Look For DAOs as Tokenization Takes Off

Recent occurrences on the market indicate that the Crypto and TradFi asset management will meet eventually. More managers will confront unique challenges in deploying institutional capital on public blockchains as the assets migrate on-chain.

Below all of this speculation and hype of future directions in price, there’s an entire internet native ecosystem building over crypto rails.

Here we shift to Decentralized Autonomous Organizations (DAOs). These are digital entities that overcome geographical borders and an authority governs them by code in place of legal contracts.

They are very much familiar with many of these challenges. This comes as a result of the large amount of funds that they gathered in their treasuries, which typically work on-chain.

Lack of Risk-Free Asset and Price Volatility

In the crypto ecosystem, the price volatility is unstable and many DAOs must confront this issue directly. Most DAOs feature their own native token, which is way more volatile than Bitcoin (ETH) or Bitcoin (BTC). There is also an additional challenge that arises with the managing of assets on-chain.

Unlike traditional markets, crypto coins lack a true risk-free asset that can take them back to certainty. Now, people often use dollar-pegged stablecoins as a proxy for risk-free assets. But, the absence of volatility doesn’t mean that there is also an absence of risk.

DAO communities feature an in-built resilience that comes via the weathering of very high volatility. Just over a 3^rd of the 200 DAOs that have the largest on-chain supplies saw a decline of over 50%. Also, 30 of them saw a decline of over 90%.

Among the solutions that the DAOs are focusing on are real-world assets, or more specifically tokenized Treasury bills. This trend offers a natural and native crypto source of on-chain demand for real-world assets. It’s also opening the doors for a broader convergence and tokenization with TradFi.

Diversification and Liquidity Constraints

Regardless of the fact that crypto coins trade 24/7, they still lack meaningful liquidity. People can see this just by looking at the DEX volumes. The DAO tokens that appear on the list have a fraction of the trading activity.

This is only for the ones that feature on centralized exchanges for longer-tail assets. It also results in a high potential impact on trade prices in large quantities.

Next, in DeFi, the returns on even the biggest liquidity pools and lending protocols can be a bit higher for small deposits. However, they can also be somewhat lower when scaling up institutional size.

The effect of this low liquidity is that DAOs feature limitations in their ability to branch out their treasuries. People should know that the DAOs usually hold highly concentrated on-chain portfolios. In December of 2023, most of the largest 25 DAOs featured over 90% of their assets in their native token.

People often refer to diversification as the only free lunch in investing. The limitations on DAOs taking full advantage of this activity have encouraged the research and building of substitute on-chain solutions. All of that is through derivative protocols or utilization of their native tokens as DeFi security.