DAO Treasury Management | Tarun Chitra

Transcript

Before we jump into the app, quick reminder that nothing on Bell Curve is financial advice. Everything is just a meme. Hope you guys enjoy. Like the point of a token to some extent, and this is not legal or financial advice but it is to some it's to some extent like allow you to not have to distribute any share of earnings, but always have some sort of ability to say you have a claim to it indirectly. But I think I think the idea of like businesses that actually don't want to have a token, so like the two ones that I think of most prominently for this are like

flashbots or EigenLayer. You do actually need to distribute cash because you don't have any way for people to speculate on the future cash flow of your thing. Huge shoutout to our sponsor, Reserve. Uh if you don't know Reserve, we're going to talk more about them later in the show. Uh but Reserve is the easiest way to design, deploy, and govern stablecoins backed by a diverse set of assets with access to DeFi yield and insurance. Super interesting. Very excited to partner with Reserve. You'll hear more about them later in the show. Should we get into it? Let's get into it.

it. All right, see you on the other side. All right, we have a new episode of Bell Curve today. We are recording with Tarun. Uh hopefully you're not watching on video cuz Mike is not looking his best today. So I would I would recommend this one on Apple Apple or Spotify would be a preferable for this one. So Mike, what are we talking to Tarun about here? Correct, I do have a face for radio. Uh so we're talking to Tarun all about DAO treasury management. So the reason why this is coming up is, you know, one of the key uh you know, talking points when it comes to DAO governance is how these DAOs should manage and allocate their treasury. So Tarun is going to lay out uh basically a couple of frameworks for how he thinks about treasury management.

Like what kind of phase one, two, three, we even get to four, 4.0 of what DAO treasury management should look like. He's also got a new product, Era. Era Finance, which basically helps DAOs manage their their treasury. So we get into all about the definitions of what it means and and we ask him some of the tough questions about uh how DAOs should be managing their treasuries. It's a great episode. Yeah, really good episode. For those who don't know Tarun, he runs Gauntlet, and Gauntlet is basically a risk manager for protocols. So really really really hands-on with a bunch of different protocols, and has seen a lot of the treasury management issues that have cropped up over the last like 12 months.

got the best style in crypto, hands down. I I think he's wearing a kimono for this episode. I was like, "Great shirt." He's like, "It's not a shirt, it's a kimono." So I mean, who does that? Who does that? Yeah. I don't know, man. Guys with better style than me, I'll tell you that. Um That's not saying much, but that's okay. No, it's not. It's extremely low bar. Basically laid the bar on the floor for Tarun to hop over there. But he does it But he does it with grace, so um All right, let's let's get into Let's get into the Yeah, let's get into the episode. It's been enough. All right, everyone, welcome back to another episode of Bell Curve. Today uh Jason and I are joined by Tarun Chitra. Tarun, welcome to the show.

Hey, excited to be here. Yeah, thanks very much. Uh all right, so we're going to be talking about a pretty hot topic in crypto, which is DAO treasury management. Uh I think uh there are a lot of misconceptions about how treasuries are supposed to work in sort of DAO and that really a hot topic right now? Is that Is that the hottest topic of uh In my mind it is. In my mind it is. All right, yeah. Let's Let's Let's We could say the hottest on-chain topic in Yeah. Yeah. All right, for for the on-chain maximalists out there, what we're all thinking about this. Uh I I think there were a lot of uh if you're thinking about how to manage

that treasury, you have to think about A, should I be diversifying? B, should I be investing in new products? C, should I be uh you know, buying back stock or issuing dividends? And so there's sort of this interesting trade-off of how much do you invest in future growth versus how much do you invest in sort of financial management of your portfolio versus how much do you sort of give back to existing investors. And so that's, you know, I'd say treasury management 201 is that you have those three functions, you have to think about how to manage those.

Um it can be hard, and I think in the 2015 to 18 19 range, there were tons of companies uh that are fintech companies that were trying to basically do treasury management for startups because usually you had to be a big enough company for it to be worth hiring someone, paying the financing costs, having the banking relationships, things like that. So, you know, companies like Modern Treasury were sort of like fintech companies built around giving startups access to the same type of tools. Um and then I think the final thing, the hardest type of treasury management is uh is when you're an exchange or a

financial asset uh purveyor like a bank because you have to think about money that's coming in that's technically income to you, money that's other people's money that you're holding and managing, and you can't treat that as your treasury, and then liabilities as things you're lending out and, you know, basically giving people some types of loans on. And and that that's sort of the hardest type of management. I would say that DeFi protocols kind of fall in the last camp. Uh other parts other types of DAOs are probably closer to the middle camp.

They're a little bit like tech companies. But broadly speaking, you you have this pool of capital, you have these cash flows coming in, cash flows going out, and you need to figure out how to allocate to future growth, sustainable management, and then also like servicing debt, servicing liabilities. Those are like the top three things. So I know I went through like a hierarchy of things, but hopefully that gives us some grounding to talk about it. No, I think that's that's great. So maybe if I could just like summarize what you talked about there, treasury management 1.0 at its most basic form is just manage your cash flows. Make sure you have enough on the finance The financing part of the business should basically support the operational part of business. You don't want to run out of money. Then maybe 2.0, which is more applicable to

software, is a little bit more of an uh capital allocation question that goes into it, right? Which is how do you balance kind of investing in future growth, which or maybe like returning cash to shareholders, or or looking at what are the the different opportunities you have for managing or allocating your cash. And then there's even like a third complication when it comes to uh fintech or DeFi and banking, which is like you sometimes have assets on your balance sheet, which technically aren't yours, right? So maybe the most obvious case, uh and just cuz you were referenced FTX before, is sort of customer deposits. But maybe if that's Aave or Compound, right, those are your your pools, right?

Uh and those Those aren't really owned by the platform, but you're sort of responsible for them. Um is that maybe kind of an accurate summary? Yeah. Boy. Yeah. So maybe let's talk a little bit about um you know, how how would you think about kind of uh that solving that 2.0 uh part of things? And you know, how how are DAOs right now kind of trading off um you know, they've got these these big pool of assets, often it's in their their sort of native token, and what do those kind of conversations look like? Are they sophisticated conversations for the most part about managing cash flows and investing in future growth versus not, or like what is what are what are some of the internal discussions about treasury management from your perspective sort of look like? Yeah, I

mean, I think the case studies uh in a lot of ways are the things that failed, um and then looking at sort of how what would have happened counterfactually had they actually been able to sell part of their treasury. The SushiSwap uh case where they tried to sell Sushi for dollars, Sushi was at like six or seven dollars. Um you know, I think I think there was might actually be more, but last time I did this calculation, it was like they would have if had the vote passed, the DAO would have had $60 million, which which is much more than it has now to spend on on sort of operations.

And most of the reason for that was that people who were um you know, how how does a DAO spend money? Well, people who own the DAO tokens have to vote on having the DAO, one of the larger owners of those tokens, sell its tokens for ETH USDC or some other asset. And there's obviously very bad incentive if you're trying to say, "Hey, use this token to vote on selling the asset you own." So, like I'm voting with this asset, I'm voting on making its price go down.

Right? That's that's already always going to be a little bit of a incentive misalignment in a lot of ways. Um So, uh I I think because of that, you you really need to think through like how how DAOs are supposed to incentivize things. Right now, I think the majority of DAO spending that is not on, you know, people who are direct service providers like auditors or people like my company Gauntlet or or others like in that world is via grants. And the grants are, you know, they're you know, they're sort of like a community pool and then people in the community the community votes on sort of

a grants committee and then the grants committee distributes money. That's the only way these DAOs are funding growth. Um I think Uniswap in particular some of them have funded charitable uh donations. I think especially around the Ukraine invasion time. Um and also in Uniswap's case, they donated to this lobbying group called the DeFi Education Fund. But more or less, I think the conversations around how to spend this money are pretty unsophisticated.

Uh although everyone now realizes they should have been having those conversations 9 months ago. So, I think the I think the reason this is such a hot topic is everyone has, you know, buyers or lack of buyers or they have remorse for not being a buyer or seller. Strikes me that the two big issues today are um uh one one is just that the community manages that there's a community that there's a community of a protocol, they own the tokens. So, like let let's use Aave for example. Aave Aave has a bunch of Aave tokens. Um I'm I don't know the exact scenario of Aave, I'm just going to make this up and use Aave as the example here. Sorry, Stani, but Aave has a bunch of Aave tokens. Uh and there's a pub they need

to the the proper treasury management solution would be to hold your treasury in something like USDC in like a stable US dollar coin, something like that. Um but then you have a bunch of people who don't want the price of Aave to go down, so they don't So, if Aave comes out and says, "Hey, we're going to sell a bunch of Aave," uh the community basically freaks out because they they want to keep they want to see the price of Aave uh they want to see the price of Aave go up, not down, right? So, that that's the first big problem. Uh and then the second the second problem is that you are basically trying to optimize for decentralization and you're doing capital management around Capital management is really like a one or two or three-person game. Like there

are a lot of a lot of hedge funds, a lot of VC firms are managed a lot of capital allocation, even CFOs, like those are usually pretty small teams. They're like two or three or four-person teams. But we're trying to basically keep decentralization, the D in the DAO, uh but that doesn't really work for capital allocation. It So, those those it seems like those are the two biggest problems. Would you agree with that, Turn? I think the third problem I'd add to that is that DAOs don't have good KPIs for what their treasury management strategy should be. It's not like they are like, "Okay, our treasury management strategy is like we want to invest in growth at all costs." If they did that, then that would be great. Even if that might not work out and the DAO dies, at least having a clear goal like that

makes a lot of sense. Or like, "Hey, we we want to be conservative and like earn yield but in a very conservative manner." Or hey, we want like to be risky. And one thing to remember, if you think about it, is DAOs are supposed to be online native institutions, institutions like a BlackRock and in in a lot of ways, right? They have a bunch of capital, whether it's sort of capital as equity or capital as as dollars. And they need to deploy it, but anytime they deploy it, they actually like cause other people to go trade against them or chase it. So, there's always some adverse selection, but their goals are not necessarily to just maximize return because

in a lot of ways, that's actually quite hard for them to do in a decentralized way right? So, I think the idea that DAOs are institutions and in the normal world, institutions have very complicated and not obvious goals in a lot of ways is extremely important to to keep in mind, right? It's like, "Why do pension funds invest in venture?" Right? It's In theory, that's because part of their goal is diversification. Also, part of their goal is um to fund things that other people won't fund because you get locked up for 5 to 10 years.

Uh and there's some premium for that. Uh and there's just a lot of diff and you're a pension fund, so your time horizon is like 30 years. And so, I think there's a lot of stuff like that that DAOs have, you know, I think like their thoughtfulness and care in deciding on that first will help you figure out how to do steps one and two. And then right now, DAOs' goals with their treasuries are very unclear for the most part. Do Do you think that uh you know, we had Derek and Larry from Reverie on on one of our earlier episodes and you know, they wrote this great piece "Musings on Governance" and they had a couple choice words and we actually talked about it

very briefly at the end of our episode with them about recommendations on treasury management. And they had very pointed recommendation for DAOs, which is that treasuries are not hedge funds or endowments. They're not supposed to be run in the same way with the same objectives. I mean, how much you know, and and sometimes you see these discussions on in forums and you do get the sense that you're trying to maximize a financial return because you have this pool of of capital. So, you know, again, just maybe being a little bit prescriptive for some of these DAOs, like if someone's sitting there and maybe either you're a contributor to a DAO or you have some say in terms of how treasury gets managed, and maybe through the grant program, maybe uh in some other way,

I mean, how would you talk to that person about how you should be thinking about even if you don't get rocks off of KPIs tomorrow, how should you change your thinking a little bit uh from managing that pool of capital like a hedge fund to how treasury is supposed to function? I'm not sure about the endowments uh comparison because like endowments are first of all not one-size-fits-all, right? Like MoMA's endowment does invest in things not for financial return often, right? Because it has an institutional goal of supporting art via its endowment on top of, you know, the goal of institution.

So, I think like throwing endowments under the bus maybe is like, "Okay, fine, Ivy League school endowments are one thing," but there are other endowments in the world that are still hundreds of millions or billions of dollars that have social missions or like fund a nonprofit or things like that, right? Which which are closer hopefully in spirit to a DAO. And in in that scenario, those institutions do have sort of some cultural goals of like the ethos of the institution that needs to show show through in what they are actually doing, which I think these grants committees are trying to do. I'd say that's like the de minimis thing they're trying to do is basically figure out what the cultural values of this community are and, you

know, distribute based on that. Of course, the problem is most of those cultural values uh still have some financial portion in this industry. There's no there's sort of no getting around that. Um But I think for DeFi protocols in particular, their treasuries should really be thought of as bank balance sheets. And that means that you need to be careful about insurance costs or like how much you can cover liabilities of users in your protocol and also the trade-off between like how much of your treasury you're willing to make a capital buffer so that you can offer more competitive products like higher interest higher amounts of margin

or higher amounts of risk. Um and those trade-offs are extremely financial. I I I would say that in in those cases, you actually do need to think of it a bit more like a bank. I wouldn't say it's a hedge fund or an endowment, but you really need to think about management the way a bank thinks about assets and liabilities on its balance sheet. And in particular, you need to think about it in a way that, you know, doesn't get you to insolvency. Arguably, the Mango Markets hack shares some some some some sort of abstract similarities with with uh you know, the insolvency at FTX in the sense that they had a token that was worthless

backing most of its insurance fund, and so the insurance fund was very easy to make insolvent via price manipulation on top of being able to borrow against. So, it it it's sort of like actively managing your treasury to ensure that if there is leverage against your equity in the same way that you could try to have leverage against a bank equity and go short on it around the capital crisis um is extremely important to maintaining the safety of your protocol. Even if you are, you know, the number one benefit of DeFi is in traditional finance, banks, you know, corporate debt structure is such that, you know, if they went bankrupt, the customers are not guaranteed to be

first in line. Like debtors might be first, preferred shareholders might be first etc. Uh Uh, on the other hand, in DeFi, the core tenant is that the customer is always the first one allowed to exit, right? You can always withdraw from the protocol. However, whenever you use your own governance token as a a lending asset or, you know, in the case of Mango, like they just didn't optimize their parameters. Like when Mango's price goes down 90%, you shouldn't allow people to get the same leverage on Mango as you do SOL.

It's like it is very similar to FTT in that way. And I think I think this is one of those things where you do actually have to think about a DeFi protocol's treasury as an insurance fund. And insurance funds need management. There's no There's just just kind of no way around that. Uh, but I do agree for DAOs that are not purely financial instruments, like, you know, maybe like a a game DAO or NFT DAO, they definitely have more of this quality of like, "What's the cultural values that we want to imbue in our treasury and our spending of our treasury? And how do we kind of do that safely?" Do you like see Let's use the example of something like Aave or

Compound. Or like this would be like what a bank looks like as well, right? There's a There's a balance sheet there where you have assets and liabilities. Even for something like Coinbase, you'd have customer deposits show up as an asset, but that's not something you can necessarily use. Do you think that's a, you know, in what sense is that a liability of the protocol and how should that inform your uh your treasury management, right? Like let's say Let's you use the example of a hack or something on on Aave. You could It hasn't really happened yet, but you could make the case that Aave shouldn't necessarily be responsible. It's a It's a software. I would probably make the argument that Aave should compensate users if a pool is compromised, basically. Uh but how do you think about you know, how how how do you kind of

think about those assets that are not technically owned by the protocol or DAO and how does that kind of build into or factor into uh the treasury management uh strategy that you select? This has happened on Compound, actually. Well, I guess we can start with Compound first. Um so, I think in December 2020, um there was this thing where the Chainlink Oracle uh I'm sorry, the the Compound Oracle, cuz they were they had a separate Oracle at that time, was manipulated. And a bunch of loans got defaulted because DAI was marked at $1.30, but it was actually basically a dollar.

And um you know, more basically what happened was was like there the people voted governance and then the protocol eventually compensated people for for those losses. In Aave, there's an explicit version of this, which is the Aave safety module. Now, in the bull market, COMP and Aave prices were high enough to support actually being real coverage, right? Um but the problem is without active treasury management, the liabilities of the protocol can change arbitrarily, right? Like anyone can come and take a loan and create a liability for the protocol.

But the assets aren't being rebalanced, and that's sort of the the key is that like without some notion of active management, you may actually have assets that suddenly decrease when your liabilities increase, which is the worst thing to have happen because if your asset values are are plummeting right when your liabilities are growing, you basically can't cover what's what's there. And this type of shortfall event, whether it's FTX, whether it's Mango, whether it's other protocols, can happen if you're not managing A, the sort of amount of leverage and you know, the risk parameters of the system, but also B, if you're not managing the treasury very carefully. And in the case of Aave and Compound, they

between having, you know, a risk manager who's conservative, but also uh basically not really offering crazy leverage in in other ways, um and not allowing you to borrow rehypothecate their token too much, like borrow against their token, they were they were able to effect effectively escape uh pretty much unscathed. Um And I guess my point is these treasuries are part of that story, right? If you do want to get to the point where on-chain protocols for perpetuals or lending can achieve the same capital efficiency as an off-chain protocol,

like a centralized one, you have to have some way of having a capital buffer that is able to make sure that assets are always greater than liabilities. And and and that boils down to treasury management. So, this might seem like a nuanced thing, but I I do think that it will, you know, if if we want to get to the world where there's more volume in perps on-chain or in the layer two, like dYdX, which I'd call sort of in the middle of pure DeFi and not, uh you really need to actually get good at treasury management. Like that I that that's the key. And And the key The other important thing, and this might be

the ultimate time to emphasize this goal, is that transparent The transparency of DeFi means that you can have infinite comfort in both proofs of liabilities, like how much the protocol is actually giving out in leverage, and proof of assets. And one of the things that's a little bit of a LARP right now is the a lot of the proof of reserve stuff. It's basically asking someone to be a third-party auditor to say like, "Okay, these are my wallets. I've signed transactions from them. Here's proof that I control the private key."

Uh and then then just saying like attesting that's your address. But that doesn't mean they've shown you anything about their liabilities. In fact, their off-chain liabilities, who knows? Their which, you know, in the FTX case is the you know, it's not like even if they did prove of reserves, you're never seeing that loan, honestly. You need proof of reserves plus proof of liability. Proof of liability is really hard. I think one interesting thing is a lot of times when you talk to exchanges about proof proof of liabilities, they don't uh include a lot of liabilities that they have on their balance sheet that they don't they don't think about. For instance, um Binance, for instance, helps you like put customer funds into BSC protocols.

So, like putting money in into Venus or PancakeSwap. If there was a hack, kind of like the the bridge hack, those assets are technically went from from ask customer assets to liabilities cuz Binance has to get them back, right? The proof of liabilities that most people call proof of liabilities does not include things like that, especially around hacks. And in DeFi, that's the opposite. Like you do really know the full loan book at all times. You know, like you know what Aave and Compound's exposure is, always. And I think that should be the gold standard, right?

Obviously, we have a long way to go to get the efficiency of that to be equivalent. But the reason it's the gold standard is the proofs of liabilities and assets are built into the protocols. And like zero-knowledge proofs plus DeFi will be, you know, in you know, obviously the mechanism design is not complete in that world yet. But the moment that actually works, you can get you should be able to get close to CeFi um with active treasury management, active risk management, and you know, an ability to preserve some privacy cuz I think I Privacy is still extremely important, right? One thing I can't help but thinking thinking about.

So, earlier at the beginning of the show, you mentioned like treasury management 101 is like making sure you have enough cash to like service the business. 201 is like starting to get into like dividends and share buybacks, maybe some M&A, things like that. 301 is, you know, basically when when you're like a bank and you have to separate like customer deposits versus your own balance sheet, things like that. There's also I'd say like maybe like 401, which is what we talked about over lunch last week, uh of, you know, if you're a United, for example, and you have to uh hedge out the the the risk that oil might go up or something like that. Or you uh it's kind of like Fortune what Fortune 500s do with their balance sheet, right? Which is hedge hedging out commodity risks, usually.

It does sound like when I think about all of the startups that we know, really what they do is treasury management 101. Let me make sure that I have enough cash in the bank to service my business. But now what you're telling me is you have all these startups that are 10, 20, 30-person startups that need to become really adept at doing treasury management 401. Am I and and and 301 and Yeah, and 301 and 401? Crypto projects that makes you actually skip You don't actually even need 201 cuz you don't really care about M&A or dividends. You go straight to 301 and and even 401.

Yeah, yeah, basically. So, yeah, the 401 piece is actually the most important part. In the normal financial markets, and this might be the point where I I sort of probably disagree with with with um Larry and Derek a little bit, is that institutions have a role in making markets more functional and liquid, not necessarily in the same way that a hedge fund does. So, you know, for instance, let's say I'm an institution, I for some reason ended up buying a bunch of airline stocks, um and you know, airline stocks are just anti-correlated to gas prices, so I start buying gas futures with the idea that like, "Hey, I'm hedging some of

that exposure. If like gas costs go up, my airline stocks go down, but at least I got I still own some some exposure to gas and oil." The thing is most institutions that do that type of stuff don't care a lot about their exact execution price, right? They're fine paying 2%, which if you talk to like a trader, like especially quant trader or you know, like a desk trader, they would just be like, "Ah, that's too expensive." And that's cuz they're thinking about the purely speculative reasons to buy derivatives, right?

They're not thinking about I'm actually hedging some commodity I own or I is somehow like related to the assets I own. They're They're just like, "How can I flip this quickly, right?" And you're not going to make a profit at 2%, right? The same thing with the NFT royalties thing, right? Like there's a reason that those fees go down. Um And so, but institutions are fine with that because they want to have long-term exposure and they have a bunch of assets on their balance sheet that they have to hedge. They have no choice. Right? And so, DeFi protocols, DAOs are very similar.

They have a bunch of assets on their balance sheet that they want to hedge, their own governance token, but they also don't want to give up a lot of rights to those, right? Because they ostensibly want to still make sure the DAO has a lot of ownership in the protocol itself. Um and so, DAOs actually function a lot like, you know, these institutions that are the long-term buyers of derivative products, whether it's futures, options, swaps, etc. And you know, I think an interesting case study of of how there hasn't there this market sort of still isn't mature enough yet on chain is that we you know, we have this huge burst of interest in these DOV vaults,

which are like the options vaults like Ribbon Finance. Really great in a in a bull market, right? Because because you you basically are capturing some type of certain option strategies that do well when there's at least some sort of sideways behavior or slightly positive behavior. Not so great in a a bear market. And we if you saw like these vaults when the prices went down, everyone pulled all their money. And when they pulled money, they caused this like bad liquidity crisis. People removed money from DOV vaults.

The protocols panic removed liquidity. They finally panic removed the the They They're just defined to like, "Hey, if you're redeeming, we just remove liquidity instantly." And then that caused the option prices to get more expensive. People stopped buying options. And you have this bad feedback loop. On the other hand, in normal finance, you have this positive feedback loop where institutions who are long some assets buy the hedging products even when the market is down. Right? They keep They keep hedging their exposure to oil even when the market's down because they're They They They're not trying to just sell their assets and speculate on their treasury.

And in that sense, DeFi protocols and DAOs, but DeFi protocol DAOs in particular, um need to get good at treasury management 401, which, you know, I I think is is the next stage of of the on-chain evolution in in finance. Do you think there's any way this can be done in a decentralized way? Like in in the forums basically? Yeah, so, you know, obviously I'm I'm going to to to at this point talk my book about this because I've spent the last year thinking about how to build protocols for for this problem after having watched and participated in many unsuccessful diversification

discussions. Wait, Jordan, before you before before you plug Era, which you should definitely do, can you say Can you just explain how it's currently done right now? Oh, the way it's currently done is someone makes a forum post, says like, "Hey, we should do X with the treasury." People discuss for 2 weeks. Then they do a snapshot vote. And then maybe they'll vote for it. Um oftentimes if the sentiment isn't very good in the forums, it'll never even get snapshot. Often it gets a snapshot. A lot of people don't vote in the snapshot. That doesn't pass. And then also if the snapshot even passes, oftentimes once it's on chain, the bigger holders are like, "Oh, no, I don't want the DAO to sell." And they vote They realize it at the last minute.

So, Yeah. There's lots of and I would add the second way that it's being done is now there are a lot of funds who are coming in and asset managers who are coming in saying, "Hey, you a bunch of 22-year-olds don't know how to manage your treasury. Let us, the hedge fund, the professional hedge fund with some gray hairs, manage your treasury for you." Which is also a bad option because now you're just giving the your treasury to a fund. And um if if we haven't learned anything from MakerDAO's proposal where they lent to Gemini Earn and then now have exposure to Genesis, which I'm sure Maker the Maker people who were very anti the strategy are extremely like angry about. Um

You know, yeah, being extremely careful about keeping your assets on chain as a DAO, I think is really, really important. Um I think the moment you move any DAO assets off chain, you basically are not actually growing the ecosystem around your protocol or users. Um and we've seen that happen before. So, like I think after 2017 and 2018, a lot of the layer one foundations, they, you know, raised these ICOs, they had these treasuries, and they would sort of delegate their treasuries to trading firms, um either via token loans or other types

of structures. And the trading firms just took them and traded on Binance and FTX and stuff like that. Uh they didn't use much of the on-chain mechanics in that in those layer ones. And so then they didn't really grow the on-chain network of the layer ones. Like there's tons of layer ones who like they probably should have been spending their treasury on being liquidity providers in protocols on their network, not doing token loans to trading firms who are trading on Binance or FTX, right? They're not generating real transaction volume for your network then, right?

Whereas in DeFi, I think like the network effect of DeFi comes in when like protocol A uses protocol B, maybe its treasury diversifies, puts part of it in protocol B. Protocol B uses protocol A uh with part of its treasury. And the net actual productive output is that by both of them providing liquidity on each other's protocols, they actually lower the transaction costs for both of their protocols so more people use those protocols. Right? And there's this synergistic effect of like protocols using each other. And that that network effect is the beauty, I think, of a lot of the early ETH DeFi.

I think like the That was when people really understood what composability meant and why it was important. It was really understanding how you could loop these things together. I think treasuries also need to do the same thing. Not just traders using these protocols. All right, everyone. Brief break in the show here to talk about our newest sponsor, Reserve. So, you know, it's looking pretty bleak out there. So, I'm not looking that great. But you know what the one thing there's no bear market in? Stablecoins. Stables, baby. Stables. We love those stablecoins at, which is why we're excited to partner with Reserve Protocol. So, let's just start with the basics. What is Reserve?

It's a self-service platform to build, deploy, and govern asset-backed stablecoins, uh which can be integrated with DeFi or within the real economy. So, the cool thing about Reserve is basically anyone out there permissionlessly can take any set of ERC-20 tokens and use them to collateralize their own stablecoin. So, the long-term goal of the Reserve Protocol is to create a non-inflationary currency that is stable on a month-to-month basis, but also a century-to-century basis. In the meantime though, they're open-sourcing design decisions for stablecoins, which is just super, super cool. I think one of the benefits that you get there is diversification. You hear it all the time in Finance 101, no such thing as a free lunch except for diversification.

That's what you're getting with Reserve Protocol. Yeah. I've known the team for a long time. I spoke on panel at SF Blockchain Week with Nevin, uh with Joe Carlson, and and Alex Gladstein. Really impressive uh growth that they've been able to have so far, right? Their premier stablecoin is RSV. It is backed by three other stables. It's already used by over half a million people transacting over 300 million dollars a month. Right now, like Mike was talking about, anyone can go create a custom bespoke stablecoin using the Reserve Protocol. You can back it by maybe specific USD stables, or you can get uh creative and, you know, maybe build something more complex like inversely correlated assets. The branding, governance, and composition are completely up to you. And lastly, if there are any builders who are listening

and you aren't interested in issuing your own stablecoin, what you can do is you can stake Reserve's governance token against your favorite stable strategies. So, what you're doing there is you're providing backstop insurance to stablecoin holders. Not riskless, right? Not financial advice. There's definitely some risk in doing that, but it does allow you to earn yield, especially now in crypto when there are so few ways to do that. It's definitely worth checking out. So, at the very least, you should click the link at the bottom of this episode, go check out the Reserve website, see all the cool stuff they're up to. Most importantly though, click this link. Got to give Jason and me some credit here, right? Show us some love. Show us some love, baby. Give us some love, baby.

Give us some love. All right. Now, back to the show. Let's get into it. There was a There was a proposal little while ago, just using an example of to make sure I'm understanding what you're saying, even between like GMX and Rage Trade, uh I remember where there was some sort of token swap. I mean, one of one of the other benefits of that as well is, you know, DAOs kind of missed the boat a little bit on diversifying out of their native token, right? The big problem that also we haven't talked about is most of these DAOs are sitting in their own native token, and there's no liquidity on their native token, right? So, they've got these liabilities denominated in USDC, which you need to pay the people that are contributing to your DAO.

And you've got You don't have the ability anymore to to transfer your native token into into USDC. But one of the things that you can do with an illiquid token is swap for another illiquid token if you get some service in exchange for it. So, that's kind of what you're describing right there, too. It's a I'm not actually sure how often that occurs in traditional corporate finance. I I haven't really heard of it. People do it, but in a weird way. Which is they make a joint venture that they own Right.

Like they do it Equity swaps are more expensive in tradi- the traditional world. Which is exactly one of the benefits of DeFi in some ways. Interesting. Right? It's the fact that you can do these things relatively cheaply with no lawyers. Right? Um and like no excess legal costs to to to to do some type of thing like this. Mhm. So, may- maybe this would be a good time to pivot into I mean you've built a solution here, right? Having been sort of boots on the ground and in your own words participated in some unsuccessful diversification efforts. So, maybe this would be a good time to talk about what is Era um and what parts of the we've outlined so many phases 1 2 3 and 4, where does Era kind of fit in that framework? So, one a a different

way of looking at um 401 is uh the allocation pro- it like is is how do you solve the allocation problem in the decentralized manner? The allocation problem means I have portfolio X like 50% governance tokens, 25% ETH, 25% USDC. And I have some notion of a KPI or objective of I want to diversify, I want to have more yield, I want to supply to protocols that are generating fees.

Um I want to make my assets always greater than my liabilities. And the question is how do you get people to optimize that metric or you change your portfolio so that it keeps improving that metric even as market conditions change. And in that sense um there's a bit of similarity between sort of the approach I've been thinking of and we've been building out and sort of something like Numerai, which is um if you if you've heard of it, haven't heard of it, it's like sort of this thing where people give like they crowd source um trading models

and then Numerai the corporation sort of aggregates their trading models and then trades on them and then based on how well they do they get some profit. The difference between something like Numerai and and this is that A um this is meant to be fully transparent. Like you can see the the DAO token holders vote on an objective. They vote on we want 20% of our treasury to always be spent on making sure assets are greater than liabilities. And they can see the measurement and calculation of that and they can see the execution of that. So, all of the trades that are done, all of the portfolio changes are done on chain.

The And the idea is people submit their portfolios on chain to get aggregated, they build an on chain track record, and then based on how good they are, how how how their recommendations over time work, they get fees paid for by the DAO. And so the idea is is sort of you know, making it so that this thing that you see in every treasury diversification, which is if you go to the forums there's like someone who says like it should be 90/10. Like it should be 90% dollars, 10% governance. Someone else says it should be 50/50.

But they all none of them has skin in the game. Right? They they're they're they're just saying like hey, this pool of money should be changed this way, but they have no skin in the game. Um and the idea here is you have to put up some skin in the game, you make a portfolio uh and and build a track record of improving these KPIs that DAO wants to improve. Now, does that mean that can cover everything that is in treasury management? Uh no. So, like things like grants things that are qualitative, like what does it mean to invest in the business which in DAOs is very nebulous, right?

Like arguably even the grants are not clearly investing in the in the business of the DAO per se. Um but I think the the idea is that anything that is quantitative that a DAO can give a a quantitative answer to this is a way of allowing you to to to get your participants to have skin in the game and you know vote on how your treasury should should look. Uh and then you know, get rewarded or penalized based on how well they did. Um and so that in a nutshell is what Era is. I I tried to give a very high level of view, but we can dive in any to any level of that.

Can you can you can we go a little deeper actually? Um cuz I I tried to fully understand it last week, but I want to I want to keep going deeper. So, let's use an example. So, Lido has I'm just looking at this is from Deep DAO. So, I'm looking at Deep DAO. Lido has according to Deep DAO 200 million in their treasury. You guys come in. How how does this work now? How does that that 200 million get allocated? Who manages it? How do you basically incentivize the management there? Yeah, so let's say Lido So, in Lido's case, right? Um as a staking derivative, there's sort of implicit uh safety issues. Like uh you people might not be able to redeem, right? At some point in the future and the Lido DAO technically

insures that. Uh to some extent. And so, some staking derivatives like Marinade on Solana, I believe, explicitly have a staked insurance fund. Um I think Lido doesn't right now, but has definitely talked about it. Um but let's say Lido's like 20% of maybe let's just make it simpler. Let's say 50% so 100 million dollars is allocated to uh making sure that uh if there's ever any reason someone can't withdraw or some validator misbehaves and like causes a loss to people staking in Lido that people will get covered.

90% of that treasury is in Lido. So, it's in LDO. So, uh you know, they'd probably deposit LDO. And then people would say would vote on hey, based on how much ETH there is staked in Lido and how much Lido's earning in fees versus how much it's liable for uh there'd be some sort there'd be an objective function on chain that says like okay, currently Lido's liabilities are 200 million dollars. And currently our assets are 100 million dollars of LDO.

Uh if we had to sell it, maybe we'd only be able to get 80 million dollars of ETH. So, we're at a deficit of you know 120 million dollars. So, what would happen would be people would vote on portfolios like hey, maybe we get some yield on LDO with 10%. We vote on selling some fraction of the LDO into ETH some fraction to USDC. And then people get measured on how much the difference between asset liabilities decreases. So, suppose suppose you suppose the three of us submit portfolios that are different um but um Michael's was the one that was actually like the best portfolio of the three of us, then he would get rewarded

from the DAO. So, the DAO would pay some fees for that and the two of us would get slashed potentially cuz we we gave a bad portfolio. But the idea is like everyone's getting graded repeatedly for That best portfolio based on highest return? No, so so that's the key thing is like it's done in a way where you the DAO provides an objective. DAO provides their goal. Best portfolio based on the DAO's goal. I see. Best portfolio based and they're grade you're graded on based on how well you do on that goal. And it needs to be an on chain measurable goal so you can write a function that just takes on chain state and says like how and can grade you and give you an a score.

Yep. You ever talk to Richard from Numerai about this? Yeah, I tutored him in college. You know, Richard actually had an amazing call. Richard came on the podcast like 6 months ago and was like I'm selling all my ETH. We're like Richard, you're crazy. Looks pretty good now. Yeah. Yeah, he's been he's been very negative on crypto every time I've talked to him lately. Yeah. Yeah. He did kind of also call the return to market neutral hedge funds. And I think a lot of honestly, not that I really want to talk about Alameda, but you go back and look at some of Trabuco's old threads and you do see this change in market neutral and clipping spreads to taking directional bets and that's probably a big part of the the downfall of that particular fund, but um I I want to I want to get a sense as

well to Rune for I I really like this framework that you have about treasury management making it so that your assets exceed your liabilities preferably entirely on chain. I'd I'd be curious you know, the one the one maybe little warning bell I have in the in the back of my head is some of these financial products are very complicated and it's very difficult to try to figure out how to incentivize people, right? Maybe the most basic thing I could see happening in in in this particular scenario is say hey, we we want to maximize return, but you should be doing risk adjusted return, right? Which is a more difficult thing to do, but something like how how do you um

you know, I guess what's your level of Do you worry about kind of the level of current financial financial know-how in the space? Um and do you think we need to see more financial know-how kind of come in for this product to be successful? Yeah, so I think the interesting thing is um if we look at the last 2 years of funding in DeFi there was quite a bit of money spent on basically building every financial product that exists in traditional finance in some form or another.

Uh and and arguably the most successful DeFi protocol is Uniswap. And Uniswap doesn't look like a normal traditional finance like like you know, after many months of writing papers uh you know, I think we you know, people people like us proved some results that like it does look like some very complicated traditional product. But it's not obviously like a normal financial product in some ways. Um but one interesting thing and and I think this gets back to the point idea of like institutions are really important at being the baseline liquidity for a lot of derivatives products.

Is that every options protocol in DeFi, every perps protocol in DeFi they don't have any long-term buyers and sellers. Like people who want positions that they're holding for months. And that is not super sustainable. Like that's fine in a bull market when like there's enough speculation-based demand to keep look you know, liquidity there because it can earn yield. But in a in a bear market, you need to actually have these kind of long-term buyers and long-term sellers to make sure that these products are liquid enough to make sure that they're safe enough.

And I think the goal I think of this bear market in my mind for DeFi is to figure out how to make these products that are very popular in centralized finance have the ability to have similar pricing but like without any of the problems of the centralized uh versions which are like you have no clue what their real liabilities or assets are. And I think the goal of this is to help DAOs bootstrap that, right? In my mind, there's a a lot of ways that DAOs are supposed to bootstrap this network growth within between DAOs, right? Like almost like B2B

in a way that like we haven't really done. Like there've been yes, there've been like small token swaps here and there. But facilitating that allocation of DAO assets to other DAOs is the only way you kind of get this like network of like DAOs supporting each other and making the overall costs a lot cheaper. Um Mhm. Which then creates this nice feedback loop. Correct. Yeah. Instead of being these isolated you know, part of the world. You know, part of the part of sometimes how I describe DeFi to people who are in finance but don't know much about it is the goal of DeFi is to unbundle the investment bank.

Right? Instead of having to like you know, when you go do M&A or IPO, investment bank sells you five million products you probably only really wanted two out of the five million. But they'd sell you the whole bundle. Right? In a lot of ways you could think of each DeFi protocol is like a desk at a bank. Right? And but there are obviously synergies that banks extract out of being in the same unit where you can like bundle these things. And I think the key thing is to make tools such that people can create their own versions of that without having to get stuck with like the the you know, the the package deal you're always sold at banks. So uh maybe to just continue in Jason's line of questioning being a little bit

prescriptive. I mean, is this is Era a solution where you would recommend it maybe specifically for DeFi protocols, DeFi like your Lidos or your Aves or Compounds of the world. Does it apply to every single you know, I I I kind of want to focus on those a little bit more just because I feel like maybe treasury management is a bit simpler if it's like a group of friends, you know, a you know, a smaller thing with with less uh complicated uh you know, structure. But I I guess yeah, how how you know, what sort of recommendations would you make for Era?

Is it sort of a one-size-fits-all or is it specifically geared towards DeFi now but you see it expanding into different verticals over time? Yeah, I think the two main objective functions we've worked on are one, the this asset liability mismatch of like making sure that your treasury can adjust to the liabilities in a decentralized manner. Um the other is uh runway management and sort of ownership in the network. So DAOs that are not necessarily DeFi DAOs generally have some notion of runway that they they have they have, right?

Like how much do we need to spend in USD on contributors, on marketing, on whatever it is. They also have some notion of how much they want the DAO to have ownership in the token. Like we want the DAO to never have less than 10% of the network or we want the DAO to never have less than 20% of the network. And then they also want some notion of either some type of diversification. Now, that diversification can be either market beta to the rest of crypto. So like maybe they want to own a bunch of ETH and like ETH and their governance token are the two things they're trading.

Or they want some type of fully uncorrelated thing and they they own a bunch of USD. And so those types of things are actually gen like you know, I gave you four components. Maybe to your DAO you care 80% about ownership and 10% about diversification and 10% about um you know, market beta. But for another DAO it's like 50 25 25, right? Those types of uh optimizations um can still use the same framework. Um and that's sort of generic to to many different different types of DAOs. It's not just strictly this asset liability mismatch.

Part of the reason we came up with this was you know, as we were constantly running these simulations, we would like run these simulations under different conditions and then noticed that some of these insurance funds were insolvent uh that existed and couldn't handle like a an event you know, I mean I guess this was like a year and a half ago. So at that time no one really cared that much when you're like, "Hey look, if your thing goes down 80% you're insolvent." Of course, yeah I guess Mango was the one that learned that lesson the hard way. But there are there are they're sort of like it was just this glaring hole to us while we're analyzing things.

Uh but I think the long-term goal is to make it so that you you know, if you have an objective like something like we said like I said earlier, you can optimize that. So like someone like ENS is a perfect candidate for that, right? They're like maybe we actually we want the DAO to always be owning at least 25%. Uh and we want to make sure we have enough USD and ETH for X years of runway. And that's that's something where people compete to do that, right? Versus like people writing in the forums like here's our allocation. That you know, that's A there's a lot of adverse selection.

Cuz you're kind of telling everyone what you're doing like weeks before the DAO even votes on doing the thing. B, there's no skin in the game. Like people aren't like actually putting up capital to like make these claims. And I think the key is to make people have skin in the game in these things because the worst scenario is someone tells the DAO, "Hey, dump all of your governance tokens uh and only buy USD." And then the same person goes and takes the other side of that. So they buy all of the governance tokens from the DAO.

And then now they own like outright ownership in the DAO and they can just keep voting on paying themselves, right? Like there there's sort of a very weird thing that happens if you don't force the treasury managers to also have skin in the game. They can extract more control over the the DAO in the long run. And so being extremely careful about avoiding that scenario is one of the main things we try to focus on. I I guess just uh I know we've got to wrap here soon. But you know, closing question and I know this isn't what we've largely talked about. But actually focusing on sort of the 2.0 part of it which is how much do you redistribute to stake uh shareholders in in TradFi and and token holders in in crypto uh and how much do you invest in the

future? You know, we talk we actually had Jason and I didn't recording on Empire with Kain Warwick. Uh and we talked a lot about just like what's the correct balance of yeah, there was a big narrative a little while ago cash flowing protocols, right? Protocols that return uh you know, that return funds to token holders and you know, I'd be curious just you know, what's your framework for kind of thinking about that because I understand the preference for that, right? Uh but ultimately I think it's a allocation question of wherever you can produce the the highest return, right? Compound value, you should be doing that. And for some of these earlier stage startups, it's like why are you giving money back to token holders if you're two-year-old company? Like can't you find opportunities to invest in there? I don't know if you see that

outside of the realm of treasury management uh or if you have an opinion on that. But I'd be curious to see how you what your internal framework kind of is for that whole question. I'd argue that Uniswap sort of beat out its competitors by never turning on its fee switch. And that if it did turn on its fee switch, it may have like incurred a lot more adverse selection. Yeah. Um I think it sort of depends. Um Like the point of a token to some extent and this is not legal or financial advice. But it is to some it's to some extent like allow you to not have to distribute any

share of earnings but always have some sort of ability to say you have a claim to it indirectly. Uh but I think I think the idea of like businesses that actually don't want to have a token. So like the two ones that I think of most prominently for this are like Flashbots or EigenLayer. You do actually need to distribute cash because you don't have any way for people to speculate on the future cash flow of your thing, right? And like at some level all markets that have these securitizations turn into something where you're either

speculating on future cash flow or it's like a zero-sum game like a derivative or like I buy one side, someone else takes the other side and you know, that's it. Um So I think like there's sort of this weird thing of like I think if you are able to build up a sustainable community uh and if and fees even if the fees go down yeah, you should probably just be reinvesting everything as long as possible in a growth industry. Um but if you're someone who's really antithetical to that and people view you as a sort of public good you probably need to start charging fees and returning them faster. That

would be my trick. Like I think there's certainly this interesting thing crypto where like a lot of things are called public goods or try to be public goods. But I think the value of a token is it will actually ironically allows you to fund your public good for way longer. If you have no token, you probably need to start charging fees sooner. Right? Like someone like Flashbots I think that will be more salient for them in in like a few years that like they effectively have to start charging fees. Yeah. I think you're probably right there.

Tarun, this has been great. Thank you, man. Awesome. Yeah, appreciate you uh enlightening us on uh crypto's most interesting topic today, which is treasury management. Most interesting on-chain topic. On-chain yeah exactly. That has been great, man. I'll uh thanks for coming on and yeah, we'll talk to you soon. Sounds good. Cheers, Tarun. Thanks. All right, buddy, what'd you think? Great episode. I I knew that would be a good one. Um really liked his framework for like treasury management 1.0, 2.0, 3.0, and then 4.0. And um or like what what was it? 101, 201, 301, 401. And uh it like that that was my biggest takeaway is that normal startups not in crypto need to know 101. You're lucky if you get to 201 and you get into like share buybacks and

dividends and things like that. 301 is like very rare that you have to deal with that. And then 401 like no one has to really deal with uh 401 unless you're like a public company or like a Fortune 500 or something. In crypto that's kind of flipped on its head where you really don't have to do the 201, but you kind of if you're a protocol you go straight to the 301 and the 401. And that's probably my my lasting takeaway from that episode. I I would actually say that I would have pushed back a little bit on Tarun. I think the 201 is always important. You know, at a high level what you're doing as a CEO or on the exact team is everyone's a capital allocator at the end of the day. It's just kind of like where should we focus our resources so

to speak? Um and I and I do think there's not enough discussion. We're going to be talking a little bit with in in a later episode with uh Chris Burniske about that. But uh for for the most part I thought the way that Tarun thinks about things were very sophisticated. Um you know, I I think there are kind of two schools of thought when it comes to treasury management. And maybe I could lay it out with uh I feel so bad for whoever's listening to this outro just listening to babies screaming in the background. It's like what are you what are you doing? It's pretty classic airport. This is like two days before Thanksgiving. I've got like a whole family of like it sounds like I'm not kidding like 15 little kids like screaming directly into my ear. All I need is a poopy diaper and

this is perfect Thanksgiving travel uh FOMO. That sums it up nicely. That sums up the year. It sums up the week. Okay. So I think there are kind of these two schools of thought and I think both of them have a lot of merit. So there is sort of what Larry on one of our earlier episodes talked about. He talks about this in Musings on Governance as well, which is a very straightforward approach to treasury management, which is that treasury management is a boring function. It should be a boring function. It's all about just preserving your cash flow. And I think that's extremely appropriate to a lot of the different startups that you see in crypto today, right? It's kind of how we think about treasury management. Like we don't have customer deposits and all that kind of stuff. Man, we we don't need to hedge our risk out. We're just

like make sure we've got enough money to meet our expenses for, you know, some predetermined period of time. Then there's the more complex requirements of something like Compound or Aave where you do need to be taking into account, right? All treasury management is really making sure that your assets outstrip your liabilities and that your assets are denominated in the same way that your liabilities are. So if you're something like Compound and you've got, you know, a pool between, you know, Ethereum and and USDC, something like that then you actually need you have a liability that's denominated in Ethereum and you need to have some part of your assets in that.

So I think that is where treasury management gets a little bit more complicated and where Tarun's Tarun's structure was frankly very interesting. I I I also thought did did did you I mean we only talked about this for a little bit, but I thought it was very cool when he kind of brought up these partnerships like token swaps between DAOs. Did you catch on to the I mean thought that was I mean I I heard it. I did I did I followed it 70% I'd say. Yeah. So let's just say right now like let's try to put ourselves in the shoes of a DAO. We have maybe somewhere between 80 and 100% of our native token our DAOs in our native token. And maybe our native token has like some cases a million dollars worth of volume traded. So basically I've got

this enormous pile of my basically my native token and extremely limited liquidity ability to get out of that. That's not great, right? You probably have people that you're paying largely in USDC, but there are some things that you can do with that liquid with that with those tokens. One of the things is is you can incentivize you can use that token uh and and basically swap it with another protocol in to to create a partnership, right? So like let's say you're GMX or something like that. Um and there's another platform where you're trying to source liquidity from, right? One way that you could do that is like hey, I'm going to like spend dollars on marketing which converts you you'd have to convert your native token into USDC and then spend it on marketing. Or you can just go to other

pools of liquidity, do a token swap, and then incentivize yeah, you know, basically bank it part of the partnership to bring liquidity onto the platform. So I just think it's I think it's a pretty interesting way of leveraging an otherwise liquid asset that's probably worth something. Yeah. I thought that was pretty cool. Yeah, that's that's interesting. And yeah, and that creates that nice positive feedback loop that he was mentioning. Yeah. Mhm. Yeah. I think the way I was listening and maybe Tarun's going to listen to this and tell me that I'm not thinking about this in the right way, but it almost the way that Tarun conceptualizes some of these things. And he actually did push back on when we said it's not necessarily appropriate to view these things as an endowment.

The way Tarun seems to think about treasuries is they do sort of look like endowments, right? Which is basically an endowment for a school you are trying to make your assets, which is the pile of capital that you're managing as an endowment manager for school, exceed your liabilities, right? Which is kind of like what you need to put out every year for the school to pay for financial what's the word I'm looking for? Like you need to offset some of the tuition for the school for financial aid, basically. Then there's also like donations where you can only use assets to build a certain thing. So all these kind of walls in terms of what that what that money actually looks like. And the way that endowments try to grow their assets so that it exceeds the liabilities is they'll, you know, every endowment has a

different strategy, but they leverage managers like money managers. And it seems like that's what Tarun Tarun's solution is basically doing where these pools of capital kind of have the ability to optimize for certain KPIs based on the business, but they're kind of farming out to different managers who will help you grow assets so that you exceed the liabilities of the protocol. It's kind of just a different way of looking at it. Yeah. I mean I think that was a point that he Tarun was really trying to hammer home is that there are different goals and KPIs of for for each protocol, right? And I always think of KPIs in at in like the growth sense of the word like your revenue goals and marketing goals. I I I guess it's a really good point like different there are a bunch of different treasury management strategies, right?

Like the treasury management strategy of a company growing at 5% a year really really different than like a SaaS company uh who's trying to double every single year. And when I when I think when people think about treasury management solutions in crypto today, they think about okay, you have a native token, you should probably get that native token into something like USDC. Or you should get that into something that earns yield. Uh it's like these very simplistic strategies and I think Tarun's vision of the future is the correct vision in that which is that there are a bunch of complex strategies going on here. You're going to eventually it's it's not all about earning yield. It's not all about protection of the asset into something like USDC. There are a bunch of

different strategies that people need to deploy here. Yeah. You really want I mean I kind of think the most basic tenant of treasury management you need to make your assets match your liabilities. So even what he was sort of describing with you know, where corporate treasury management gets a little bit trickier, right? Is if you're a large corporation with exposure to a lot of raw materials. So say you're BMW and an enormous amount of your percentage of your gross margin is dependent on the price of copper or steel or something like that. You know, steel will go up or down 50 to 100% every year. You'll notice that the margins of BMW don't do that. Like what's the reason for that? They go out into the markets, they use futures to hedge that exposure to their raw materials. I think the crypto equivalent of that is basically

big steel consultant here. Oh yeah. Dude, I haven't mentioned this entire series that I used to be a consultant. So I I get I get so few opportunities. Oh, so you get to plug that right in. I I to plug it. I got to plug it. You got to plug it. So, you know, I think the crypto equivalent of that is probably the more appropriate way to think about it is almost like a bank, basically. And you're managing different durations, you're managing different currencies, I suppose, that you that you denominate your risk in. I thought I thought it was interesting he he also made the point that you and I have talked about that proof of assets, proof of reserves, the way it's being thought of right now is basically just proof of assets for an exchange.

Assets alone are useless. That's like a balance sheet and you all you have is the asset line. I mean, you you completely negated the liabilities, right? What matters for these exchanges in terms of their solvency is the ratio of assets to liabilities, right? So, I thought he made a very interesting point there. He also brought up I never really thought about it like this but the some of the harder to measure liability for some of these exchanges, and it's probably applicable to DAOs as well. So, like if you offer a service to your customer base, like giving them access to financial product X, Y, or Z, if that access results in the loss of customer funds, even if it wasn't your fault, even if you were just

facilitating it, that probably should be a liability that you should be putting up that you should be thinking about, because you don't want to lose that business or like you don't want to damage your reputation. You're going to have to make your customers whole. So, I think that's a very I think that should be factoring in, frankly, to more to more people's thoughts. Um You know what? On Aave, do you remember a little while ago, about two or three months ago, you started to see these proposals crop up in the governance forums, uh where you're they were off-boarding certain layer ones, right? Like Phantom and stuff like that. So, Yeah, the small they probably are thinking like that.

Yeah. Yeah, that's interesting. Yeah. Um who do we have coming up next? Oh, we have Charles I think it's Charles St. Louis and Jules, uh just talking about this is going to be really interesting episode, talking about the like the cutting edge of DAO governance and like experiments and alpha happening in not just DAO governance, but just DAOs in general right now. Um and I think a lot of the experiments What what I want to get out of this episode is a lot of the experiments and like weird stuff that you see in bull markets, like the successful crazy stuff, ends up it it it starts as these like small little experiments in bear markets. Usually, there's like a group of 50 people paying attention to these experiments, and Charles and Jules are the are the two people who are paying attention to these experiments closest. So,

Well, I would say, you know, the the structure is so Jules is at she's at Orca, and Charles is at Element Finance. And those two projects, the the the thread there between those two projects, I think they have some of the most inter- especially Element, the the structure that they're trying over there is very, very innovative. I think just in terms of thinking about DAOs and from from a first principle standpoint, you know, Jules, she she's one of one of the you know, I I think foremost voices, basically, on that on that line of on that line of thought. So, that that's what we're going to be talking You know, so far we've sort of talked about, okay, what are the apt analogies and comparisons that we can make in between DAO governance and corporate finance and

how should this work? And now, I think this this next episode is going to be, okay, what is possible in crypto in the form of DAOs that was not possible before, and what are some of the cutting-edge experimentation that's going on. So, that's why we've got them coming on. Awesome. Should we wrap? Wrap. Wrap, baby. All right. You guys next week.