Olympus and Forks (part 2)

Let’s refer to them as DAOs; priority will be to focus on value creation leading to wealth creation (part 2 of a two part series)

As we start the second instalment of this discussion, it is probably prudent to clarify that there is no intention to assess the merits and viability of any specific DAO. Any reference made to any specific DAO is to better illustrate the strategic and/or tactical options available to create value for the token holders.

Let’s examine the second means of value creation in the existing construct, the growth of the treasury assets through active management. The most basic process involves the bonding mechanism. Bonding, essentially the selling of the DAO tokens at a discount to its market price, is the simplest way to increase the treasury assets per DAO token, as long as the bonded price is above the treasury assets per DAO token. This option is available to all DAOs that are trading above their treasury assets per token value, i.e seigniorage.(at this moment, this can be a huge challenge for some of the DAOs)

Theoretically, DAOs should be trading at a price above their treasury backing, all else being equal. This can be complicated by the rebasing process as the number of tokens keep increasing especially with high APYs (the easier comparison is the market cap of the token vs the value of the treasury assets). For DAO tokens trading below the value of backing treasury assets, this should sound an alarm bell for the project team. Perhaps greater transparency in the composition of the treasury assets will go some way to alleviating any doubts around the value of the treasury. In the extreme scenario, if the token price is still trading below the value of backing treasury assets with increased transparency and after having adjusted for potential dilution due to rebasing and expected passive income streams, I hazard to suggest that maybe a distribution of all treasury asset pro-rata to token holders might be the best outcome.

Most of the DAOs have, in varying levels of details, described roadmaps to accrue value to their treasuries (aside from bonding and earning fees from POL). This will involve active management of the treasury assets coupled with the ecosystems they have chosen to be part of e.g Metaverse, climate action, veToken, etc. Over the last few weeks, we have seen DAOs who have de-emphasized their “reserve currency” ambition e.g PAPA and Jade, instead pivoting to investment agendas, adopting hedge fund or private equity-like models. This is a welcomed development, which I think couldn’t have come sooner.

Wonderland Time has consistently executed an active treasury management plan, over a diversified portfolio of investments covering Defi opportunities like yield farming and now entering into NFT and gaming markets. There are also DAOs taking the path of VCs or being incubators e.g PAPA, Jade and Olympus. These types of investments though, by their nature carry higher risks and has longer gestation periods. In the traditional finance world, a portfolio approach is frequently used as one or two homeruns will cover the returns for the whole portfolio. However, with relatively longer gestation period, will their online communities be patient enough to wait for these investments to bear fruits?

A more optimal approach is to balance between short term performance and long term sustainable value creation (this same dynamic applies to public listed stocks where management needs to balance between show term performance and long term franchise building). The treasury can be ideally allocated to investments with different time horizons and risk categories while minimizing idle assets not earning any returns. There should also be sufficient and appropriate level of transparency over the portfolio strategy and regular update on the performance of the investments. This will allow investors to do their own research.

Bonding grows the treasury through selling freshly minted tokens, active treasury management creates value for the treasury through profitable portfolio of investments. With a clear path towards value creation, the DAO’s token can then trade at a premium over the value of it’s treasury assets.

Recently, there have been debates and discussions around the rebasing mechanism of the DAOs. Theoretically, rebasing is inflationary in nature with a consequent drop in token price, all else being equal. However, in reality, price movements react to token supply and demand in the liquidity pools. If rebase rewards are only accruing to staked tokens and staking ratio remains the same, the extra supply of tokens will have less impact on the price of the token than it would mathematically. This is the basic hypothesis of the (3,3) meme. We have seen Jade protocol removing this mechanism since the turn of the year but that did not prevent it’s token price from falling as the general market fell. PAPA DAO is also putting this proposal up for a governance vote, let’s see how this experiment pans out.

Perhaps, other options are worth considering, as the rebasing mechanism in fact does reward stakers over non-stakers. One option is basically community education, instead of just displaying the APY on it’s website, the DAO can consider also displaying the impact on the price of the token of that APY, from a mathematical perspective. Hopefully, this will reduce the anguish of the token holders when and if the price does fall as expected. Second option is basically what Wonderland Time has done, refocusing token holders attention to the market value of their holdings including staked rewards (wMemo), rather than the price of the token (Time).

Adios, amigos.