Sep 13, 2023

DAO Treasury Management

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DAO treasury managers face the unenviable task of achieving yield on DAO funds while avoiding the risks introduced by crypto volatility.

One of a DAO’s most difficult but important responsibilities is managing its treasury. DAOs are expected to grow the treasury to better support its mission while at the same time ensuring sufficient resources are available for fiat-denominated operating costs for as long as crypto winter lasts. It’s a tough job.

But the hardest part of this management is the DAO’s own inertia. Decision-making can be so difficult that no decision gets made at all, especially when there are so many ways to get rekt amongst the tantalizing yields in DeFi.

In managing our own treasury, AdmiralDAO observed the following problems:

  • Holding 100% USD stablecoins ensures operating costs can be covered, and even allows for yields via onchain treasuries or LPing in money-markets. However, this means the DAO will fall behind its crypto-hodling peers if crypto rises.
  • Holding 100% crypto (e.g. ETH/BTC) ensures upside in a bull market. But if crypto falls the DAO may face trouble covering its operating costs.

The obvious compromise is to hold some of each, such as 50% ETH and 50% USDC. Furthermore, each asset can be staked for yield: the ETH can be staked and the USDC can be allocated to treasuries or a money-market lending pool. This is also wise because financial theory teaches that diversified portfolios provide better returns relative to risk.

But crypto is so volatile, these proportions won’t last for long. For example, if ETH rises the portfolio will no longer be 50-50. To correct the imbalance, the DAO could sell some ETH for USDC until the treasury is back in balance. This concept is known as portfolio rebalancing and it is common to anyone who’s take an  Intro to Finance course.

However, this rebalancing costs money in gas, slippage and of course time, which can create performance drag. In crypto, prices are so volatile that the costs from rebalancing can wipe out the yield from staking ETH or lending USDC! Intuitively we all know that annual yields of 5% from staking ETH are dwarfed by ETH volatility that can move 5% in a single day. 

AdmiralDAO built Clipper to solve this dilemma

Clipper’s Core pool is a daily rebalancing portfolio of 60% crypto (split between ETH & WBTC) and 40% USD Stablecoins (USDC, USDT & DAI), similar to Curve’s Tricrypto pool. Instead of paying for transaction costs, it makes a market for traders who pay for the rebalancing trades. And instead of relying on arbitrageurs to rebalance (which is what creates impermanent loss for AMMs like Uniswap), it incorporates offchain price oracles to rebalance at fair market prices (with validation onchain). The result is performance that closely tracks the benchmark of a perfect rebalancing portfolio with zero transaction costs.

One attractive characteristic of this benchmark is that the process of rebalancing daily (as opposed to doing so monthly or quarterly) actually generates yield of its own. This is because even when crypto is going up over the long-term, it tends to be mean-reverting on a daily basis. As a result, rebalancing daily is in effect systematically buying eth when its low and selling when its high. This transforms day-to-day volatility into additional yield! This may seem miraculous, but it’s not magic. It’s a common commodities trading strategy and is perhaps the most well-researched and repeatable sources of yield in finance. It even <won a nobel prize>.

Because crypto is so volatile, the rebalancing process generates yield that can make up for the unfortunate opportunity cost of not staking the ETH or lending the USDC in the portfolio. For example, at time of writing Clipper generated an annualized comparable yield of 31% on its blue-chip assets.

Diversification is Crucial

The biggest challenge DAO’s face isn’t optimizing treasury management, it’s fighting inertia. Many DAOs hold entirely ETH or entirely USDC for months as they debate various portfolio weights and struggle to compare staking proposals. Clipper is meant to be a reference point rather than the only solution. 

Here’s a plan AdmiralDAO recommends to balance care with performance:

  1. Deposit 20% of the DAO’s ETH, WBTC and USD into a pool like Clipper Core, which tracks the theoretically optimal daily rebalancing portfolio. This is noncustodial, costlessly redeemable at any time, and entirely passive.
  2. Use Clipper Core’s performance as a basis to compare and contrast future proposals from the community for yield farming and staking. Comparing expected returns from other investment sources to a daily rebalancing portfolio in the same approach recommended by a16z.
  3. Once you identify attractive opportunities for more yield, take them judiciously with small portions of the treasury.

A plan like the one above ensures responsible management of a core part of the Treasury, while improving internal evaluation of new opportunities by using a stable reference point. That will help overcome inertia.

Using Clipper as a treasury management solution is the first step toward taking control of your DAO’s financial future. It’s crucial to maximize resources - and avoid getting rekt - so your DAO can achieve its goal of creating the world you want to see.

DAO members interested in proposing updates to their DAO treasury management can use this proposal template to build case.