Now in a Bear Market, Can DAOs Still Afford to Pay Wages?


Back in January, we pointed out in our Tokeninsight Annual Report that DAOs had accumulated a substantial amount of treasury reserve, however, much of the reserve is in their own protocol token. This potentially poses a threat that, when the bear market comes, DAOs could face a huge devaluation of their treasury reserve. We are officially in a bear market now, so how are DAO's treasury? Do they still have money to pay for their development costs?

DAOs Haven't Diversified Their Treasury and Experienced a Steep Drop in Treasury Value

Protocols normally allocate a substantial percentage of their token at launch to the community and treasury in order to facilitate future development, such as incentives for contributors, grant programs, liquidity mining campaigns etc. Therefore, it is natural that protocols have the majority of their treasury assets in native protocol tokens. It would be a good idea for protocols to gradually diversify their treasury by means of token exchanges with other protocols or cash out some portion to $ETH or stablecoins.

However, as of early June, we find that the majority of DAOs still hold their treasury asset in their protocol native tokens, such as $UNI for Uniswap, $GNO for Gnosis, and $AAVE for AAVE. For some, the percentage is over 95%. This results in a steep drop in treasury value, and some protocols have a more than 50% decrease in their treasury value compared to January. Since no one knows how long the bear market could last, it is not impossible for protocol tokens to drop another 50% or even more.

I know it is easier said than done. With almost 99% of treasury assets in their native tokens, they can't just sell their tokens on a DEX as it would cause a significant price impact.

Treasury Value Ranked by Hard Assets

There are some protocols such as BitDAO, OlympusDAO, and Aragon which have a small percentage of treasury assets in their native token. It will be interesting to see what the ranking will look like if we rank the treasury value according to hard asset in Crypto, here I mean $BTC, $ETH, and stablecoins.

The ranking becomes quite different. BitDAO, OlympusDAO, and Aragon still have hundreds of million dollars in value in their treasury even though we completely exclude their protocol native token.

Having such a large amount of non-native tokens in reserve is exceptional. How do they achieve this? BitDAO has a very special reason, while others benefit from their unique business model or have worked hard to conduct a series of active treasury management efforts.

BitDAO - Contribution from Bybit

BitDAO is an investment DAO backed by some of the most influential people and entities in the tech industry and crypto industry, including Peter Thiel, Founders Fund, Bybit, Pantera, Dragonfly Capital, etc. The DAO invests in decentralized assets, technologies, and organizations to support the growth of open finance and develop decentralized, tokenized economics.

The DAO accumulates its non-native reserves mainly through ByBit, a derivatives exchange. As one of the most important backers for BitDAO, ByBit pledged to contribute 2.5 bps of futures trading volume to BitDAO, which is roughly 35% of ByBit's futures revenue. The pledge is paid monthly in $ETH (50%), $USDC(25%), and $USDT(25%). Since the pledge began on July 15th 2021, Bybit has contributed around $760 million to the BitDAO treasury, averaging $2.4 million per day.

OlympusDAO - Exchange Your Hard Asset through Bonding

OlympusDAO is famous for its bonding mechanism. Through bonding, liquidity providers exchange their LP tokens for $OHM by purchasing a bond issued by OlympusDAO (single asset bond is also available, such as $DAI bond). Regardless of native token price, the DAO continuously accumulates stablecoins through bonding, making it the second place in the ranking. (Related reading: OlympusDAO - How's it Now After the 98% Token Price Dropping)

In addition, Olympus Pro provides Bond as a Service and charges a 3.3% fee on bonding volume, and the fee is paid in other protocol's native token. This also contributes to the diversification of its reserve assets.

Aragon - Start Diversification Early

Aragon is a DAO infrastructure project which enables users to easily create and manage DAOs. It is one of the earliest DAO infrastructure providers, founded in 2016 and conducted its ICO in 2017. The project provides the most comprehensive DAO management tools in the industry.

Its treasury mainly consists of $USDC & $ETH. The reason is just that, as with many other protocols conducting ICO in 2017, the fund raised was denominated in $ETH back in that time. It raised 275,500 $ETH (only worth $25 million at the time). And the majority of its token was sold to investors, as the concept of community allocation didn't exist back then. The DAO gradually diversified its treasury asset into $USDC in the following years.

Active Treasury Diversification Strategies

There are mainly two ways for treasury to diversify their treasury, either sell/exchange their native token for stablecoin/$ETH or create a revenue stream that can earn them stablecoins or other tokens.

As previously discussed, Olympus Pro is an example. Another example is AAVE. AAVE has a reserve factor that allocates a share of the protocol's interests to a Collector Contract as a reserve for the ecosystem, used to sustain the DAO and pay protocol contributors.

Directly selling protocol tokens could have an adverse impact on token price and will also lead to native tokens being held by short-term holders. Therefore, many protocols choose to find a strategic partner to exchange their native tokens for stablecoins or $ETH.

One example is Lido, which sold 10% of the $LDO in the treasury to some strategic partners, including Paradigm, for a total of 21,600 $ETH back in 2021. (by the way, although Lido is in the business of $ETH staking, the DAO doesn't earn any $ETH staking rewards as the fee revenue is distributed to node operators and slashing insurance)

Closing Thoughts

Paying contributors in DAO native token, which continues to decline in value, is not a good idea. People need hard assets to buy goods and services. However, most DAOs still hold their treasury in native tokens. Those that have diversified treasury either benefit from their unique business model or have treasury diversification strategy very early. For others, they probably need to pay a much larger amount of native tokens to fund their community and contributors in this bear market, resulting in a quicker run off of treasury.







Remember, away from the market, enjoy life.

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