HackMoney Summit | Treasury and Sustainability: A $10 Billion Opportunity

Perfectly. Okay, cool. So, we move on to our next conversation, which will be with Kaido. The topic is called "Treasury and Sustainability: A $ 10 Billion Opportunity." So, yeah, Kaido, when you're ready, don't be shy, oh ready, don't be shy, oh , here you are.

It's great to see you back on the ETH Global stage. And I give you the word. OK. Thank you very much, and thank you to Eth Global for organizing this event. This is great.

I'll quickly share my screen. Give me a second. Today I'll talk about Treasury and sustainability—a $ 10 billion opportunity . I hope this is attractive enough for everyone. So first a little about me.

I work on incentive design at Llama. My work spans governance design, tokenomics, liquidity management, and my goal is to create systems that help protocols realize their vision in this highly cyclical market. At Llama, we build the economic infrastructure for DAOs infrastructure for DAOs . Here are some partners we are working with or have worked with in the past, such as Uniswap and many others. I used to work at Trader Joe's, a decentralized exchange on Avalanche that had about $2.

4 billion in TVL at its peak, and when I joined, we had about 40 million TVL. So during my time there, I saw firsthand the explosive growth that these protocols can have , and also the problem when that growth becomes difficult to sustain. You know, one day a protocol can have billions of dollars at its disposal, in a few weeks it becomes a tenth, and in a few months they can no longer support their team, are forced to lay off people and eventually close the project. So I became interested in the sustainability of crypto projects, and I also proposed some sustainability projects for economic game design and liquidity systems to combat this nature and sustainability problem. However, the sustainability of the project is multifaceted.

So in this talk, I'm going to focus on one thing—protocol treasuries and how we can use them to enable longer-term sustainability. The purpose of this conversation is this conversation is to answer several questions. First: what is a protocol treasury? Why should I develop a solution for him? Second: what are the current solutions in this area, and finally, most importantly for you, what most importantly for you, what can you create?

You probably already know that I'm not very good at presentations, but I hope this talk will be interesting and useful for all of you hackers. So, what is treasury and what is the problem here? The definition of a protocol treasury is quite general—it is the assets held by the protocol for further development. This is intentionally made so broad to cover a variety of functionalities. Perhaps a few examples will help us better understand what this is.

A few examples of the use of protocol treasury funds are grant programs. We see prize pools for hackathons provided by protocols to encourage people to build on top of them . Another significant expense is ecosystem development, where you build partnerships with other protocols, which sometimes involves money transfers. And finally, the biggest part is budgeting. You have to pay team salaries, operating expenses, marketing costs, events, and external communications.

Of all these uses of the treasury, the last, the budget, is the most significant. Now let's quickly change the subject and talk about how big this space is. On the left you see a time graph of the total value of Treasuries from last year to this one. There are now about $9.5 billion in these protocol treasuries , a tenfold increase over the past 10 months, even though the prices of Bitcoin or Ethereum have barely changed during that time.

A lot of this came from the launch of new DAO the launch of new DAO protocols, and when I first heard about it, my reaction was extremely positive. I thought, positive. I thought, "This is just incredible." These protocols are doing amazing things, and they have so much capital to attract talent and innovation. However, there is a nuance.

Most of these treasuries are made up of their own tokens, and on this slide I'll show this slide I'll show how concentrated this is, and on the next slide we'll discuss why this might be a bad thing. Let's start with the structure of Uniswap's treasury. Uniswap is a decentralized exchange on Ethereum. This is the second largest treasury of the protocol. It has 1.

6 billion dollars. However, 99.9% of this value consists of their own UNI token. UXD is another project, an algorithmic stablecoin on Solana with the third largest treasury of 620 million. 99.

4% of its total value is locked in its native token, and MakerDAO, which many are familiar with, has the 14th largest protocol vault, with 99.2% of funds held in its native token. And some might think that I'm, you know, just picking convenient examples. A little bit so, but although in several projects and protocols the share of non- native assets is slightly higher, the percentage is still very high. So, right now Lido is one of those who is doing extremely well.

This is a decentralized Ethereum 2.0 staking solution provider. Despite the fact that they operate very successfully, they have the fourth largest treasury. It still has the fourth largest value, but 88% of this treasury is its own native token, and there is also Mango Markets on Solana. Out of 500 million, they have 88%.

So you can see this trend across most protocols most protocols , where most of that $9.5 billion is actually concentrated in various native tokens. So why is this a problem? There are three main problems with such a high level of concentration. concentration.

First of all, you know, the market is very volatile. So the value of your treasury could drop dramatically. During such downturns, which most people in the crypto world are used to today, your valuation can drop by 50–95% in just a few weeks. For example, the total value of Uniswap’s treasury has fallen by 65% ​​over the past six months. And the second thing I want to emphasize, and this is the most important thing, is that most important thing, is that growth usually requires cash, not native tokens.

I'll try to explain this in a little more detail . What does this mean? In a very simplified model: if you think about how it all works, the treasury rewards people, and people provide growth, right? However, in the end, people still have to trade on the market to get out of their native token and cover daily expenses. But the native token is very, very difficult to exchange for cash, Ethereum, or other highly liquid assets.

For example, if we use 1% of the Uniswap treasury, which is about 2 million UNI tokens, it will cause the price of UNI to drop by 40%. And if you were to use 10% of the Uniswap treasury, the price of UNI would effectively drop to zero. So this is extremely painful for the protocol itself. And also for his community. And finally, why this is a problem—it's what I call the "holding versus sustainability" dilemma.

Imagine you are a protocol founder or team member and you need to let the community know let the community know that we need to diversify or sell tokens to pass them on to others to pass them on to others . How can you and your team encourage the community to stick around while simultaneously merging your own tokens? Is that so? This requires careful communication, and most importantly, clear and explicit community agreement that your actions are acceptable and that everyone agrees and shares the same view. However, this is very, very difficult to achieve.

So if cash is so important, the question to answer is: how can we generate funds from the treasury? In this slide, I want to talk about current solutions for protocol treasuries to achieve this, ensure sustainability, and generate funds for further growth. As you can see, I put the word “ I put the word “ potential” in brackets because some of these projects have not yet been launched or have not gained much popularity due to complexity or difficulty in use by other protocols. I have divided these current solutions into three categories. I called them innovative solutions, DeFi solutions, DeFi solutions, and “low- hanging fruit.

” However, this classification does not mean that one level is better than another, because simple solutions often win. However, I believe we are still in the search phase, trying to find more optimized ways to manage protocol treasuries. So, below we have what I call the "low- hanging fruit." These solutions have already proven themselves well and are actively used by protocols. In the middle—DeFi In the middle—DeFi solutions.

These solutions essentially borrow existing proven ideas from corporate finance and implement them into network smart network smart contracts. At the top are contracts. At the top are innovative methods. These solutions are less well-known in the traditional world or unfamiliar to most people, but they offer promising ideas for the crypto industry. I also added a risk spectrum because a lot of these things involve risks.

The options on the right carry more risks than those on the left. However, you should understand that these are relative risks, and they vary significantly depending on specific projects. So, let's start with the "low- hanging fruit"—there hanging fruit"—there are some very simple options. You can sell your tokens on the market, and I would recommend using MEV-secured transactions and decentralized exchange (DEX) aggregators. The second option is native income.

So, for example, if you are a protocol, your treasury has USDC, and you are not spending them, you can make a deposit; you can essentially be a lender on Aave or Compound to earn income. Or you have Ethereum; you can even become, uh, you can exchange or stake ETH through Lido to become an ETH 2.0 staker. And on the right we have the so- called yield aggregators, such as Yearn Finance, Convex, PoolTogether, and many others. And they do what ...

you don't know which one gives the best return on your assets. So you just give it to them and they help you optimize it. In the middle are TradFi solutions. Uh, there are three main categories of TradFi solutions that I'll talk about. Fixed-income lending, debt issuance, and, uh, PIP—private equity investments in public stocks.

And I'll talk more about what PIP means a little later. So, first—fixed lending, it's very simple. You have a certain amount of capital that you are not currently using. You can place them for a fixed term at, usually, a higher or guaranteed annual percentage rate. Now Element Finance, Notional Finance, and many other projects support this.

Debt issuance is very similar: in some cases, you put up your native tokens as collateral and borrow funds against them , and then you can essentially use that money to generate income or to pay for development. And two key, uh, two very well-known figures here well-known figures here are Goldfinch Finance and Dopex DAO. Their mechanisms are slightly different; I won't go into it, but they have very interesting design decisions. The last one is PIP. It's like a16z wanted to invest in a coin that's already public, so they're doing what people call strategic investing—a kind of OTC deal that favors, uh deal that favors, uh , OTC trading firms like Genesis Trading.

And the last one is what I call innovative solutions, or solutions that, you know, are less familiar to most people, and, uh, most people, and, uh, so we have Lock, we have Opyn and Ribbon, and each of them has very different design solutions. I'm also sure there are many others that I haven't had time to talk about and that don't fit into this schedule. And now, in the next few slides, I want to briefly walk through each of these innovative solutions so that you can better understand what exactly they're trying to do and how you might be able to combine different ideas with each other. So, first of all, this is a success token, and in the past I mentioned over-the-counter (OTC) trading. This usually happens like this: let's say A16Z wants to buy Lido, or more precisely, buy Lido tokens; they contact DAO Lido, after which they enter into a real legal contract.

For example, if the price of Lido is now $1, they buy them at $0.6 or $0.7 per token with a lock-in period of two years. The problem is that it is very difficult to get community support, and when concluding OTC deals, you have to sign legal documents. Here's one example that didn't work: SushiSwap.

They tried to diversify, but they couldn't because the community voted against it. UMA offers something different: instead of buying at a discount for private investors private investors , they can buy at the current price, but their advantage is that if the token price exceeds a certain level, the so-called strike price, they receive additional profit. Next profit. Next is the streaming auction of the block protocol. Previously, only protocol sales took place.

The price is fixed, and the problem is that it is difficult to agree on the token sale price with the community, as everyone has different opinions and it is difficult to make everyone happy. The method the protocol uses is a continuous streaming auction based on TWAM, a specific type of automated market maker, where people can invest capital and withdraw unlocked funds, and any such movements change the implicit price of these governance tokens. Next is the governance tokens. Next is the Fate Turbo protocol. As I mentioned earlier, protocols can deposit their tokens into Aave or Compound, use them as collateral, and take out loans against them.

However, most protocols do not meet the risk parameters for listing on Aave or collateral requirements because the assets must be highly liquid and the systemic risk is too high. Aave should protect the interests of creditors. Therefore, the Fate protocol allows you to use your own token as collateral and earn interest on its monetary value using Turbo. That is, if you have 10 million or 100 million in your native token, you can deposit it; you can borrow $10 million, which is, you know, 10% is, you know, 10% of that amount, and then use that $10 million to generate, say, $ 500,000 a year, a steady 5% income, to pay for your various expenses. Ribbon, uh various expenses.

Ribbon, uh , here, uh, they, they, uh, Ribbon—this is sorry, this is Ribbon Treasury, and in the past, basically, unless most protocols have a diversification plan, they don't say outright when they're going to sell their tokens for cash. And the problem here is that it's hard to agree on diversification during a bull market, right? When the price is rising, no team wants to tell the community that, say, we will sell 200 million, or two million, or five million tokens on the open market, because that makes no one happy. Therefore, Ribbon creates special storages that effectively give the protocol the freedom to diversify based on a specific price benchmark, while receiving a premium upfront. So, you know, you can decide during a sideways or sideways or bear market that in the future we're going to do this, and then everyone knows about it in advance, and it's easy for people to express their support.

I've talked a lot about these different ideas, about what people are building, and now the question is, do you know what you can build? Just looking at it, it might seem like most things already exist. However, if you remember, I mentioned that while these are solutions, they are only potential ones. Many of these tools are extremely difficult for developers to understand, especially those without a strong financial base; and the trade-offs in choosing parameters for any of these projects are very difficult to visualize. So the adoption of the system in protocol treasuries is still very low, and this echoes the $9.

5 billion slide, where 80-90% of the treasury is still held in stablecoins and native tokens, earning nothing and not generating any profit. So what can you build? In this part, I actually want to offer you three methods or three perspectives from which to look at this problem. So the first thing is to create something thing is to create something that can complement what already exists, and we want to reduce the trust barriers to that, essentially encode transactions on the blockchain. So I'll give two examples here.

The first is a token exchange contract. Token swapping is a way for protocols to exchange their treasury tokens with other protocols to build partnerships build partnerships . For example, Protocol A and Protocol B want to establish a mutually beneficial relationship. What we can do is exchange our treasury tokens. So tokens.

So we have some value in another project, but at the same time we can participate in governance and many other things. However, there is no very good way to code this contract, and every time you want to enter into such a relationship, you usually have to write a new contract. The second thing is private investments in public capital, or we can consider it over-the-counter transactions. Now it mostly happens offline. However, there might be some simple contracts that people can create during a hackathon where you can think about how to bring this to the network so that not only OTC players but also other people and other DAOs without legal entities can participate in these transactions.

Next these transactions. Next is reducing the friction of coordination. Basically, these are tools for managing these positions. As I said, it's really hard for people to understand what the right strategy is, or maybe there's no such strategy at all . So some very simple options are payoff simulators based on past data or certain heuristics.

This is, you know, how we see the payouts, or what the downside risks are what the downside risks are , sensitivity analysis— , sensitivity analysis— purely traditional financial stuff. The second thing, in my opinion, is very underrated—it's a convenient and understandable interface understandable interface . I know we have teams working on decentralized interfaces. I think this is very important, and it is also important to make sure important to make sure that they are clear to users, because if I am a Uniswap token holder, I do not have to be an expert in diversification or treasury management. So how you present information so that voters or governance token holders can understand and interact with it is very important.

The last thing is to brainstorm new ideas: maybe you heard some ideas while studying economics or mathematics at university, or any concepts outside the crypto world, and try to implement them in the crypto world by creating transactions on the network. And I think those are three main areas where it would be great for hackathon projects to see some innovation. And if anyone is interested in discussing this, feel free to reach out to me on Twitter at zeroaxkaido and I'd be more than happy to help you narrow down the scope for solutions, etc. This concludes my speech. I still have some time, so I'd be happy to answer a few questions if there are any.

Thank you, Ko. I'm just checking the chat to see if they're there. Quick question, Jacob. What is the general background of our hackers? Yes, that's a good question.

I think this is a very diverse group of people. But of course the main focus is that they are all very interested in DeFi. So I think it's mostly people who want to build what you just outlined you just outlined . So, I think it's interesting. I guess I have one question about your report.

Em. Now we see how the treasuries have grown significantly in the last few months that you mentioned . We are still in a fairly strong fairly strong bull market. which, as you pointed out, makes it difficult to give up growth. To what extent do you think this problem is purely mathematical or a liquidity issue, and to what extent does it come down to the internal politics of the DAO or treasury and the ability to convince people?

How much do you think is math and how much is emotion? Yes, that's a great question that links to the slide about "your friend about "your friend is not your exit liquidity." In my opinion, most projects that think long- term know that this is a real problem. It depends on the specific project, but for most of the ones I interact with, the team and community at large understand that we need to build reserves for a potential bear market, and I think that's very important. And I don't think there are important.

And I don't think there are many internal political obstacles here. I think it's more about communication, how to get this from the inner circle of the project to the outside, to people outside, to people who may be making more speculative bets on the token price. Got it. Very cool. And I believe that " low-hanging fruit" is not enough right now.

That's why I don't think we're seeing much hype in this area. And the reason is that if you think about these "low-hanging fruits "low-hanging fruits ", they require the use of non-own assets. So if you don't have non-owned assets, they don't work very efficiently. And this is where TradFi solutions for generating such non-owned assets come to the rescue. I think they are good and even wonderful.

I think this is a very good first step. However, how can you innovate and move forward while keeping everything simple for people to understand and use? Got it. Perfectly. Hmm, cool.

I don't see many other questions in the chat. Ideally. Ideally. Yes, it was a great conversation. Thank you so much for organizing this and sharing it.

Of course, this is a very relevant topic right now. Maybe it doesn't seem like it because everything is going up. Yes. But this will become very important in the future, when things will not always go uphill. So, yes.

That's right. That's right . OK. Thank you very much for the invitation, this is a great event, thanks for organizing it, and see you soon.