Nik Pletikos from DeFiWaves on Web3 Treasury Management

Episode 57 | Nik Pletikos from DeFiWaves on Web3 Treasury Management

[00:00:00] Umar: Welcome to The Accountant Quits, brought to you by the Web3CFO Club, a community of web3 CFOs sharing best practices on web3 operations and Convoy Financial, a crypto accounting firm specializing to provide digital assets bookkeeping and tax support. On this podcast, we discuss how blockchain will impact the accounting profession, and how accountants should prepare themselves for the future of work. 

[00:00:26] Umar: My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need that will be relevant for the accounting industry as a whole. 

[00:00:39] Umar: Welcome to episode 57. While there is a lot of guidance and literature on treasury management in traditional finance, in web3, a lot of those concepts don't apply. Managing treasury fiat currencies in traditional finance largely involves managing banking partners. Whereas with cryptocurrencies, that involves managing your wallet addresses in the event you're using self custodial wallets.

[00:01:06] Umar: The other recurring challenge is that crypto is not commonly accepted as a form of payment today. And if the company's business model and sources of revenue are based on cryptocurrencies, having an efficient off ramping setup is key. Many web3 firms do not have a dedicated treasury manager today. And therefore it's up to that CFO to figure things out like custody, using DeFi platforms, on and off ramps, token economics if applicable, or managing payroll and expenses using crypto.

[00:01:38] Umar: To help us better understand web3 treasury management, today, I have the pleasure to speak with Nik Pletikos, the Founder of DeFiWaves, a consulting firm specializing in token economics design and web3 treasury management. Nik currently manages the treasury and token economics for multiple protocols and previously spent four years building the treasury department at Bitstamp, one of the longest running crypto exchanges.

[00:02:05] Umar: He co founded Elixir Protocol and Kover Finance and has been working with some of the leaders in the industry such as Hacken and Sweat Economy. Moreover, Nik is also an instructor of the Crypto Accounting Academy where he teaches treasury management. For this episode today, we will learn the hedging strategies for volatile crypto assets, stable coins versus fiat currencies management, risk mitigation strategies when investing in DeFi, maximizing your risk free returns with U.S government bonds, the role of a web3 CFO with treasury management, and much more. 

[00:02:45] Umar: Nik, welcome and thanks for making the time to be here. 

[00:02:49] Nik: Thanks for having me, Umar. Glad to be here. 

[00:02:52] Umar: Nik, before we start, can you share a little bit about your background? How you became interested with blockchain and the story of you co founding DeFiWaves?

[00:03:02] Nik: Yeah, of course. As most of the guys in web3 finance, right, I come from a traditional finance background. I started my career straight out of college in the asset management company, then shifted into the treasury within the insurance company. And then, yeah, that followed that, I joined, Bitstamp in the early 2019.

[00:03:22] Nik: As you mentioned, I was one of the two members who responsible for setting up the, the treasury department practically from zero to one and the pretty much same treasury department, it's still there running, right? The same old processes and same setup that we initially, initially structured. I've been involved even before that in crypto, right?

[00:03:41] Nik: Since, let's say late 2016, but mostly through different part time roles, helping some of the, some of the early projects on their tokenomics analysis and all this stuff. And then lately, yeah, as you mentioned, I shifted from, from Bitstamp, spending there roughly four years to go into, to more, let's say, consulting waters, right?

[00:04:02] Nik: Helping multiple protocols, shaping their treasuries and building their tokenomics. Treasury topics became particularly interesting after the, the FTX crash and the Terra Luna fall, right? Before that, not many crypto projects, aside maybe from the centralized exchanges, didn't put much emphasis on the, on the treasury management, liquidity management and risk management, maybe if we put it out as well right. 

[00:04:28] Umar: Now to start our conversation today, I want to start with how do you hedge for volatility? So Nik is a prolific writer and has been publishing an ongoing series of articles on topics like web3 treasury management, and building efficient token models, and these can be accessed on his Substack account at defiwaves.substack.com. 

[00:04:50] Umar: Now, in one of your articles titled three key principles for building a strong web3 treasury, you stated that treasury management can be categorized into three primary pillars, financial management, stakeholder management, and ecosystem management. And under each of these pillars, you suggested six rules or best practices to follow.

[00:05:14] Umar: So these rules will form the basis of our conversation today. And I want to start with rule two, which states that if revenue or expenses are received or paid in a volatile currency, it is crucial to hedge against the volatility. In other words, this means planning your runway and not having unforeseen increases in expenses and fluctuations in revenues.

[00:05:38] Umar: So, let's say a company receives its revenue in a volatile currency like Ethereum. What would be some of the strategies to hedge against that volatility? 

[00:05:49] Nik: Yeah, it's a good question. This is the case particularly in the DeFi space. As most of the protocols, they earn fees in non stable, let's say, non stable currencies, right?

[00:05:58] Nik: Treasury can be quite substantial in the terms of, let's say, USD value, but if you're, let's say, overexposed to ETH, for example, but ETH's still, in the crypto sense, it's not that volatile, right? You also have, like, much more volatile tokens. So that could structure your treasury, essentially between the bear market and bull market, the difference between your treasury valuation can be 80 to 90%.

[00:06:23] Nik: There were a lot of protocols that went under practically because of this mismanagement of their non volatile assets. This was mostly common in 2018, 2019 after the ICO era where most of the protocols actually raised funds in ETH, right? And they just kept holding ETH because they thought it would only go up.

[00:06:41] Nik: Until it didn't, right. And then essentially they shrank the runway from a few years to a few months. And if the market doesn't turn, let's say soon enough, you're, you run out of the capital essentially. 

[00:06:55] Nik: But yeah, I would say that it's a bit different than in traditional finance, right? In traditional finance, it's very common to actually hedge using different, let's say, various derivatives, let's say products such as options, futures, forwards and all this kind of stuff. 

[00:07:11] Nik: In Crypto is a bit different because it's volatility is higher. Liquidity needs are higher, particularly in the, let's say in the near term, in traditional finance, everything happens much slower. So probably on a monthly basis, you'll notice some big shifts. In crypto, everything happens on a daily basis, right?

[00:07:27] Nik: So in practice, a lot of these hedging techniques via derivatives are not really efficient, right? You have to have someone who is actively managing those positions. You have to have quite, quite huge collateral there not to run into any, let's say, liquidation risk and issues if the price turns against you.

[00:07:47] Nik: And then you have the issue at which price they want to hedge it, right? For example, is. 2,000 US dollars worth of ETH or a high price or a low price, right? Do you see, you know, from 2,000 mark, it can go up like a lot. It can go also down below 1,000. So the volatility and the drawbacks and potential upsides as well are quite, quite huge.

[00:08:08] Nik: So I'd say that the planning is the key. So you list all the expenses you have, all the revenue that you have, then probably some store or stress testing as well. If you see under which particular price, you may run into any issues, right, and this might give you like a rough, rough idea on where is it, where is, let's say, efficient or where it makes sense to actually hedge the treasury allocation in the non volatile assets.

[00:08:32] Nik: Another, another option is always this, it's some sort of, let's say, DCA, so you're receiving revenue in, let's say, in this case, in ETH on a monthly basis, and this could be, let's say, I don't know, 100k in ETH tokens, right? And the USD value will fluctuate depending on the USD/ETH rate on that particular day.

[00:08:53] Nik: So what you could do is to convert a portion of the received income revenue upon receipt, right? Or let's say at the beginning of each month. So by doing this, you essentially diversify the volatile assets into a non volatile asset. And you're a bit less exposed to the volatility risk. Of course, you won't always convert ETH at a good prices, but still it helps, you know, diversify the portfolio.

[00:09:18] Nik: Instead of having like, I don't know, 10, 20 million worth of ETH, that's purely volatile assets, you will then have like 10 million worth of USDC, for example, and the rest in ETH, right. Even though you might have converted it at a bit of lower prices. 

[00:09:32] Nik: Maybe as a rule of thumb, the idea would be to target, let's say, being somewhere on a break even once you, let's say, generate sustainable revenue. Once you have certain expenses, then you put on a paper, right? Expenses are amount to, I don't know, 1 million USD. If you're earning, let's say, revenue in ETH terms, I mean, in ETH, but in the USD terms of around, let's say, 2 million USD, then you aim to convert 1 million worth of ETH each month, right, to cover for the expenses, at least for that particular non stable asset.

[00:10:06] Nik: Yeah, as I said, the hedging itself, the derivatives would only be viable in certain cases. But I've seen most of the protocols not having dedicated treasury manager as well in house, right? So it's even more difficult to actually manage those positions because it's probably like a part time to full time job to manage those liquidity positions on different derivative platforms, right?

[00:10:29] Umar: Now the cash ratio is the safest measure of the liquidity of a company's treasury. A healthy cash ratio would enable the company to meet its short term liabilities when they fall due. Crypto startups and DAOs have to manage their fiat currencies, and stablecoins allocation. In the article that you published that I mentioned earlier, rule number three states that the ideal target for liquid assets is 18 to 24 months, which can be held in either stable coins or fiat.

[00:11:00] Umar: Both can be invested in low risk strategies to maximize the return. So let's say a company holds its stable coins in self custodial wallets. What would be some of the strategies to hold on to the stable coins for the near future to meet its operating financing expenses and invest the remaining part to maximize its return?

[00:11:24] Nik: Yeah, I'll start at the beginning. Usually it really depends on your, on let's say, in which currency your costs are denominated, right? So if you pay, I don't know, 50 percent of expenses in fiat in USD and 50 percent of expenses in stable coins, It is usually advised to hold, let's say, similar ratio in assets as well, right?

[00:11:46] Nik: So you, you should hold like roughly 50 percent in USD with a certain banking partners and 50 percent of the USDC or USDT. Let's say whatever stablecoin your holding into certain custodians with certain wallets. And so on. 

[00:12:01] Nik: The reason here is that each fiat and stablecoins pose a different, let's say, slightly different risk profile, right?

[00:12:07] Nik: So, you want to match the risk paying out the expenses the same, let's say, to the assets. But, yeah, back to your question on stablecoins. The most common allocations are USDC and USDT at the moment, right? UST, the Terra Luna one was particularly popular before the crash due to high interest rate they were paying, right?

[00:12:28] Nik: And then, yeah, a lot of us saw what happened when, you know, if stablecoins depegs and you're not able to actually, you know, convert it anymore or spend it anymore. So there were quite a lot of companies that burned quite a lot of their runway due to their treasury falling down after the collapse of UST, right?

[00:12:47] Nik: So that's really important to have, you know, some sort of diversification also in stablecoins to use the most trusted one. Most of them, particularly the non algorithmic ones, are pretty much centralized, but there is no, let's say, proper solution to this issue at the moment. So definitely consider the ones that are, let's say, most transparent and collateralized, just for the, let's say, risk, risk safety, right?

[00:13:10] Nik: And what are the best, the best options, let's say, on chain to actually invest those stablecoins? The first rule would definitely be to diversify also where you hold those, where you store those tokens or those, let's say, stablecoins. So don't hold everything in a single basket, right? So if you're working with custodians, if you have self custody wallets, always diversify, 

[00:13:31] Nik: Keep a portion up to a certain percentage with each of them, so if one goes bust or something happens to one particular, let's say, wallet, that you don't lose all of your stable coins at once, right. That would be the number, the number one rule, and then as investment options, if you have excess capital, you can always deploy stablecoins to different, let's say, lending protocols, particularly Aave and Compound are interesting ones. Have an option to deploy to the LP pools on Curve. 

[00:13:59] Nik: And also there are quite a lot of real world assets based, let's say, type of products launching recently that could also emphasize, or that could also, let's say, put your stablecoins to work.

[00:14:12] Nik: If I say it like this, for example, Ondo Finance, OpenEden and Maple Finance. The risk profile is a bit different, but most of them are still, let's say self custodial or at least to an extent self custodial. They have some sort of collateral, so you have to definitely check, check them out and read the documentation to be aware of all the risks they possess.

[00:14:31] Nik: But these are like the best, the best solution, solutions on the market at the moment, or at least the more, the most risk free solutions in a DeFi space, right? 

[00:14:41] Nik: But still as a general topic at the moment, the risk adjusted rewards or just risk adjusted deals slightly favors the traditional markets, right?

[00:14:51] Nik: So if you compare, say the USD bills, they currently pay about 5%, right? So accounting for the fees, you'll probably get around 5 percent net or let's say maybe slightly lower, but roughly that. And for the lending protocols on the DeFi space. I think the rates went a little bit up, but still you're in the range of six, seven percent, I believe, but a few months ago they were still below five percent, right?

[00:15:17] Nik: But of course the risk profile is very, very different from, let's say, lending stable coins on Aave or deploying it to some LP pools compared to having the U.S government exposure, right? I mean, if you're like a pure DAO or a pure decentralized protocol, you might have issues with getting a bank account or getting an access to actual, let's say, purchase of T bills via traditional ways. 

[00:15:42] Nik: So the best option for you in this case are solutions such as Ondo Finance, OpenEden, and let's say Maple and some similar protocols that are offering you, let's say T-Bill yield, but via DeFi, DeFi projects. 

[00:15:54] Nik: But if you have like a solid treasury, if you have bank accounts open or if you have access to, let's say, to the U.S market in general, it's definitely advisable to put in, let's say, an excess allocation there at the moment, right. Once the yield will shift towards the DeFi, then of course the equation changes and you, I mean, much more feasible to also deploy capital to the DeFi. But for the time being, I don't see, like, it's worth taking the risk if you have an option to actually invest in, you know, T-Bills via either via traditional assets or let's say some DeFi solutions.

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[00:18:11] Umar: Okay. Very interesting. Now, moving on to counterparty risk. If we learned anything from 2002, it is that counterparty risk and absolute trust and third party custody is dangerous. Of course, I'm alluding to companies like FTX, Celsius, amongst others. 

[00:18:30] Umar: Now counterparty risk refers to the risk that a party involved in a financial transaction might default on its obligation. In the context of crypto, counterparty risk could arise from banks, exchanges, lending platforms, or any other entity that you interact with to have custody over your crypto assets. I want to ask you, how can a CFO today manage its counterparty risk with centralized institutions like banks, exchanges, et cetera?

[00:19:00] Nik: It's a good question. We've seen this happening in the past quite a lot with US banks, with FTX, as you mentioned. There were a lot of protocols launched on Solana that held probably 90 percent of their treasury on FTX, right? And it was It was thought that it could, it can't fail, right? It was thought as a safe exchange, but then it showed us that this wasn't the case. So it doesn't help, you know, even if it's the most trusted exchange and if you run out I mean if they go they go bust if they go under and you essentially left out without any funds It doesn't help.

[00:19:34] Nik: So definitely the number one, let's say rule is to diversify, right? To have several different exchanges, several different custody providers. Even if you're using self custody, they use multiple solutions, right? In order to avoid risk, you can, I don't know, forget, forget the keys or somebody from the team can forget the keys.

[00:19:53] Nik: Something may happen on chain. You never know. It's, it's better to be safe than sorry, right. So definitely, particularly if you hold like a large treasury, always diversify, always use several solutions. Use, let's say, one solution for safeguarding, use another solution for, let's say, daily liquidity management or working capital stuff.

[00:20:11] Nik: The same goes for the banks, right. If you are able to open an account with a, let's say, crypto friendly bank, try to open at least two bank accounts with two different banks, particularly in the early stages. If you have the vigor, then try to open, open even more, but two would be more than enough for the early stage or the stage company.

[00:20:30] Nik: If you of course hold like sustainable, a sustainable amount of treasury in cash, right? If you hold very little, then a single bank account would be enough. 

[00:20:38] Nik: And on the DeFi side, on the safeguarding of crypto assets, stable coins, right? So if you're using like a centralized custodian, such as BitGo, Fireblocks. Try to try to diversify as well, or at least put something with a centralized custodian and put something in the centralized let's say solutions such as Gnosis Safe, for example, right? Again, not to have all the eggs in a single basket because it can save you, if you want to be like in a game for a long term.

[00:21:07] Nik: There are a lot of quite good projects that went under just because of the poor risk management and the poor counterparty, particularly counterparty risk management because they were overexposed to a certain entity. 

[00:21:19] Umar: Now at the time of this recording, the total value locked in DeFi is approximately USD 57 billion. I got these stats from DeFi Llama.

[00:21:28] Umar: We touched on the fact that it can be challenging for Web3 startups and DAOs to access the traditional banking system. From me speaking with people in the industry, I understand, for example, if you're incorporated in countries like the Cayman Islands, BVI, it's a little bit more of a struggle to have a crypto friendly bank account.

[00:21:47] Umar: And therefore, this means that operating on chain now has become a much more attractive option. 

[00:21:52] Umar: Rule four of your article that we mentioned earlier states that unless your business model requires differently, it is advisable not to have over 10 percent of your treasury portfolio in volatile assets. So if a CFO is contemplating to invest its volatile assets, bearing in mind that it's not over the 10 percent you advise.

[00:22:15] Umar: What would be some of the attractive strategies you could recommend? 

[00:22:19] Nik: Yeah, so definitely depends on type of assets that you hold, right? If these are stablecoins, as I said, most of the, the best, let's say, DeFi solutions are lending protocols, such as Aave or Compound, could use Curve to deploy, let's say, stablecoins to the LPs.

[00:22:36] Nik: You have the real world assets type of protocols, such as Ondo Finance, Maple, Open Eden, and as I said. 

[00:22:43] Nik: On the other hand, if you hold, let's say, ETH, or if you hold Bitcoin, or if you hold, I don't know, Solana, or some other, some other tokens, then you have to take a look at the more, let's say, native solutions, native to that particular blockchain, right?

[00:22:58] Nik: So, an example of ETH, you can always use staking, you can always use liquid staking, if you hold, let's say, less. I mean, yeah, lower amount of ETH if you don't want to deploy or to your own validator in particular. And yeah, you always have different LP pools and the decentralized exchanges that you could deploy, deploy capital there.

[00:23:18] Nik: But of course, the risks are different. The more, let's say, the more complex the DeFi solution is, the higher the risk usually, right? You want to also balance this out. If you, let's say, deploy 10% of your capital to, to such protocols, always, let's say, differentiate from that 10%. 

[00:23:36] Nik: How much will you actually put to like a really sophisticated DeFi protocols? How much will you put to lending? How much do you put to, let's say, classical staking? That's pretty much, liquid as you can, un stake them at any time. Also, yeah, bear in mind that different, let's say, staking, lending protocols that have some sort of a lock up period may become an issue if you need to, let's say, to liquidate those funds earlier if you need liquidity.

[00:24:02] Nik: So always bear in mind also this for how long your assets are, let's say, locked or not non liquid.

[00:24:09] Umar: Now as per good internal controls, a company needs to have an investment policy and define the risk and risk mitigation strategies before deploying capital in DeFi protocols. Could you provide some of the risk mitigation strategies that should be formally documented in an investment policy pertaining to DeFi?

[00:24:29] Nik: Yeah, so definitely the allocation, right? You should have set certain limits on that you should always, you know, abide by not to exceed them. So, what's the maximum allocation of non stable assets that could be in your portfolio? What's the allocation of, I don't know, locked invested assets that should be in your portfolio?

[00:24:47] Nik: This will help you navigate going forward particularly if you receive revenue in a non stable asset and you're not that aware of this can grow over time right. And for example, if you hold I don't know 10 million in usdc ,and 5 million worth of ETH at the moment. This is let's say roughly 33 percent more of your treasury in ETH, right?

[00:25:07] Nik: But if ETH goes times two, then at once you have like 50 percent of your treasury in a non stable, a non stable asset. So definitely have to have this written somewhere in the policies to, to be able to, to mitigate those risks and to have like a strict rules. So, you know, not to follow the market. If the market goes up, you will be, you know, keen on holding data going forward.

[00:25:28] Nik: So if you have like a strict rules, you will know, okay, I need to sell it. Not to, not to break our internal rules for, for example, right. That's one thing. And the other thing, which is. It's equally important, I'd say it's the safeguarding of assets. So definitely you have to have some sort of internal policies that are linked to the access to the accounts.

[00:25:47] Nik: For example, centralized exchanges, bank accounts, even multi sig wallets, right? Who has the access? Who can sign the transactions? Who can initiate the transaction? Particularly if you have multiple wallets, multiple bank accounts, this may become very handful going forward because you will lose track of the number of people who actually has the access.

[00:26:05] Nik: And the main idea here is to be able to quickly adjust if, let's say, a team member leaves the company or if somebody, someone new comes in, right? Then you're fastly able to change the person who is responsible for either signing the multi sigs. Or having access to the centralized exchanges, right? If you don't have this then it could be all over the place or it might happen that someone who left the company like a year or two ago can still access some of your funds. It's not necessary that he will do something about it. But you know, it's not a very good practice to have someone outside the company view of your funds. So these two I would say are the most important ones. 

[00:26:42] Umar: Now, one of the many articles you wrote is titled maximizing risk free returns in web3, where you put forward the case that short term US government bonds are the most reasonable investment type from a risk reward perspective.

[00:26:57] Umar: In this conversation today, you've already shared the difference in rates between these bonds and for example, rates offered through DeFi. Now, what I want to go through is something you put forward called a laddered investment strategy. And you share the example of how MakerDAO uses this. So can you explain what is a laddered investment strategy and the different steps to implement such a strategy in DeFi?

[00:27:24] Nik: Yeah, sure. So the, the MakerDAO was probably one of the first protocols that used this strategy in crypto. They also have significant treasury allocation. So it was much easier for them to actually deploy such strategy than if you hold like a smaller treasury. 

[00:27:41] Nik: They also have the access to bank. I think they went via Sygnum Bank. This is all the public information. But they deployed quite a lot of funds in the in the T-bills can't recall the exact number. But I know it was like in tens of millions. But the main idea behind is that in crypto you never know when you'll need like more liquid funds, right?

[00:28:02] Nik: It can happen that you would need wouldn't need them for a year or so. But it could also happen that you would need them like in I don't know two or three months. Depending on the type of the , the type of the project, the volatility on the market, and all the different, different stuff, right? 

[00:28:16] Nik: So the laddered strategy essentially comes from a traditional finance as most of the things, and is a method of investing by spreading your investment through, let's say, different maturity, there's different time horizons in order to, to avoid or to reduce, let's say, interest rate, a fluctuations in the traditional finance, but in crypto, it's mostly linked to the, let's say, liquidity management and having the access to funds earlier. If the need is there, right? 

[00:28:42] Nik: So in the MakerDAO example, they tend to, or they usually, they, they went for six months in the total maturity spread out in 12 batches. So every two weeks or so, 1/12th of their allocation actually matured, right? So what does this enable them is that for example, if they deployed 120 million words of, let's say cash into the, in the T bills.

[00:29:09] Nik: They will have 10 million maturing every every two weeks. And what can you do in this case is if you see that, okay, you don't need this funds for liquidity operations, for daily operations, you can just reinvest them going forward at the same maturity rate, right and you just roll them over and keep the flow going. 

[00:29:29] Nik: If you see that with one certain or one particular period in time you need the excess liquidity, you need some additional funds, you just don't reinvest a single batch in between right so you can access the capital . This is the main idea. 

[00:29:42] Nik: The caveat here is that if you hold smaller positions, your fees might eat out quite a lot of your revenue. So you have to be aware of this. Maybe try to go with a bit longer maturity , calculate the fees. And also you have to have the access to the traditional, let's say T bills via a banking partner.

[00:30:03] Nik: It is also possible to do similar strategies via Open Eden and, and Ondo Finance, but I think that someone will have to act quite actively manage it. So you have to deploy a lot of instances of, of let's say investment patches, right? So that you have different maturities. And then you have to monitor when it actually matures.

[00:30:25] Nik: So I think it's a bit more complex, but if you don't have the access, this is also also solution. 

[00:30:31] Nik: But definitely if you hold smaller treasury, it's not, you don't have to complicate as much. So just, you know, choose a few months of, let's say. There's a total maturity, right, and then split it to a few smaller time periods so that you can have a certain portion matured in the early stages and, and that's it, right?

[00:30:50] Nik: But the idea is, yeah, that if you have, let's say, 10 million USD worth of treasury, that you don't lock the 10 million, into the T-bills with the maturity of six months, because if you need like some sort of liquidity in three months time, you will have to sell that on a market might come at the cost or at the loss, right? So that's the idea that if you have like three or 4 million maturing for three months, you can just, collect the yield, collect the principal that you invested and use that for the, for paying out the expenses. 

[00:31:21] Umar: Before we continue, we'll take a quick commercial break from our sponsor. The blockchain industry is still in its nascency and so are the accounting guidelines that govern accounting for crypto. 

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[00:32:50] Umar: Now, Nik, before we speak about the consulting work that you provide with DeFiWaves, I want to speak about native token management, a very important topic in Web3 treasury management. There is a great article from Hasu titled, 'A new mental model for DeFi Treasuries', where he draws an analogy between traditional equity and native tokens.

[00:33:14] Umar: I'll try to sum it up to this. So he states that the authorized shares of a company are made up of its issued shares and outstanding or non issued shares and outstanding shares are of course, not usually counted in the company's balance sheet. So likewise, native tokens are outstanding shares that should be excluded from the company's treasury.

[00:33:37] Umar: Rule one of your article, Nik states that native tokens should be segregated from the rest of the treasury as they are less liquid and should not be subject to the same principles. Managing a project's native token is unique to Web3 and native tokens should ideally not be used to fund or cover the project's runway.

[00:33:59] Umar: In your experience with Sweat Economy, how do you go about managing the native token of the company? And how does that affect the overall treasury management of  the company? 

[00:34:11] Nik: So, yeah, as you mentioned, this is distinct to the web3 companies. This is not something that was present in traditional finance.

[00:34:19] Nik: So I'd say that if you're part of a DeFi protocol, decentralized app, or some more crypto native type of company, this would probably comprise like or take 50 percent of your time as treasury manager in a company, right? Essentially, a lot of projects do it wrong, particularly from the point that you stated, and I got it from Hasu, but it's definitely, you know, the rule number one in crypto, most of the, most of the projects, particularly in the past, tend to launch a token to finance the operations, to finance the company or to, I don't know, profit out of native token, right, which is fundamentally wrong because essentially you want your token to be like a core utility or core I don't know medium of exchange within your ecosystem and it has to have like a real function not just you know, nice to have it. 

[00:35:09] Nik: So this is where most of the, most of the protocols projects fail, right? So until you, you incorporate it well into your ecosystem, it's hard to have like, apart from speculation only, it's hard to have any sustainable value in the, in the longterm, of course, it can increase a lot in the short term, but in the longterm either probably converge down to to zero, right? 

[00:35:30] Nik: But around yeah, around native tokens, there's a lot of different stuff that you can do. There is how do you manage the supply demand side, the token sinks the token faucets, right? Trying to keep the token sustainable in the long run, not to create a huge sell pressure events on the market such as let's say big unlocks can be like a huge sell pressure. 

[00:35:51] Nik: And structuring the good unlocking schedule is let's say the number one thing you could do and then of course prepare before the big unlocks either as your project or with in partnership with certain market makers to help you somehow balance the sell pressure out, right?

[00:36:07] Nik: But a lot of, a lot of work is done in collaboration with market makers who essentially provide liquidity on centralized exchanges for your token. And we know that liquidity and the volume on, on the exchanges is pretty much everything for, for the native token. Even in the worst case scenario, if you want to sell it on the market, you will have to have a certain, say, rate of liquidity if you want to do that otherwise.

[00:36:28] Nik: It will only go only go down, right? But also if you want to let's say keep your token sustainable if you want to get it listed on all the major exchanges, if you want for the token to succeed in the long run you have to get liquidity and you have to get volume and then you have to get consequently listed on all the major exchanges that are there in crypto, right, where market makers play a big part.

[00:36:49] Nik: And then, of course, depending on your capital and your, how would I say, treasury strategy, there are also events such as token burning and the buybacks, token buybacks that you could perform, which both are aimed towards token price sustainability in the long run, right? With the token buybacks, you essentially create a small buy pressure, you essentially try to, not necessarily push the price up, but to support the price to an extent, you of course burn your stable coin, stable coin treasury by doing this, but it can help in the certain micro market environments in particular, and with token burns, you actually reduce the circulating supply, which essentially will reduce your market cap immediately.

[00:37:31] Nik: But if you want to, let's say if you do market caps stays the same, then the price will have to increase consequently, right? At least in theory. So by doing this, you're essentially lowering the circulating supply and less and less tokens are there in the circulation. So it's most likely, more likely that the token will appreciate in prices, in valuation, uh, going forward.

[00:37:50] Nik: Of course, it has to have some underlying utility, some underlying purpose. And it, of course, depends also on the global market, market state, right? If the crypto market is going down, nothing, nothing will help you to actually, let's say, avoid this. You can. You can avoid it to an extent, but you can fully avoid it, right?

[00:38:09] Nik: And yeah, as I as you stated and pointed out again once you start selling your native token on the open market for the purpose of funding the operation, you're pretty much done, right? Unless you're like in a full bull market when you probably can get out of with it. It shows you everything is on chain and it shows an issue with your projects so that you have to actually sell the tokens to, to support the operation.

[00:38:32] Nik: So it's not usually a good thing to do, particularly not at the early stages of the company. 

[00:38:37] Umar: Now, Nik, providing token economics design and web3 treasury management is a rare and very in demand skill to have these days. And I can understand why a lot of web3 projects would be fighting to have you come and advise them.

[00:38:54] Umar: So, in your work with your consulting firm at DeFi Waves, can you share a bit about the overview of services that you provide and maybe like the timeframe you would normally work with a project? 

[00:39:08] Nik: Yeah, sure. So it really depends. I've worked in the past from a very early stage companies, right? The ones that only had like a

[00:39:17] Nik: business model set up and they, they wanted to apply to the token. So essentially the whole token economy has to be designed following their initial business idea and also with some, let's say later stage companies that already had a token, but they felt like they need some sort of optimization around it.

[00:39:34] Nik: Particularly on the supply demand side and how to limit the supply, how to essentially try to make token valuable in the long run. Right. So the scope is of course very different, but I've worked with a lot of different stages of the companies and the treasury related topics, particularly on the strategy side, strategic side became much more popular during the, after the FTX crash, when most of the more companies shed more light on the risk management on the treasury allocations and how to actually manage this.

[00:40:04] Nik: So here it also depends. I helped quite a lot of projects going towards the token launch, the TGE, how to actually structure both economics and their treasure allocations initially right after the fundraising, for example, and then immediately post launch, post TGE, how to go forward, what would be the ideal strategy.

[00:40:23] Nik: What to be aware of and how to mitigate the risk in particular, right? So the scope of work really depends on the particular needs of the projects and work with some of them only on. Let's say on the on hourly basis on a let's say few few days only to transfer some of their questions to try to help them to optimize some parameters and I've been working with some of them also long term on the, let's say on the, on the monthly basis on a different, different types of engagement.

[00:40:52] Umar: Perfect. Now, Nik, for the last topic of the day, I want to speak a bit about the role of the web3 CFO for treasury management, because we do have a lot of CFOs, accountants listening to this show. As compared to the traditional CFO, not dealing with crypto, the CFO in web3 faces unique challenges, that come with managing the treasury functions, everything we went through earlier today.

[00:41:16] Umar: For example, having to manage treasury across multiple chains, tracking and reporting their DeFi positions. developing risk management policies for investing their idle crypto assets, etc. Now, with the years of experience you have managing crypto treasuries, what advice would you have for web3 companies looking to hire a CFO given this enhanced responsibility they now have over treasury management?

[00:41:45] Umar: Are there any skills and experience you think this CFO must have to thrive? Obviously, it's much more than just bookkeeping. 

[00:41:53] Nik: So particularly at the early stages of the company or let's say relatively small companies in crypto or in particular the more decentralized DAO types of companies right the DeFi protocols and such, the CFO roles is very different than what the CFO role means in like traditional finance, even in a smaller companies, right?

[00:42:14] Nik: You are very, very much hands on. You have to do a lot of stuff yourself. You have to understand the roughly several risks protocols, how to use them, how to transact, how to, let's say, send the funds over, how to do all sorts of different things, right? When the company's a bit bigger and you have, if you have someone underneath you, for example, someone who handles treasury, someone who handles finance, an accountant then if you have a good team, it's enough, you know to know high level of how the things works in crypto. How things work in crypto, right? 

[00:42:46] Nik: So it's not that necessary to be to be really hands on. But I think the most important thing is to for the CFOs particularly the ones that come from TradFi background to understand at least high level how the operations in crypto work, how the day looks like in the crypto finance team, for example, because it varies pretty much from from the traditional finance or traditional types of companies, the needs are different, the priorities on the liquidity, on the risk management.

[00:43:13] Nik: And also the access to the institutions, as you mentioned, will be much, much tougher if you want to open an account with banks, if you want to, I don't know, get an account elsewhere. So this should be like a number one priority. Everything goes around liquidity and getting things done, right?

[00:43:29] Nik: So either you have like pretty solid knowledge of crypto and how to actually do several things in finance hands on, or you have certain team members underneath you that are able to do it, or they actually come with a crypto background in, so they're able to actually do the transactions, know the risks, and then, of course, you have to trust them on what they're doing if you don't have such experience, right, so.

[00:43:53] Nik: It's, it can be several trade offs here, right? I've seen quite a lot of teams, you know, it really depends. If you come from a crypto background, then you have certain, personal features, and if you come from TradFi, then you're much more risk averse to an extent, but in crypto, you have to act much faster than you, you will have to do in a, in a traditional finance.

[00:44:13] Nik: So this is the main difference, right? Everything happens much faster. All the decisions need to be made much, much faster than in TradFi. So of course, it's, it takes time to, to adapt. But definitely a high level understanding of the DeFi of the crypto protocols. So how the, the main transaction transactions work.

[00:44:32] Nik: It could be very, very useful. But again, each company in crypto is a bit different, right? So you have to spend a few months to dig in really into the gist of the company, into the, in the protocol to really understand what all the operations are about, what the inflows, cash flows in particular are in order to, to be able to set up the finance function, let's say in the particular company.

[00:44:53] Umar: And also the CFOs can probably register for the Crypto Accounting Academy. So for the listeners who don't know, Nik is also an instructor on the recently launched academy for a module dedicated on treasury management, token economics, where Nik goes in much more detail about the, these topics. Nik provides specific use cases, specific examples of how projects in web3 manage their treasury and design their tokens.

[00:45:21] Umar: So Nik, thanks a lot for coming today. Has there been any topics that we haven't touched on that you would like to share with our listeners today? Do you have any closing thoughts? 

[00:45:34] Nik: I think we covered pretty much, pretty much everything. Of course, we could go into much more details, right? But I think that the one thing that's particularly important in crypto, which is also different to the traditional finances that each crypto company is different, right?

[00:45:48] Nik: Each crypto company tends to tackle a bit different problem, different solution, and also the treasury needs are different following that depending if you're, let's say directly operating with clients, if you don't hold any client funds. What is the frequency of the inflows, outflows? What are the types of inflows outflows, right?

[00:46:06] Nik: In traditional finance, that's pretty much the same in each industry, right? Depending on the industry that you operate in the things are pretty much similar between the companies. Where in crypto, even if you're in DeFi, you have like two very similar protocols. But they have a totally different treasuries, totally different kind of fees, totally different revenues, expenses So it takes some time to, to adjust, but you should always have this in mind that wherever you, wherever you go, there will always be something, something new in crypto, right?

[00:46:36] Umar: Perfect Nik, there's a last question that I always ask to my guests before they leave is, do you have a favorite quote or a favorite maxim that you live by? 

[00:46:46] Nik: Yeah, I think it summarizes a little bit of what I was speaking about today, or at least the last two paragraphs. So, go out of your comfort zone, the life starts there, right?

[00:46:55] Nik: And I think that crypto definitely encapsulates this, as every day is, it's something, every day something new happens, right? It's not, it's never boring. Yeah. 

[00:47:05] Umar: Perfect. Nick, thnks a lot for coming in today. If people want to reach out to you, They want to learn more about DeFiWaves, they want to reach out to you for to hire you to for token economics design and providing services on web3 treasury management.

[00:47:21] Umar: How should they do so?

[00:47:22] Nik: Yeah, I'm available on Twitter, LinkedIn or through DeFiWaves. So definitely feel free to reach out in case you need any help or just want to chat. 

[00:47:32] Umar: Perfect. I'll be sharing the links to those in the show notes of the podcast. Thanks a lot for coming today, Nik, and I will see you soon for Cohort Two of the Crypto Accounting Academy.

[00:47:44] Umar: Perfect. 

[00:47:44] Nik: Thanks for having me, Umar. 

[00:47:46] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only.

[00:48:01] Umar: And is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts and Google Podcasts. And by leaving us a review and rating, you will support the channel and all your fellow accountants.

[00:48:23] Umar: In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn. We hope to have you with us next time. Bye for now.