As Tokenization Takes off, Look to DAOs

Crypto
and
TradFi
asset
management
are
converging.

From
the
record
breaking
launch
of
the
U.S.
spot
bitcoin
exchange-traded
funds
(ETFs)
to
BlackRock
CEO
Larry
Fink’s
latest
claims
that
the
next
step
is
the

“tokenization
of
every
financial
asset,”
the
direction
of
travel
is
becoming
clearer.
As
assets
migrate
on-chain,
more
managers
will
be
confronted
with
unique
challenges
in
deploying
institutional
capital
on
public
blockchains.

Ainsley
To
is
the
head
of
asset
management
at
Avantgarde
Finance.

Beneath
the
hype
and
speculation
around
future
directions
in
price,
an
entire
internet
native
ecosystem
has
been
building
atop
crypto
rails.

Decentralized
autonomous
organizations
(DAOs),
digital
entities
which
transcend
geographical
borders
and
are
governed
by
code
in
place
of
legal
contracts,
are
uniquely
familiar
with
many
of
this
challenges,
given
the
large
pools
of
assets
they
have
amassed
in
their
treasuries,
which
are
typically
managed
on-chain.

Price
volatility
is
rampant
across
the
crypto
ecosystem
and
many
DAOs
must
confront
this
head
on.
The
majority
of
DAOs
have
a
native
token
which
is
even
more
volatile
than
bitcoin

(BTC)
or
ether

(ETH).
An
additional
challenge
for
managing
assets
on-chain
is
that
unlike
traditional
markets,
crypto
lacks
a
true
risk-free
asset
to
fall
back
to
as
a
haven
of
certainty.

See
also:


Explaining
Ethereum’s
‘Risk
Free’
Rate
of
Return

While
dollar-pegged
stablecoins
are
often
used
as
a
proxy
for
a
risk-free
asset,
the
absence
of
volatility
is
not
absence
of
risk
—
as
was
made
clear
during
the
collapse
of
Silicon
Valley
Bank
in
2023
when

USDC
suffered
a
drawdown
over
7%
due
to
Circle’s
underlying
exposure
to
the
bank.

There
is
a
certain
resilience
built
into
DAO
communities
through
the
weathering
of
extreme
volatility.
Of
the
200
DAOs
with
the
largest
on-chain
treasuries
in
the
fourth
quarter
of
2022,
over
a
third
of
them
saw
their
portfolios
decline
by
more
than
50%
the
the
wake
of
the
FTX
collapse,
and
30
saw
a
drawdown
of
over
90%,
according
to

DeepDAO
data.

One
solution
DAOs
have
been
turning
to
is
real
world
assets
(RWAs),
in
particular
tokenized
Treasury
bills.
This
trend
is
providing
a
natural
crypto
native
source
of
on-chain
demand
for
RWAs
and
paving
the
way
for
broader
tokenization
and
convergence
with
TradFi.

Despite
the
fact
that
tokens
trade
24/7,
there
is
still
a
lack
of
meaningful
liquidity
for
many
of
them.
This
is
seen
by
looking
at
decentralized
exchange
(DEX)
volumes,
where
many
DAO
tokens
are
listed
and
which
have
a
fraction
of
the
trading
activity
seen
on
centralized
exchanges
for
longer
tail
assets,
resulting
in
high
potential
price
impact
for
trades
in
large
size.

Further,
across
DeFi,
yields
on
even
the
largest
lending
protocols
and
liquidity
pools
can
be
superficially
high
for
small
deposits
but
significantly
lower
when
deploying
institutional
size.

A
knock
on
effect
of
this
low
liquidity
is
that
DAOs
are
constrained
in
their
ability
to
diversify
their
treasuries.
DAOs
often
hold
extremely
concentrated
portfolios
on-chain.
At
the
end
of
2023,
the
majority
of
the
largest
25
DAOs
held
more
than
90%
of
their
treasury
in
their
native
token.

Diversification
is
often
referred
to
as
the
only
free
lunch
in
investing.
The
constraints
on
DAOs
taking
full
advantage
of
this
has
spurred
the
exploration
and
development
of
alternative
on-chain
solutions
via
derivative
protocols,
or
use
of
their
native
token
as
DeFi
collateral.

Though
the
unique
transparency
of
on-chain
portfolios
is
appealing
for
a
number
of
reasons
(i.e.
portfolio
transactions
are
auditable
and
verifiable),
it
also
has
its
tradeoffs.
Visible
trading
activity
is
a
source
of
information
leakage,
increasing
the
risks
of
front
running
and
potentially
leading
to
higher
transaction
costs.

Increased
transparency
can
also
exacerbate
governance
issues,
where
any
selling
of
a
native
token
carries
a
signaling
aspect,
where
it
may
be
interpreted
as
a
loss
of
confidence
in
the
project
by
large
token
holders.

The
visibility
of
large
positions
in
DeFi
protocols
can
also
lead
to
adverse
governance
action
from
that
protocol’s
community,
such
as
the

proposal
last
year
from
the
Aave
community
to
freeze
CRV
on
the
lending
protocol
due
to
the
size
of

a
large
borrow
position
that
was
visible
on-chain.

See
also:


DeFi
Died
and
We
Didn’t
Even
Notice

|
Opinion

Many
of
the
unique
risks,
constraints
and
trade-offs
that
confront
institutional
capital
looking
to
manage
assets
on-chain
are
shared
by
DAO
treasuries
(the
indigenous
crypto
native
institutional
investor).

The
novel
frameworks
and
solutions
being
developed
by
the
ecosystem
of
DAO
service
providers
to
meet
this
crypto
native
demand
can
also
serve
as
an
interesting
sandbox
for
traditional
institutional
investors
to
learn
from.