Treasury management in an era of DeFi
13th August 2021
As much progress has been made in respect of DeFi protocol, treasury management has become a major issue to be addressed. Capital management by DAOs is interesting. The author shared his/her views in this article.
- Selling assets in the public markets may signal a lack of confidence and cause a collapse in the asset price. Some protocols get around this through reaching private agreements with venture capital firms. However, this may not be genuinely fitting in the ethos of community-based governance.
- The other angle they may take is to make a public announcement on which the community votes. These could get rather messy as we have recently seen Sushiswap. The community may not be fast enough to form the consensus needed to initiate such an agreement meaningfully.
- More importantly, many large organizations would rather avoid the scrutiny altogether and purchase the assets from the public markets. Due to a mix of the two, some of the largest DAO treasuries remain concentrated on very few assets with directional exposure. The graphs below show the percentage distribution of prominent DAO treasuries in dollar terms.
Treasuries need to liquidate their holdings on a regular basis as crypto markets are largely cyclical. Selling part of the treasury during a bull run extends the team’s runway and gives resources to make strategic acquisitions in the case of a market pullback. In this article, we briefly look at capital allocation for University Endowments and then evaluate a few solutions for protocol treasuries to hedge their risk. The rationale for DAO capital is the same as that for University Endowments. The goal is to optimize for longevity and be anti-fragile to ensure operational deployment and development funds even in bear markets.
Using a single Token as a treasury can magnify the risk dramatically, even for very large coins, e.g., Uniswap
There are several solutions:
Using Options: Treasury funding puts by selling covered calls to protect the protocol in case of a significant market correction/simply buying puts to hedge downside risk.
Stablecoins and Indices: Treasuries holding stablecoins, diversified indices, and other on-chain structured yield products to provide working capital without having a distress sale in an already weakened market.
Borrowing Against Treasury: Treasuries availing on-chain loans against token collateral to provide working capital without the need to sell tokens upfront.
Range Tokens: Treasuries leveraging range tokens to avail debts that can be settled later with the native token.
Based on the conservative estimates, there will be at least $10 billion in assets looking for treasury management within the next six months. The infrastructure to cater for its optimal control is still under development. Centralized service providers are slowly waking up to the opportunity, and startups have capitalized on the narrative. Given the large-scale coordination necessary to make decisions on these large pools of capital, it may be a while before we trend towards efficient management. In our opinion, we will likely see specialist fund managers emerging within the next few quarters. They will be individuals who understand the complexities of the CeFi world and bridge it to the DeFi market. In the interim, communities and protocol developers will likely continue to bring new instruments like UMA’s range tokens to assist with the transition.
One of the angles we did not mention in this article today is the possibility of specialist fund managers running portfolios entirely on-chain. We will dive into how a hedge fund or a venture fund will transition towards running on-chain in future articles. For now, all that can be said is that protocol treasuries are a sleeping giant waiting to be used optimally to push the industry forward.
Link to original article: https://globalcoinresearch.com/2021/08/06/treasury-management-in-the-age-of-defi/
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