Unlocking the Treasury

Over the next 12 months, we will see project treasuries “unlocked.”

Saying treasuries will be unlocked implies they are “locked” today. Indeed, the vast majority of tokens in project treasuries aren’t being used for anything — tokens are sitting in contracts collecting dust.

Just one reference point on the astonishing state of treasuries today: Uniswap — which has nearly $5 billion vested UNI sitting in the treasury — has spent only $1.5 million to-date. I mention this not to call out Uniswap (in fact, with the Uniswap Grants Program, Uniswap is leading the charge on smartly spending treasury assets), but rather, to show just how underutilized treasuries are.

There are many reasons for why project treasuries have seen very little spending action. If I had to name the main reasons, it would be these three.

People don’t know treasuries exist. Most participants in the market are unsophisticated; they’re still wrapping their heads around concepts like decentralized finance and NFT’s. Treasuries are college-level courses while the average market participant is still in grade school. Treasuries aren’t well understood by more sophisticated players like VC’s and crypto hedge funds either, which I attribute to information overload: there is too much exciting stuff happening in the industry, and keeping track of treasuries isn’t a top priority.

Spending money from treasuries is hard. Going from learning the treasury exists to spending it isn’t an easy process. For most projects, spending money from the treasury requires going through a formal “governance” process, which includes writing a public proposal, soliciting feedback from stakeholders, and lobbying stakeholders to vote for the proposal. This process isn’t well-documented, varies by protocol, and takes a very long time to get through.

People don’t know what to spend treasuries on. Assuming you know what treasuries are and how to navigate the governance process around them, how do you think of what to spend them on? The process of spending money typically goes by a fancy name: capital allocation. And even for the most talented CEO’s in the world who know their companies inside-out, finding things to spend money on is a tremendously difficult task. There’s no shortage of opportunities to fund, and stack-ranking opportunities by their return on investment is a task very few people do well. When billions of dollars are at stake, the task becomes even more challenging.

“Unlocking” the treasury

The good news is these barriers to spending the treasury will start breaking apart over the next year. In fact, the industry is slowly starting to chip away at productively spending treasuries, with small spending initiatives like grants programs from Uniswap ($1.5mm) and Compound ($2mm) being the tip of the iceberg. Slowly but surely, treasuries are being “unlocked.”

The key to the treasury lock comes in many forms. First, market participants are getting smart on treasuries quickly. As market participants learn just how much financial firepower treasuries hold, they’ll start thinking of ways to deploy it productively. The barriers to entry to spending the treasury are coming down too: documentation is rapidly improving/standardizing and infrastructure that makes it easy to access the treasury is getting built up (e.g., Boardroom, Compound governance contracts, Orca, and Tally).

Lobbying stakeholders to vote on your proposal will still take some effort, but arguably, that’s a feature not a bug. (It shouldn’t be easy to get millions of dollars from the treasury without a good “investment case” for how you will spend it in a way that benefits the project).

One final “treasury unlock” to watch is innovation in capital allocation frameworks. Should treasuries be managed as asset management vehicles, corporate balance sheets, permanent capital pools like endowments and sovereign wealth funds, project ecosystem funds, or a hybrid of all the above? We don’t have the final answer to this question yet, although one thing is clear: simply copy-pasting traditional capital allocation frameworks won’t be enough.

My finger in the air estimate is we’ll see over $1 billion in treasury spend in the next 12 months. The natural question to ask is what can projects possibly spend that much money on? The short answer is things that improve the project’s product, get the product in the hands of more users, diversify the treasury, and improve the project’s competitive position. We can get to the longer answer in a future post.

In short, treasury spend will become more sophisticated soon, and we will be very surprised by what’s possible when money is spent prudently and productively. Drake may have said it best:

I got car money, fresh start money

I want Saudi money, I want art money

I want women to cry and pour out their heart for me

…

Dreams [only] money can buy

If you’re interested in chatting about governance, treasury management, and/or capital allocation, don’t hesitate to reach out.