How to Structure a Protocol's Treasury

There is currently a negative perception associated with selling the protocol's token because it could signal that the treasury has lost confidence in the protocol. This has a short-term impact on price. Selling large amounts of the protocol’s tokens would involve slippage, especially if it’s not done thoughtfully. However, this can be avoided if t... See more

Protocol treasuries need to be structured with an infinite time horizon. This requires thinking effectively about:

Insurance cover and options. Example: rolling buys of smart contract cover or short-dated puts on the protocol’s tokens. This could benefit the protocol during Black Swan events like contract hacks, economic exploits, and market drawdowns. 

Principles of treasury management

One of the most valuable things a protocol can fund is ecosystem development, which can eventually serve as a competitive edge. Pilot programs by Uniswap and Compound have proposed $750,000 per quarter in grants that might be reduced or expanded based on their effectiveness. 

Here is a sample allocation (without knowing the numbers above):

Propose treasury budget to discuss and vote onDefine liquidity requirements based on budgetDecide asset allocation policy and review this policy allocation every monthDefine policy for liquidity mining, token buybacks, salaries and vesting schedule of core contributorsPublish monthly / quarterly financial statementsPublish monthly / quarterly repor... See more

It is risky for protocols to only have their own governance tokens in their treasury. If Uniswap has only UNI in its treasury and the token price falls by 40%, its balance sheet would also shrink by 40%. This is dangerous because it occurs at a time when the protocol needs to ramp up spending, whether it is LP subsidies, token buybacks, or core dev... See more

A protocol's treasury should be diversified over time. Diversification should be planned based on the treasury’s expected annual outflows, liquidity needs, and risk-return of assets.