Opportunities & concerns

Opportunities and concerns for Web3 treasuries

Opportunities to improve treasury systems

Blockchain and distributed ledger technology provide a number of opportunities for improving how treasuries are developed and operated. Many of these improvements could lead to increases in economic stability and treasury efficiency. Efficiency gains could reduce costs or increase growth or the amount of funding that an ecosystem has available for funding public goods. Even small percentage improvements in how these treasuries are managed and how funds get disbursed can represent a massive return on investment for growing Web3 ecosystems. Some example opportunities include:

• Transparency & accountability - Using blockchain and distributed ledger technology the transactions and assets owned by a community can be stored on a transparent public ledger system. This makes it easier to see how funds are being stored and disbursed, helping to increase the amount of transparency and accountability. Community members can track and verify how funds are spent which helps to increase stakeholder trust in these emerging treasury systems and processes.

• Removing intermediaries - Blockchain and distributed ledger technology can help with eliminating the need for intermediaries to manage and distribute treasury assets, this helps reduce costs and custody risks and can also help with increasing process efficiencies.

• Reducing fraud and corruption - The immutability of blockchain and distributed ledger technology means that once a transaction is recorded, it can't be altered. This becomes a deterrent to actors who are considering committing acts of fraud and corruption due to this ability to more easily track how funds have been used.

• Reducing transaction costs - For treasuries involved in international transactions, blockchains and smart contracts deployed on top of these networks can help with providing faster and cheaper cross-border transfers compared to traditional banking systems.

• Easier auditing - Having treasury transactions stored on a public ledger means that auditing and oversight can happen as soon as funds are disbursed, which helps with spotting any irregularities sooner so they can be investigated and resolved.

• Automated smart contracts - Treasury operations such as payments or contractual agreements could have their funds disbursed automatically through the use of smart contracts. Conditions for distribution can be built into the contracts. Payments can also become more timely and require less manual oversight for disbursement. Automated liquidity management could also help with increasing the effectiveness of applying risk management strategies that help to protect treasury assets.

• Improved data access & management - Making all treasury transactions available on a public ledger will make it easier to access the data about the treasury, such as current available assets and any trends in how those assets are being used. This data can then be used to create better financial reporting and forecasting tools that could guide future decisions.

• Decentralised decision making - For communities that want to increase the amount of participation in treasury decision making, a blockchain can help with providing a scalable and tamper proof solution for facilitating and storing any votes on chain when executing any governance decisions.

• Inclusive decision making - Enabling an entire community to participate in treasury decisions will help with making a more representative process for capturing the preferences and opinions of that community. Open and transparent voting systems mean it will be easier for anyone in the community to verify the results from any treasury decision.

• Improved identity management - Self sovereign identity (SSI) could help with providing evidence about who has received funding from the treasury, this could help with reducing any identity duplication or fraud. SSI can also help with enabling people to take ownership of their data and have control over who is able to access that data. Zero knowledge (ZK) proofs can also help with improving treasury management by enabling private voting mechanisms for governance decisions.

• Increased system robustness - Centralised systems are a single point of failure for many existing treasury systems. A decentralised ledger means that data and transactions would be stored and distributed across multiple nodes that operate the network. This creates a system that is more resilient than centralised systems that could have localised failures or disasters.

• Improved security - Security around treasury management can be improved through the adoption of cryptographic techniques to handle how assets get managed and disbursed. Reliable security will still mean that contributors involved in a treasuries operation will need to follow best practices when developing and improving any treasury systems and whilst securing their own private keys.

Opportunities to replace existing products & services

Web3 treasuries could eventually replace a number of products & services that are commonly used. A number of open source solutions could be developed and combined together as needed to replace many of the following products and services:

• Banking - Banks are commonly used for sending and receiving payments, savings accounts, loans and wealth management. All of these services and any existing functionalities can be created in Web3 ecosystems as smart contracts and open source solutions. Communities will be able to manage their assets themselves using these solutions and without the need for a bank.

• Payroll - Contributors that receive income from a Web3 treasury will need to ensure that they are paying any taxes they owe. Solutions can be created that make it easy for anyone to translate their addresses and on-chain data into a report showing how much income they have received between two specified points in time. As this data is on-chain and always available it should be easy enough to automate many parts of this process of reporting total income to tax authorities. Contributors could also automate the depositing of assets into other accounts such as retirement funds or any other financial obligations they have when their income is received.

• Accounting - Financial record keeping is much easier with distributed ledger technology as every transaction and asset is always available and easily verifiable. Self sovereign identity solutions might be needed to ensure it is clear when assets are going to certain individuals so that these transactions can be properly tagged during any audits.

• Auditing - Public and on-chain data will make it easier to automate the auditing of treasury transactions and where funding has been allocated.

• Reporting - Treasury transactions should often be public, always available and easily verifiable. This can help with making reporting easier and increasingly automated over time. Solutions could aggregate and present any transaction data into reports that highlight different trends or insights or other key pieces of information that are required for any compliance.

• Analytics - Public and on-chain data can be used within any analytics tools to identify trends and statistics about what is happening in each treasury.

• Legal compliance - Self sovereign identity solutions could be integrated into any treasury to handle KYC for anyone that is receiving treasury assets as income when this is required. Public ledger data that is always available will also help with making it easier for individuals and companies to create automated reports and document filings for complying with any local legal requirements.

• Asset management - Open source contracts can help with automating the allocation and management of treasury assets. Smart contracts could automatically reduce the amount of assets available for funding rounds if the value of the current treasury assets falls below a certain threshold. Treasuries could adopt different DeFi solutions as part of their portfolio management strategy and automatically allocate between assets depending on their risk tolerances.

• Risk management - Many checks and balances can be introduced to help with protecting treasury assets. Threshold values for different parts of the treasury could trigger protective counter measures to ensure the safety of assets. Allocations could be automatically set aside for emergencies and market changes could trigger automatic responses that help to protect an ecosystem's assets.

• Decision making - The data that is available on-chain could be used to automate a number of decisions that need to be made when operating a treasury. Automated decisions could be established around what tax percentage or fixed amount should be used when the value of the treasuries assets drops below or exceeds a certain value. Another decision a treasury might need to make is how much funding should be available when the treasuries assets drop below or exceed certain values. An ecosystem could manually make these decisions however they could also decide to fully automate them by developing these solutions into the protocol itself or by using smart contracts.

Concerns for emerging Web3 treasuries

• Volatility - Cryptocurrencies have historically been very volatile, the value of the total assets under management for different Web3 treasuries can change fairly quickly. This factor makes it more difficult to execute effective financial planning and risk management. As these ecosystems continue to mature and grow this problem should reduce over the long term.

• Governance complexities - Increasing the amount of participation in treasury decisions can help with making these systems more representative of a community's preferences and opinions. However there is also an increased amount of complexity with governance for the treasury when more people are involved. Treasuries need to identify simple and effective governance solutions that will enable these systems to scale to a larger audience of voters. Being able to delegate voting power to other people will likely play an important role in developing longer term solutions.

• Voter apathy - Decentralised ecosystems can be effective for inviting a larger amount of voter participation in key treasury decisions, however this participation relies on the interest and willingness of the community to engage in governance. Creating solutions that are effective for decision making but that do not overburden the voter will be an essential part of developing decentralised decision making systems that can effectively scale.

• Lack of historical data - As Web3 treasuries are still a new trend there is a lack of data on how they perform and behave in different environments. This lack of data and history makes it more complex over the short term to identify trends and effectively manage Web3 assets.

• Security concerns - Which stakeholders have the ability to disburse treasury assets and how private keys are handled create an ongoing concern for how treasury assets are securely handled. As these emerging treasuries grow in value these risks and any potential vulnerabilities will need to be resolved to prevent any significant loss from occurring.

• Centralisation concerns - There is an ongoing risk that influential stakeholders with large amounts of coins could have an excessive amount of influence over these emerging Web3 networks and the decisions that get made. Democratic decentralised networks are currently difficult to implement at scale due to the threat of sybil attacks.