“You can escape the responsibility of tomorrow by evading it today.”
— Abraham Lincoln
Raising Money When You Need It
Back in September of 2021, I remember reading that Coinbase was pursuing a $1.5 billion debt offering and thinking, Huh… that’s probably not good.
Coinbase has operated in crypto for almost a decade, and no company makes it that long without learning one very important lesson.
Raise money when you can, not when you need to.
That $1.5 billion debt round was a clear signal that Coinbase was preparing for crypto winter.
Every company that has survived multiple cycles in this industry has learned first-hand the importance of cash management.
During downturns and times of crisis, a nest egg to get you through the winter is often the difference between life and death.
You know who didn’t learn that lesson this time around? DAOs.
Asset Liability Mismatch
Chainalysis just came out with a great report — “The State of Web 3” — which you can read here. I prefer reading this newsletter from Joel John, who added some helpful context.
One of the segments that caught my eye was on DAOs and their treasury management practices.
Here are two interesting observations:
DeFi-related DAOs hold 83% of all the capital in DAOs
The average DeFi related DAO manages ~$100 million
On the surface this sounds pretty good right? DeFi DAOs sound pretty well capitalized, especially considering most of them have minimal OpEx and small teams.
Dig a little deeper though, and that’s when the problems start to become apparent:
~85% of DAOs store their treasuries in a single asset (!!)
Only 23% of DAOs surveyed by Chainalysis had stablecoins
Of these, ~130 had <10% of their assets in stables, while only 40% had >75%
(Note: This data could be skewed because it’s shown in relative terms based on the number of DAOs with a certain percentage of their treasury in stables. It would be better to see the actual dollar amounts.)
That is…really bad! The purpose of treasury management is to minimize the operational risk of a business.
Holding all your company’s in one (extremely volatile) token definitely, definitely does not accomplish that end.
To be honest, I even have my doubts about DAOs holding significant percentages of ETH or BTC on their balance sheets unless they have liabilities that are specifically denominated in those assets.
A basic principle of treasury management is that you don’t want a mismatch between your assets and liabilities.
If you have consistent dollar-denominated liabilities (personnel, AWS costs, vendors, etc…) and your balance sheet is 50% ETH, you risk becoming a forced seller of ETH to meet your obligations.
It’s sort of a hidden way businesses can get levered to the price of an asset. And just like most investors when it comes to leverage, 95% of them should just not do it at all.
Treasury Management for DAOs
In my opinion, treasury management will be a big part of the narrative for the next cycle.
It’s a huge opportunity for anyone looking to build a business that services DAOs. (Shout out to Reverie which is doing great work in this arena.)
Why? Two reasons:
Virtually every DAO will have to figure this out.
The existing stack of treasury management services doesn’t work for DAOs.
As of today, roughly $9 billion of assets are managed by DAOs.
Some day very soon, if it’s not already happening, someone will simply point out the obvious: The vast majority of those assets (90%+) should be converted to stables.
What’s interesting is that these DAOs won’t interface with a bank or prime broker and park their funds in Treasurys. They will likely find DeFi-native sources for generating yield.
That means an entire new services stack will need to be built out to farm out the tokens and manage them in a transparent, risk-compliant way.
That probably looks like some mix of a DeFi back end with a pretty CeFi front end on top.
Meow is doing this today, but the opportunity is ripe for other CeFi companies that are basically already doing this to simply rebrand themselves a bit (👀).
Treasury Management Writ Large
The less obvious opportunity for treasury management comes from a less obvious source: Web2 and TradFi companies.
While the whole world was obsessing about whether or not companies would buy bitcoin and put it on their balance sheets (which I always thought was silly), companies were struggling with a very real problem.
Customers were trying to pay regular old companies in crypto.
Some wanted to pay in bitcoin, but many others wanted to pay in USDC, ether, and a host of other cryptos.
For the past year, a parade of companies have been announcing that they accept payment in crypto, for the simple reason that expanding the ways customers can pay = more money.
The problem is they have no way to manage that crypto on the back end.
This will take longer, but I think over the next 2 years (or whenever the next bull run resumes), companies will broadly begin to accept large cryptos (BTC, ETH, USDC, etc..).
That pressure will usher in a whole new suite of treasury management solutions and make it a favorite narrative for TradFi.
DAOs, it isn’t too late. Transfer some funds to USDC and live to fight another day.
As always, tell me what I’m missing! Especially if you work for a DAO with a large amount of ETH-denominated liabilities, I’d love to hear from you.
My twitter is @mikeippolito_. Cheers and enjoy the weekend!