How to: DeFi treasury management

A Decentralized Autonomous Organization (DAO) treasury refers to the pool of funds that a DAO holds and manages. These funds are often collected through token sales and other fundraising efforts and are used to finance the operations, initiatives, and goals of the DAO.

What is a DAO treasury?

The treasury within a DAO is a critical component of its ecosystem, acting as a financial backbone to its operations. It provides the resources necessary for the DAO to function effectively and to fund its projects, grants, rewards, and other expenditures. The management of these funds, therefore, is of utmost importance to the overall health and sustainability of the DAO.

An ideal DAO treasury is expertly managed, with its features and functions geared towards efficient utilization of resources, risk management, and alignment with the DAO’s objectives. This entails strategic budget allocation, effective governance mechanisms, robust risk management protocols, and transparent operations. Through these features, a well-managed treasury supports the resilience and longevity of a DAO, while promoting trust and accountability within its ecosystem.

DAO treasury management tasks

The management of a DAO treasury involves various tasks, each essential to its effective operation:

• Budget Allocation: This involves the strategic distribution of funds towards activities and initiatives that align with the DAO’s objectives, ensuring the efficient and effective use of resources
• Governance: Treasury governance involves the establishment and implementation of decision-making processes related to the treasury’s operations, ensuring that tokenholders are able to vote on proposals and have a hand in the operation of the DAO
• Risk Management: This involves the identification, assessment, and mitigation of financial risks that could impact the treasury’s holdings, such as market volatility, regulatory changes, and security threats

Challenges for DAO treasuries

Managing a DAO treasury comes with unique challenges. Qualities that help tackle these challenges include diversity, liquidity, and transparency.

• Diversity: A diverse treasury portfolio reduces risk by spreading exposure across a variety of assets. Diverse portfolios are more resilient to market volatility and therefore more protective of the DAO’s holdings. Failure to achieve a diversified portfolio may expose the DAO to heightened risks associated with specific asset classes or market trends
• Liquidity: Ensuring sufficient liquidity is key for the smooth functioning of a DAO, enabling it to quickly mobilize funds for operations, projects, and emergency situations. A lack of liquidity can hinder the DAO’s ability to meet immediate financial obligations, potentially jeopardizing its operations and credibility.
• Transparency: Transparency in treasury operations fosters trust and accountability within the DAO’s community. It allows members to monitor the DAO’s financial health and decision-making processes, promoting engagement and participation. Without transparency, a DAO risks eroding trust and participation, which could ultimately undermine its sustainability and success

How to allocate budgets for DAO treasuries

The allocation of budgets for a DAO treasury is a complex task that requires a solid understanding of the DAO’s goals and strategic planning. Goals may include a diverse set of objectives, such as profit generation, public goods funding, development of a protocol or product, and grant provision. In this context, budget allocation serves four primary goals:

• Aligning DAO Expenses with DAO Objectives: Resources must be directed efficiently to achieve specific goals related to the DAO’s overall mission. This process involves prioritization of expenditures according to their relevance to the DAO’s objectives
• Ensuring Efficient Use of Resources: Regular budgeting and expense control form a feedback loop, which allows for constant review and improvement of resource allocation. This process helps in identifying and correcting issues such as over-spending or under-spending
• Promoting Transparency and Accountability: In DAOs, transparency is of utmost importance. The traceability of expenses fosters a sense of accountability for fund allocation and results. This, in turn, generates public information and reinforces trust in the DAO’s operations
• Risk Management: In treasury management, thoughtful asset allocation is a key factor in determining the amount of systemic risk taken on by the portfolio. Properly planned asset allocation can reduce overall treasury financial risk

The core tasks of budget allocation include identifying the overall mission and objectives, building financial statements, forecasting financials, and allocating funds:

• Identifying Overall Mission and Objectives: These dictate the needs to be satisfied and serve as the foundation for all further steps in the budget allocation process
• Building Financial Statements: An understanding of the DAO’s operations, financial position, and cash flows needs to be established. Though formal financial statements may not be required, special focus should be given to revenues and expenses as these determine the viability of the operations along with treasury composition and management
• Forecasting Financials: This task can be tricky due to the impact of market cycles and sentiment. However, historical data and past experiences can be valuable resources in this process
• Allocating Funds: Funds available should be distributed to activities or objectives that align with the DAO’s objectives, prioritizing by importance. The expected availability of funds is dictated by financial forecasts

The elements and factors of budget allocation depend largely on the nature of the DAO. Whether it’s for profit, a public good, or any other purpose, the DAO’s specific value proposition should guide budget allocation. In general terms, key categories to consider may include development (in-house or contracted), maintenance, marketing, audits, and governance. This list, however, is not exhaustive and can vary significantly depending on the DAO’s objectives and operational context.

How to manage governance for DAO treasuries

Core tasks of treasury governance include understanding the DAO’s goals and objectives, defining asset allocation and strategies, risk management, performance reviewing/reporting, and updates:

• Understanding DAO Goals and Objectives: Effective treasury governance starts with a comprehensive understanding of the DAO’s mission, activities, organizational structure, processes, and desired risk/return profile. Knowing the DAO’s risk tolerance, unique circumstances, and constraints helps tailor the treasury governance to the specific context of the DAO
• Defining Asset Allocation and Strategies: After acquiring a deep understanding of the DAO’s context, needs and desires can be translated into specific asset allocations and yield generation strategies. These should be designed to fulfill the DAO’s requirements and align with its risk tolerance
• Risk Management: Risks associated with treasury management in DAOs include market risk, protocol risk, technical risk, governance risk, among others. Effective risk management involves identifying, measuring, and mitigating these risks. Regular monitoring ensures that the DAO’s treasury remains within its risk tolerance
• Performance Reviewing/Reporting: Regular reviews of treasury performance against desired metrics facilitate accountability. Performance reporting also allows for adjustments in the DAO’s strategies to improve future performance
• Updates: The blockchain and cryptocurrency landscapes evolve rapidly. Regular reviews and updates are essential to ensure that treasury management practices remain aligned with the current environment. Changes in governance, regulations, market conditions, and technology are just some factors that necessitate regular updates in treasury management practices

DAO governance management is a cornerstone of effective DAO operations and should include all DAO stakeholders working together towards the common good of the DAO.

Key risk categories for DAO treasuries

Risk management is a crucial part of DAO treasury management, and risk assessment in DAO treasuries typically encompasses several factors:

• Market Risk: This includes price/asset risk, where changes in the value of assets held in the treasury can impact its wealth, and interest rate risk, which refers to the potential impact of changes in interest rates on the treasury’s assets or liabilities
• Counterparty Risk: This pertains to the risk that a counterparty fails to fulfill their contractual obligations, potentially leading to a loss for the treasury
• Liquidity Risk: Liquidity risk involves the possibility that the treasury may not be able to quickly convert its assets into cash without incurring significant losses.
• Protocol Risk: DAOs often rely on blockchain protocols, which can sometimes be vulnerable to various issues such as bugs or governance disputes
• Technical (Smart Contract) Risk: DAO treasuries usually interact with smart contracts. These can be vulnerable to bugs, hacks, or failures, potentially leading to substantial losses
• Legal/Regulatory Risk: Lastly, changes in legal or regulatory environments can also present a risk to DAO treasuries. These can arise from changes in laws related to cryptocurrencies or DAOs or from broader changes such as shifts in tax laws or regulations governing financial transactions

DAO managers have a duty to their stakeholders to be aware of and to carefully manage all risks relating to the DAO using the above outlined strategies.

How Karpatkey manages DAO treasuries

Many DAOs, including CoW DAO, have partnered with Karpatkey for their treasury management needs. Karpatkey retains a team of web3 professionals who provide financial, risk management, business development, legal, and other services to DAOs, with a focus on treasury management.

Karpatkey helps DAOs make the most out of their treasury funds in several ways:

• Generating Yield: An idle treasury comes with significant opportunity cost. Karpatkey regularly rotates DAO treasury funds into yield-bearing crypto assets to maximize earnings
• Risk Management: While generating yield is important, treasury funds must, above all, stay secure and protected from risk exposure. Karpatkey’s team of risk experts helps DAOs make smart fund allocation decisions
• Training a Core Treasury Team: Karpatkey mentors internal DAO team members on best practices around treasury management including wallet signature decentralization, liquidity providing, and more
• Facilitating Liquidity: Karpatkey sometimes helps provide liquidity for DAO tokens to be traded easily at any time

Karpatkey counts some of the most well-respected DAOs among their clients, including Gnosis, Balancer, ENS, and CoW Protocol. Their non-custodial assets under management total close to $400,000,000, so they know how to take care of large treasuries. To learn more about Karpatkey, check out their official website.

How CoW Swap can help your DAO

Managing a treasury is a complex task with lots of moving parts. When it comes to making trades using DAO funds, many DAOs go straight to AMMs like Uniswap. This can cause problems as liquidity pools expose trades to MEV bots, experience significant price impact, and are generally sub-optimal for the needs of DAOs — resulting in worse prices overall. CoW Swap, on the other hand, is optimized for DAO trading.

On CoW Swap, DAOs can:

• Forget about timing trades: Rather than locking your price in when you first sign your multi-sig, CoW Swap actually finds you the best price at the time of execution, so you get the best deal without having to worry about timing your trade

• Automatically manage price impact: CoW Swap spreads your order across different liquidity sources including peer-to-peer swaps and multiple on-chain liquidity pools

• Outsmart the MEV bots: On CoW Swap, all of your trades are always protected against MEV through sophisticated trading algorithms

• Enjoy more price surplus than anywhere else: On CoW Swap, your quoted price is the worst price you’ll have to pay. Between Coincidence of Wants matches, gas optimizations, and MEV protection, there’s lots of room for CoW Swap to find price surplus on your trade to forward to you

• Custom-tailor every order: Support for EIP-1271 signatures is now live on CoW Swap, meaning that any DAO with engineering resources can code any custom order type they’d like

• And more: DAOs can enjoy a range of advanced order types for streamlining token launches, buyback programs, or any other special types of transactions

CoW Swap is a top choice for DAOs making trades. In fact, one out of every three DAO trades in DeFi takes place on CoW Swap.

To learn more about how your DAO can trade on CoW Swap, join our Discord or check out CoW Swap for yourself.

• FAQs about defi treasury management

What is the primary purpose of a DAO treasury?

A DAO treasury serves as the financial foundation for decentralized autonomous organizations, holding collective funds crucial for their sustainability. These funds are allocated to support operations, execute initiatives, and achieve the DAO's strategic goals. Effective management ensures the organization has the necessary resources to function and grow.

How do DAOs mitigate financial risks within their treasuries?

DAOs employ several strategies to mitigate financial risks, including diversifying their asset portfolios to reduce exposure to market volatility. This involves holding a mix of assets such as stablecoins, blue-chip cryptocurrencies, and sometimes even traditional fiat currencies.

Additionally, DAOs often utilize secure tools like multi-signature wallets and robust governance frameworks to protect funds and ensure responsible decision-making.

Why is asset diversification crucial for a DAO's treasury?

Asset diversification is crucial because it significantly reduces the risk associated with concentrating holdings in a single volatile asset. By spreading investments across various asset classes, DAOs can better withstand market downturns and price fluctuations. This strategy enhances financial stability, improves liquidity, and ultimately ensures a longer operational runway for the DAO.

What role does transparency play in effective DAO treasury management?

Transparency is a cornerstone of effective DAO treasury management, fostering trust and accountability within the community. Publicly accessible transaction records on the blockchain allow members to monitor fund allocation and usage, promoting informed participation and engagement.

This openness reinforces the DAO’s decentralized ethos and helps maintain confidence among its stakeholders.

What are common operational challenges in managing a DAO treasury?

Beyond market volatility, DAOs face operational challenges such as navigating complex governance structures to reach consensus on financial decisions. Ensuring sufficient liquidity for day-to-day operations and project funding, particularly during market shifts, is also critical.

DAOs also have to mitigate various types of risk—including financial, technical, and governance-related—which adds another layer of complexity to treasury management. Additionally, DAOs must continuously manage smart contract vulnerabilities and adapt to evolving regulatory landscapes to protect their treasury assets effectively.