Cryptocurrency has taken the financial world by storm, with decentralized autonomous organizations (DAOs) becoming increasingly popular as they manage substantial amounts of assets on-chain. However, with the rapid growth in the value of DAO treasuries, concerns about overexposure to crypto assets have emerged. In this article, we will delve into the risks associated with this overexposure and explore strategies to mitigate them for the long-term sustainability of DAOs.
The Current State of DAO Treasuries
Onchain analytics have revealed a concerning trend in the composition of DAO treasuries. Between November 2023 and March 2024, the total value of DAO treasuries surged by over $20 billion. Leading the pack were Optimism’s DAO treasury with around $7.9 billion in assets, closely followed by Arbitrum DAO with $6.9 billion. This significant increase in value was in parallel with the overall spike in the cryptocurrency market, indicating a correlation between the two.
What’s alarming is that most DAO treasuries hold cryptocurrencies exclusively, with a recent report by Avantgarde showing that nearly two-thirds of the top 25 DAOs allocated over 90% of their treasury value to their native token. Additionally, Chainalysis estimated in 2022 that 85% of DAO treasuries were concentrated in a single asset. While it’s common for DAOs to hold reserves in Bitcoin, Ethereum, and other altcoins, this narrow focus on crypto assets poses a significant risk.
The Risks of Overexposure
One of the primary risks associated with overexposure to crypto assets is the lack of financial planning. DAOs that hold a large portion of their assets in cryptocurrencies but incur operational costs in fiat currencies face a dilemma. They must predict when to convert crypto to fiat to cover expenses, which becomes increasingly challenging during market downturns. Overexposure to a native asset or other volatile cryptocurrencies can expose DAOs to financial instability and potential collapse.
Furthermore, internal voting processes within DAOs can be influenced by bullish sentiment, leading to decisions that prioritize high APY and trending assets over prudent risk management. This short-term focus may hinder the ability of DAOs to account for operational costs and maintain financial stability in the long run.
Strategies for Mitigating Risk
To address the risks of overexposure, DAOs should consider appointing treasury managers or a Chief Financial Officer (CFO) who can make proactive decisions based on risk management principles. These financial experts can help diversify treasury assets, implement strategic investment strategies, and ensure long-term sustainability.
While fiat currencies may not be the ultimate solution, diversification is essential for risk management. Stablecoins offer a viable option for DAOs to mitigate risk while maintaining liquidity and solvency. Additionally, tokenized assets, such as USDY, BUIDL, TFUND, and TBILL, provide opportunities for DAOs to diversify their treasury holdings without leaving the blockchain ecosystem.
Another approach is to explore crypto-uncorrelated assets, such as fixed-income assets like T-Bills, which offer lower volatility and stable returns. By diversifying into assets that are not correlated with the crypto market, DAOs can reduce their exposure to market fluctuations and enhance risk management practices.
The Path to Longevity
In conclusion, DAOs must prioritize long-term sustainability by diversifying their treasury holdings, embracing risk management strategies, and exploring innovative investment opportunities. While the crypto market continues to evolve, DAO treasury managers must evolve their methodologies to adapt to changing market conditions and mitigate risks effectively. By taking proactive steps to diversify assets, DAOs can ensure their longevity and resilience in the face of market uncertainties.