Credix & Mean — Blog 1: Treasury Management Best Practices

Proper treasury management is as critical to a protocol’s success as it is a hotly-debated topic. How is a treasury best managed? Do you hold solely your native token? Focus on preservation with USDC? Speculate on NFTs or invest in yield-bearing assets? How are these decisions made and how are they executed? Let’s dive in.

In its simplest form, a treasury can be seen as the aggregate of a protocol’s capital accounts. With multiple accounts, perhaps the “checking account” funds everyday expenses, the “savings account” is its ultimate capital backstop, and the “investment account” targets capital appreciation via capital gains and yield. The assets comprising these accounts are derived from multiple sources, but come primarily from token issuances and protocol revenue. An Initial DEX Offering (“IDO”) generates fresh capital for a protocol as it lists a newly-minted token on a decentralized exchange for sale to retail investors. This new capital is most often directed to the protocol treasury. Although not all protocols issue a native token via an IDO, most-to-all target revenue generation. This protocol revenue represents an ongoing source of treasury capital accumulation, assuming positive operating metrics. While other sources may exist, this piece will focus on those two, with the IDO being the primary source of treasury capital. To illustrate:

Typically in an IDO, the issuing protocol will retain a significant portion of its native token in its own treasury account. These tokens are set aside for a variety of uses such as for farming rewards, core contributors, grants, or future capital needs. Thus, the protocol’s treasury may be composed largely of its native token; effectively seeking to safeguard itself with itself. In fact, Messari highlighted exactly this point in its Crypto Theses for 2022, as seen in the breakdown of top protocol treasuries in the chart below.

Note: Olympus has since shifted its treasury from a majority OHM to ~47% DAI per .

Shown above, some of DeFi’s largest treasuries are all-to-nearly all made up of the protocols’ native tokens. This introduces a significant risk factor to the treasury holder. The risk emerges as, and without opining on any of these protocols, unfortunately ‘ token don’t always go up’. Proper asset allocation and defensive diversification are fundamental pieces of traditional investing that carry into the DeFi realm as well. An investor holding an S&P 500 ETF will almost certainly fare better than the investor holding one individual technology company stock in the face of a tech sector bottoming such as the Dot-Com Crash. Narrowing the focus, holding that one specific stock introduces direct, unmitigated exposure to a sole company: if it goes under, the investor goes under. These same principles can be applied to the DeFi ecosystem and specifically to treasuries. At its core, a treasury should be a fortress of capital, walled against market gyrations and certainly impenetrable by the malperformance of one individual asset. This approach, as seen in the Messari chart, is not always taken, however. So how should a treasury be composed? What is the proper asset allocation?

Capital Preservation

For proper protocol treasury allocation, as with a traditional finance investment strategy, there is no “one size fits all” solution. There are, however, some best practices and a framework for approaching treasury allocation. A16z Crypto succinctly states that “the goals are capital preservation, liquidity, and income, in precisely that order” for treasury asset allocation and management. We tend to agree with the bright minds at a16z and seek to deliver products that fit these foundational principles. Building off of this framework, let us dissect each component and build a hypothetical treasury basket assuming a profitable, decentralized protocol with a native token.

As highlighted by the cryptocurrency market’s volatility and overall 2022 performance, capital preservation can be a challenging target. However, focusing less on the market movement of an investment, an investor may look to the underlying protocol’s health and likelihood of survival. In other words, what is the chance of it blowing up? Without naming specific tokens, some assets within the ecosystem are generally respected as “blue-chip” investments with the largest market caps, they are foundational to the industry; if they go under, we all go under. Additionally these assets have shown massive historical price appreciation since launch which more than preserves purchasing power.

Capital preservation can also be achieved by holding industry-standard, dollar-pegged assets. For example, and not providing recommendations, Circle’s USDC or MakerDAO’s DAI might fit this approach. Assuming operations as usual, a treasury of 100% these two assets would have the exact same balance in thirty years as it does today. This is essentially a “leave it under the mattress” approach.

Liquidity

So which approach to choose? While the former comes with volatility and a litany of protocol-specific risks, the latter delivers no possibility of price appreciation and loss of purchasing power when off-ramped to a fiat currency due to off-chain inflation. This leads back to the basics: Diversification. Including a mix of both types allows a protocol to know its treasury will have a floor value of the dollar-pegged assets while also aiming for capital gains from the industry’s top coins or tokens. Capital is preserved and maintained.

This is the cash in the checking account used to cover expenses. A protocol will have a list of basic cash expenses such as compensating core contributors, audits, server hosting, marketing at events, and so on. Without immediate liquidity, the project could potentially renege on contracts or miss payments.

1. Downward pressure on the token’s market valuation. Selling large blocks into an otherwise stable market reduces the token’s price, all else equal.
2. Capital loss when selling into a down market; if the token has declined in price then selling for liquidity results in a loss.
3. Invites the appearance that the protocol offloading its own token has lost faith in its own project. Other sellers may follow, cratering the token price, or users may abandon the platform.

Going back to the need for diversification, a protocol with 100% of its treasury in its native token would need to sell that token in order to generate short-term liquidity. This raises three, of multiple, primary complications.

Income

Liquidity exists in the form of cash. Cash, in the cryptocurrency ecosystem, exists in the form of dollar-pegged assets. Thus, liquidity is best maintained by holding a diversified basket of the most battle-tested such stable assets. This selection may include the aforementioned names USDC and DAI or introduce other well-known dollar-pegged assets with transparent collateral reporting.

1. Capital gains, highlighted above, strives for the “buy low, sell high” approach. However, as seen in the case of my investment portfolio, this approach does not guarantee positive returns and often results in massive losses. It is a high risk strategy. That does not mean protocols must eschew asset speculation entirely, but rather that they should diversify to protect against market or asset downturns.
2. Yield bearing investments, present an income strategy that, if selected properly, is insulated by market dynamics.

A treasury may generate income through two methods:

On Lido, for example, ~$5.7 billion ETH is staked earning 5.0% APR ( as of October 10, 2022). Similar options exist for other proof of stake chains such as Solana or Polygon. Staked assets must be appropriately balanced against available liquidity due to lockup periods on many staking platforms and protocols. Lido and others do afford investors the ability to sell the staked assets on the secondary markets, but these assets are subject to the same risks as highlighted in the “capital gains” strategy.

A further, more stable, and often higher-yielding option is investing in a yield-generating platform such as Credix. On Credix, institutions and accredited individuals may generate ~12% targeted APY on USDC by investing in the Liquidity Pool which represents the Senior Tranche of all active deals in a marketplace. Credix deploys capital to traditional, off-chain FinTech lenders in emerging markets which then issue loans to SMEs and consumers. This type of investment relies on a pegged-dollar asset, USDC, and extends the lion’s share of risk outside the cryptocurrency market. Thus, it is a market diversification from holding an asset such as Bitcoin. Neither should comprise the entire treasury, but balancing one against the other helps mitigate risks.

Let’s Talk

This three-pronged approach to treasury management ultimately fails without proper diversification. A treasury focused 95% on capital gains income fails in capital preservation and liquidity as nearly all of its assets are in the riskiest strategy thus putting its capital at risk and limiting dependable liquidity. Likewise, a 95% idle USDC treasury is not generating income. Diversification is the backbone of proper treasury management. Without a diversified allocation, a treasury puts the entire protocol and its community at risk of failure. Diversify, Diversify, Diversify.

About Credix

How diversified is your treasury? Is it generating strong returns or sitting idle and eroding in value? Reach out to August Widmer (Twitter: @AugWid) to learn more, discuss potential strategies, and explore integrations with the Credix platform.

Credix is a global platform that provides liquidity against novel, tech-enabled, tokenized assets. Credix provides on-chain asset-based financing to innovative non-bank lenders in Emerging Markets, focusing onLatin America.

The team at Credix has built deep expertise within specialty finance, financial technology, and decentralized finance. This has allowed them to create a unique platform for liquidity providers, underwriters, and borrowers, with a standard offering for early-stage companies and more tailored solutions for growth and scale. Credix’s end-to-end process is tech-driven, leveraging the latest data and blockchain-based technologies.

About Mean

The platform has provided credit against receivables to a tech-enabled SME lender, a multi-tranche facility for car loans, and liquidity against B2B SaaS recurring revenue streams. Credix is moving the $800 billion private credit market into the digital era.

​Mean is a censorship-resistant, user-friendly, self-custody, permissionless & trustless bank bringing everyday banking workflows and real-time finance to crypto and DeFi. People and businesses from around the world can create and manage international accounts with thousands of assets like stable coins and tokens, as well as access several capital products like deep liquidity markets, a decentralized exchange, and access to several investment vehicles. DAOs, projects, and organizations have access to asset and risk management tools like multisigs, treasuries, payroll, payments and collections. Learn more about Mean on the official website, or go to the application.

Originally published at https://medium.com on October 31, 2022.