The Problem With Current DAO Governance – A Look at 3 Recent Cases

3 recent incidents have exposed how token-based community governance is being taken advantage of by members, with unjust outcomes that threaten to disrupt the crypto economy.

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Blockchain token-based governance is an innovation of the crypto economy that makes it possible for people to take care of a crypto project, usually by assigning voting rights to token holders.

However, according to Jack Niewold, an influential crypto journalist/chronicler, 3 recent incidents have exposed how such token-based community governance is being taken advantage of by members, with unjust outcomes that threaten to disrupt the crypto economy.

The incidents involve DAOs, a distributed power structure that is taking root in the crypto world.

A decentralized autonomous organization (DAO) is a software running on a blockchain that offers users a built-in model for the collective management of its code.

DAOs differ from traditional organizations managed by boards, committees, and executives. Rather than being governed by a limited group, DAOs use a set of rules written down in code and enforced by the network of computers running a shared software.

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SEE ALSO: LEGAL OUTLOOK: A Comparison Between Decentralized Autonomous Organizations (DAOs) and Limited Liability Companies (LLCs)

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To become a member of a DAO, users need to first join the DAO by buying its cryptocurrency. Holding the asset then generally gives users the power to vote on proposals and updates, proportional to the amount they hold. 

This however, is a loophole if recent events are to be considered.

Tribe/Rari

In short, Rari was hacked for $80 million, then the community voted to refund lenders who got funds stolen, then vetoed the refund vote.

Basically, they put token holders over depositors. And now the SEC is subpoena-ing Coinbase for transaction data that has to do with the case.

“Imagine if a bank got robbed and told depositors they were out of luck so that they could protect the wealth of the board of directors: that’s kind of what’s going on.”

– Jack Niewold

YGG/Merit Circle

YGG invested in a metaverse project called Merit Circle; their investment has since then 30x’ed. Until the DAO decided that they didn’t want YGG to have the SAFT anymore, and voted to cancel their seed investment.

Here is how the proposal to cut off the investor looked:

Neither the original post nor the majority of comments made any mention of the fact that this was a contractual breach. There was only one dude who popped in to mention that it would destroy their reputation and get them sued

Solend

Solana-based lending platform, Solend, passed a governance proposal to take over a private account.

A whale borrowed $108 million in stablecoins against a $170 million Solana position. If it gets liquidated, it would tank token price and potentially crash the Solana network.

To prevent that from happening, a proposal was put forward to take over the whale account as the tweet below shows:

As we have covered before in our comprison between DAOs and Limited Liability Companies, you will see that in DAO’s, by default, all members are equal, and the size of an investment does not confer anyone higher status or power.

While this seems right to safeguard a project, based on the three incidents covered above, we can see that the community can vote overwhelmingly towards unfair, unjust, or even, illegal outcomes.

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RECOMMENDED READING: How DAOs are Being Used for Investments

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