The importance of DAO treasury diversification

I believe that DAOs would greatly benefit from broader treasury diversification. As their role in the crypto ecosystem continues to increase, they must become more liquid entities capable of expansionary policies even throughout bear markets.

Round Trip

A classic example would be the Uniswap DAO. At the peak of the prior bull market, the treasury was valued at close to $12 billion, compared with its current valuation of $2.5 billion. Many other DAOs followed this exact same pattern.

DeepDAO: Uniswap Treasury

Foundations

Uniswap did seek to change this through the creation of the Uniswap Foundation, allocating 1.05% of $UNI’s total supply to the organization. The status of the Uniswap Foundation as a legal entity gives it more freedom in its holding and its ability to provide different types of grants. Creating legal entity sidearms attached to DAOs gives them more discretion in spending and holdings and presents a partial solution to the diversification issue.  

Why Diversify?  

Very few investors have a portfolio consisting of a single asset. Due to the difference in objectives, DAO treasury holdings remain ideologically distinct from single investors. Rational choice dictates that individuals seek to maximize profit, whereas a DAO’s central objective is to support its protocol. However, basic risk management applies to both.

A DAO must always hold the majority of its holdings in the native token to signal confidence in the protocol and the governance token itself- without digging into the fact that issuing governance tokens is how DAOs build treasuries in the first place. However, instead of holding 100% in the native token, proper risk management and general efficacy would indicate that a ranging set of allocations from 80% to 20% (bull) to 60% to 40% (bear) split would be better depending on market conditions.

A DAO’s liquidity directly correlates with its ability to serve this aim. As the market conditions hint that perhaps the bottom has already been, now is the time for DAO members to begin making diversification proposals with exit positions in place to rotate treasury holdings and ensure that, even throughout the bear market, DAOs can operate at maximum efficiency.

Examples

MakerDAO presents an excellent example of a DAO that has diversified its holdings. MakerDAO purchased $500 million of bonds last year, and a recent proposal seeks to increase this exposure by an additional $750 million.

The Upside

DAOs that diversify and rotate their holdings from native tokens to stablecoin during the bull market will have greater operational runways and can continue building and attracting talent, which is always easier without the distraction of price.

The actions taken by DAOs regarding their treasury holdings in the next twelve to eighteen months will define their operating capacity for the next four years. DAOs that successfully diversify and rotate holdings into stablecoins during a market frenzy will be able to undertake far more ambitious policies for expansion throughout the next bear market. DAO members should be introducing proposals advocating for this idea now.