Analysis

The Biggest Shutdown

The biggest merger in DeFi history has taken a turn for the worst. Here's what you need to know.
Ben Giove Ben Giove Aug 22, 20224 min read
0
0
The Biggest Shutdown

Dear Bankless Nation,

The current state of DAO governance is showing its limitations.

Decentralized organizations continue to face numerous challenges as they grow and mature amidst a trying bear market.

The most recent example of this surrounds the impending wind-down of Tribe DAO. On August 19, Fei Labs, the entity behind the development of Fei Protocol and one of the Tribe’s constituent protocols, proposed that the DAO be shut-down.

It should be expected that many DAOs, like other startups, will fail.

However, the proposed manner in which the Tribe DAO would be sunsetted has caused significant controversy within the community.

Let’s walk through the series of events that led the Tribe DAO to this point and the broader implications for DAOs as a whole.

Image

1. The Fei Protocol & Rari Merger

Tribe DAO was created in December 2021 via the merger between Fei Protocol, the issuer of the USD-pegged FEI stablecoin, and Rari Capital, the entity behind Fuse, a protocol that enables users to create isolated money markets.

While it was the first of its kind, at first glance the deal seemed promising. The merger was poised to unite two emerging powerhouses in the lending and stablecoin sectors, as at the time of closing FEI had a circulating supply of $735M, while Fuse had more than $1.1B in TVL.

2. Fuse Exploit and Repayment Vote

Things began to take a turn for the worse in April 2022 after Fuse was exploited for $80M, leaving several of the largest Fuse pools with bad debt and lenders unable to withdraw their assets. The victims included both individuals and DAOs such as Frax, Olympus, and Babylon Finance, all of whom managed pools on the platform.

The Tribe DAO initially sought to make victims whole using protocol-controlled value (PCV), the assets used to back FEI which are controlled by TRIBE holders. An initial Snapshot vote to fully-repay depositors had passed, with 75% voting in favor of repayment.

However, the situation changed before the final, on-chain governance vote.

Despite initially signaling their support, Fei Labs came out against repayment. This stance was highly controversial and likely swayed the outcome as, after a close, high-turnout vote, TRIBE holders elected to not repay affected depositors.

3. The Shutdown Proposal

On August 19, Fei Labs released a proposal to wind down the Tribe DAO.

Under this proposal, FEI holders would be able to redeem their stablecoins 1:1 for DAI, Fuse exploits victims would receive 57M in TRIBE compensation (worth $11.3M at current prices), while the DAO’s remaining assets would be distributed pro-rata to TRIBE holders.

As with the repayment vote, this proposal has been met with backlash among a variety of Tribe DAO stakeholders, as exploit victims are not being made whole.

For instance, DAOs such as Frax and Olympus would receive just ~2% and ~3% of their respective $12.3M and $8.9M in lost assets under the current proposal.

Further fueling the controversy is the fact that the Tribe DAO has the resources to fully compensate all the affected parties from the hack while still returning value to tokenholders, as per calculations by community members, even after redeeming FEI and fully-compensating Rari depositors, each TRIBE token would be entitled to $0.16 worth of assets.

Although it is worth noting that the proposal could be revised before it passes governance, in its current form, it appears that TRIBE holders have a higher liquidation preference than exploited victims.

The ‘A’ Matters

The implications of the wind-down of the Tribe DAO are immense.

It is likely to set a precedent for how the industry handles these types of matters going forward. In particular, it may go a long way in determining whether or not DAOs treat exploit victims as creditors.

In typical bankruptcy proceedings, creditors have a higher liquidation preference than equity holders, a guarantee enforced by the legal system.

This means that should a firm go out of business and its remaining assets be liquidated, debtholders would be compensated before shareholders.

It is unclear whether the victims of the Fuse exploit are truly creditors, and therefore if the Tribe has a legal obligation to pay them in full before dispersing treasury funds to tokenholders. While the regulatory noose seems to be tightening, DeFi is for now still the wild west — There is no precedent for this type of situation.

However, moving forward, DAOs should not leave these matters up to the whims of after-the-fact governance. While much of the focus is on the ‘D’ and ‘O’ in a Decentralized Autonomous Organization, this situation shows that the ‘A’ —automation— matters as well.

Although implementing this may be easier said than done, this situation highlights the need for mature DAOs to create automated wind-down procedures.

Rather than leave tokenholders and community members to duke it out, or in a worst-case scenario, have critical decisions be made by a judge in meatspace, liquidation preferences should be enforced by smart contracts ratified by tokenholders and social consensus.

Given the immaturity of DAOs, we are likely a long way from reaching this automated state. And the promise of creating more automated repayment mechanisms in the future does nothing to solve the issues facing the Tribe today.

But as always, the industry will learn, adapt and hopefully become more resilient and autonomous in the wake of these challenges.

-Ben

P.S. Tune into Ryan & David discussing how Flashbots can save crypto in this week’s episode!


Action Steps

In this article

Frax Frax

0
0
Ben Giove

Written by Ben Giove

97 Articles View all      

Former Senior Analyst at Bankless.

No Responses