AMA Transcript: DAO Treasury Management with Aragon DAO

Yesterday we joined Aragon’s Twitter Space for an AMA about how DAOs can grow their treasury through risk management and automated tools and services. Below is an abbreviated transcript of the session.

The full recording is also available at: https://twitter.com/i/spaces/1ZkKzXzPBZrJv?s=20

Q: How did Exponent get started with building treasury tooling and services?

A: Like most startup companies, you start to know what to build when you feel the pain yourself. In the beginning, we experimented with a few different product offerings around DeFi asset management as our team brings experience from TradFi asset management and technology. Going through multiple crypto cycles, fundraising, building and managing cash to fund product development, and coordinating teams from multiple timezones, it became obvious there is a product and service gap in the market.

For instance, setting up a multisig wallet can already be a daunting task, particularly for new teams. However, once you raise funds, then they need to take on the additional tasks of how to operate and manage the runway, as well as how to keep the assets safe. It’s clear that teams need help with proper ways to set up treasury operations, management, and strategies. We have team members that have been around crypto across several cycles and take part as a multisig holders for billions of dollars in wallets. We saw the evolution of DAOs and DeFi unfolding. Solving these friction points for protocols will hugely help unlock development cadence in the space.

Q: Why is treasury and risk management such a hard problem for DAOs right now?

A: It’s a hard problem for multiple reasons. First, if you think of DAOs as organizations with a certain mandate whether its to build a product, invest or provide a specific service, they rarely will be able to both focus on their mandate and manage other operational requirements simultaneously well.

I’ve spoken to a few people and their view is that DAOs are reinventing LLCs. If this is the case, you need to figure out, from a finance perspective, how to handle accounting, budgeting, treasury strategies, and risk management. These are some of the problems we take for granted in an established traditional model. For example, Yearn built everything in the house, and it was a lot. At some point, however, it becomes clear that most projects do not and cannot afford to build everything in-house. With “corporate” treasury, one of the biggest aspects is risk management. From DAO model perspective, it’s very hard to outsource risk management functions to the community whether it's to handle DeFi, treasury, asset, or market risks. DAO contributions are great for a pooled resource model like engineering or design work. However, treasury requires super domain focus, hence I believe it's going to be very tough to efficiently source directly form a generalized community.

Q: It makes sense that when you are a start-up and you want to focus on what you do. But you have funds sitting there so an option would be to outsource the tasks to manage. It’s extremely beneficial.

A: There are also a few key areas to zoom into that. How do you think about financial operations e.g. multisig, decision-makers, budgeting, accounting, reporting, and tax. If you are running a product or operations for a protocol, your job is to build and grow that product. Adding treasury management scope to your role, it's a lot of responsibility and scope to cover for one person. When you look at product design and managing billions in the protocol treasury, having to additional think about runway and set up payments, as well as adding treasury management strategies. Protocols like Maker, Compound, or Aave for example, spend a lot of time bringing in treasury managers to analyze their own capital requirements, develop and update strategies, and monitor things like Defi utilization ratio, liquidity etc,. which are mainly esoteric concepts. This becomes a lot for one or two people to handle.

Another example is Euler Financer. The founder mentioned that the challenge they have is making risk adjustments to their protocol and treasury is incredibly application specific. Unless you have a full-time person focused 24/7 on this, you won't be able to contribute and vote on parameter changes effectively.

As protocols get bigger and the products under management become more complex and larger, making a risk adjustment through the protocol is tough. We believe you will need a bespoke solution for this.

Q: You touched on token diversification briefly. What do you think people should take into consideration when choosing what kind of tokens they hold?

A: The most important thing for you as a startup or protocol is to have sufficient operating cash and expenses. I look at this through the lens of ‘risk or ruins’ or the risk of having a black or white swan event in the market. You want to make sure there is at least 6-12 months of runway available, and hold enough cash or stablecoins to prevent volatility risks. That being said, nothing in crypto is without risks. We’ve seen it with UST where many projects at the beginning of the year were boasting about fully banking with UST and 20% interest. Lending protocols or stablecoins also have collateralization factors that introduce the financial market, lending pool, utilization, and depegging risks. Then you have things like Tornado Cash with its compliance risks and challenges. You have to look at your own risk exposure and then work through possible mitigation and asset diversification strategies. It’s not one size fits all which is why we emphasize bespoke solutions at Exponent. It’s about thinking about liability and risk factors.

For Exponent’s treasury specifically, we watch data on Curve pool and see whether assets in that pool are about to become lopsided. We then set up alerts when it's about to hit a certain threshold. Everything in DeFi is smart-contract based thus it should be able to automate both the alerts and prevention actions.

Stablecoin depegging is going to continue to happen and the space needs a solution to track and assess the risks associated with it.

Q: I checked out your Twitter thread earlier today. Can you talk a bit more about that?

A: We ran a 90-day historical data set to parse through price data in order to figure out the divergence level using simple standard deviation formula and adapted for DeFi. Once you dig into this it turns out to be a rabbit hole. We’re hoping to make these types of research into a more regular cadence as well as develop an open-source education piece on stablecoin risks framework. Welcome collaborators, DM us if you're interested to get involved.

Q: Speaking of Terra, what are some of the things DAOs could have done to protect against incidents like Luna, Celsius, and Tornado Cash?

A: it comes down to the risk of ruins. If you as an organization is 100% exposed to that, then you should reconsider and diversify. On CeFi versus DeFi, the OGs are super wary about centralized service providers. For us, we keep our treasury in an on-chain vault. We also make sure there are around 6-12 months’ of runways of cash and keep those stablecoins diversified. Some tokens are decentralized while others are free floating. We try to reduce the concentration of USDC exposure and recognize that over the past year the rest of crypto is waking up to the regulatory exposure risks USDC introduces. We try to balance making our stablecoins holdings productive while covering operational needs. Here we arrived at a DeFi Cash Saving Account.

In crypto, you are always at risk of getting your bank account closed or frozen. We were wary of this risk. Our goal is to keep the cash safe and be able to earn 5-10% APY. The solution today is a Curve and Convex staking pool. We don’t advocate for pushing a certain type of return profile because this pushes you higher around the risk curve. With our current holdings, we watch a lot of utilization ratios on Aave and Compound, and actively watch the APY to see which liquidity or lending pool provides an acceptable return. Our goal is a long and passive return with proper risk monitoring and guardrail in place.

Q: So be safe with what you do. If it's too good to be true, it probably is.

A: Greed = rose colored glass. Always be wary of your obligations.

Q: What about scaling a DAO structure? How do you deal with that?

A: Lots of DAOs are early-stage companies. There are not that many mature DAOs out there yet today. By mature, I meant having operating products, multiple double-digit headcounts, hundred million treasury. This I believe will start to grow. We are seeing it now with the OG DAOs like Maker, Aragon, and Gnosis as they mature they begin to lean towards professionalized services.

In terms of engagement with DAOs, there are two things. First is using products and relying on products. There are lots of this DAO tooling classification that aims to automate the setup and manage contributors. What's more interesting in my opinion is over the next few years, governance and contribution are going to become professionalized over time. Legal and treasury management, you are going to need to find someone to help you. Relationships will be closer to professionalized service as an internal team or a member of your DAO. The secret weapon is going to be value or incentive alignment, and it’s achievable here. Maker is calling its model Meta DAO.

Q: Interesting. Why can’t we create a bot to set a simple threshold to help us monitor and keep capital and protocol safe? We can do that with trading bots. Why not safety bots?

A: That's the aim is to have that available as good practice. One of out engineers mentioned earlier that sure you have lots of hacks in DeFi today. However, the nature of the adversarial environment, people have to learn quickly in DeFi, and thus you have faster evolution cycles.

Q: How is Exponent helping DAOs and what does the future look like if Exponent is successful?

A: First, we prioritize building treasury products. Our first product is a Diversified Cash Account where we diversify stablecoin holdings against different risk factors to ensure the asset pool and stablecoin capital remain diversified. We then add a low to moderate DeFi risk strategy with constant monitoring and actions being taken. We deploy this on Enzyme Finance infrastructure which is fully trustless and on-chain.

Secondly, we provide professional services in embedded governance and sub-DAO participation with a focus on risk and treasury functionalities. Scope of other services includes reviewing multi-sig transactions, proposals, asset and protocol inclusion, DeFi positions to name a few. We also run analyses like the 90 days trialing pegged ratios, and now extend it to other DeFi protocols.

In terms of what does the future look like? Once we hit Maker DAO’s end game, and implications for the larger ecosystem, we should have corporate infrastructure that is open and trustless for all of the digital organizations and decentralized org that they can plug, integrate and play with.

Additionally, we ourselves aim to become a DAO. So bringing in analysts and having a path for them to learn and growing the next generation of DAO corporate governance.

Q: Something like LexDAO is full of law students and lawyers right?

A: Yeah, LexDAO is completely underrated in terms of what they do.

Q: DAO Expert program, what is your perfect customer?

A: In general, we can provide support in setting up treasury solutions. All smart contracts are out there. Taking capital on-chain for the first time, starting on the right format. For us, the sweet spot is if you're a medium to a larger team, and you are focusing on building protocols. We can help you add the capability that goes unmet to manage treasury and think about cash flow and operations bucket.