The upside volatility of cryptocurrencies has led to the creation of hundreds of billions of dollars of new wealth this past decade. However, multi-year, downside corrections have led to the destruction of countless fortunes. Corporates in the cryptocurrency markets, who denominated their entire treasury holdings in digital assets like BTC, ETH, or their native protocol’s token, have amassed large amounts of paper wealth during the upswing. However, it is critical to remember that these organizations need to reduce the downside volatility of their digital asset holdings by diversifying their treasury to meet their debt obligations and liabilities, including payroll and other accounts payable. These organizations need to position themselves to prevent holding from 90+% drawdowns. In this article, we will dig into the treasuries of DAOs (Decentralized Autonomous Organizations), but the analysis applies to corporate treasuries as well.
Diversification is an important area to focus on at the moment given that the space has dramatically fallen in market capitalisation. Why are depressed prices bad for the treasury you might ask? Well because most of them are not diversified.. It is not uncommon for leading DeFi applications like AAVE, Compound, and Uniswap to hold the entirety of their treasury balance sheet in their native governance token.
Let’s look at the 1-year chart below (Sep 7, 2021, to Sep 7, 2022) that shows three types of treasuries: 1. Yellow curve shows treasury holdings are 100% UNI Tokens, 2. The orange curve shows treasury holdings are diversified in the top 10 cryptos by market cap and 3. The green line shows if the treasury holdings would be 100% Stablecoins. Clearly, during the past 365 days (a down market), a diversified treasury would have performed better than the UNI treasury, and a stablecoins-only treasury would have performed the best.
In addition to diversifying their treasury holdings, some protocols also deposit the holdings in DeFi yield-generating strategies. Sherlock.xyz, an audit marketplace and smart-contract coverage protocol built on the Ethereum blockchain, deploys its treasury funds into DeFi Yield generating strategies. Treasuries that budgeted for the future at the portfolio high could have trouble meeting their debt obligations denominated in USD as their treasury value decayed in USD terms. Although the stablecoins themselves do not appreciate as they are pegged to the US Dollar, they can be used to farm yield in DeFi. It allows organizations to earn a yield on their treasury holdings while also preventing any downside volatility that can put them in financial jeopardy.
Coinchange offers this solution to multiple treasuries with our High Yield Investment Accounts denominated in the most popular stablecoins (by circulating market capitalization) including USDT, USDC, DAI, and UST. As a result, corporates depositing a percentage of their treasuries in DeFi yield strategies can rest assured knowing that their short to mid-term debt obligations can be met regardless of what the market does in the meantime. One might say that why can’t the treasuries themselves allocate capital to DeFi strategies; why Coinchange? At the heart of our DeFi Yield strategies is Risk-mitigation. We have an extensive risk assessment framework that filters only the most secure protocols. We use market-neutral strategies for volatile assets and stablecoin strategies to eliminate price exposure. We have no minimums and no lockups. We have an expert compliance team seeking registrations, as well as licenses, around the world. As the world of crypto grows and new legislations are passed, we pride ourselves on continuously ensuring that our company operates within any new regulations established. For a treasury to do this on its own would cost a lot of capital, time, and legal hurdles.
Another issue for most DAO treasuries is that they are managed by a Multisig (multiple stakeholders need to sign for every transaction), which is how it should be for a decentralized protocol. However, yield optimization is an active process, involving regular claiming or swapping transactions, each transaction requiring gas fees to be paid and signatures from several stakeholders who may simply not have time to devote to such day-to-day management. The solution is to make one vote and one transaction to deposit a percentage of their treasury with yield optimizers such as Coinchange so that the team can focus on building the protocol. Additionally, they can save their invested capital from being eaten by gas costs as Coinchange benefits from economies of scale.