TLDR: Treasury refers to a single or more smart contracts that hold a certain amount of tokens. This is where the DAO’s funds are stored.
In both TradFi and DeFi, treasury composition refers to the variety of assets it is made up of:
  • Traditional Finance (TradFi): shares held in bank accounts
  • Decentralized Finance (DeFi): tokens held in smart contracts
A DAO’s treasury could be composed of not only the native protocol token, but also of other tokens that might be of interest (or not) to investors.
In TradFi, knowing the composition of a company’s treasury is crucial for investors. In DeFi, this holds true as well. The added benefit is that the transparent nature of blockchain technology allows for on-chain tracking of treasuries.
Diversification and good management of the resources and tooling for treasuries is vital to the longevity of projects, i.e. helps them last longer and go through bear markets quickly and without great fluctuations.
Treasury composition provides protocol investors with insight on what tokens they get exposed to. (There is a false belief that treasuries only hold the protocol’s native token. This is not true and Compound is a good example, see here).