The Strategic Cost of Holding Too Much Native Token

Every dollar locked in a treasury is a dollar not earning yield or funding development. This creates a massive drag on capital efficiency versus competitors like Aave or Compound that actively manage assets.\n- Real Yield Loss: Idle ETH or stablecoins miss out on 3-8% APY in DeFi.\n- Growth Stagnation: Capital not used for grants, R&D, or liquidity incentives cedes market share.

Massive native token holdings create a false sense of security. The token's value is often tied to the protocol's success, creating a circular dependency. A death spiral in token price directly erodes the very treasury meant to be a backstop.\n- Correlated Risk: Treasury and token price crash together, as seen with Terra/LUNA.\n- Attack Surface: Large, static treasuries are prime targets for governance attacks and exploits.

Protocols often fund operations by selling native tokens, creating perpetual sell pressure that suppresses price. This disincentivizes holding, reducing staking/security and forcing more sales—a vicious cycle.\n- Inflationary Funding: >5% annual inflation to fund ops is common, diluting holders.\n- Reduced Staking APR: Low/volatile price drives stakers away, weakening network security.

A treasury with >50% in native tokens is a single-point-of-failure. It creates a death spiral: price decline → reduced runway → forced selling → further price decline. This is a primary failure mode for DAOs like OlympusDAO forks.

• Vulnerability: Protocol security and development funding are tied to speculative asset performance.
• Consequence: In a bear market, you can't pay contributors or fund grants, stalling development.

Treat the treasury like an endowment. Allocate a majority to low-volatility, yield-generating stablecoin strategies (e.g., Aave, Compound, Maker DSR). This provides predictable runway and operational independence from token price.

• Key Benefit: Decouples protocol operations from market sentiment.
• Key Benefit: Generates sustainable revenue to fund grants, security audits, and development without selling native tokens.

High native token staking APY (>20%) is a red flag. It signals the protocol is paying for security/participation with inflation, not real revenue. This dilutes holders and creates sell pressure from stakers taking rewards.

• Vulnerability: Attracts mercenary capital that exits at the first sign of trouble.
• Consequence: Real Yield from fees is drowned out by inflationary emissions, making the token a poor long-term store of value.

Tie token value directly to protocol utility. Implement a fee switch or buyback-and-burn mechanism funded by protocol revenue (e.g., Uniswap, GMX). This makes the token a claim on cash flows, not just governance.

• Key Benefit: Creates a positive feedback loop: more usage → more fees → more token value accrual.
• Key Benefit: Reduces reliance on inflationary staking rewards, attracting long-term holders.

A large native token holding by the foundation or core team creates centralized, illiquid voting power. This undermines credible neutrality and deters sophisticated delegates (e.g., Flipside, Gauntlet) from participating, as they cannot overcome the foundation's vote.

• Vulnerability: Governance appears decentralized but is controlled by a single, price-sensitive entity.
• Consequence: Stifles innovative governance proposals and reduces the protocol's resilience to capture.

Dilute concentrated voting power by delegating tokens to expert third parties or using them to fund a Grants DAO. This distributes influence to aligned, knowledgeable entities without selling. Alternatively, diversify the treasury and use the proceeds to fund a long-term liquidity lock-up program.

• Key Benefit: Increases governance legitimacy and participation from professional delegates.
• Key Benefit: Converts a governance liability into a tool for ecosystem growth.