DAO Cash Management Methodology

It’s been an extremely challenging year for many protocols and DAOs from treasury and risk management perspectives. First, the macroeconomic downturn and slowdown of investment into high-risk assets pose fundraising challenges for founders going into 2023. Second, the market continued high volatility means teams must stay vigilant and adaptable to properly monitor and manage their budget and treasury strategies. Most recently, the impact and contagion from FTX have further exposed weaknesses in industry treasury and risk management practices, and as a result, many teams have lost a significant portion of their funds.

While the FTX situation is very unfortunate, the reality is that WE as an industry have become complacent in education and reinforcing best practices. Going forward, we MUST do better. Only the paranoid survive.

As a first step towards this, Exponent has been connecting with teams to help projects set up and educate them on multisig and self-custody best practices. In parallel, we wanted to share some steps for treasury safeguarding and management more widely here.

Step 1: Setup Crypto Custodian Account

Select the type of custodian service for your treasury. There are largely two types of services: custodian services and self-custody solutions. A crypto custodian is a financial services company that stores digital assets on behalf of investors, while crypto self-custody refers to the fact that users can take complete control of their digital asset(s). In a self-custody model, users can send, receive, and store their cryptocurrency without relying on any third party.

We believe that teams should self-custody their own assets as this removes counter-party risks and any liquidity risks from centralized service providers’ exposures. Under the self-custody model, your treasury should be held using a multi-signature hardware wallet which requires more than one private key to sign and authorize a crypto transaction.

Our smart contract recommendations include:

• Safe Multisig for small-medium sized and early-stage startups

• DAO contracts for larger decentralized organizations of stakeholders (e.g. Aragon and Juicebox)

• Hardware recommendations: Ledger Nano or Trezor. Do not use Metamask without an external hardware wallet

For a more detailed on-chain treasury operations guide. Check the below resource you could adopt as a template: Treasury Operations Guide.

Step 2: Fiat vs. Crypto

We often ask, “should we keep money on-chain or off-chain”. The answer is that it depends on:

1. The size of your treasury

2. Your cost center (e.g. GCP, hosting, office rental fee) and payroll requirements

3. Your familiarity and sophistication in operating wallets

4. Your risk diversification strategy

5. Your jurisdiction and tax obligations

Assuming projects raised funding in crypto on-chain to a multisig wallet, there are a few options for cashing out to fiat including Over-the-Counter (OTC) trading service which is enabled institutions or VIPs to place large block orders and receive custom quotes instantly. Typical OTC Trading Service is available 24/7, allowing transacted funds to be deposited and withdrawn upon trade confirmation. The second option is to go through centralized exchanges. Today, it goes without saying that you should not leave any assets on an exchange and do your homework thoroughly.

We recognize that teams will continue to have expenses that required fiat payment. While this guide focuses on on-chain asset custody, we do recommend that you set up both options for operational efficiency and risk diversification.

📑 Stay tuned for guides on treasury setups for off-chain bank accounts and entity setups.

Step 3: Planning for 6-12 months “Cash”

Once your fiat and cash account has been set up, we recommend teams carry out annual budgeting, expense tracking, and business forecasting processes. This should be done at the annual and quarterly cadence. If you need help setting up and handling accounting services reach out and we’re more than happy to share our templates.

You need to ensure that there is a healthy cash management practices in place to meet the organizational needs. This is equivalent to having a cash account setup. Capital kept in this account should be:

1. Well-diversified against different risk vectors

2. Sufficiently liquid for near-term expenses and liabilities

3. Smart contract secured with explicit roles and approvals in place

📑 Stay tuned for more guides on risk analysis for operating cash.

Step 4: Beyond the 12 months

After the first year’s capital requirement is met, the team can start looking beyond this and pursue ways to put capital to productive uses, such as to offset cash expenses, accumulate capital assets, or provide liquidity. The expectation is that the yield-generating account should be sufficiently risk-managed with a small to moderate risk and return profile.

We believe capital kept in this account should:

1. Be actively managed with market risk monitoring and automatically managed position

2. Be deployed in money markets and low-risk liquidity pool protocols

3. Not give up custody of funds to a trusted third party

4. Avoid leverage and re-hypothecation

This can be a highly involved and hands-on process. We recommend teams hire a full-time position or a dedicated sub-DAO/ small team of supporting contributors to manage a yield-generating account. Here, active and regular portfolio evaluations and market monitoring are required.

📑 Stay tuned for more guides on capital deployment within DeFi.

In closing, we hope this guide can help act as a helpful resource for teams to set up good treasury and risk management practices. It is not too late for the industry to turn around, and we believe the next generations of crypto projects that survive will come back stronger as a byproduct of this tragic event.

Feel free to reach out if you would like some help setting up your treasury operations.