Best Practices for CeFi & DeFi Treasury Management

5 min read

Best practices for CeFi and DeFi treasury management that help build brand resilience.

Treasury management is an essential part of business operations for any CeFi or DeFi project. The bull run of 2020 and 2021 created a sense of exuberance and invincibility for many projects, leading to a rather lax attitude towards managing their finances. However, the recent market downturn has highlighted why it's essential to have good treasury management practices in place.

Many Treasuries Have Seen Their Assets Dramatically Fall in Value#

Some of the leading DAO treasuries have seen their assets drop to as low as ~5% of their peak value:

  • AAVE's treasury holdings fell from $1.08 billion in August 2021 to $101 million in July 2022.
  • Uniswap's treasury is down from $4.8 billion in September 2021 to $1.3 billion in July 2022.
  • Index Coop is one of the biggest losers in terms of treasury value, dropping from $105 million in September 2021 to just $4 million by July 2022.

Treasury managers must find ways to protect their funds against the volatility of the crypto markets while also keeping them secure, and ideally be able to generate returns from them.

Defining the Needs and Goals of Your Treasury#

Before you can maximize the performance of your treasury, it's important to understand your goals and the needs of your clients. Issues to consider include:

  • How secure are the funds?
  • How much of your treasury is accessible in what timeframe (asset/liability management)?
  • What is your desired return on investment (ROI)?
  • What risks is your treasury exposed to, and to what extent (i.e., how much volatility, as a result of what changes … price of ETH, interest rates, token price)?

Ideally, you'd maximize security and accessibility and generate a high ROI with minimal volatility. Ticking all of those boxes at the same time is almost impossible, so you'll need to perform risk assessments and think carefully about what you're willing to sacrifice in each area.

With many DAOs, the majority of the funds held by the treasury are in the form of the protocol's native token. This puts the DAO in a precarious position because those funds aren't really assets but more like a modern, blockchain-focused version of 'authorized but not issued shares.'

If the value of the native token starts to fall in a bear market, the DAO could be forced to liquidate that token. The downward pressure on the token's price caused by selling a significant amount of the token could further depress the token's price, potentially leading to a death spiral if investors lose faith in the protocol.

This is why it's so important to evaluate your treasury holdings carefully and consider how you can protect yourself against unnecessary risk.

One option is diversifying the treasury to minimize the risk of overexposure to one area of the market. Another option is investing in stablecoins to decouple your treasury's funds from the volatility of the crypto markets. Even within the stablecoin market, it's a good idea to diversify to reduce the risk of being impacted by any stablecoin depegging.

CeFi & DeFi Can Learn from TradFi#

One of the main selling points for CeFi and DeFi projects is that they make financial tools accessible to those who are shut out of the TradFi world. While that's admirable, and there are many areas in which TradFi could be improved to be fairer and more accessible, there are areas where CeFi and DeFi could learn from TradFi.

Sustainability and brand resilience are among those areas. For CeFi and DeFi projects to survive for many years, they must have robust plans for securing their treasuries. In addition, they must make it clear to their users what those plans are, so they have faith in the project even during hard times.

Even traditional banks have fallen victim to crises of sentiment. We're going through a period of economic instability that is affecting institutions globally. Both retail and institutional investors are worried about the stability of their investments and the organizations that hold them.

It's vital for CeFi and DeFi projects to take steps to make themselves as resilient as possible internally and to work to protect their image so they're less likely to be impacted by the equivalent of a bank run on their protocol should there be some "bad news" spreading online. A little transparency and forward planning can go a long way toward reassuring users and investors that a DAO can weather any storm that comes its way.

One model for DAO treasuries that can improve their resilience is the Fibonacci treasury model:

  • 1% DAO treasury devoted to token buy-back fund.
  • 1% of project tokens dedicated to cover pool liquidity bootstrapping rewards.
  • 2% of the treasury funds invested in the project's dedicated cover pool.
  • 3% of the project's protocol fees directed to feed into the cover pool's liquidity.
  • 5% hedging project-specific liabilities and investments in fixed-interest returns.
  • 80% of treasury funds accessible in less than 13 days.

This model is designed to kick-start treasury discussions within DAOs, DeFi, and CeFi projects; it is not supposed to be followed blindly. Each CeFi and DeFi project should construct its own treasury investment plan and determine its own requirements and capital allocations.

Investing 1% of a project’s treasury in its own dedicated stablecoin cover pool in the Neptune Mutual marketplace contributes in a variety of ways to the best practice goals identified for treasury management.

  • It provides the treasury with a reliable ROI, independent of market price volatility, based on stablecoin policy fees paid by cover purchasers.
  • It provides cover protection to the project community in a way that builds brand resilience.
  • If necessary, treasury funds can be withdrawn in a 7-day window every 6 months.

If you'd like to learn more about how Neptune Mutual can help your project become more resilient, contact us to discuss your cover pool needs.