Framing
Just through April 2022, venture capitalists have invested a whopping $16.2 billion dollars into 570 crypto projects according to DoveMetrics year-to-date, in a mix of equity capital and tokens.
Until deployed into building/improving products and networks, this capital remains stagnant on private company and DAO balance sheets, and subject to the highly volatile token market. Even the largest market cap protocols are not immune to fluctuation. Fifty percent drawdowns occur twice per year in crypto:
Unfortunately, expenses are largely fixed, with minor exceptions for hosting costs which correlate with usage. During the past twelve months, contributors would have been underpaid relative to stables for half of the year, and Treasuries may have had to seek “curing” functions to account for this.
Below, I lay out current practices for crypto treasury management and suggest new frameworks and resources for private companies (i.e., the 50+ private, VC-backed unicorns) and DAOs which may have a liquid native governance token.
In Practice
Let’s consider the following two scenarios:
- Privately owned VC-backed company that operates in the crypto industry.
Your product generates revenue natively in crypto.
However, your company pays its expenses in fiat including staff to build, market and support software products, and go-to-market activities including conference sponsorships and advertising in crypto channels to attract users.
Your balance sheet has a mix of fiat via your last VC funding round and the ongoing crypto paid to you by users and enterprise customers.
However, it is unlikely all vendors will accept crypto (i.e, tax authorities) and you will need to swap. Or you could immediately swap all crypto into stables or fiat, but lose out on all upside.
The Web3CFO takes a builder’s orientation to the typical crypto VC’s investment process by creating a bespoke framework to govern swapping decisions based on price movements, token concentration, project runway, fundraising climate, revenue acceleration, cost modeling and individual preferences.
You could continue accepting crypto revenue by incentivizing all vendors and contributors to be paid in the same token, or use a tool like Request.Finance to send/receive invoices and expenses with native swapping features to enable contributor and vendor choice.
Even Terra, the stablecoin of Luna has diversified $2 billion of its treasury through purchases of Bitcoin and USDC via the LFG:
2. DAO with a native governance token
DAOs have workstreams which are swimlanes for different functional responsibilities - a Product workstream might manage planning, execution, delivery and engagement of software, while a Marketing workstream might build, deliver and track the performance of content.
Contributions are assigned native token rewards based upon completion of tasks.
I see lots of debate on crypto twitter on treasury diversification and wanted to see what exists in practice. Here’s a sampling of token diversification courtesy of DeepDAO to understand the composition of what the contributor receives:
Reviewing the data, it seems there are currently two approaches: DAOs that engage in Treasury Management, and DAOs that don’t.
This implies a circular: as a contributor, do you want your contribution reward to purely reflect the network you are building? Or do you want exposure to a diversified index fund basket of digital assets? Somewhere in the middle?
And to double click, the above data excludes any sort of hedging instruments or participation in DeFi pools. For example, Origin Protocol swaps into stables and then earns a 5% yield:
See documentation here, or another example from FWB’s Aave Curve pool proposal.
Goals and Considerations
A core benefit of Web3 is incentive alignment across users, contributors, and investors. Therefore to #buidl for the long term, diversification is required to sustainably compensate contributors, vendors and ecosystem participants.
To visualize a crypto treasury, plot on the below matrix:
Any point in the above graph could achieve desired goals.
High conviction: A private company could make select strategic investments in new projects to complement its product offering with capital.
Ecosystem fund: A project which has seen multiples of price appreciation could swap out a portion of its own token into stables and participate as a Seed or A-round investor in a number of high reward / high risk illiquid venture investments. See Uniswap’s new venture unit announcement, or Emilie’s post launching Coinbase Ventures.
Proxy for Cash: A DAO with a high expense/burn rate could swap its token into stables to continue steadily paying contributors.
DeFi & yield farming: A project generating high cashflow could seek liquid mid-single-digit % blended returns similar to the Origin and FWB proposals above.
An overall treasury could live in one of the single quadrants, or could take a portfolio allocation approach across each quadrant.
For more information, I lay out a summary on building an ecosystem fund here: Mirror: 3 Page Summary on Building a Crypto Investment Program
Resources:
There are a number of ambitious teams tackling this and I suggest reviewing Electric Capital’s database of DAO tooling with ~1K dApps covering governance tools, data services and more: Airtable link
About author:
@kishandao has 15 years of experience building billion dollar technology companies as a COO/CFO and was previously a growth equity investor at Goldman Sachs.