DeFi DAOs have made some serious cash in 2021 — but generally only in their native tokens. Now they’re looking to diversify.
Fueled by a combination of rising token prices and an explosion in fee revenues as DeFi continues to attract new users, the decentralized autonomous organizations (DAOs) that act as a management layer for DeFi currently hold billions of dollars worth of crypto assets in their treasuries.
The management of these war chests is an increasingly important issue as the bulk of these assets consist of the protocols’ native tokens. This leaves projects vulnerable as any sudden drop in their token price means a corresponding loss of treasury value. If they are then forced to sell tokens at depressed prices to cover expenses, that could lead to further price declines and risk the viability of the project itself.
And this isn’t an unlikely scenario — crypto markets are infamously volatile.
Consequently, DeFi projects are finding new ways to diversify their treasuries.
Mask Network is building a bridge between legacy web applications and web3.0. Their browser extension integrates with Twitter and allows users to access decentralized applications (dapps) including Uniswap, Sushi, OpenSea, and Gitcoin.
Mask recently launched SocialFi, an alliance of ecosystem partners, and is now taking the collaborative effort further through a series of token swaps. According to a forum post, the move is meant to foster deeper ties between the communities while also serving as a means of treasury diversification.
“With the ecosystem rapidly growing (>30 DApps), we feel the increasing need to strengthen partnerships with additional incentives. Utilizing the MaskDAO for token swaps is an obvious choice,” Suji Yan, the founder of Mask Network, told The Defiant.
“As for swap partners, Sushi’s wide adoption and complete product offering are both key. dHEDGE’s social trading feature is a match made in heaven with Mask. Gitcoin hackers have done over half of our dapp integrations. We are one of the largest bounty issuers (>40).”
In stark contrast to the closed-door deals prevalent in traditional finance, these swaps are being openly discussed by the communities involved. SUSHI holders seem to be in favour according to this informal poll.
dHEDGE, a trading app that allows users to invest crypto assets into managed pools, has approved a $500K swap of MASK for DHT, its native token.
“We believe the future of DeFi is social, that is why our community is convinced a partnership with Mask makes so much strategic sense.”, dHEDGE co-founder Henrik Andersson told the Defiant.
It appears this token swapping for diversification could be a method employed by more DAOs in the future.
Perpetual Protocol, a derivatives trading platform, recently concluded a $1M token swap with dHEDGE.
Nick Tong, head of strategy at Perpetual, said, “We believe at a high level that composability is the key to unlocking a lot of innovation in DeFi. We are building out an ecosystem with like-minded protocols with the idea that everyone is able to leverage each other’s protocols to further the space. Token swaps is an ideal way to do it as it aligns the incentives for both parties involved in reaching a shared end goal. Our aim is to do more token swaps and we expect to continue to size up through multiple rounds of swaps.”
The most common method for diversification is to sell tokens to institutional investors or via a public sale. However, this comes with its own set of challenges, which include an increased circulating supply and the need to offer discounted tokens to attract investors. Further, the interests of the project and the investors may not be aligned, as we’ve seen in countless ‘pump-and-dump’ schemes, wherein large investors buy discounted tokens and promote projects only to offload the tokens onto new entrants.
Sushiswap’s proposal to sell discounted SUSHI tokens to a slate of VCs drew backlash from the community and was ultimately scrapped, illustrating the problem.
Token swaps seem like a great way to build deeper ties between DeFi protocols.
Collaboration is at the core of DeFi as composable protocols integrate seamlessly to open up new and advanced divestment strategies. We’ve seen the Yearn ecosystem take shape over the last year, bringing together disparate protocols into a cohesive unit.
From a diversification standpoint, it’s certainly an improvement over holding 100% of treasury assets in native tokens. However, as most DeFi tokens are correlated assets, this would offer limited protection during a broader market downturn.
Disclosure: The author does not hold positions in any of the projects mentioned.