Crypto overexposure is putting on-chain treasuries at risk

Onchain Analytics is not lying when it shows us a very unhealthy state of DAO tanks. The collective value of DAO tanks has been reported to be more From November 2023 to March 2024, Optimism’s DAO assets rose to $7.9 billion, followed by Arbitrum’s DAO at $6.9 billion. It’s no coincidence that this massive surge in the value managed by DAOs has been in line with the collective rise of the cryptocurrency market as a whole. That’s not good news, really.

It is clear that on-chain treasuries tend to hold only cryptocurrencies in their reserves exclusively. a report A study by Avantgarde found that nearly two-thirds of the top 25 DAOs hold more than 90% of their value in their native currency. Similarly, Chainalysis has estimated In 2022, 85% of DAO treasuries were stored in a single asset. And if not the native token, it has also become common for DAOs to hold their treasuries in Bitcoin (BTC), Ethereum (ETH), and altcoins.

With DAO treasury management influenced by internal voting processes, it can be assumed that voting trends are influenced by bullish sentiment, recklessly favoring high APY and “what’s hot” while ignoring the huge adjusted risk. As a result, DAOs become overly exposed to extreme risk during market downturns, hampering their ability to account for operational costs that are managed with fiat currencies.

The importance of financial planning

When a DAO holds most of its assets in cryptocurrencies but incurs operational costs in fiat currencies, it creates an unnecessary dilemma in predicting when to withdraw cryptocurrency to pay for those costs. Welcoming overexposure to its native assets is a slippery slope for any DAO. In theory, cryptocurrency market volatility could lead to a financial collapse of a DAO at any time. This makes financial planning increasingly difficult.

However, there is a clear need for DAOs to take more deliberate action in appointing treasurers – or CFOs – who are able to make smart, proactive – rather than reactive – decisions in the face of a storm of unpredictability.

Add to this the ongoing number of security breaches, and it becomes clear that putting all your eggs in one big basket of tokens is not sustainable at all. For DAOs to be serious about growing their treasuries, they need to start looking at approaches that reduce risk and favor longevity. This could provide financial managers with greater insight, rather than thinking in cycles or bursts.

Clearly, fiat currency is not the permanent solution; it is counterintuitive and can be seen as a step backwards in the name of security. However, there is no doubt that a degree of diversification is required. At the most basic level, it is risk management 101. So, is it time to look to TradFi for inspiration? Clearly, assets with non-crypto-correlated returns can avoid bearish landmines and hacking attacks. And while decentralized ideals are, of course, necessary to strive for, there is also an argument to be made that web3 is no longer a decadent playground that should eschew long-term products for the sake of pride.

A sensible treasury manager should approach risk management with the same zeal as he pursues profit maximization and theoretical principles. Ultimately, the sustainability of the ecosystem should be the top priority. While we know there is a lot of untapped potential, as the crypto ecosystem continues to evolve, Web3 treasury managers would do well to look beyond their reserves and asset allocation.

Non-Cryptocurrency-Related Assets (RWAs) to the Rescue

There is an argument that the most obvious option for DAOs that want to mitigate risk while maintaining a blockchain-based treasury is to diversify into stablecoins. Stablecoins provide efficient liquidity management that ensures solvency in the event of a market crash or crypto winter. The seamless conversion to fiat currency would also simplify the process of paying operational costs.

There is another trend emerging. There are several prominent decentralized autonomous organizations, Included Firms like Arbitrum have begun to allocate significant funds to tokenized treasuries, with products like Ondo’s USDY, Blackrock’s BUIDL, Cogito’s TFUND, and OpenEden’s TBILL proving favorable. The boom in the RWA market is being driven by the maturation of institutional values ​​in web3. By closely following fundamental principles, tokenized assets can free DAOs from their current association with sentiment-driven volatility while preserving the value of the treasury on-chain. By tying to tried and tested products, RWAs provide a space for strategic treasury management that can see the future.

Fixed income assets such as Treasury bondsKnown for their low volatility and stable returns, cryptocurrencies offer a thoughtful solution for DAOs that need to eliminate their high-risk consumer positions. In a high interest rate environment, short-term US Treasuries are currently yielding 5% with low risk associated with them. They are considered safe bets because they are fully backed by the government, giving investors a safe place to store value. Companies like Tether, with its stablecoin, have already done so. I turned Banks seek to use these types of options to ensure their offerings are more transparent rather than using non-transparent debt instruments.

The Road to DAO Longevity

Opponents might argue that DAO treasuries should be able to diversify without resorting to traditional finance tools for help. While top-tier crypto assets have the potential to mitigate volatility in a similar way, the reality is that real-world tokenized assets, including stablecoins, offer more immediate security for projects that are serious about building long-term products.

Treasury management strategies must take the seriousness of the task at hand, which is to maintain the longevity of the project. On-chain capital must be diversified; it’s that simple. Cryptocurrencies will continue to mature and their use cases will expand, but as new products are introduced on-chain, it would be remiss of DAO treasury managers not to commit to evolving their methodologies in line with this.