DAOs Embrace Diversification Strategy to Mitigate Crypto Volatility

DAOs are increasingly recognizing the risks associated with over-reliance on their native tokens and are seeking to diversify their holdings. According to a report by Karpatkey, two-thirds of the 25 largest DAOs hold over 90% of their treasuries in their native tokens. To mitigate these risks, DAOs are exploring various diversification strategies, including holding stablecoins, staked Ether, and fiat currencies. The optimal level of diversification is a subject of ongoing debate, with experts recommending a 90% threshold for the native token's proportion in the treasury.

Diversification of Decentralized Autonomous Organization (DAO) Treasuries: A Prudent Strategy Amid Cryptocurrency Volatility

Introduction

As the cryptocurrency market continues its upward trajectory, Decentralized Autonomous Organizations (DAOs) are increasingly recognizing the importance of diversifying their holdings. This strategic move aims to mitigate risks associated with over-reliance on native tokens and seize income-generating opportunities.

Perils of Over-dependence on Native Tokens

The recent downturn in Uniswap's UNI token, a stark reminder of the volatility inherent in crypto assets, has underscored the perils of relying heavily on native tokens. DAOs holding a significant portion of their treasuries in such tokens face heightened risk exposure, as evidenced by Uniswap's 20% price drop following an SEC notice.

Diversification as a Mitigation Strategy

To counter this risk, DAOs are exploring diversification strategies. A recent report commissioned by Arbitrum DAO revealed that nearly two-thirds of the 25 largest DAOs hold over 90% of their treasuries in their native tokens, highlighting the need for diversification.

Benefits of Diversification

Diversification can provide numerous benefits for DAOs. It enhances treasury resilience, enabling DAOs to withstand market fluctuations and maintain sustainability. Additionally, it allows DAOs to diversify income streams and capture opportunities in the evolving cryptocurrency landscape.

Implementation Considerations

While diversification is crucial, excessive diversification can lead to selling pressure on native tokens and impair alignment with the organization's primary purpose. StableLab's Doo Wan Nam recommends a "good indicator" for sufficient diversification is a 90% threshold, ensuring that native tokens do not comprise more than 90% of a DAO's treasury.

Diverse Treasury Examples

CoW DAO, governing the CoW Swap decentralized exchange, exemplifies a diversified treasury approach. It holds approximately 12% of its treasury in stablecoins and staked Ether, complementing its 88% holding of COW tokens.

Income-Generating Opportunities

DAOs are finding innovative ways to generate income from their diversified treasuries. Many are embracing liquid staking tokens for Ether, which yield a modest return from staking rewards. Stablecoins pegged to the dollar, known as yield-bearing stablecoins, offer a further hedge against volatility while earning interest.

Balancing Diversification and Treasury Goals

While diversification is essential, DAOs must also consider their treasury goals. Arbitrum DAO, for instance, opted to focus on ecosystem growth over diversification. The organization explored treasury diversification through real-world asset providers, aligning with its members' preferences.

Time Considerations

Diversifying DAO treasuries is a complex process that requires careful planning and coordination. Arbitrum DAO's journey from proposal to final vote spanned almost four months. Uniswap DAO has initiated a working group but anticipates a lengthy deliberation process before presenting a diversification proposal.

Conclusion

The diversification of DAO treasuries is a prudent strategy in the face of market volatility and evolving income-generating opportunities. By spreading their holdings across various asset classes, DAOs can mitigate risks, enhance sustainability, and seize the potential benefits of the growing cryptocurrency ecosystem. However, careful consideration must be given to the balance between diversification and treasury goals, ensuring that the process aligns with the organization's mission and objectives.