DAOs Invested $1.4B+ in Real World Assets Since 2020

Analysis across the three largest DeFi protocols in the world and how they are investing in traditional, real-world assets.

To date, DAOs, or “Decentralized Autonomous Organizations,” have invested over USD $1.426 billion in traditional real-world assets, such as U.S. Treasury & corporate bonds, in just the last two years. With regulatory ire increasingly targeting the world’s cryptocurrency markets, which are collectively valued at $1.2 trillion, DAOs are being forced to diversify into traditional assets to increase revenues and survive continued global recession, crypto regulatory ambiguity, and a de-dollarizing world.

In this brief, we explore the exponentially growing, multi-billion dollar, DAO-RWA investment market and ponder about how a world where traditional finance (”TradFi”) and decentralized finance (”DeFi”) are interconnected might function. Along the way, we’ll provide primers on “DAOs” and “RWAs,” and explore use cases of DAO’s investing in real-world assets.

What are DAOs?

A DAO are a type of organization that operates on a blockchain network and is governed by a set of rules and smart contracts. Think of it as a niche, digital community that has its own, internal economy, governance structure, and set of strategic focuses (e.g., venture capital). DAOs are typically designed to be decentralized and autonomous, meaning that they operate without the need for intermediaries or central authorities. In fact, you may consider some to be the next digital sovereign nations.

The largest DAOs have multibillion dollar treasuries and are typically associated with either (1) blockchain networks, or (2) decentralized finance (i.e., “DeFi”) protocols, which generate the DAO’s revenue. A few examples of DAOs in the wild include the following (treasury sizes accounted for at the time of this writing, June 2023):

1. Optimism Collective (L2 Blockchain Network) — USD $2.7 billion treasury
2. Arbitrum One (L2 Blockchain Network) — USD $3.5 billion treasury
3. BitDAO (Investment & Partnership DAO) — USD $3.3 billion treasury
4. Uniswap (Decentralized Exchange) — USD $1.7 billion treasury
5. Polygon (L2 Blockchain Network) — USD $712.8 billion treasury

Today, DAO treasuries collectively command over USD $18.3 billion (changes radically), and many are diversifying their investments from simply cryptocurrencies to traditional, real-world assets.

Wait…what are Real World Assets again?

Real-world assets are physical or tangible assets, such as real estate, commodities, and infrastructure, that have intrinsic value and can be owned or traded. As of October 2022, the global real-world asset market cap was an estimated at around $576 trillion, with the real estate market accounting for $362 trillion, the fixed income debt market accounting for $127 trillion, and non-financial corporate debt accounting for $87 trillion.

Examples of real-world assets are:

1. Real Estate: Land and buildings, including residential, commercial, and industrial properties.
2. Infrastructure: Public works, such as roads, bridges, airports, and water treatment facilities.
3. Commodities: Physical goods that are traded on commodity exchanges, such as gold, silver, oil, and agricultural products.
4. Artwork: Paintings, sculptures, and other works of art that have aesthetic and cultural value.
5. Precious Metals: Metals such as gold, silver, and platinum, which are used as stores of value and for industrial applications.
6. Natural Resources: Assets such as timber, minerals, and water resources that are extracted from the natural environment.
7. Collectibles: Items such as rare coins, stamps, and sports memorabilia that have value due to their rarity and historical significance.

Why are DAO’s Investing in RWAs?

For the past several years now, the health of the crypto-economy has largely subsisted off the transaction volumes of centralized exchanges (i.e., exchanges that allow for the trade of cryptocurrencies) and decentralized finance protocols (i.e., automated financial services built using blockchain technology), which currently stand at $35.21 billion per day. Thus, the vast majority of capital value being produced in the crypto-economy is speculative, swaying at the mercy of volatile cryptocurrency prices.

However, cryptocurrency usage, and usage of blockchain technology more broadly, is quickly becoming less and less speculative as many of the technology’s most-adopted protocols amass multi-billion dollar treasuries to hire, strategize, and expand their projects. Here’s a few reasons why RWA-investment is aligned with future DAO growth:

DAO Treasuries Aren’t Diversified

Since many DAO treasury portfolios are dominated by the DAO’s native currency (i.e., avg. 75% of DAO AUM is in its native tokens), DAO AUM changes just as widely as the cryptocurrency markets. Though holding native tokens is important, as many DAOs bootstrap themselves financially by selling their own tokens and giving community members governance rights over the DAO (and underlying protocol’s) strategic direction, doing so at the expense of diversification is unwise to say the least. Note, DAO/protocol tokens DO NOT give the token holder ownership rights of the DAO/protocol itself like corporate stocks do, as they are open source.

Regulatory Ire Threatens DAO Treasury Holdings

Regulatory pressure from SEC’s Chairman Gary Gensler, who has personally deemed all cryptocurrencies (other than bitcoin) as unregistered securities, puts the vast majority of DAO wealth at risk if pursued by American regulatory agencies. If, say, the SEC or CFTC decided to pursue seizing the cryptocurrency-denominated allocation of DAO treasuries (or fine the DAOs directly) under the claim that the DAOS holdings were illicitly acquired/distributed, some DAOs could go bankrupt overnight.

Many DAOs Have High Inflation Costs

Lastly, DAOs and protocols typically sustain users (i.e., token holders) by providing users with yield in the DAO’s native token. Yield can be earned by providing the DAO’s protocol with liquidity, participating in DAO governance, and/or completing community bounties. Such yield, which is referred to as ‘token emissions’ (i.e., inflation caused by minting more of the DAO’s token to emit rewards) is considered the highest cost that a protocol/DAO incurs, as it lowers the price of the project’s token over time.

Unsustainable Token Emission Yields Are Dying Out

The DeFi landscape has struggled to scale because the underlying yield generation mechanism only works when cryptocurrency prices are going up. The unsustainable yield model is best reflected by the cumulative total value locked (TVL) in DeFi protocols dropping from nearly $180 billion to nearly $50 billion since the market peak (Blockworks).

Source: DeFiLlama

Getting to the Point — Why Invest in RWAs?

The trifecta of poor treasury diversification, western regulatory pressures, and costly token emissions is forcing DAOs to diversify their AUM into traditional, real-world assets. The benefits of such diversification are the following:

1. Increased recurring revenues. DAOs may increase their recurring revenues by investing capital that doesn’t naturally generate yield by itself, such as stablecoins like USDC (USD Coin), which are backed 1:1 with U.S. Dollars stored in American financial institutional accounts.
2. Reduced regulatory risk. By investing in traditional financial instruments, rather than just the cryptocurrencies of other blockchain projects, DAOs may greatly reduce the speculative, regulatory risk of their treasuries (to prevent seizure on the basis of holding alleged, unregistered securities).
3. Decreased reliance on secondary market. By diversifying their treasuries, DAOs become much less reliant on bull-runs that increase the value of cryptocurrencies for unpredictable stints of time, as assets such as U.S. Treasury bonds provide stable returns (if held to maturity).

RWA investment, paired with maximizing revenues generated by their associated protocols via transaction fees, loan origination fees, etc., help DAOs generate and maintain their wealth.

The Oncoming, Multibillion Dollar DAO-RWA Market

Real-world assets have a favorable, tokenized future. In fact, Citi expects $4 trillion in value of tokenized assets by 2030 alone. It’s no surprise that DAOs, as they mature, are looking to diversify treasury investments and collateral support into traditional financial instruments that have a much longer track record than that of digital assets.

To date, DAOs such as MakerDAO, have already started to actively invest in real-world assets, committing over USD $1.4 billion in RWA investment to date to collateralize its decentralized stablecoin, DAI.

For background, DAI is a digital dollar over-collateralized by a basket of assets. Such assets include other digital dollars (e.g., stablecoins such as USDC), real-world assets (e.g., U.S. treasury bonds), and other cryptocurrencies (e.g., ETH). The more diversified collateral DAI has, the stronger the stablecoin is as a store of value.

MakerDAO has invested in several types of real-world assets to use as collateral for its stablecoin DAI, including the following:

• USD $335M+ in BlackRock 0–1yr U.S. Treasury Bonds
• USD $152M+ in BlackRock 1–3yr U.S. Treasury Bonds
• USD $100M loan to Huntingdon Valley Bank (marking the first commercial loan participation between a US Regulated Financial Institution and a decentralized digital currency). The bank loan will fund the following loan categories: (1) Amortizing Commercial Real Estate Mortgages, (2) Construction Loans, (3) Private Lender Loans, (4) Business Loans, (5) SBA Loans, (6) Capital Call Lines
• USD $97.66M in loans to BlockTower representing super-senior tranches of BlockTower’s core investments in senior-secured, asset-backed facilities to fintech or other non-bank lenders

Since making RWA investments, MakerDAO has doubled its revenues and its strategic finance committee has indicated that the DAO still needs to activate $1.47B in stablecoin collateral reserves in the near-term to further boost revenues and reduce reliance on other stablecoin projects (particularly USDC). With aspirations to mature DAI into a trillion dollar stablecoin by marketcap, MakerDAO’s RWA collateral needs will continue to exponentially increase with the demand for its stablecoin (& DAI’s market cap. has increased 50x since 2020).

Maker is but one of 15 protocols that have over $1 billion in AUM and it’s DAO is way ahead of the curve when it comes to RWA investment. Provided that the DeFi sector alone is projected to reach $232.20 billion by the end of 2030, with a compound annual growth rate (CAGR) of ~42.6% between 2022 and 2030, the DAO-RWA investment market will likely balloon to the dozens of billions of dollars by the end of the decade, a minimum 3,328.57% market capitalization increase.

At the end of the day, Maker’s strategic investment in RWAs is quickly solidifying (and expanding) its financial position to become the most diversified and profitable DAO/protocol in the world.

The DAO-RWA Investment Management Gap

Despite the tremendous potential for DAOs to invest in RWAs, frameworks for identifying which RWAs DAOs prefer to invest in isn’t a as straight forward as one might hope. Outside of an obvious desire to (1) earn consistent yields and (2) have a relatively low-risk portfolio as they get started, the science of ‘what makes a great DAO-RWA investment” is still evolving based on each DAO’s revenue needs and community culture.

Traditionally, most ‘crypto-native’ community members have embraced a cyberpunk ethos that prioritizes hyper-transparency, censorship resistance, and decentralized (i.e., community-based) governance, but inconsistencies begin to creep into these decentralized, purist tenants when hundreds of millions of dollars of unallocated investment is involved.

Specifically, most DAOs that leverage RWAs as collateral have terribly undiversified portfolios and poor means to coordinate sophisticated portfolio development in a decentralized way without relying heavily on centralized financial institutions (e.g., MakerDAO’s $500 million treasury bond investment is in BlackRock’s financial products). Even when communities are prompted with the decision to choose which assets are within their DAO’s RWA portfolio, the available options reek of Western bias, as many active, governing community members are from the United States and Europe.

DAO RWA Investments Aren’t Diversified Enough

Of the ~USD $1.4 billion of RWA investments that MakerDAO and Aave have made to date, over 96% are concentrated in U.S. treasury & corporate bonds. Granted, U.S. treasury bonds have long been the conservative investor’s gold standard for stable yield, high liquidity, and low risk, but with increased de-dollarization and federal interest rate hikes, you’d think that having a portfolio that’s nearly 100% exposed to the American bond market might be a bit shortsighted.

Additionally, if the purpose of decentralized protocols is to serve a global audience, one could make the argument that it is each DAO’s responsibility to ensure that its collateralization scheme is well-diversified across the underlying sovereign risks of each investment (i.e., if you’re going to invest in bonds, invest globally, not just in the U.S.). A good counter-argument would be that there aren’t many tokenized, emerging market RWAs available, but that could soon change if U.S. federal interest rates begin to downtrend.

A Potential DAO-RWA Investment Framework

A potential DAO-RWA investment framework that could guide a more diversified collateral-investment approach could be segmenting high-level asset attributes both important to the DAO’s community as well as including characteristics steeped in portfolio management best practice. Each attribute would be scored, and then an aggregate score would be produced to provide DAO members a high-level assessment of the investment opportunity. Such attributes could include the following:

I. Risk Level. Assessing (e.g., scoring) multiple risk variables associated with the real-world asset and representing the asset’s risk in an easy-to-understand, aggregate risk level (High, Medium, Low) that the DAO’s community can understand. Proposed RWA risk factors could include the following:

1. Sovereign Risk. Sovereign risk is the risk of a government defaulting on its debt obligations or taking actions that negatively impact investments in the country. An extended definition could also refer to sovereign risk as the state of the asset’s native economy (e.g., U.S. treasury bonds are more risky as the U.S. increases its indebtedness, the U.S. Dollar’s inflation increases, etc.).
2. Compliance Risk. Compliance risk refers to the risk that the financial product (i.e., the real world asset) is not compliant with regulatory expectations of the asset’s custodian and/or the asset’s owner (i.e., the DAO’s special purpose vehicle assigned ownership rights).
3. Volatility Risk. Volatility risk refers to the potential for an investment’s value to experience sudden and significant fluctuations over time, which can result in gains or losses for investors.
4. Execution Risk. Execution risk refers to the risk of the executing team(s) to properly (legally, financially) facilitate the DAO’s investment in the RWA(s) related to the deal.

II. Liquidity. Liquidity refers to the ease, or lack thereof, of buying or selling an asset without significantly affecting the price of said asset. Highly liquid assets are easy to trade with minimal price impact, medium-liquidity assets are somewhat easy to trade and carry reasonable price impact, and low liquidity/illiquid assets are hard to trade and carry significant price impact.

III. Transparency. Transparency refers to the ability to understand (1) how the asset is being managed, (2) when and where the asset is being transferred in real-time, and (3) how the liquidity, yield, and risk level of the asset changes in real-time.

1. Off-Chain RWA (Low). A real-world asset that is custodied and managed off-chain. Updates on the asset’s liquidity, yield, and risk level must be made in recurring reports to the beneficiary (i.e., the DAO).
2. Hybridized RWA (Medium). A real-world asset that is tokenized on-chain, but that is collateralized (1:1) by an off-chain asset that is custodied and managed off-chain. Updates on the asset’s liquidity, yield, and risk level are made available online and via recurring reports to the beneficiary (i.e., the DAO).
3. On-Chain RWA (High). A real-world asset that is tokenized & collateralized on-chain. Currently, all on-chain RWAs are produced by lending protocols that execute lending terms, borrower repayment, and yield distribution on a (ideally public) blockchain network. Updates on the asset’s liquidity, yield, and risk level are publicly accessible on-chain (digitally) in real-time.

IV. Yield. The return on investment that the real-world asset provides (typically only associated with loan-based RWAs, as an increase in RWA value/price is not considered yield). RWA yield is typically defined within the terms of the investment.

V. Conflict of Interest. An analysis to determine if any influential governors (i.e., delegates) within the DAO are financially vested (and/or rewarded) in any of the entities related to the RWA investment (e.g., brokering intermediaries, technology providers).

Conclusion

As DAOs continue to grow their RWA investment strategies, and RWAs are increasingly tokenized, the crypto-economy will become more stable as its risk diversifies. The result? Emerging technologies such as DeFi will mature beyond its niche status, and, increasingly institutions and consumers alike will use DeFi protocols to access trustless financial services in contrast to their traditional finance predecessors. Such a trend arguably threatens the business models of traditional banks, which could (and likely already has) led to government lobbying to increasingly restrict anything crypto-related.