Beyond the Runway: Designing Sustainable Treasuries with Volatile Tokens

Transcript

Oh, okay. It's on. Hello everyone. Please come join me. Um and we can sit in order of the flyers so everyone No, I think Abdullah is here. This order. So, >> [laughter] >> yeah. Let's try this. Oh, this is very loud. Okay. Hello everyone. Also, warm welcome from my side here to governance day one. Um the interactive part, I think tomorrow is governance day two research session. Great to see everyone here. My name is Zoe. I'm founder of Claris AI and partner at Valhalla Cloud. I'm going to moderate the first panel discussion here.

And we have an exciting topic. We're talking about sustainable treasury design. Therefore, I'm joined by four excellent panelists. We have um please welcome this my speakers here. We have Abdullah, co-founder of of now I forgot it Arana Digital. >> [laughter and gasps] >> We have Carlton, co-founder of KPK. >> I'm governance lead. >> Governance lead. Okay. This governance lead. Sorry, it says there. >> [laughter] >> Um we have Juan, co-founder of Adam Capital and Juan, BD and growth manager at um AvantGarde. Please welcome the speakers with me.

>> [applause] >> Great. So, guys, I would take it over to you guys. Um please give in one short sentence a short description of what you guys are actually contributing to the governance space um within your position. >> Sure. Uh okay, it's working perfect. Hello everybody. Uh I'm Abdullah. I run governance at um Arana Digital. Uh we are a governance and consulting group uh with a primary focus on working with DAOs across primarily Ethereum, Ethereum D5, but also in other spaces like Solana.

My personal focus nowadays is usually on Uniswap and Compound DAO. And when it pertains to treasury management, one of my recent contributions has been through Uniswap treasury working group regarding research on how Uniswap itself can mobilize the DAO's treasury. >> Thank you. >> I'm Colton Luberacki. I'm governance lead at KPK. Before I was there and kind of my space or place in the space was I was involved in ENS DAO. I helped them write the RFP and start their endowment, which I think now is a really accessible treasury endeavor in the blockchain space.

But I work for KPK currently full-time and I'm the governance lead there interfacing with with all of our clients. We do on-chain asset management and I'm there to interface with those those online and digital protocols. >> Yeah, so I'm Juan and I'm at Dam. We're like an asset management company, but I have been managing I managed Kleros treasury since 4 years and in Kleros we always have been very involved in governance, not only like from the product side since Kleros is a subjective oracle, but also now with a lot of changes and adopting and new things like prediction markets, Futarchy and how to make and yeah, decisions in a more like

accurate and trustworthy way. So, yeah, in that way we are pretty close in in the intersection of governance and finance. >> Thank you so much. So, this is Juan. Growth manager and the at Avantgarde Finance. Avantgarde has been within the crypto ecosystem since 2016. One of the first on-chain asset managers. Right now also getting into ball creation on blue chip Morpho actually. And well, we are supporting and running several mandates from important ecosystem players and partners.

We support ecosystems in you know defining sustainable and organic growth strategies which means and implies also running different kind of treasuries. This is a TLDR of what we are doing. >> Thank you guys. Definitely deep expertise here on stage. And how about you guys in the room? Who of you are currently active contributors to DAO or delegates in the DAO environment? Okay, and do we have some builders in the room as well? Oh, a few. Okay, cool. We can definitely dive deeper into this conversation.

Of course we're talking about a design of sustainable treasuries, but as the title also entails the runway is very very important part of this. And I think as all of us know here in the room, a treasury or crypto native treasury should not be just be used as a bank account, right? We actually want to use it as a strategic active and also productive asset. So I would like to hear from you guys as a kickoff, how would you define a sustainable treasury? Juan, if you want to take this on.

>> Normally our approach is to understand that treasury is the most important asset of a protocol, DAO, call it whatever you want. So it's important to understand that you have to depending on the situation apply different kind of strategies. It may be a defensive one or it may be an offensive one. You know, like trying to have a regenerative or self-regenerative treasury which means that you are constantly yielding in some way in order to not only expand your runway but also being able to cover you know like different kind of scenarios. You know, maybe this also implies like trying to minimize in volatility as much as possible, but always taking into account and then having mind that you need to properly diversify your portfolio

um in order to yeah, strange your positions and strange your treasury which at the end of the day is a thing that you have to defense. >> Mhm. Juan, you would like to add? >> Yeah, uh I agree pretty much with what John said. Generally in in crypto we have kind of a we live in a parallel world in the sense of in web 2 you generally need to have a treasury that in the medium term you have like more revenues that outflows. In crypto we have a lot of treasuries since we are in a very like green industry and in which it can happen that you're in growth stage so you like the profits are way less and than what you spend. But assuming that you can have an exception like for

example Kleros is an exception in the sense of uh and early companies that have a lot of like a very big treasury because of the being early to crypto then you need to like position differently and say, "Okay, how do you like find a balance between having a exposure to very volatile assets like ETH BTC or others and then having your own native token if that's part of like big part of your treasury or not. You generally want to rely as as little as possible on selling your tokens and therefore you need to have like a good of medium term coverage for stable coins and then maybe long term exposure on the assets you're lying to

that also enables to have like a longer runway and that's attached to the long term price action of the market that also goes like along with the with the market itself of of crypto and that option overall. >> [snorts] >> Okay, if we um look into um two challenges that we face, right? Volatility and illiquidity. Um how do we face this or how do you have some some Yeah, let's say solutions to these problems. Coltrane, if you want to start with volatility overall in treasuries.

>> Yeah, I think volatility we talked we talked yesterday but is it a feature or a bug? And I think mulling this over it definitely I think volatility is a feature. Um with these tokens and these assets you want to have um you want people to see upside in them. Obviously that creates a bit of demand. But you have to be careful because like like a car engine, um if it runs too hot it becomes unreliable. Um so when we think about our treasuries we want them to be a reliable source to pay contributors, to pay operational expenses. And I think we think about that in the context of sustainable treasuries, so this sustainability to me means mitigating those those risks or those unreliabilities.

Um and that means creating more productive assets and thinking about more on like a long-term and holding an asset composition um that is just not your native token. You're not just spending your native token um just to pay contributors. >> And Abdullah, your point of view, volatility, a feature or bug in web three treasuries? >> I would say that it's neither a feature nor a bug. It's just a condition of the market and it's entirely dependent upon how a token itself is sort of designed. If a token itself is more linked towards cash flows, revenues, distributions, burns, you can actually uh edit your models and your growth assumptions and see like what the

relative valuation of a certain token would be. And once you can curate that valuation, uh you can more easily uh compel investors to invest in your in your uh in your token. And the more investors that you have who are not simply going to dump your token uh when there is high volatility, high risk, um it makes it makes your direct treasury more uh sustainable as well because a lot of these treasuries are directly denominated in their in their native token. So, what the most important thing at the end of the day, it's really how the token itself is designed. Now, as Colton mentioned that you do want to have upside volatility. Issue with a fundamental token is that you cap your upside volatility when you can project cash flows for example.

>> [snorts] >> But, the main thing is you're protecting yourself on the downside. Where where DAOs really fall into issues is during bear markets and a lack of runway. And so, if you're able to provide some sort of fundamental value to the token itself, you can reduce the overall volatility. You can increase your runway by making it more easy for yourself to project out how long you have left before XYZ amount of capital is used for example. >> Okay, great. So, you're saying the treasury strategy should be definitely be closed in design with the token design.

How about over protocol incentives? What? >> So, protocol incentives, those are a key portion in deriving the assumptions that are behind the valuation of a treasury and the valuation of a token. So, like I said, like if you want to project out how much of runway you have of a native token treasury, you have to see what the valuation of that protocol is. And and then simultaneously you have to look at how much you're sort of expending. Now, you can adjust your incentive allocation depending upon how how much your where you think the valuation of the treasury will be based on the token value itself over time. Um, and so, if you don't have any sort of direct value attached, the only variables that you can utilize are at the end of the day how much expenditure

that you have and then sort of loosely hit at some running target of how much what the projection will be. That's why it's like best to ideally go from native tokens to some sort of stables or ETH or whatever else it may be. >> Mhm. Okay. Colton, would you like to add anything on the the value like the incentive strategies? We discussed this yesterday also um in terms of like how to create maybe revenue strategies. The incentive should be there, um your point of view on like creating the revenue strategies. >> Yeah, I think in the conversation we had yesterday, I think we we kind of came back to, you know, creating an actual product um and creating ways to accrue value to those token holders.

Um I think we like the token is not the product itself. We have to have something underlying that to create some sort of intrinsic drive and some sort of intrinsic value there. Um you look at like the hot topic is Uniswap now. Um and maybe Abdul can can touch on that, but like my familiarity is ENS and it's a bit of an outlier in the ecosystem uh for sure, but they actually have a product where people are buying the treasure buying uh names, they're selling the names, and then uh that revenue occurs accrues to the treasury, um which hopefully would accrue um value to the token holders itself. Um but I think I think the the key thing here is we actually have to be creating real products and and not just be creating speculation. Uh I think that

that's purely unhealthy and we've seen this play over and over throughout the years in crypto. >> Okay. >> Yeah, um I agree on the on the creating products and profit. I think though overall even if you create like some direct revenue stream, always the price of a token is more attached to the narrative, but but the narrative is generated by this actual value. That's why it's kind of a egg and the chicken issue. Um and on the incentive distribution side and again on examples of of these revenues and how could be distributed and I think now there's this meta in which um revenue is is a thing and all these

these companies that actually generate some sort of revenue like either five with like spending with the the credit card bundle and on the Y T side and hype because people like to be gen and is seen that is like what market like start to like that is what happening in web two traditional stocks. I'm combined I think with a having way more simple like tokenomics. I think that they like be tokenomics and I like it I like them, but more revenue my more companies are showing that maybe like a more right curve approach is which simply like buybacks or maybe buybacks in the not the most efficient, but something that

people briefly understand of how the value of the company is transmitted to the token and that will create a narrative is is what is having most effect and I feel I like it combined with something like yeah. No, I don't know like how you learn distribute incentives in a locking way and aligning long-term actors. I think that are nice approaches that we're seeing that are a bit different from 2021. So yeah. >> Actually, we were talking about this before with Colton. We have to say that selling your token is not a revenue stream. You are giving away something.

You are diluting, but we have to understand here maybe it's like stepping back for a minute what is a token. A token is just a digitalized share, which implies that you have like two rights, the governance right and then the economical right, which means that it can generate some kind of dividends like traditional stock market shares. When we talk about generating revenue through the token, I feel like here you can like for instance deploy liquidity on on on the axis like Uniswap. That's a pretty good way for generating this kind of passive income. Another potential strategy me that I'm like more the the growth guy maybe into marketing, you can use your token and when we talk about incentives it's also like trying to promote this kind of I don't want to call it like yield farming because maybe sometimes that means that

you're attracting mercenary liquidity. That's not what you want to create. You want people and you want token holders that stay with you for the long term, but you can use it as a marketing tool. You know, you can you can understand that you can give up your token in exchange for creating your community or also for creating um um you know, like creating this kind of uh supporters. And and this is a way of investing your token and creating or transforming something that may be illiquid into a very productive tool. Uh but at the end of the day, it's about having a real product market fit. And again, properly designing the tokenomics and understanding how with your product you are uh increasing the value of your token.

>> Great. And if you when we talked about like the theoretical part, do we have some real-world examples that you guys want to mention on the revenue strategies? Where where would you look at within the ecosystem to actually find the successfully um executed strategies, Abdullah? >> Sure. Um I can give one example of two contrasting examples, actually. So, we have [clears throat] on one side a protocol we work with, of course, Uniswap, which is much larger. And then one that is completely on the other side, which is a niche uh Solana company called uh Lifinity. Both of them are DEXes. One of them is very different in terms of how it's valued. Uh Uniswap is entirely based off a future potential

turning on of the fee switch, which now is an exciting time to sort of discuss that. Lifinity itself is different because it's an it's a Lifinity how it works is it's a DEX on Solana, but it's not like a normal DEX where it's like a permissionless one uh where any LP can deploy liquidity. It's one where they own the assets. It's all POL based. It's protocol liquidity. And so, they generate fees from people trading through aggregators like Jupiter. And then they also own the underlying tokens that are being used to generate those fees. So, it's kind of like a it's like a trading shop. Um and the interesting thing about that investment, uh we it like it's it's up like 1% over the past 30 days and it's down like 5% over the past year. So, it's like our hedge against volatility. But, the reason

it's an interesting bet relative to other more speculative tokens is because they have one revenue generation directly through the product itself. So, that's that's like operating revenue. They have asset appreciation depreciation. They have a whole bunch of swell for instance inside of their in in their treasury. So, they own the treasury. And there's actually a direct Two more things. There's a dividend as well. So, the revenue that they earn they give a portion of it back out to stakers. And it's it's it's paid back directly as a dividend. Interesting thing there is that it's allowed to be done for them because the the the owners are actually not docs. So, you get a bunch of regulatory issues cuz it's you know, there are SEC laws and whatnot in the US for example that prevent this. So, they give back dividends directly. And you

can also redeem all of the underlying assets. So, you can have a direct book value associated with a company as well. Um, so that's a very contrasting example where they pulled all the levers and is relatively stable. It's basically a stablecoin at this point that that that investment. Now, Uni however is very very different where they're using an alternative means like a buyback and burn which is not a direct dividend, but they also don't have that activated quite yet. So, we want to ideally go towards the Infinities of the world, these smaller DEXes who don't have as much regulatory scrutiny right now, but they've kind of showed how you can actually start implementing these sorts of things. So, that's like one example on our end.

>> Great one. Colton, do you have specific examples to add? >> I mean, I've already touched on it, but like I mean, I think I mean, it's not DeFi though. It's ENS. I think ENS is really simple. And I think when you have like on in the DeFi world, you have like a lot of these these complex protocols and complex revenue streams that that you take a to read you need to read a white paper to understand like how how they work. To me, I I just wish we could maybe reduce that a little bit and just get to something more simple. Like I want to be able to explain how we're making money in crypto in an elevator pitch, not by having to like give you a document to to read and understand. I think for me, like but I'm super cynical and that's that's why I love ENS and

that model for revenues is very simple. Um I think it's it's kind of a red flag to me when it takes a degree to understand why I want to give you dollars. >> And yeah, I think like you have more examples to be like the most well-known are well, ENS is a very big exception because it's the only one I think that it has since 2021 is generating actually money and costs are like pretty low as far as I know compared with the money it generates. So, it's a great business. Uh but then it's a kind of you're you're biased to see the the protocols with more effect.

For example, I mentioned Hype, EtherFi, Pendle that actually generate revenue and distribute. You can then debate Curve and Aerodrome like distribute revenues or not. If they're like like yeah, like we can then it's a parallel discussion. Uh but then you have well, Aave obviously is like a great example. And then you have like more most decentralized projects that I really like like for example, Protocol Effects and generates a lot of revenue like revenue for the token holders, enables people to have fixed leverage and part of that up front fee they pay goes to stakers. Uh and also something like Contango that is an abstraction layer for looping that is one of the most like used strategies in

DeFi. And you have different features. Those are two examples that maybe generate revenue, send it to stakers, but they don't have the narrative that maybe the VC traditional VC play gave them or that this of what I mentioned of Okay, you can have the revenue, but then you need that revenue to be attached with a narrative and after all the price action is determined way more by the narrative and the community than the actual revenue itself. It's not like a like we are still far away like from Web 2. Uh but yeah, I think those are the best examples and the most maybe not that much recognized examples.

>> In my case, I'm a big fan of DeFi blue chips, Ave, Uniswap. We recently saw a couple of days ago that Uniswap will finally implement this kind of fee distribution. Um so I feel like that's the best example. If you talk about how to distribute this kind of revenue among the stakeholders, I guess like you have like two main options. The first one is to directly um give away your fees to your token holders. The other one is through buyback strategies, which at the end of the the day increase the the value of the of the of the supplying token. Um those are like my my two cents.

>> Okay. Great. Thank you. Um and if we dive a bit into the decision-making process, right, of treasuries, which is also of course important point here. Um which should be adapted or like also react to market conditions. What are some governance frameworks um that you have seen that work also to be very adaptable for um govern- for market um changes? One thing. >> go for that. And I think the most important thing is that we really need to divide and split what is governance that execution. Because if not, you end up having a very slow processes, and that's what you want to avoid. You know, um maybe like a kind of bold statement, but decentrali- decentralization

sometimes uh doesn't work that well. Because it take a lot of time. I think that most probably most of us we have seen that. So it's super important that you properly divide and you have like this kind of decision-making uh process which relies on on on the centralized governance, that's true, but then you delegate uh the execution in some specific groups or um um let's say like players that really know how to run several specific strategies depending on the on on on your goals. It may be marketing, it may be community creation, it may be um, running your treasury, but you have to find out who can provide your value and delegate on them the the the right to execute.

>> The question between decentralization and fast decision-making, right? Always very critical. Juan, you wanted to add? >> Yeah, uh, on on the latter, uh, I think um, in in Kleros we we gave a couple of talks back in 2021, 2022 in which we explained this approach of having like the executive, judicial, and uh, of and the legislative power like applying governance. And basically if you use something like Snapshot that is like one of the most used for like a voting itself on DAOs, you can have like these three legs and implement like a relatively efficient way to make decisions and and and trust this way. And if you pair that with

in in my opinion the most like, yeah, like interesting and thing we're seeing now that is future is basically you can have like a decision being voted by the DAO and they enable that things like a prediction markets validate if this will have like a positive impact for the protocol or not. I think the next talk will be will be on that. But yeah, basically you ensure that okay, even if like you have like this corrupt small team that has all the votes and that should be also reflected in the price based on prediction market odds.

And I think that's one of the most like interesting things we will see in terms of also um, efficiency of the decision-making process and transparency itself. >> Yeah, I think I think it comes down to solid organizational design and from the outset. Uh, I think I've seen it maybe we all have seen kind of like mic drop tokens like to the community and you have like kind of just forgot what to do with it and then they end up having a treasury uh that they need to manage. Uh, and I think that that's really unstable and that's just doesn't invite a lot of predictability for like let's say asset managers like Enzyme or Carbone to come in um into work with them. And I think

the best things that DAOs can do is to if you're going to launch a DAO, make sure you're doing a lot of thought into organizational design. Um and I think of like the the DAO at large like the token holders kind of as a board. Like the board is helping guide kind of those decisions, but they aren't the ones that are actually doing the operational work. They they shouldn't be in my opinion because it is it's slow. Um so you need to set that up in such a way where you can actually hire outside contributors, you can hire outside service providers and make it a predictable environment for them to want to do business with you. So that then they can effectively manage your treasury or you know, uh steer operations in a in a way that's meaningful.

>> Agreed on all that. Basically the principal agent problem is going to be introduced if you're going to ha- handle a you know, a treasury over to somebody else. The DAO itself >> [snorts] >> practically never can make decisions on its own regarding like effective treasury management, especially if your voting processes take I don't know, 4 weeks, 5 weeks, 6 weeks. If by design some of them just like like by how it's designed directly takes like at least 4 weeks or so. So you should definitely hire treasury manager and I I give them some sort of leeway as to how they manage the treasury. There are operations in place to restrict what sorts of transactions they can do. Like you guys uh for like Avantgarde and both the Carbone guys use like a Zodiac

module essentially to make sure that there are restrictions within how transactions are conducted and where they can go to and it's not just put into some degen yield fund where you don't know where the yield is coming from. Um so there are restrictions you can inherently put in and to make big decisions you can go through like say for example like an on-chain vote, a direct vote that actually grants permission or removes permission from a particularly elected treasury manager, but certainly always elect somebody more competent to do the work directly and the decision makers of course are the delegates.

>> Okay. Good, interesting approach. We have uh only some minutes left and yes, I will take one or two questions from the audience if you guys want, but to close it up um a 30-second playbook for new DAO, do's and don'ts if you have something uh that you can fire shot. >> [laughter] >> Juan, uh yeah. Juan actually, but Juan. Juan, if you want to start. >> Yeah, um I I think we were talking before and uh today for a new DAO launching actually my first recommendation will be not launching at all like from moment zero in a in a in a company and and we're seeing this at in early stages of crypto we have the lack of like making the ICO in ETH and BTC and then

having a big treasure because of that, but today that doesn't seem that likely and the the runway of companies like uh basically is very short and all company most companies don't focus on how to generate revenue that is after all even if it's a crypto protocol you need to generate revenue or growth in such way that you generate future expected revenues. So uh I would say like and create create a model which or either you sure and you transmit how your value will have and yeah, value uh or expectation of cash flows over the long term and that your product needs to be good for and having such sort of revenue that you can redirect there even

if it's tangibly small and that should reflect and have long-term price impact. >> Completely agree. I feel like I think that uh creating a doubt is something philosophical. Okay, that's why we are here. We believe in blockchain. It's a something something that can improve the world. Um my recommendation is keep it centralized at least at the first stage and once you have a proper a proper product market fit, you can design how you want to decentralize your product. >> Centralization over decentralization for effective decision making, good product, culture and more.

>> Yeah, keep it centralized. I well that actually worked really well well in ENS for one. But keep it centralized, keep it simple, have a really good vision of your product and what you are and that product is not the token. It should not be the token itself. And then make it a hospitable place through like good and like prudent organizational design where you can invite outside people who who can clearly see the intrinsic value of their involvement and I think it'll it'll naturally come. >> Cool. >> Yeah, summing it up. If your token is not a strong token with any without any sort of utility, without any sort of fundamental downside protection, your treasury is in effect going to be subject to high degrees of volatility and potentially go to zero. So what you want to first start off with is make

sure your token design is strong and then of course that links back to a strong product and then combine those with proper economic incentives and that's how you actually draw in treasury managers who are incentivized to properly help bolster the protocols balance sheet effectively. So starts with the token, starts with the product and trickles down and directly affects treasury management because without the other two, treasury management is not effectively possible. >> Cool. That was a great summary. Thank you so much and I hope that it sparked some discussions also going forward if some people here in the audience have maybe different perspective on on this treasury design.

Are there questions from the audience if we have a microphone? If there are actually any public questions? >> Hot takes are also encouraged. >> No, okay. Then we can wrap it up but because the speakers are around. Oh, there is a question. Yes, please. Go ahead. >> Yeah, you haven't talked too much about security, right? Nowadays after what happened for example with Bybit, we all know that could have happened to any company in the blockchain ecosystem. So, what are you given the fact that you're managing treasuries, right? And that you're obviously all DPRK targets, how are you managing that? What's your

long-term strategy to survive in an in an ecosystem that is super super hard to to survive? >> Like kind of stress test also? >> Yeah. >> Security stress test, sort of something. >> Yeah, at least what what I can say on our side is and I agree like overall on the last few years, even besides the last weeks, the smart contract hacks are like way less and most of the the attacks come from this kind of like vectors of social attacks to people. So, I would say that like an audit and an obstacle audit is like critical in the sense of

whoever has access to the multi-sig and what threshold do these multi-sigs has, if there is like some window like a cool down period like for any decision like for example Morpho has with Aragon and you can implement with different options and also start with after all most of the things still relate to multi-sigs and how your offset is set up. On our case, we make a like an an audit on how yeah, the full stack of the signers and the thresholds are set up and their reliance is and have like diversification also in those risks. So, so yeah, like I agree it's important and having it mentioned, so thanks.

>> Is this set Yeah, go ahead. >> Like for as far as like trea- a treasury manager's perspective, I I think like what we we think about it at KPK in Carpaki is what you're setting up automations, working with like providers like such as Hypernative to have alerts. So if there is some sort of hack or there is a a market movement that is so volatile that it would risk positions that we hold, like we already have the triggers in place to be set, to be alerted. And then we're our team's like in a war room to to mitigate that and to to divest if if needed, yeah. >> Great. Okay, thank you so much. Uh thank you guys for joining. I think we are out of time, but um feel free to take the question offline. Um if that's fine for you.

Okay, we have time for one more question. I know there's Okay. Okay, I think we need to cut it here, sorry. They told me we need to stay on time. Well, um another question maybe afterwards uh to the panelists. Thank you so much. Big applause to our panelists, please.