On paper, Ethereum-based initiatives seem to have monumental treasuries, with some treasuries containing billions of {dollars} price of native tokens. However upon nearer inspection, plenty of these funds are questionable.
Though these initiatives could appear steady on the floor, the majority of their holdings are literally in extremely unstable or illiquid tokens. Take into account what transpired with Luna as an illustration. Its stablecoin’s worth fell throughout a market meltdown as a result of it was backed by different tokens.
One of the vital notable initiatives that confronted points on account of backing with unstable tokens was Luna, which was unable to safeguard its stablecoin with tokens that rapidly misplaced their worth as a result of poor liquidity. Ethereum-based initiatives that primarily depend on their very own tokens for his or her treasury valuation might expertise one thing related. We will observe from the info that some initiatives have little or no and even nearly no stablecoin reserves.
That is problematic as a result of their treasuries are almost completely depending on their native tokens, whose worth is topic to excessive fluctuations. Any treasury on this precarious place runs the danger of shedding most of its on-paper worth in a serious market drop, as occurred with Luna. It’s protected to say that a few of these DAOs aren’t as liquid as they could appear.
Though their native tokens could also be extremely valued, they lack each tangible backing and real-world liquidity. These initiatives’ treasuries can be all however nugatory in the event that they skilled surprising demand for funding or needed to convert their holdings into stablecoins throughout a market meltdown.
The aforementioned strategy might end in overstated paper values, concealing the truth that many of those initiatives are insecure, together with financially. What appears like $20 billion in worth right this moment may drop to only a few million if the market as an entire collapses, leaving many initiatives within the mud.
