Treasuries

At the centre of many Web3 businesses are pools of collectively-owned digital assets. This is the community treasury of a Web3 project. Many of these treasuries are valued in the hundreds of millions of dollars.

The long-term success of a Web3 project can turn on how the treasury is used and how sustainable it is. The treasury can be an important resource for supporting the development and evolution of the project, as it funds the process of finding product-market-fit. Relatedly, investors valuing tokens can take into account the size and composition of the treasury.

Understanding Web3 treasuries more deeply is important because they sit at the core of a Web3 business. Why do treasuries exist? How are treasuries funded and spent? How is the typical treasury structured? What are the key design considerations and problems in Web3 treasuries? We explore these questions in this step.

What is a Web3 Treasury?

Web3 treasuries are pools of digital assets. There is a norm that those assets are collectively owned by the members of that Web3 community. They are typically on-chain and transparent (even if you have to search a bit).

When the assets are on-chain, anyone can view a treasury’s digital assets using a block explorer. For instance, here is one of defi protocol, Aave’s treasury addresses.

The assets within a treasury can include:

• Native tokens (i.e. a portion of a total supply of the tokens of the project)
• Stablecoins (popular stablecoins include USDT and USDC)
• Other fungible and non-fungible digital assets

But where do these assets come from? There are three main ways that treasuries are filled up.

1. Pre-mine or allocation at launch. The founders of a project often allocate a significant portion of overall native tokens into a treasury address at launch.
2. Public and private sales. This is related to the first, but treasuries can sell some native tokens (e.g. to private investors, the public) and the proceeds can be placed in the treasury. The effect of this can be to diversify the treasury holdings, helping with a longer-term runway.
3. On-going revenue streams. Many projects have mechanisms to top up the treasury as the project grows. A defi protocol, for instance, might take a small portion of every swap fee. Other projects integrate these mechanisms into the consensus process (e.g. the Decred project allocates 10% of block rewards to the treasury).

Treasuries can be shockingly large. Throughout 2021, many treasuries hit a valuation of over $1 billion USD. The size of treasuries makes them a target of both malicious attacks, or more subtle efforts to direct treasury funds for private purposes. These opportunistic behaviours underscore the need for robust treasury governance.

The ways that treasuries are spent can vary widely. A large portion of treasury funds in many projects are allocated to ecosystem incentives (such as rewards to early users, or rewards for using the protocol). Sometimes treasuries are earmarked to be spent through different mechanisms. For instance, a portion of the treasury might be periodically allocated to a grant program, or to pay a major service provider to the protocol. The decisions about how treasury funds are spent includes the emergence of committees and governance token holder votes.

Why do treasuries exist?

Web3 treasury funds are spent on a wide variety of activities, including

• Research (both specific to the project and more broadly across the ecosystem)
• Product development (e.g. developer costs, testing)
• Bounties (e.g. to incentivise bug discovery and solve other problems)
• Ecosystem incentives (both to mitigate the cold start problem and to direct activities in certain directions)
• Marketing (e.g. to spend on raising awareness of the protocol)

Aside from their practical purposes — spending money on things that the project needs — a treasury can also act as a credible and costly signal. Treasuries might demonstrate to your community and investors the long-term intentions of the core team.

Designing Treasuries

Web3 treasuries typically have a range of different governance mechanisms to spend their treasury funds. That governance can range from majority voting by token holders (e.g. for major treasury spend decisions), or the delegation of governance rights to smaller committees (e.g. grants committees).

Three of the key design questions in building an effective Web3 treasury are the size of the treasury, the composition of the treasury and how the treasury is governed.

How big should a treasury be? It’s not clear at first whether a treasury should exist temporarily (to solve a bootstrapping problem) or exist in perpetuity. That is, whether a treasury should be drained, or grown. This design consideration relates to the purpose of a treasury relative to a business model, that is whether the treasury there to solve the cold start problem rapidly, or to fund the development of the project over many decades or centuries? Maybe it’s both.

What is the composition of a treasury? Many treasuries begin by being filled with the native token of a project. There are some signalling benefits to this such as a large treasury of native tokens that can demonstrate some long-term commitment of the protocol. A series of public and private sales might also stock the treasury with some stablecoins. Over time, many treasuries will seek diversification of their assets. This will help to make them robust to price downturns, and help them through inevitable crypto winters.

How is the treasury governed? There are two competing problems in treasury design. On the one hand, they need to be protected against attack. On the other hand, they need to be spent under uncertainty (i.e. what should we spend a treasury on?). The result of these dual problems is a suite of different spending mechanisms (e.g. grants programs, community voting, committees) might be necessary to achieve the objectives of the treasury. We turn to Web3 governance in later stages of this course.

Thinking about treasury design in the early stages of project development is important. Many critical decisions will be made about the governance of the treasury, the framing of what the treasury is for and its size. No project knows precisely what a treasury is for when it is created. But all Web3 projects should have a clear vision of their treasury evolution.