The first episode of our treasury management mini-series co-hosted with the Royal Melbourne Institute of Technology (RMIT) features a conversation between Yearn Finance’s Bull Trapper and RMIT Blockchain Innovation Hub senior research fellow Dr. Darcy Allen. The conversation was moderated by SCRF’s Head of Operations, Eugene Leventhal and Associate Professor and RMIT Blockchain Innovation Hub co-founder Chris Berg.
What unique challenges does treasury management present for web3 organizations?
How does a web3 organization balance diversification of treasury assets with growth and token buybacks?
How does a web3 organization use incentives to create a community that is aligned with its long term goals?
Takeaways from the discussion:
Many web3 projects aren’t bringing in much cash flow; they have treasury assets in highly volatile cryptocurrencies; and at times can be hamstrung by community voting.
DAOs don’t need to reinvent treasury management, transparency combined with traditional financial practices such as balance sheets and run rates can serve them well.
Sub-teams and committees can provide DAOs with the fast decision-making of a hierarchical organization.
Yearn Finance core contributor Bull Trapper remained anonymous during his conversation with SCRF but describes himself as coming from a traditional finance background. This experience proved to be an asset with the DeFi platform.
“Crypto is a very young industry,” he says. “There are a lot of people involved who only know crypto. When I came into Yearn, the first thing we did was calculate run rates and create balance sheets and made it all public, so everyone could see what was in our treasury and how things were spent.”
He identifies three major issues with web3 treasuries: they’re rarely profitable so there isn’t much cash flow coming in; most projects keep their treasury assets in cryptocurrencies that are extremely volatile, making hedging difficult, and because of the communal nature of decentralized communities, making swift decisions can be difficult.
Yearn uses small teams (Yteams) which are accountable to the community at large to act as stewards, and, partly as a result of their meticulous attention to treasury management, have managed to become profitable over the past year, accumulating enough cash for eighteen months of operation, even if the market drops to zero.
“Treasuries exist for two broad reasons,” says economist Dr. Darcy Allen. “They exist to fund local public goods such as marketing or research, and they also act as a costly signal to the ecosystem: a large treasury with a long runway signals to the ecosystem that this is a long-term play.”
Diversification is a crucial discussion. “There are a lot of different approaches to strategic diversification,” Allen says. “Crypto Winter is always coming. We also have to consider who we’re selling tokens to. Do VCs provide value for the discount they’re receiving? Many tokens also confer governance rights, which is also something to consider.”
Treasuries can also be used to generate funds. “From the very beginning we focused on managing debt and earning yield,” Trapper says. “Managing risk is a crucial part of earning. We’re always monitoring debt and prepared to pay down debt if there’s an adverse event.”
Young DAOs can benefit from really thinking about what their treasuries are for. “Overtime we’ll see two broad approaches,” Allen says, “It always comes down to a make or buy decision. It’ll be interesting to see if professional treasury fits in.” Trapper agrees. “A lot of protocols would really benefit from having experienced people who know how things run. Unless you know what you’re doing, you can’t run a treasury.”
I enjoyed learning about how certain treasury management practices could benefit DAOs. For organizations that are hesitant to adopt more mature/conservative management practices like the ones Bull described or even consider profitability as an avenue, I wonder why they would be hesitant… Is it simply because they lack the knowledge/expertise to understand how it could be beneficial or is there an advantage to signaling a short-term play? Perhaps this makes a DAO or the ecosystem more attractive to certain actors with short-term motives.
Centralized Treasury Management for Decentralization
Treasury management is a core activity for any organization. For example, it helps ensure that the funds and other assets are used effectively and efficiently, which can have a significant impact on the organization’s performance. A successful treasury management system should also allow an organization to make strategic decisions about where it invests its resources and how it uses them. Decentralized organizations (DAOs) are no different from traditional organizations in this regard; they still need to manage their treasuries effectively.
Their objective is ensuring our entity meets future obligations from its current position without having to liquidate assets at unfavorable prices or raise additional funds from investors who may be unwilling to provide them at reasonable terms. This Core activity for any organization ensuring the funds or assets are used effectively and efficiently, is a significant impact on the organization’s performance.
A successful treasury management system should also allow an organization to make strategic decisions about where it invests its resources and how it uses them. Managing cash and other liquidity resources, including investments, loans and debt financing. It is an important function for any organization or corporation with access to capital markets. In order to achieve this goal, an entity needs to understand its cash flow patterns, its mix of short-term liabilities (such as accounts payable), long-term liabilities (such as bonds).
DAOs are no different from traditional organizations in this regard; they still need to manage their treasuries effectively, It’s a function affects every aspect of an organization, from its ability to raise capital and pay employees, to paying vendors and suppliers and making investments in the future.
Similarly, a difficult challenge is forecasting future needs when there are so many unknowns. The solutions will vary depending on the organization. Decentralized Organizations & Centralized Organizations discuss the same topics that have been discussed and debated on-chain and off-chain since the notion of time.
Treasury management is one of the most important roles in any organization, whether it be a traditional company, a DAO or a community. Teams and committees can provide DAOs with the fast decision-making of a hierarchical organization while still being transparent and accountable. By using traditional financial practices such as balance sheets and run rates, treasury management doesn’t need to reinvent itself for the web3 era.
The right structure and processes will also allow an organization to replace fees with direct community contributions and donations.
This is the ideal solution as it allows a DAO to remain independent from any external parties. Early project teams are advised to focus on ensuring that they have enough resources to develop their projects before raising more funds.
Early project teams are advised to focus on ensuring that they have enough resources to develop their projects before raising more funds.
This is due to the fact that a DAO Treasury can only be used for token holders’ decisions, so any excess after funding will not provide additional value to the network. The same applies to organizations and companies with an existing treasury structure. In this case, it is recommended that these organizations adopt a DAO Treasury as part of their organizational strategy in order to make better use of their resources and align themselves with current trends in governance and financing models.
Rely on decentralized organizations and technology, using funds from ICOs and community contributions.
A decentralized autonomous organization (DAO) is a computer program that operates using smart contracts. The rules of the DAO are enforced using software, which allows them to be self-governing and prevent fraud or breaches of contract.
A DAO is not necessarily a company, but it can be one. A company is a group of people who work together to achieve an aim, usually for profit, just code that executes on blockchain technology.
Created by any individual or group who wants to run it without any human intervention or oversight. It will have its own token, which can be used as currency within its community. The tokens can also be traded on exchanges, although they may not have legal status as securities in all countries due to their complex nature and lack of regulation by any central authority.
The more treasure a DAO has, the more resilient it becomes against attacks from adversaries. Therefore, it is important to store assets safely in order to maintain its financial independence and autonomy.
In order to engage with the DAO community, users must purchase tokens — often referred to as “tokens” — using cryptocurrency such as bitcoin or ether (ETH). After buying tokens, users can make proposals for how the DAO should spend its funds or vote for proposals submitted by other members of the community
The benefits of a decentralized autonomous organization include:
There is no single point of failure — if one individual or institution fails, the project can continue as planned because it’s decentralized and distributed across multiple networks
Transparency — all payments, salaries and other financial transactions are visible to all members of the team
Accountability in decision-making — members can vote on major decisions to ensure they have full control over their funds while also contributing their expertise; there’s no need for a central office where decisions are made by middle managers who may not understand every aspect involved in making these decisions
Treasure management is critical for the survival of your DAO and require proper planning.
DAOs are a new type of organization that aims to operate without a leader. However, treasury management is critical for the survival of your DAO and require proper planning. Treasury management refers to how the funds are managed and allocated by the community members who hold tokens within your smart contract.
Treasury management requires meaningful feedback and decision-making opportunities available for the community members that hold tokens within your smart contract. This means that any changes in how funds will be managed by a third party should be made transparently so that everyone has access to information about any potential risks involved with making changes as well as what benefits could come from those changes.
DAOs are a new type of organization that aims to operate without a leader. However, treasury management is critical for the survival of your DAO and require proper planning. Treasury management refers to how the funds are managed and allocated by the community members who hold tokens within your smart contract.
This means that any changes in how funds will be managed by a third party should be made transparently so that everyone has access to information about any potential risks involved with making changes as well as what benefits could come from those changes. In addition, it is important for the community members holding tokens within your smart contract to have a say in how Treasury Management Tools:
The following tools can help with managing your treasury. Ethereum Wallet DApp — allows further interaction interact with your account including sending and receiving transaction, checking balances, deploying contracts, etc. It also allows you to create multiple accounts which is useful when creating a multisig or multi-user wallet
Conclusion
DAOs can be viewed as an organization that has a built-in mechanism for self-funding and is fully autonomous. This means that it does not need an external source of capital from investors, banks or other institutions to operate. The only requirement is support from the community which will determine its success or failure depending on how well it serves its users.
DAOs should be viewed as crypto-equity. Their value is determined by the revenue generated and the team involved. They are only useful when the community will be there to provide cash flow, technical development, marketing strategy and business partnerships.
Your DAO will live and die depending on the success and survival of your community. Your organization will be supported by a community of investors and users. In order to ensure that there are enough resources to keep your coins stable, the value of the coin should not be over-inflated and must stay under the exchange value after some time. Ideally, it should be lower than the exchange value which demonstrates low risk and high confidence among investors. The foundation of the success of your DAO is trust, tight governance and proper funding.