Crypto overexposure is putting on-chain treasuries at risk

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On-chain analytics don’t lie when they show us a very unhealthy state of DAO treasuries. The collective value of DAO treasuries reportedly increased by more than $20 billion between November 2023 and March 2024. Optimism’s DAO treasury led the charts with around $7.9 billion in assets under management, closely followed by Arbitrum DAO with $6.9 billion. It’s no coincidence that this significant increase in value managed by DAOs coincides with the collective growth of the overall cryptocurrency market. And that’s not good news.

This is telling, as on-chain treasuries tend to hold only cryptocurrencies in their reserves. A recent report by Avantgarde found that almost two-thirds of the top 25 DAOs hold more than 90% of their treasury value in their native tokens. Similarly, Chainalysis estimated that 85% of DAOs’ on-chain treasuries will be held in a single asset in 2022. Even without native tokens, it has also become common for DAOs to hold their treasuries in Bitcoin (BTC), Ethereum (ETH), and altcoins.

With DAO treasury management being influenced by internal voting processes, it can be assumed that voting trends are driven by bullish sentiment, impulsively favoring high APY and “what’s popular,” and ignoring large adjusted risk. As a result, DAOs are overexposed to significant risk during market declines, which hinders their ability to account for operational costs managed in fiat currencies.

The importance of financial planning

When a DAO holds most of its assets in crypto but incurs operational costs in fiat, it creates an unnecessary dilemma in predicting when to withdraw crypto and pay out. Tolerating excessive exposure to its native asset is a slippery slope for any DAO. The volatility of the crypto market could theoretically trigger a DAO’s financial collapse at any point. It makes financial planning an increasingly difficult task.

However, it is clear that DAOs need to take more careful steps in appointing treasury managers or CFOs who can make proactive (rather than reactive) decisions to weather the storm of unpredictability.

Add the constant number of security breaches into the mix, and it becomes even more apparent that the practice of putting all your eggs in one big token basket is not sustainable. To get serious about growing a treasury, DAOs need to start thinking about approaches that reduce risk and promote longevity. CFOs who exhibit greater foresight rather than thinking in cycles or sprints can provide this.

To be clear, fiat is not a permanent solution; it can be seen as counterintuitive and a step backwards in terms of security. Still, some diversification is definitely needed. At its most basic level, this is risk management 101. So is it time to look to TradFi for inspiration? Assets with yields uncorrelated to crypto can clearly prevent bearish mines and hacking attacks. Of course, while it’s imperative to strive for decentralized ideals, there’s also an argument that web3 is no longer a playground for degeneracy, where long-term products must be avoided for the sake of pride.

Sensible treasury management should approach risk management with the same zeal that follows profit maximization and theoretical principles. As a result, ecosystem sustainability should be a priority above all else. As the crypto ecosystem continues to evolve, while we know there is a lot of untapped potential, web3 treasury managers should look further afield to strengthen their reserves and put assets to work.

Crypto-uncorrelated assets (RWAs) come to the rescue

One argument is that the simplest option for DAOs looking to reduce risk but maintain a blockchain-based treasury is to diversify into stablecoins. Stablecoins offer efficient liquidity management that ensures solvency in the event of a market crash or crypto winter. Frictionless conversion to fiat money would also simplify the process of paying operational costs.

Another trend is emerging. Many major DAOs, such as Arbitrum, are starting to allocate significant funds to tokenized treasuries, with products such as Ondo’s USDY, Blackrock’s BUIDL, Cogito’s TFUND, and OpenEden’s TBILL showing positive results. The RWA market boom is being driven by the maturation of institutional values ​​in web3. By more closely following fundamental analysis principles, tokenized assets can free DAOs from their current reliance on sentiment-driven swings but keep treasury value on-chain. Based on tried and tested products, RWAs provide scope for forward-thinking strategic treasury management.

Fixed income assets like Treasury bonds, known for their low volatility and stable returns, offer a conservative solution for DAOs that need to shed their aging, high-risk stance. In a high-interest rate environment, short-term U.S. Treasury bonds currently sit at a low-risk 5% yield. They are considered safe bets because they are fully backed by the government and provide investors with a safe place to store value. Companies like Tether have already turned to such options with their stablecoins to collateralize their offerings more transparently rather than using opaque debt instruments.

The path to DAO longevity

Opponents may argue that DAO treasuries should be able to diversify without turning to TradFi vehicles for help. While blue-chip crypto assets have the potential to similarly reduce volatility, the reality is that tokenized real-world assets, including stablecoins, provide more immediate security for projects serious about building long-term products.

Treasury management strategies must embrace the seriousness of the task at hand, namely maintaining project longevity. On-chain capital must be diversified; it’s that simple. Crypto will continue to mature and expand its use cases, but as new on-chain products are introduced, it would be reckless for DAO treasury managers not to step up to the plate by harmoniously evolving their methodologies.

Chloris Chen

Cloris Chen is the CEO of Cogito Finance, a DeFi platform that offers institutional-grade investment products by tokenizing fixed income assets and stocks. Cloris combines her banking background with hands-on DeFi experience. She spent six years at HSBC and served as treasury director at a unicorn startup.