One of the most prominent oversights observed across DAOs is the lack of treasury diversification. This prevailing shortcoming was illustrated in a study which showed that 85% of DAOs hold their treasuries in a single crypto asset. In most cases, this was their native governance token.
While there are many strong arguments for the validity of this approach as well as many practical reasons for employing it, the downsides pose significant risk. This is especially true for DAOs compensating their contributors in crypto.
The Drawbacks of a Single-Asset Treasury
When considering risk management for DAO treasuries, despite their divergence from traditional financial norms, some of the same practices for risk mitigation are applicable.
Like with traditional financial institutions, DAOs are subject to market volatility. The value of a DAO’s treasury is impacted by inflation, market sentiment, asset performance and more. For many DAOs, this became especially evident as 2022 came to a close with a global rate of inflation at roughly 9% and the stock market hitting a 14-year low.
In moments of market downturn, a common reaction is the panicked selling of DAO-native tokens for more stable or established currencies. In instances of mass sell off, DAO treasuries can see sweeping devastation if no measures towards diversification have been previously established.
Bear markets can result in similar shifts in market sentiment, causing price drops and subsequent liquidity issues. For DAOs remunerating contributors in crypto it is of principal concern to ensure liquidity at all costs.
A lack of liquid assets can lead to a project's collapse, emphasizing the criticality of treasury diversification as the most assured pathway to consistently meet operational expenses.
Treasury Diversification with Non-Speculative Assets
For DAOs that want to hold blockchain-based treasuries while optimizing for risk mitigation, the most straightforward option is to diversify with stablecoins. The combination of assets that includes a DAO’s native token and stablecoins significantly reduces exposure to the potential volatility of crypto markets.
Stablecoins are virtual currencies pegged to a stable asset such as a fiat currency and provide a reliable store of value and a means of exchange within the decentralized ecosystem. By holding stablecoins in their treasuries DAOs can minimize the impact of volatile markets on their financial resources.
The efficient liquidity management that stablecoins offer plays a critical role in ensuring solvency in the case of market drops or crypto winters. Additionally, when it comes to paying contributors, stablecoins are easily converted into other currencies, whether crypto or fiat.
Holding enough non-speculative assets to cover operational expenses for up to two years guarantees that operational expenses can be met and a consistent financial position can be maintained.
Furthermore, optimizing for solvency while continuing to execute all operations through smart contracts reduces risk of value erosion without sacrificing blockchain-based governance systems.
Investing in Established Cryptocurrencies
Blue chip cryptos such as Ethereum and Bitcoin possess increased stability due to their long-standing presence and general market resilience. Though more volatile than stablecoins, these well-established currencies allow DAOs to generate passive income earning interest through liquidity protocols such as Aave.
In the case of DAOs compensating contributors in crypto beyond their native token, these blue chip protocols represent a highly desirable and valued form of compensation that is less vulnerable to high rates of slippage.
Holding Fiat Currencies
It is critical for DAOs with payment obligations in fiat currency to maintain sufficient savings in the required currency to fulfill those expenses. Budgeting in advance removes the risk of selling crypto on a downturn to make payments in time. Similar to the strategic holding of stablecoins to ensure solvency, it is advisable to hold enough fiat currency to cover one to two years of expected expenses.
Even for DAOs without significant fiat expenses, it is still prudent to hold a small portion of one’s treasury in fiat. While the crypto ecosystem offers numerous opportunities and benefits, maintaining a balance that includes fiat currency provides another level of stability and flexibility.
Managing DAO Payments and Compliance with Rise
When issuing payments to global contributors in crypto it is crucial for DAOs to go through a platform that both supports their unique governance structure and ensures compliance. At present, few solutions exist for crypto payroll in native governance tokens while providing an international compliance layer.
Rise is a market-leader in crypto payroll and compliance, delivering a comprehensive solution tailored to web3-native organizations and traditional companies alike.
Through Rise, DAOs can compensate contributors in their native token anonymously while guaranteeing full compliance. Rise verifies contractor identity using Know-Your-Customer checks while personal information is kept anonymous to fellow contributors. The RiseID functions as a Rise user's self-sovereign, on-chain identity and is the mechanism through which payments are issued and received.
Streamline hiring, payroll and compliance for your DAO with Rise. Schedule a demo today to learn more about how Rises’ next-level crypto payroll can scale and support your organization.
