022 that around 85% of DAOs’ on-chain treasuries were stored in a single asset. In many cases, DAOs prefer to hold reserves in Bitcoin or their native cryptocurrency, leaving them vulnerable to market downturns.
DAO treasury management is often governed by internal voting processes, and the report suggests that bullish market sentiment frequently influences these decisions. “Voting tendencies are swayed by bullish sentiment, impulsively favoring high APY and ‘what’s hot’ while disregarding massive adjusted risk,” one analyst said. This approach leaves DAOs overexposed to potential financial difficulties, especially during crypto market declines.
The core of the issue lies in the misalignment between DAO treasuries and their operational costs. DAOs typically hold their assets in cryptocurrencies, but their expenses, such as employee salaries and operational fees, are usually denominated in fiat currencies. This discrepancy complicates the process of predicting when to convert crypto assets into fiat for expenses, leading to significant financial challenges.
“Welcoming overexposure to its own native asset is a slippery slope for any DAO,” cautioned one expert. The volatility of cryptocurrencies could trigger a financial collapse at any moment, making it difficult for DAOs to plan long-term strategies. Furthermore, the persistent threat of security breaches adds another layer of risk, making it clear that current treasury management practices are unsustainable.
To address these challenges, many believe that DAOs must adopt more deliberate approaches to risk management. Appointing treasury managers or Chief Financial Officers (CFOs) with the foresight to make proactive decisions is seen as crucial. “CFOs who exhibit more foresight, rather than thinking in cycles or sprints, could provide this,” said one industry insider.
While fiat currency may not be the ideal solution for decentralization, there is a growing consensus that a certain level of diversification is necessary. “At the most basic level, it’s risk management 101,” the report emphasized. Diversifying treasury holdings with stablecoins, for example, could mitigate risks and ensure liquidity during market downturns.
Prominent DAOs such as Arbitrum are already exploring alternatives. They are allocating substantial funds into tokenized treasuries, with products like Ondo’s USDY, Blackrock’s BUIDL, Cogito’s TFUND, and OpenEden’s TBILL gaining favor. These tokenized assets offer a more stable foundation for treasuries, helping to decouple DAO finances from the volatile swings of the broader cryptocurrency market.
In conclusion, as DAOs continue to evolve and grow, the need for sound treasury management becomes increasingly apparent. Sensible financial planning, risk management, and diversification are essential for ensuring the long-term sustainability of these decentralized organizations. With the right strategies, DAOs can weather market downturns and position themselves for future success.
