Concentration of reserves in own tokens: a hidden threat to DAOs
An analysis of market data has revealed a troubling trend: decentralized autonomous organizations (DAOs) hold, on average, about 70% of their treasury reserves in their own native tokens. At first glance, this looks like a show of confidence in their own project, but in reality, it harbors serious systemic risks.
Such a reserve structure creates a vicious cycle of procyclical vulnerability. When the market price of the token declines, a triple blow occurs simultaneously: collateral assets depreciate, protocol revenue from fees shrinks, and overall market activity falls. In this situation, DAOs are forced to sell even more coins to cover operational expenses—developer salaries, grants, marketing. This additional pressure on the market only intensifies the downward trend, closing a destructive spiral.
The behavior of platforms during periods of stress is especially telling. Instead of proactively hedging risks, most projects turn to protective instruments only after a price crash. At that moment, volatility reaches peak levels, and the cost of downside protection—whether options or other derivatives—becomes prohibitively high. In essence, DAOs pay the maximum price for protection at the worst possible time, when their reserves have already significantly declined.
Diversifying treasury assets is not just a matter of returns, but a matter of survival. Smart contracts and automated liquidity management strategies can help, but fundamentally, the approach must change: reserves should be distributed among stablecoins, leading cryptocurrencies, and possibly tokens of adjacent protocols with low correlation.
My professional view: The market underestimates this risk, focusing on staking yields and token price growth. However, in the long term, it is treasury resilience that determines trust in a DAO. Projects that do not revise their reserve policy now risk facing an existential crisis during the next significant market downturn. Investors should pay close attention to the composition of treasury assets as one of the key fundamental indicators of a protocol's health.