Regardless of their title, many decentralized autonomous organizations aren’t autonomous, and management is usually centralized amongst giant tokenholders who’ve the ability to sway governance choices.
Whales or small teams of holders controlling as little as $17 million in tokens can assault protocols controlling over $2 billion in consumer funds.
Mockingly, inactivity from different whales can also be an issue. Their outsized voting energy can defend protocols from governance assaults however is usually wasted away doing nothing within the background.
“Participation within the present setup of DAO governance could be very low, so the amount of cash wanted to assault these governance protocols isn’t a lot,” Luca Prosperi, CEO of M^0 Labs, tells Journal.
In a number of latest circumstances, DeFi whales have acquired a major variety of tokens and influenced governance choices to get what they needed.
Humpy’s controversial proposal highlights DAO governance flaws
Essentially the most notorious occasion noticed a crypto whale often known as Humpy suggest that Compound DAO allocate $25 million in COMP tokens to a yield-bearing protocol managed by their group, the Golden Boys.
After two failed makes an attempt, Humpy’s third succeeded on July 28. Compound safety adviser Michael Lewellin suspected this proposal was made in order that voting would happen over a weekend when participation is decrease.
Although the proposal was finally canceled in favor of a yield-bearing product managed by Compound, the scenario may have been prevented if influential voters had been energetic.
Humpy’s group accrued an estimated 325,333 COMP within the open market, simply 75,000 in need of the 400,000 quorum threshold.
At Compound, a16z holds the best voting energy by 333 delegations. Its 361,000 COMP represents 90.25% of the quorum.
Regardless of this, the VC agency not often votes in governance choices, even to thwart proposals different customers see as “governance assaults.”
However perhaps it has its causes.
“If you happen to’re such a big vote holder, then both it is best to vote with integrity on (nearly) all the things or vote on nothing in any respect,” Dan Hughes, founding father of DeFi platform Radix DLT, tells Journal.
“Voting on just a few proposals sends a sign of interference or agenda, even when it might not be. In case your place is abstinence, then you shouldn’t settle for delegation and delegate your vote energy throughout a variety of third events.”
Humpy sat on a number of partitions earlier than Compound
Diego Alvarez, chief technique officer at Ethereum layer-2 community Cyber, doesn’t take into account Humpy’s proposal at Compound a “governance assault” on account of subsequent communications, a compromise and an eventual decision.
“It was performed inside the techniques and processes of the DAO, so if something, it was a bit shady, but it surely was not exterior the remit,” he says.
However Compound was not Humpy’s first rodeo.
The whale has allegedly pulled comparable governance “strikes” at DeFi protocols Balancer and Sushi.
Whereas the Balancer saga resulted in a “peace treaty,” Sushi’s run-in with Humpy left some soiled dishes within the sink.
Sushi’s “head chef” on the time, Jared Gray — who now heads Sushi Labs — and his operations workforce obtained heavy backlash in March 2024 for a proposal to switch Sushi’s treasury property to Sushi Labs, a United Kingdom entity included in October 2023.
The transfer was referred to as a “hostile takeover” by former Sushi developer Naïm Boubziz, however Gray defends it as an try to guard the protocol from Humpy’s alleged governance assault.
“Throughout the [discussions], he made a number of authorized threats directed at me and the workforce,” Gray tells Journal. “He delegated a few of his holdings to a gaggle of disgruntled former Sushi contributors and neighborhood members, SushiCitizens, led by [Boubziz]. He utilized stress on the operations workforce in any approach doable to get his desired final result.”
Gray mentioned that Humpy used SushiCitizens as a mouthpiece to launch “clandestine governance proposals” and put up “inflammatory tweets” towards the Sushi operations workforce.
“The deal he supplied for the Sushi DAO and operation workforce initially included a provide enhance of 750 million tokens, with two-thirds of the newly minted tokens going to swimming pools of his selecting, one-third instantly supporting his Golden Boys mission,” Gray alleges, including that his workforce didn’t comply with the deal.
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Humpy responds
Relating to the claims and allegations towards them, Humpy requested Journal “how” and “who” ought to decide governance proposals to be clandestine. The whale additionally defended SushiCitizens as authentic involved DAO members.
“Authorized motion is by all means authorized in democracy. Alas, I didn’t pursue authorized motion towards this crooked workforce,” Humpy tells Journal.
“Beneath the false guise of Sushi being beneath assault, the core workforce despatched many of the DAO’s reserves to a UK firm whose final possession is members workforce and lawyer,” they are saying.
Humpy didn’t say whether or not they imagine latest proposals at Compound and Balancer to be governance assaults.
Numerous sizes and styles of DAO governance complaints
Governance points showcasing siloed management amongst wealthy insiders have been noticed in even the most important DAOs.
“If you happen to look actually fastidiously, there are very small teams that haven’t been appointed, and so they make all the selections,” M^0 Labs’ Prosperi says.
He remembers a proposal at MakerDAO in 2022 that he believes was overpowered by a smaller group regardless of robust neighborhood help.
“I used to be asking for extra checks and balances within the DAO, and on the time, all the big holders voted in favor — but it surely was not sufficient to beat the founders of the DAO.”
Governance points aren’t distinctive to large-scale DAOs.
In 2023, “hacktivists” often known as “DAO raiders” took over Nouns DAO and Aragon DAO by gobbling up governance tokens to amass affect.
The raids led to governance threats and the extraction of $27 million from Nouns, whereas Aragon got here out the opposite finish as a nonprofit.
Obligatory voting system
Prosperi and M^0 have techniques in place to make sure governance tokenholders don’t waste away their voting energy by “punishing” those that don’t take part.
“If you’re not collaborating, you’re progressively diluted out by way of voting energy for the protocol,” he says.
Nonetheless, one purpose buyers might keep away from voting is that they threat doable authorized penalties by mingling with DAO choices.
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In June 2023, the US Commodity Futures Buying and selling Fee received a authorized case towards Ooki DAO for working an unlawful buying and selling platform. The end result included fines and bans on buying and selling and registration.
Whereas solely the founders have been liable, the courtroom categorised DAOs as normal partnerships, that means members may very well be held accountable.
Elsewhere, the DAO behind Mango Markets just lately voted in favor of a settlement proposal with the US Securities and Trade Fee over safety regulation violations, hoping to resolve the allegations with out admitting or denying wrongdoings.
The SEC has but to simply accept the proposal.
Full decentralization isn’t reasonable
DAOs distribute decision-making tasks amongst tokenholders, however this fails in observe on account of real-life human behaviors, says Radix’s Hughes.
“An actual tangible answer I may provide you with is to have a redelegation mannequin,” he says.
“If tokens are redelegated to extra energetic voters whom you may belief, they will vote in your behalf, and this might characterize extra of the bulk sentiment.”
Prosperi stays optimistic about the way forward for DAOs, noting that governance points are extra widespread in “first-generation” DAOs based mostly on Compound’s governance mannequin.
He says this design grew to become the blueprint for early DeFi governance on account of Compound’s monetization success, not its governance high quality.
Many merchants purchase governance tokens like COMP for hypothesis relatively than energetic participation, resulting in inactive voters.
Newer protocols are studying from early DAO design flaws.
Prosperi’s M^0 separates governance tokens from fungible funding tokens, making it smart to penalize inactive delegates.
Cyber’s Alvarez suggests a “safety council” may veto proposals throughout governance raids, an idea adopted by newer DAOs like Optimism and Cyber’s DAO.
Compound launched the same function referred to as a “Guardian” on Aug. 17, and the proposal handed with overwhelming help — even a16z voted in favor.
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Yohan Yun
Yohan Yun is a multimedia journalist overlaying blockchain since 2017. He has contributed to crypto media outlet Forkast as an editor and has lined Asian tech tales as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking, and experimenting with new recipes.