KIP-28: Rook DAO Treasury Charter

KIP Draft: Rook DAO Treasury Charter

title: Rook DAO Treasury Charter
category: core documents
author:  @DaddyMatty <matt@rook.fi>
created: 2022-07-13
replaces:
dependencies:

Proposal

This KIP is a request for the community to ratify the following Treasury Charter.

Purpose and Rationale

By ratifying this document, we can establish a shared mindset, a culture and a formal signal that outlines our vision around the management of our treasury. Like our DAO, this document should be viewed as a living organism that is flexible and must adapt to not only survive, but thrive. This document is intended to provide a North Star, so to speak, by which governance can make more decisive, systematic, and collaborative decisions within a broad framework.

This charter explores and presents a shared culture around the DAO’s treasury and identifies the purpose of the Rook DAO Treasury as well as five core principles to effectively manage it.

Upon adoption, this Treasury Charter will guide treasury activities for the ROOK Protocol, and will be publicly accessible at [insert link]

Document Text

DAO Treasuries Are Checking Accounts: Not Brokerage Accounts

Go into any discord of a DAO with funds in its treasury and you will see the same thing: dozens, and in some cases hundreds, of community members recommending that the DAO invest their money into a countless number of projects to receive a variety of different returns. While many of these ideas could result in meaningful windfalls, are they truly helping meet the long-term mission of the DAO? In many cases these basic investments simply expand the treasury’s balance and don’t consider the opportunity costs of not using those funds to instead acquire another cash-generating business, investing in talent to expand/diversify existing capabilities, or potentially support integration partners who support the flywheel we hope to create.

The purpose of any DAO is to manage and govern its protocol in perpetuity. DAOs therefore need to position themselves in a way that not only ensures their ongoing operations can continue, but also lets them invest in their protocol’s future growth — this is not dissimilar to how corporations think about capitalizing themselves. Similar to how traditional corporations can use retained earnings, equity, and debt to finance themselves, DAOs also have a similar universe of options. Instead of viewing our treasury as a brokerage account, these funds should be used as a business’s checking/saving account that is there to expand the DAO’s mission. Although the DAO structure is a new paradigm in social interaction, in the end, it is just a more transparent and equitable business and should be run as such.

Imagine if early stage Amazon had chosen to deploy the extra cash in their treasury into a portfolio of securities to earn an immediate return. Would they have built the capabilities, talent, or moat that they have now? Would they have had the liquidity to survive during the dot com bubble crash? Instead, they took a simple stance: let’s reinvest our money in internal efforts that make us the easiest and most reliable retailer in the world. They focused on being customer obsessed and correlating their spending back to their long-term mission.

We propose to follow a similar path for Rook. Simply put, let’s invest in ourselves and the things we can control. We should make bold rather than timid business decisions where we see a sufficient probability of gaining market leadership advantages and should manage the treasury to support our ability to make those long-term investments. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.

Purpose of the DAO Treasury

The purpose of the Rook DAO treasury is to ensure that the operation of the DAO is ongoing, sustainable, and resilient to market volatility. As such, the main focus of the treasury management framework is to ensure that decisions are being made to support the contributors, capture market share and support key infrastructure of the DAO. While direct investments in other tokens will be key to the treasury’s mission of ensuring stability, the primary driver of treasury growth should be the revenues generated through partnerships, integrations and protocol revenues.

Like our members, the goals, initiatives, and passions of our DAO are diverse and cannot be managed as fully independent variables. There are myriad investment opportunities available but they must be managed in relation to each other in the aggregate including consideration of protocol risks, opportunity costs, lockup periods, etc.

As such, we roughly strive to prioritize using treasury funds across four key areas:

  1. Funding ongoing operations through budgets discussed and ratified through governance
  2. Building and maintaining capital reserves as a buffer against market volatility
  3. Funding community grants in support of community-generated initiatives that support Rook’s overall mission
  4. Making targeted and risk-controlled strategic investments

Note: the key areas outlined above are listed in order of priority.

By focusing on these key uses of funds rather than unrelated speculative investments, we can more effectively manage risk and rewards as well as better align our capital and mission.

Core Principles

To effectively ensure the survival of the Rook DAO treasury, the community controlling it should strive to operate by five key principles:

  • Mission-based management: All treasury decisions should be viewed in relation to their impact on the mission of the DAO
  • Maintain an infinite time horizon: The treasury should be structured to exist in perpetuity
  • Systematic Execution: Decisions should be made in a systematic, informed and understandable manner
  • Diversification is critical: Treasury allocations should ensure that critical expenses can be funded even if the protocol token has a significant drawdown.
  • Find Win-Win Scenarios: The most optimal ROI is one where others win with us.

Mission-Based Management

A common attribute of organizations that have a high-performance culture is that they have a clear, well-specified purpose that states both how and why the company makes a positive impact on the world. It’s their fundamental reason for existence beyond just making money. This is not a “feel-good” statement, it actually pulls people forward, especially in difficult (and good) times. It helps people make better decisions and generates tremendous energy that aligns everyone toward a common cause.

The reason it is so powerful is because it’s the why: the emotional connection the DAO has to the world. It’s an outside-in perspective, rather than the more common inside-out approach typically used by organizations. Humans are emotional beings that buy-in to communities based on how much the purpose resonates with their own values.

Luckily, Rook DAO’s why (its mission) is clearly defined:

We are united around a shared mission: to provide the coordination engine that enables a more efficient, secure and egalitarian economy for all blockchain users

Because RD is driven to create a more profitable, fair, and secure decentralized economy, our allocation of resources must be directly tied to the granular objectives to accomplish this vision (”mission-based budgeting”). A mission-based budget is less concerned with the detailed revenue and expense line items typically found in a traditional budget. Instead, these classifications are aggregated into a smaller number of line items. By doing so, there is less emphasis on the accuracy of specific items and a greater focus on the overall goals to be achieved.

Managing for the Long-Term

Currently, much of the value of Rook DAO can be seen on-chain represented by tokenized assets or tangible assets. To be a public good it will be necessary for RD to grow considerably in terms of part-time and full-time contributors. This means that the growth of non-tangible assets, the value of contributors, will far exceed the on-chain assets that we hold. Without a conservative approach to treasury management, in the form of stablecoins and non-directional assets, a downturn in the market could prevent hiring/compensating the necessary personnel and/or lead to the liquidation of intangible assets in the form of contributors leaving to work elsewhere.

In addition to making sure we have sufficient, liquid capital to support our contributors, there are numerous benefits to holding a large percentage of our treasury in stables:

  • Provides for predictable, safe, and recurring cash flows
  • Yield earned is relatively predictable making budgeting and cash flow forecasting more effective
  • Provides for a greater ability to engage in other M&A activities and strategic partnerships
  • Signals financial soundness to the community, investors, partners and contributors
  • Allows for RD to continue making the necessary investments somewhat agnostic of market conditions
  • Creates a more stable and diversified treasury

Systematic Execution

Before attempting to make any material financial transactions, we must ensure that a holistic and systematic approach is taken to view how our mission, risk tolerance, and market forces are interrelated. This is even more important in an industry as volatile and quick-moving as crypto because the opportunity cost of any action is constantly a moving target.

To ensure that decisions are appropriate for the long term, research and execution must be performed in a way that is reproducible, objective, and are done in relation to clear standards and guidelines that can be understood by all stakeholders. To better foster an environment that honors and encourages this systematic decision-making, the development and utilization of the following are critical:

  • Treasury management framework
  • The expected use of funds by priority level
  • Ratified governance processes and proposal templates
  • Frequent budgets and forecasts
  • Dedicated team of contributors responsible for researching, executing and monitoring treasury operations

In addition to these broad requirements, a DAO should, at a minimum, define the following:

  • Defined fund allocation process
  • Their capital or emergency reserves strategy
  • Classifications of how different investment types are viewed (eg. high risk, strategic partnership, etc.)
  • Minimum requirements any investment must adhere to
  • Minimum IRR (risk-free rate)
  • Asset composition parameters

Diversification

While DAOs are a newly-evolved organizational structure that does away with the traditional hierarchical management framework, age-old principles such as diversification should still be honored to ensure the continued survival of the organization. DAO treasury diversification ensures that the entity can fund its operations and achieve its mission and objectives. If a DAO is only holding their native token or highly volatile, directional assets, any negative market forces could cripple the organization’s ability to predictably deploy capital and keep talent. Diversification is therefore critical to spread out our risk so that the performance of one investment doesn’t necessarily correlate to the success of our protocol and community.

Coordinating with Ecosystem Partners to Create Win-Win Outcomes

The basic objective of a business or equity strategic partnership is to achieve synergy through integrated, combined and tailored in-depth cooperation; put another way, it is to achieve an additional joint effect that an individual organization would not be able to achieve on its own, while concrete objectives may be quite different in each individual relationship and for each participant.

While building will always be the cornerstone of what we do at RD, we feel, now more than ever, that buying and partnering are integral components of our growth strategy. Using treasury funds selectively to develop partnerships with complementary stakeholders in our ecosystem allows us to strengthen our technological diversity, knowledge base and market mindshare. Building a portfolio of partnerships rather than a portfolio of investments will almost certainly result in better optimizing return over the long term. While at times we may come across protocols offering higher yield on a deposit, depositing that same asset into a protocol that produces MEV-derived revenues in perpetuity is a much more compelling business proposition.

More specifically, we look for the following characteristics in partnerships:

  • Significant alignment in core values, culture, and mission
  • Significant elements of knowledge and technology are shared or transferred
  • Creates significant awareness of both projects and offers a compelling narrative
  • Creates additional opportunities for networking
  • Organizations complement or supplement skills sets, infrastructure, and processes on both sides

Looking Forward

The marriage between community engagement and decentralized governance is providing the world with a new level of organization — one that copes with current social and economic needs and overthrows archaic models based on hierarchies and fragmented power. The future is bright for DAOs and us pioneers that are creating new paradigms in human interaction and value creation. While the path ahead is unknown, scary, and difficult at times, it is one worth taking for future generations. Every DAO should strike a perfect balance between making money and becoming a public good over time.

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I strongly support this proposal. It sets a high standard for other parts of Rook (including governance) to begin articulating the longer-term values that drive how we operate. In this case, it also establishes a set of criteria that both Sophons and the community can draw on in reviewing Treasury proposals as part of a larger framework in addition to considering the individual merits of each proposal.

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