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Treasury Management for DAOs

The treasury management of a DAO is essential for effective strategy execution and sets the stage for successful governance.

DAO Treasuries

With an increased number of businesses choosing to set up and operate as Decentralized Autonomous Organizations (DAOs), it opens a world of opportunity and new ways of working.

Something that remains, however, is the need to manage the cash flow efficiently. How do you do this effectively without a traditional business structure?

Below are some considerations that DAOs need to have when managing their treasury.

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What are DAOs & Why are They Valuable?

A DAO makes it possible for people across the globe to work towards a common goal while doing so effectively and safely. They can be thought of as a web-hosted business run and collectively owned by its members. Everyone has equal power commensurate to their contribution, and there’s no traditional hierarchical system.

The purpose and value of a DAO is that there is transparency in what is happening as all the rules are written into code. This is especially valuable when it comes to monitoring the spending of funds.

It’s not hard to understand that when someone makes an investment in a business, there is a level of trust that the money will be used for its intended purpose. This is true of any business. It complicates further when the members of the business are spread worldwide. They may never have met each other, and all of the business is done online.

A DAO takes away the risk of someone having their fingers in the pot as the code can be accessed and verified by anyone.

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What is Treasury Management?

In a DAO, there are built-in treasuries that are only accessible by members when they have the authority of the group. Voting and proposals are used to make sure everyone is given a voice and has the same level of influence.

However, the problems arise when you consider that some DAOs are holding millions, if not billions, in capital. This raises a number of questions:

  • How do you manage it without a centralized accounting team?
  • Is it being used effectively, and is spending going on the right things?
  • If you need borrowing, how much? And where from?

These are all tricky questions to answer, and this is why treasury management is so important. It ensures assets are appropriately used.

How Should DAOs Approach Treasury Management?

First of all, it’s crucial to understand how important effective treasury management is. It’s the best way of ensuring a business makes it in the long run and that the spending aligns with the company's mission and values. As with anything, poor management can lead to failure.

So, how can DAOs manage their treasury? At DAOworks they do just that and have been thinking about this issue for many of their clients.

Source: DAOworks
  • Be defensive in strategy

This may sound obvious, but the whole point of a Treasury is to be there on rainy days and to pay the bills. If a Treasury is overly aggressive and overextends investments into the latest memecoin or altcoin, then when the bear markets hit and these coins dump, the Treasury goes along with it.

Further, being defensive is thinking about risk as well, and in particular about platform and currency risks. You don’t want the Treasury to be staked on a platform that may be hacked or see the algorithmic stablecoin suddenly unpeg. Risks, though always there, need to be thought about and managed.

In terms of diversification, when capital is held in native tokens, there is a risk that the asset's volatility may impact the DAO’s ability even to continue operations. If 100% of the capital is held in one place, this may constitute an unacceptable risk.

This is why you need to be thinking defensively and long-term in your treasury management strategy. At DAOworks, they advocate stablecoins being a big part of the treasury because it is key to maintaining the buying power of the Treasury, in good times and in bad. Over at DAOworks they prefer the framework from Credmark, which stratifies strategies into low, medium, and high risks, with a target VaR associated with each.

  • Formulate and execute your strategy

Once platforms and coins are discussed and determined, the next step is to formalize the strategy. DAOWorks believes that the best strategy should be to snapshot, so the decision is transparent and agreed upon.

The next step is to execute the strategy and to review the strategy on a cyclical basis— for example, in fifteen days which is what DAOworks recommends for its client Utu, who is building a trust infrastructure for Web3.

  • Transparent Reporting

One of the benefits of a DAO is that no single person can make financial decisions independently, and most DAOs use a Gnosis multisigwallet that allows all transactions to be verifiable on-chain and allows for shared ownership of the “wallet.”

This means that the need for transparency around investments and results is increased. Financial reporting is essential to build trust in the community and increase engagement. 

DAOworks believes that an investor dashboard should show the exact strategy that is snapshot, plus a count on the exact amount of Treasury staked, the percentage gain, and the time to the end of investing cycle. This allows for transparent reporting and for all DAO contributors to be better informed on making decisions for the next cycle.

Looking To The Future

The value of an effectively run treasury cannot be understated. It’s what will help DAOs grow their business and ensure they make it in the long run. There will always be a level of risk, primarily when funding is held in volatile assets. Being prepared for this may be the difference between surviving and not.

As the world of DAOs grows and these businesses start to hold more money, the need for proper regulation and treasury management will be essential. Hiring a treasury management expert may be vital to ensure you’re handling the finances in a way that’s as beneficial as possible. 

Check out our other articles regarding DAO Governance and Frameworks:

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