Decentralized Autonomous Organizations (DAOs) are always looking for new and exciting ways to garner yield on their treasuries. And now Compound DAO, one of the most high-profile DeFi protocols, is making a big move in that direction. They’re using Enzyme, an on-chain asset management platform, to earn a focused 15% Annual Percentage Yield (APY) on their treasury. This initiative marks a larger overall trend towards more sophisticated, data-driven treasury management across the DAO landscape. BlockchainShock.com takes a closer look at the intricacies of this approach and what it means for the future of DAO finance.

Compound DAO's Ambitious Strategy

Compound DAO's proposed strategy centers around three core components: staking idle ETH and earning yield on COMP tokens. The DAO’s goal is to generate 15%-35% annualized net USDC-denominated yield on its COMP assets. A total of 100,000 COMP tokens ($5 million in value) will be committed to this program. Our intention is to implement these strategies which accrue COMP and mint USDC back to the treasury. The general objective of the COMP Yield Strategy is to produce an all-in 15% yield entirely from premium capture. Projected yields for staked ETH are currently at around 4-5%. By contrast, COMP strategies are set to provide at least 15-35% return.

This approach represents a fundamental breakthrough in treasury management. Rather than simply custodizing assets, it sets out to actively deploy them into DeFi strategies. By utilizing Enzyme, Compound DAO has access to a unique platform where it’s fairly straightforward to implement complex on-chain options strategies. This enables the DAO to engage in yield-generating activities that otherwise would have been out of reach or too complicated to directly manage. Targeting a specific APY to stick within shows a high level of understanding. This skill is quickly becoming essential for DAOs looking to maximize their financial return on assets.

The Power of On-Chain Options

On-chain options offer several key advantages for DAOs:

  • Enhanced Transparency: Contracts are self-executing and operate without intermediaries, ensuring trust and eliminating the need for third-party intervention.
  • Increased Efficiency: Automated and efficient execution of trades reduces the need for manual intervention and minimizes the risk of errors.
  • Improved Liquidity Management: A more efficient way to manage liquidity, allowing DAOs to hedge against potential risks and capitalize on opportunities in a more flexible and dynamic way.

To understand what Compound DAO’s 15% APY is all about, let’s first dive into the covered call strategy. Taking a hard look at it will yield some really helpful information.

Understanding Covered Calls

A covered call is a strong income-generating strategy. The strategy consists of purchasing and holding an investment, most commonly a stock, and simultaneously writing (selling) a call option on that investment.

The main advantage of a covered call is the income it can produce from collecting the premium when you sell the short call options. Be advised, traditional monthly covered call strategies usually only provide modest downside protection.

  • Owning an investment (typically a stock)
  • Selling a call option on that same investment

Compound DAO’s use of new on-chain options strategies is a historic step on the road to the professionalization of DAO treasury management. As DAOs have grown up, they’re starting to realize that as custodians of financial resources, they need a more sophisticated approach to managing those assets. This may mean more than diversification, but rather being actively involved in income producing endeavors. This abrupt transition requires the embracing of new tools, strategies, and knowledge. Several key trends are emerging in this space:

  1. An investor sells a call option on a stock they own.
  2. The investor receives a premium from selling the call option.
  3. If the stock price stays below the strike price, the option will likely expire worthless, and the investor keeps the premium.
  4. If the stock price rises above the strike price, the investor may have to sell the stock at the strike price, missing out on further gains.

Compound DAO's partnership with Enzyme exemplifies this trend, demonstrating how DAOs can leverage specialized platforms and strategies to enhance their treasury performance. The more DAOs that adopt these kinds of approaches, the more they’ll be increasing their overall efficiency and sustainability. This move will lead to increased innovation and development of a more decentralized ecosystem.

Implications for DAO Treasury Management

Compound DAO's adoption of on-chain options strategies marks a significant step towards the professionalization of DAO treasury management. As DAOs mature, they are recognizing the need for more sophisticated approaches to managing their financial resources. This includes not only diversification but also active participation in yield-generating activities. This shift necessitates the adoption of new tools, strategies, and expertise. Several key trends are emerging in this space:

  • Increased Security: Secure storage solutions such as multi-sig wallets and platforms like Gnosis Safe will continue to enhance the security of DAO treasuries.
  • Improved Risk Management: The adoption of risk management tools and strategies like Value at Risk (VaR) and Failure Mode and Effects Analysis (FMEA) will help DAOs to better evaluate and mitigate risks.

Furthermore, the following are key aspects for treasury management:

  • Treasury Management Tools: The use of treasury management tools like Hedgey, Llama, and Yearn Finance will become more prevalent, making it easier for DAOs to manage their treasuries.
  • Expertise and Governance: The importance of having the right expertise and governance structures in place will become more apparent, with DAOs establishing dedicated treasury management committees to oversee treasury management.
  • Data-informed decision-making: A data-driven strategy can help DAO treasuries make more informed decisions by providing insights into the organization's financial performance, market trends, and community engagement.
  • Optimized asset allocation: By analyzing data on market trends, asset performance, and risk exposure, DAO treasuries can optimize their asset allocation to maximize returns and minimize risk.

Compound DAO's partnership with Enzyme exemplifies this trend, demonstrating how DAOs can leverage specialized platforms and strategies to enhance their treasury performance. As more DAOs adopt similar approaches, the overall efficiency and sustainability of these organizations are likely to improve, fostering greater innovation and growth within the decentralized ecosystem.