What is DAO Treasury management?

| November 17, 2023

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Dao Treasury Management

The increasing recognition of decentralized solutions has fostered the emergence of numerous innovative approaches. Blockchain technology discussions often highlight the significance of cryptocurrencies, NFTs, and DeFi solutions. Within this context, exploring the concept of DAOs (Decentralized Autonomous Organizations), which have revolutionized traditional hierarchical structures, operational frameworks, and treasury management, is essential.

The increasing recognition of decentralized solutions has fostered the emergence of numerous innovative approaches. Blockchain technology discussions often highlight the significance of cryptocurrencies, NFTs, and DeFi solutions. Within this context, exploring the concept of DAOs (Decentralized Autonomous Organizations), which have revolutionized traditional hierarchical structures, operational frameworks, and treasury management, is essential.

Key Takeaways:

  • DAO treasury management lets decentralized organization sustain and grow in the long run.
  • It helps ensure that the pooled funds are allocated appropriately across multiple crypto-assets.

What is Crypto Treasury management ?

Crypto Treasury management involves the effective administration of an entity’s digital crypto assets to accomplish its strategic and operational goals. This comprehensive practice encompasses various essential activities, such as cryptocurrency management, token funding and investment oversight, trade finance, risk management, and portfolio optimization.

The significance of crypto treasury management lies in its ability to optimize an organization’s digital assets and effectively handle potential risks. It is crucial to meticulously administer treasury operations to guarantee an adequate token reserve for meeting short-term obligations while securing sufficient funds for long-term growth prospects. Additionally, crypto treasury management plays a pivotal role in managing and mitigating various risks, such as crypto-exchange risks, counterparty risk, liquidity risks, operational & compliance risks and risks associated with strategic investments.

What is a DAO treasury?

The DAO treasury serves as a collective pool of funds dedicated to the continuous growth and advancement of the organization. DAO members rely on specified governance mechanisms to determine how the treasury funds are allocated.

Decentralized Autonomous Organizations (DAOs) are innovative coordination mechanisms or digitally native organizations that operate based on smart contracts. Smart contracts play a crucial role in establishing and enforcing governance rules within the organization.

DAOs follow a community-based ownership model, where individuals collaborate to achieve shared objectives. Participants have various avenues for engaging with DAOs, such as acquiring the organization’s governance tokens. Ownership of these tokens grants individuals the ability to participate in governance activities.

While DAOs exhibit distinct characteristics compared to traditional organizational models, the treasury management aspect in DAOs shares similarities with conventional organizations. Notably, both require capital to fund operational activities.

How to Manage a DAO Treasury?

The primary principle of DAO treasury management, similar to any asset management, is to prioritize capital preservation. While this principle may appear challenging and self-evident, it holds crucial importance as it serves as a guiding factor for all subsequent decisions made by the DAO.

Fortunately, DAO treasury management is a shared responsibility among all members, alleviating the burden of any single individual. Nevertheless, having a few sensible voices proposing and offering feedback on proposals can assist in maintaining a grounded perspective, particularly during periods of speculative enthusiasm, such as a bull market.

DAO treasury management and Risk evaluation:

Every investment inherently carries a certain degree of risk, making risk management the primary responsibility of a DAO concerning its treasury. The DAO treasury management responsibility can be broken down into four key elements: management expertise, acknowledgement of potential risk, risk evaluation, and strategic execution.

Management Expertise

The DAO must decide whether to handle every investment internally or outsource to decentralized applications (dApps) or professional services organizations. Dedicated management tools and experienced teams possess expertise and track records that are challenging to replicate within a DAO. Even if a DAO is specifically formed for investment purposes, there is no substitute for real-world experience. Additionally, the risk of failure by these tools and teams can be mitigated through platforms like InsureDAO, which offers insurance coverage. Therefore, it is seldom practical for a DAO to independently assess and execute every single investment.

Acknowledgement of potential risk

When evaluating potential investment opportunities, it is natural for individuals, including DAO members, to focus on the potential gains while overlooking the associated risks. To address this tendency, it is essential to establish teams and procedures that transparently assess the risk associated with each treasury allocation.

Appropriate Risk Evaluation

Insurance companies commonly employ a standard formula to assess risk, which factors in the probability of loss multiplied by the potential loss.

The formula is: Risk = Probability of Loss * Loss.

By incorporating such risk assessment formulas, DAO members can better understand and manage the risks involved. Enabling them to make more strategic and informed decisions regarding their treasury allocations and management.

Assessing the probability of loss is a complex subject in its own right, but risk management teams within DAOs can adopt several techniques from traditional finance as precautions:

  • Failure Mode and Effects Analysis (FMEA): FEMA technique helps identify potential failure modes and their impact on the overall system. By systematically analyzing failure scenarios and their consequences, DAOs can better understand and mitigate risks.
  • Sensitivity/What-If Analysis: By conducting sensitivity analysis, DAOs can assess the potential impact of changes in various factors on their investments. What-If analysis allows them to simulate different scenarios and evaluate the corresponding risks.
  • Value at Risk (VaR): VaR is a widely used method in finance to estimate potential loss within a specified confidence level. By applying VaR, DAOs can quantify and manage the potential downside risk associated with their investments.

Managing the loss metric is comparatively simpler on the other side of the equation. DAOs can control losses by appropriately scaling their investments based on the estimated risk. This ensures that investments align with the risk profile, helping to minimize potential losses.

Strategic Execution

Execution risk is a significant topic within the realms of business and finance. In the context of DAOs, it is crucial to consider the following aspects:

Individuals with Treasury Management skills

Ensure that your DAO comprises individuals with the requisite skills and experience to conduct research and implement treasury allocations. Alternatively, collaborate with applications and partners who specialize in these areas.

High signal-to-noise ratio

To ensure efficient decision-making and effective execution of treasury allocation strategies, it is important to have a high signal-to-noise ratio. One approach to address this challenge is establishing a dedicated treasury management committee, as done by Pickle Finance. This committee operates autonomously in day-to-day operations and consults the broader community on major decisions.

System assessment

Regardless of the systems used for storing and managing the treasury, conducting thorough and well-documented test runs for all planned operations is vital. This process should account for system limitations, gas fees, and potential human errors. By meticulously assessing and addressing these factors, DAOs can enhance the reliability and effectiveness of their execution processes.

DAO Treasury Management Tools

If your DAO is encountering challenges in managing its treasury, numerous tools are accessible to simplify and streamline the treasury management process. These tools cater to various tasks, encompassing diversification, reporting, and everything. Some notable tools include:

Diversification Tools

Diversification tools aid in optimizing the allocation of funds across different assets or investment options, ensuring a well-diversified treasury portfolio.

Reporting Tools

With reporting tools, DAOs can generate comprehensive and real-time reports on their treasury performance, including key metrics, financial statements, and analytics.

Risk Management Tools

Risk management tools assist in identifying, assessing, and managing risks associated with the treasury, enabling proactive risk mitigation strategies.

Liquidity Management Tools

Liquidity management tools facilitate efficient management of cash flows, ensuring that the DAO has sufficient liquidity to meet short-term obligations while maximizing investment opportunities.

Governance Tools

Governance tools provide a framework for transparent and efficient decision-making within the DAO, enabling members to participate in governance activities related to treasury management.

By leveraging these tools, DAOs can streamline their treasury management processes, enhance decision-making, and optimize their financial resources effectively.

Popular DAO treasury management platforms:

Yearn

Yearn is an automated tool designed to provide a hassle-free experience for users seeking yield-as-a-service (YaaS) through various backend yield strategies. It enables deposits in currencies such as $USDC and $ETH, along with popular blue-chip tokens like $LINK, $UNI, and $COMP, as well as various Curve LP tokens. Yearn simplifies the process by allowing users to set their deposits and forget about actively managing their investments while it leverages its backend strategies to generate optimal yields.

Balancer

While Balancer may not possess the same overall liquidity level as protocols like Curve or Uniswap, it offers a distinct advantage by enabling the creation of pools containing up to eight different assets. This feature makes Balancer an excellent choice for managing diversified treasuries. The term “balance” in Balancer refers to the mechanism of maintaining a stable ratio of assets within the pool.

Exponent

Exponent offers decentralized capital-as-a-service, empowering DAOs to retain control over their cryptocurrencies while effectively managing their treasuries. Their comprehensive toolkit includes features such as risk monitoring and built-in alerts, enabling DAOs to identify and address potential exploits and threats proactively. With Exponent, DAOs can confidently safeguard their assets and stay one step ahead in ensuring the security and integrity of their treasuries.

Llama

Llama collaborates with DAOs to create customized treasury allocation strategies, providing a personalized and tailored service that lines up with the specific needs of each organization. By understanding the unique requirements and objectives of the DAO, Llama helps optimize treasury management and offers a bespoke approach to ensure the effective allocation of resources.

Future of DAO treasuries

With the advancement and increasing complexity of decentralized governance models, we can anticipate the evolution of more sophisticated DAO treasury management practices. This progress may involve a greater utilization of credit and other financial instruments to facilitate day-to-day operations and transactions like decentralized mergers and acquisitions.

Related Articles:

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture