How to decentralize management of DAO treasury assets

Original title: "A Guide to DAO Treasury Diversification Sales"

Original author: Justin M 

Original compilation: Kxp, Rhythm BlockBeats  

The protocol treasury is the most critical value component of DAO, which is related to the vital interests of protocol participants and Later development of the protocol.

 

The well-known encryption researcher Hasu has been in"A New Mental Model for Defi Treasuries" discusses the importance of asset diversification in the DAO treasury from a theoretical dimension, and uses MakerDAO as the Negative cases show us the devastating blow to the agreement caused by the simplification of DAO treasury assets under extreme market conditions.

 

However, it is not easy to diversify the assets of the DAO treasury. From asset selection to asset ratio to transaction execution, many details need to be carefully considered.

 

This article is from the top encryption fund 1kx, and it analyzes in detail the practical details of the asset diversification of the DAO treasury. Rhythm BlockBeats translated the original text:

Introduction

According to OpenOrgs.info, the world's largest DAO treasury currently holds billions of dollars in assets. Since these properties are mainly concentrated in the original governance token of the protocol, they also put forward a lot of requirements for management, such as:

< p>- While minimizing the impact of the market, realize the diversification of treasury investment 

- Control the risks related to the agreement while concentrating positions

- Use High volatility asset to fund workflow and pay contributors

Many DAOs are starting to tackle These challenges have also led to a shift in thinking about more complex asset management strategies.

This article is the first in a series of studies that focus on assets Management strategy, and will give advice on how to effectively govern the collective assets of the DAO.

In the first article of this series, we will explore how decentralized sales of vaults can be effective Reduce the concentration of native DAO Token and provide guidance for sales in a positive sum manner. We are two DAO vault sales (Index Coop and Forefront ) lead investor, and also a participant in an upsell (Visor). In this article, we will also borrow the experience gained from these several experiences.

Benefits of decentralization

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The advantages of investing in Stablecoin are:

- Reduce the overall volatility of the portfolio 

- Offset future operating expenses 

- Improve the DAO during periods of market turmoil Adaptability 

Because of DAO focused on native Token The value of the treasury itself is reflexive, and the predictions of stakeholders can greatly change the valuation price of the treasury. If external events or negative forecasts trigger price dislocations, the DAO will lack sufficient purchasing power when it needs it most. So, diversifying investments into non-speculative assets not only strengthens capital reserves, but also allows DAOs to maintain operations during bear markets.

Furthermore, as Hasu recently pointed out, the native tokens held by the DAO treasury are actually An unissued rated share of a traditional business. However, these shares are not considered assets as they are only used to represent the total available supply of the agreement or business. The DAO can gain some purchasing power by selling these unissued tokens, but the price is likely to be significantly lower than the market price. In other words, when analyzing the available purchasing power of a DAO treasury, we should focus on its diversified portfolio allocation.

But if the DAO wants to invest in Stablecoin, it will eventually have to sell its native Token, but its There will be some nuances in the process. Ways to acquire Stablecoins include but are not limited to the following:

- Over the Counter (OTC): Under this sales strategy , Token can be directly exchanged for another asset without going through the secondary market. It can be a direct transaction between institutional investors or between communities, or between institutional investors and the community. This type of transaction will hardly have any impact on the price, and will also provide additional benefits for Token lock-up and agreed redemption plans. flexibility. We will focus on this method in this article.  

- Market sale: This is the most direct way to get Stablecoins, but it will Prices can be adversely affected while also sending negative valuation signals to stakeholders. In addition, selling in an illiquid market or selling large amounts in a short period of time will increase the downward pressure on prices.  

- Conditional order strategy: This is an alternative to the method above and consists of Calendar cycle rebalancing, TWAP/VWAP strategies, limit orders, and more.  

- Derivatives: Derivatives strategies involve creating debt that can be hedged by collateral positions, adopt new financial primitives, such as UMA's range Token, implement liquidity management plans through agreements such as Visor to achieve rebalancing, or adopt other income-generating strategies, such as Ribbon's treasury. These are often more complicated, or like the range Token, DAO needs to be fully marketed to complete the sale. This type of financing method has certain requirements for manpower.  

Before using any of the strategies above, we must first Consensus is achieved within the DAO, as treasury rebalancing will affect all stakeholders. We recommend creating and voting on a governance proposal to ensure that everyone's needs for Stablecoin distribution and methods of earning Stablecoins are aligned. At this stage, we should also reiterate our plans and goals for revenue.

The specific implementation of sales

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1. Design and determine the range of financing amount

Before you start raising funds, you should first clarify what specific needs your DAO has. For example, you can think about how much money you can raise in an ideal situation, and the minimum acceptable financing amount is How many. You can consider it from two aspects: Stablecoin and native DAO Token. While building the psychological expectation of the sales amount range, you must also have a full understanding of the maximum sales of the native Token. Finally, you need to determine a target date for closing the financing. Ideally, this process doesn't take too long so that you can get down to building as quickly as possible.

Once you have completed all these steps, you can start gathering community consensus for this funding up. The advantage of gaining community consensus at the beginning of financing is that it can avoid issues like Sushi Phantom Brigade Strategic Financing appear again. The proposal plans to take out 51 million SUSHI Tokens from the community treasury, thereby attracting more institutional investors to join. For reference, there is a 6-month tier in the terms of the deal, followed by a straight-line redemption period of up to 18 months, at a 20-30% discount to the 30-day TWAP. Proceeds from this will be deployed into productive assets such as Yearn, Stable Pool LP, and Kashi Marketplace.

However, this proposal was dissatisfied with the community. The transaction scale accounted for the share of the total assets of the treasury, the number of participation of strategic investors, and the discount encountered when the price of SUSHI was already sluggish have also attracted people's attention.

However, as long as you build community consensus up front and get key stakeholders on board, Your DAO will not encounter the above problems.

Transaction Size

The ultimate goal of selling community treasury Token is to solve the optimization problem with multiple constraints, which In other words, the community needs to raise as much funds as possible through the project, while minimizing the number of tokens sold, and attracting high-quality investors who are also optimized under economic constraints. Not only that, but the above process must be completed as quickly as possible in order to shift the focus of the DAO back to actual goals.

If a DAO uses a lot of Token but only returns a small amount of funds, then the project The long-term effectiveness will be greatly compromised. High-quality investors are well aware of this, so they will not sell Token at the lowest market price, but at the fairest price. For example, when ForeFront approached us about financing, they initially valued the project at $3 million, a fully diluted network valuation (50% discount to current value).

They intend to raise $800,000, or 30% of the vault's holdings. At that time, we found that $800,000 didn’t provide much room for the project to grow, and they had already sold a lot of tokens in the early stages of the project.

With this in mind, we raised our valuation to $10 million (later to meet other The demand has risen to $20 million), because the value is not only good for us, but also for the DAO itself. If we had sold at a lower price, the investment would not have paid off much.

My suggestion is that if you are doing a decentralized sale for the first time, you should try to Raise enough stablecoins to provide sufficient funds for operating expenses for the next 1-2 years. In this way, you can free up enough energy to achieve the goals of the DAO without worrying about the difficulty of securing operating funds. Considering the constrained optimization problem mentioned above, you can turn this number up or down, but it also provides a starting point for internal discussions.

Discount and promise fulfillment

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DAOs should have proper redemption terms to retain those long-term partners. The length of the terms is irrelevant, but the degree of discount and investor preference should be taken into account.

The redemption period is generally 1-2 years, but longer than this is also possible, because This enables longer-term cooperation between strategic partners and DAOs. At the same time, however, the extension of the redemption period should also match the redemption demand.

When the redemption period is agreed in the transaction, the transaction price will often have a certain discount, The discount also takes into account illiquidity. We can use a simple thought experiment to understand this: If you have two Tokens in the secondary market, one of which has a 1-year lock-up period and the other has no lock-up period, assuming that they trade at the same price, Which Token would you choose to buy as an investor? I believe that out of rational considerations, you will definitely choose the more liquid Token, because a Token with a redemption period will not bring you any net income.

Now, suppose this token with poor liquidity is more valuable than the one with better liquidity 30% cheaper. At the same time, you also know that no matter how the prices of these two Tokens change during the year, you can sell them at an amount that is 30% higher than the current price after one year. So at this time, which Token will you choose to buy? So, if the terms of the deal include a lock-up period, then you have to offer enough discounts to offset the risk of low liquidity.

As the transaction continues to advance, the discounted price of the sale needs to be maintained for several months , although market volatility during this period can also result in significant discounts or premiums to spot prices. But we cannot constantly adjust the price according to market fluctuations, because this will make all parties in the transaction feel uneasy. Instead, we want to keep prices steady and adjust them only when absolutely necessary.

Entrusted Negotiation Rights

Once you have scoped your fundraising, determined constraints, and established a community Consensus for the sale can then proceed to electing representatives from the DAO to lead investors to participate.

Due to the complexity and sensitivity of the negotiation process, we'd better use the DAO's negotiation power Delegate to the team of contributors, for example, Index Coop handed over all the negotiation work to the B-D working group; or it can also be entrusted to its own core team, but it depends on the status of the project in the process of decentralization degree of progress. Ideally, members of this team should have experience in business or finance, but in general, not all DAOs can achieve this. However, in any case, the negotiation should be completed by a small number of people, so as to ensure the efficiency of the negotiation and the fulfillment of responsibilities.

2. Determine investment participants

In the process of raising funds, choosing who to participate in the sale is also a very important part. The most ideal situation is that the investors of the project are also the users or community contributors of the project. At the same time, strategic investors can also help the project develop its strengths and avoid its weaknesses.

Strategic Investor

Some DAOs hope to get investment from strategic partners to help them grow their protocols. These strategic investors include investment-oriented DAOs (such as MetaCartel, Seed Club), institutional investors (such as 1kx) or Angels. They have rich experience and professional knowledge and can help projects smoothly from conception to reality.

DAOs need to carefully consider whether they want a lead investor, and if so, A decision needs to be made on who will lead the round. Specifically, the benefits of setting up a lead investor are:

- Help DAO recruit more investors to complete this round of investment together. They will select new investors based on their personal characteristics, industry experience or network, so that the participation of all investors can maximize the value of DAO. The joining of leading investors not only allows the investment to be completed smoothly, but also helps to achieve the goals of the community in the process.  

- Serving as a bridge between the DAO's negotiating team and investors. Typically, the lead investor will negotiate on behalf of all investors, minimizing negotiation time between the various parties involved.  

Given the pivotal role played by lead investors, DAOs are better off choosing a lead investor who shares similar ideals or visions as their own. If you want DAO to develop in a certain vertical field, then you can find a lead investor who has done similar work for other DAOs, so as to maximize the benefits for the project. Not only that, but you also need to think carefully about the huge risks in DAO and find the corresponding people who can reduce these risks.

Generally speaking, lead investors (generally venture capital) have certain requirements for the ownership of the Token network due to certain considerations, so they will take away A substantial portion of the proceeds from the financing. Therefore, it is up to the community to decide whether the income brought by the fund will flow into the community or be taken away by investors. Sometimes though, a diverse set of investors can have the opposite effect on a project, so you might prefer to see a project led by a small number of investors.

In investment projects, we generally recommend that the income should be in the hands of a few investors instead of Shared by all kinds of investors. This is because once there are too many investors, they will not pay close attention to the project, and no one will be willing to stand up and take charge.

However, not all DAOs require a lead investor. We see this role as one of many tools that can help a DAO accomplish its mission goals. If DAOs want to diversify their investment, or want to have more control over the negotiation process, then they don't have to set up the role of lead investor at all. So, be sure to choose the program that is most suitable for you according to your own conditions.

If DAOs intend to receive investment from institutional investors, they should also consider reporting requirements question. Such requirements will vary from investor to investor, their third-party service provider (auditor/administrator/accountant), and jurisdiction and structure. Investors will benefit from additional verification information and materials regarding this investment, including:

- Smart contracts and various terms of investment terms details (a written confirmation of the allocation mechanism from the smart contract auditor would also be a bonus).  

- About how to query the smart contract to view the locked or recoverable Token Instructions, or a basic front-end user interface for investors to connect to their wallets and view their positions.  

- Memorandum of Understanding or Term Sheet, these two agreements are not legally binding and include everyone's different understanding of the mechanism, A point of contact (signed by core contributors to the DAO and investors) is also provided for investor audits.  

For institutional investors, audit work is One of their main concerns. However, auditors are not currently skilled enough in terms of the mechanics of verifying smart contracts. Traditionally, if assets are held in escrow, auditors get in touch with the relevant contacts and verify that the funds are in safe custody, have been redeemed, or are in the hands of investors. But with smart contracts, none of the above situations will happen, so providing investors with as much clear information as possible will definitely benefit them.

Community Investor

Actually, your own community members are your best strategic partners. A successful decentralized vault sale should allow community members to also reserve a certain amount of funds under the same terms, which both Forefront and Index Coop have done in their recent vault sales rounds.

In the sale of Forefront, DAO reserved 1 million FF coins for community members 20% high proportion of Tokens, so that those who have made important contributions to Forefront can get Tokens first. Members have a purchase cap of $10,000 and a minimum contribution of $5,000.

Index Coop also reserves purchase credits for community members. They assess eligibility by reviewing which members have received contribution awards in the three months prior to the sale. The purchase terms for these community members are the same as for strategic investors, including a 6-month straight-line redemption period and a percentage discount, with a total purchase cap of $100,000 per contributor.

3. Create Final Proposal

All DAO members should have a say in determining the final deal terms. Building community consensus requires long-term efforts, and DAOs should do their best to manage it openly and transparently. For this reason, we recommend drafting a proposal in advance and having DAO members vote on it before the final sale.

The drafting of the proposal can be done by the founder (such as Forefront), or by the community (such as Index Coop), and sometimes by the venture capital leader Finish. In any case, proposals are drafted to facilitate agreement among various stakeholders.

The deliberation process on the forums gives community members the opportunity to discuss and revise proposals together, ensuring that This means that the proposal is consistent with the goals of the DAO. The proposal should focus on raising capital, including specific terms of the deal (e.g., discounts, redemption periods), and various ways to engage the community. Additionally, the proposal should have been published well in advance of the funding close, allowing enough time for the community to figure out how to get involved.

Conclusion

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The decentralized investment of the community treasury will open the door to a new world for many DAOs, allowing them to focus on their specific goals without worrying about operating expenses. Decentralized treasury sales can both ensure that the price does not have a material impact on the inventory Stablecoin, and can also attract more new stakeholders to join and align with the goals of the DAO.  

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