(This post is competing in the Lens x Kiwi writing contest)
During bull markets, proposals in tokenvoting DAOs are easily approved
In bears, even good proposals are rejected
Why is this the case?
Because 60% of the top 25 DAOs hold 90% of their assets in their native token
So when price is high, proposals are "cheap" in proportion to treasury size
When native token price is low, proposals are more expensive
Keeping a warchest for rainy days is a competitive advantage: outspend during a bear to capitalize in a bull
This essay will look at some strategies to create a reserve of stables in which to pay contributors to your DAO
1. Cash management is simply enabling the option for contributors to request payment in stablecoins rather than your native token.
Why would we want this?
To avoid the scenario of service providers having an underserved bonanza when token price goes up, while being unable to meet commitments (or requesting additional funds) when the price drops
Here are 2 cash management strategies;
a. Balancer pools let you set fixed ratio of stablecoin and native token value in your treasury (eg: 80% of treasury value in native token, 20% in stables)
When contributors draw on stables or native token value changes, the pool rebalances to ensure the treasury is still constituted by the same ratio of stables and native tokens (20:80).
b. Aera vaults let you set a volatility targeting strategy, so that when price swings for your native token occur (in either direction), a higher amount goes into stablecoin reserves
While periods of low volatility see more allocated to your native token
This strategy prevents massive gains but also protects against huge losses from drop in value of native token
2. Treasury Management usually refers to generation of yield from idle assets in a DAO treasury, risk management via diversification and creation of an endowment to cover operating expenses
Solutions in the space suffer from a trilemma
A. Appointing a Treasury Manager to manage assets for the DAO (principled and responsive but not trustless)
This approach starts with an RFP seeking qualified institutiions to manage an endowment. Gnosis DAO and ENS are some prominent DAOs using treasury managers
B. One-Time diversification covering immediate needs but not evolving over time (trustless and principled but not responsive)
This approach begins by defining the type of product the DAO should diversify into through a RFP, followed by appointing a committee to review applications and finally a program manager to oversee selected projects.
It is especially useful for L2 DAOs to diversify the treasury in a manner that promotes ecosystem growth, since the best projects want AUM or TVL more than grants
For example, in April 2024 the Arbitrum DAO voted to diversify 1% of its treasury or 35 million ARB into products that are stable in value, liquid in conversion and have yield uncorrelated to crypto markets (such as t-bills or money market instruments)
The $30 million served as treasury diversification, earned yield of $1-$2 million per year and boosted the RWA ecosystem on Arbitrum by adding to the AUM of promising projects
Selected projects such as Ondo USDY and Securitize (BlackRock distributor) launched on Arbitrum to receive the allocation, growing the ecosystem.
At the same time, such diversification is done at a point in time and does not change according to the market
C. Coinvoting based diversification (responsive and trustless but not principled) where the DAO makes large reallocation decisions based on tokenvoting is still blue ocean territory
The latest in this approach is use of zodiac modules or Aera vaults, where the tokenvoting DAO continues having custody of funds but assigns roles to specific treasury managers for undertaking predefined actions such as converting or depositing assets into protocols for yield generation
However, these approaches do not achieve ecosystem growth in the way that one time treasury diversification programs such as STEP did
Conclusion
Diversification is perceived as a euphemism for dumping your native token in favor of stables
However, all DAOs and especially L2s want to grow the ecosystem of apps on their chain
Most of the mature apps do not want grants so much as increase in their TVL or AUM through legitimate customers earning money from their product
The future of diversification, whether via one-time programs or appointed treasury managers, is diversification as a means of ecosystem growth.
This post was written by Devansh Mehta, WG lead for the Arbitrum Treasury and Sustainability Working Group, thanks to funding from the Firestarter program by ThankArbitrum