Protocol Economics··1 min read
Treasury management for protocols
How protocols should manage treasuries: runway calculation, diversification, burn rate control, and common mistakes to avoid.
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Protocol treasuries fund ongoing development, pay contributors, and provide a buffer against market downturns. Unlike traditional corporate treasuries with established best practices, protocol treasuries often hold concentrated positions in native tokens with unclear liquidation paths.
Key takeaways
- Treasury inflows come from protocol revenue, token sales, and grants; outflows fund operations and incentives
- Runway is treasury balance divided by monthly burn rate, showing how long the protocol can operate
- Diversification reduces risk by holding stablecoins and non-correlated assets rather than 100% native tokens
- Common mistakes include holding illiquid native tokens, overspending on non-essential items, and no burn control
- Best practices: maintain 18-24 months runway in stablecoins, track burn rate weekly, operate profitably
Treasury fundamentals
Treasury inflows typically come from three sources: protocol revenue (fees retained by the protocol), token sales or raises, and ecosystem grants. Outflows include contributor compensation, infrastructure costs, liquidity incentives, grants to ecosystem projects, and security audits.
The goal of treasury management is ensuring the protocol can continue operating regardless of market conditions. This requires balancing growth investment against capital preservation, and understanding which treasury assets are actually liquid versus theoretically valuable.
Calculating runway
Runway equals liquid treasury assets divided by monthly burn rate. If a protocol has $10M in stablecoins and spends $500K monthly, runway is 20 months. This calculation must exclude native tokens unless there's a clear, tested liquidation path that won't crater the token price.
Most protocols should maintain 18-24 months of runway in stablecoins. This provides buffer for bear markets when revenue typically drops 50-80% and token prices may fall further. Protocols with less than 12 months of stablecoin runway are at material risk of insolvency during downturns.
Diversification strategies
Diversification means holding assets that don't move together. A treasury of 100% native tokens isn't diversified—when the protocol struggles, the token drops, reducing treasury value exactly when capital is most needed.
Effective diversification includes: stablecoins for operational expenses (USDC, USDT, DAI), blue-chip crypto for upside exposure (ETH, BTC), and potentially yield-generating positions. The specific allocation depends on the protocol's risk tolerance, runway needs, and market conditions.
Selling native tokens for diversification is politically challenging but often necessary. Protocols can use OTC sales, gradual market sales, or token swaps with other protocols to reduce concentration without causing panic.
Common mistakes
Counting native tokens as assets: Treasury reports showing billions in native tokens are misleading. These tokens can't be sold without destroying value and don't represent available capital. Only liquid assets with clear liquidation paths should count toward runway.
Overspending in bull markets: When token prices are high, treasuries look massive and spending increases. When prices fall, these commitments become unsustainable. Conservative spending regardless of market conditions prevents this trap.
No burn rate tracking: Without regular monitoring, spending creeps up. Weekly or monthly burn rate reviews catch problems early and enable course correction before runway becomes critical.
See live data
Links open DefiLlama or other external sources.
Related Concepts
- Protocol revenue: Understanding inflows to the treasury
- Emissions vs revenue: How token incentives affect treasury sustainability
- Onchain profit: Whether the protocol generates surplus after expenses
FAQ
How much runway should a protocol maintain?
18-24 months in stablecoins is a common target. This provides buffer for extended bear markets without requiring emergency fundraising or severe cost cuts. Less established protocols may need more; protocols with strong recurring revenue may need less.
Should protocols sell their native tokens?
Yes, if necessary for diversification and runway. Concentrated native token holdings create existential risk. The political challenge of selling can be managed through transparent communication, gradual sales, and demonstrating that diversification ensures long-term protocol survival.
What's a healthy burn rate?
It depends on the protocol's stage and revenue. Early protocols may intentionally burn through treasury to achieve growth. Mature protocols should aim for profitability or at minimum sustainable runway. A good benchmark: monthly burn should be less than monthly revenue plus a modest runway buffer.
Cite this definition
Protocol treasuries hold assets to fund operations, pay contributors, and sustain development, requiring balance between runway and diversification.
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