How to Structure a Protocol's Treasury

How can protocols diversify their treasuries?The simplest method to diversify is to sell some of the protocol's tokens to buy other assets (e.g. ETH, DAI, etc.). Treasuries can’t be diversified overnight. But plans can be made to reach a steady-state allocation over several years.

The annual budget for a treasury should be decided based on the protocol’s needs and its treasury size. Ideally, a protocol’s annual budget should be less than its expected revenue (e.g. Uniswap fee revenue) and treasury investment income.

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. 

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

Inflows should exceed outflows: Over the long-run, the returns of the treasury (inflows) should be greater than the spending rate (expenses/value of treasury) + inflation rate.

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

The treasury’s purchasing power should be maintained or grown after accounting for expenses.Diversified asset allocation: The assets in the treasury should be diversified and aligned with the goals of the community.

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

Fiscal policy: how much to spend and what to spend onAsset allocation: how the treasury should be diversified to fund key protocol development irrespective of the market environmentReporting: financial statements of the treasury and summary of key transactions