Crypto-wells like Humpy are playing off the DAO sounds – but there are solutions.

Despite their name, many decentralized autonomous organizations are not autonomous, and control is often centralized among large, alternating bodies with the power to sway management decisions.

Wells or smaller groups that control up to $17 million in tokens can attack protocols that control more than $2 billion in user funds.

What's surprising is the problem with other whales being inactive. Their power of choice can protect protocols from management attacks, but they are often wasted behind the scenes.

“Participation in the current DAO governance structure is very low, so the amount of money needed to attack these governance protocols is not large,” Luca Prosperi, CEO of M^0 Labs, told the magazine.

In several recent cases, DeFi whales have acquired a large number of tokens to get what they want and influence management decisions.

Hampi's controversial proposal highlights the shortcomings of DAO management

The most egregious example saw the crypto-well known as Hampy, Compound DAO, proposing to allocate $25 million of COMP tokens to a production protocol controlled by their group, Golden Boys.

After two failed attempts, Hampi's third succeeded on July 28. Michael Llewellyn, a compound security consultant, suspected that the proposal was made to allow voting during the weekend when turnout was low.

Although the proposal was ultimately scrapped in favor of compound-controlled production, the situation could have been avoided if influential voters had been active.

The Hampi Group accumulated approximately 325,333 COMP in the open market, 75,000 short of the quorum limit of 400,000.

In the compound, a16z holds the highest voting power with 333 delegates. His 361,000 COMP represents a quorum of 90.25%.

Even so, the VC firm has little voice in management decisions, even to thwart proposals that other users see as “management attacks.”

But maybe it has its own reasons.

“If you're a big vote holder like that, you either have to vote faithfully on (almost) everything or you have to vote on nothing,” said Dan Hughes, founder of DeFi platform Radix DLT.

“Voting on a few proposals sends a signal of interference or agenda, even if it isn't. If your position is to abstain, you shouldn't accept proxies and delegate your voting power to multiple third parties.”

Hump ​​is placed on several walls before the compound

Diego Alvarez, Cyber ​​Chief Strategy Officer of the Ethereum Layer-2 network, does not see Hampi's proposal on Compound as a “management attack” because of further communication, consensus and eventual resolution.

“This was done within the systems and processes within the DAO, so if anything, it was a little shady, but it wasn't out of circulation,” he says.

But the compound was not Hampi's first rodeo.

The whale is said to have pulled similar governance “moves” on DeFi protocols Balancer and Sushi.

As the Balancer saga ends with a “peace deal,” Sushi's run-in with Hampi leaves some junk food in the sink.

Sushi's “head chef” at the time, Jared Gray – who now heads Sushi Labs – and his work team faced strong opposition to a March 2024 proposal to transfer Sushi's Treasury assets to Sushi Labs, a UK entity, in October 2023.

The move has been called a “hateful invasion” by former sushi chef Naim Boubziz, but Gray defends the protocol as trying to protect it from an administrative attack from Hampi.

“at the moment [discussions]He made several legal threats against me and the team,” Gray told the magazine. “He has ceded some of his holdings to disgruntled ex-Sushi contributors and community members, a group he leads, SushiCitizens. [Boubziz]. He pressured the operations team by any means necessary to get the results he wanted.

Gray Hampi used SushiCitizens as a mouthpiece to launch “unintelligible management proposals” and post “disturbing tweets” against the Sushi Operations team.

“The deal he proposed to Sushi Dao and the operations team initially included an increase in the supply of 750 million tokens, with two-thirds of the newly minted tokens going to the pools he chose and one-third supporting the Golden Boys project,” the group said in a statement that it disagreed with the deal.

Hampi responds

Regarding the claims and accusations leveled against them, Hampi asked the magazine to judge the “how” and “who” of management ideas in secret. The whale advocates for Sushi Citizens as legitimate members of the DAO.

“Legal action in a democracy is legal by any means. Alas, I did not take legal action against this crooked group,” Hampi told the magazine.

“Under the false pretense that Sushi was being attacked, the core team sent most of the DAO's stock to a group of members and a lawyer in England who ultimately owned the stock.”

Hampi did not say whether he believed the recent proposals by Compound and Balance were management attacks.

DAO management complaints come in various shapes and sizes

Governance issues that demonstrate tacit control among wealthy insiders have also been observed in large DAOs.

“If you look carefully, there are very small groups that are not appointed and make all the decisions,” says M^0 Labs' Prosperi.

He believes that despite strong community support, the MakerDAO proposal was defeated by a small group in 2022.

“I was asking for more checks and balances in the DAO, and at that time, all the big owners voted – but it was not enough to defeat the founders of the DAO.”

Governance issues are not unique to large DAOs.

In the year In 2023, “hacktivists” known as “Dao Raiders” have increased their influence by collecting the Dao and Aragon Dao governance symbols.

The raids led to management concerns and a $27 million withdrawal from Nonce, while Aragon emerged as a non-profit organization.

Compulsory election system

Systems are in place to prevent Prosperi and M^0 governance tokens from wasting their voting power by “punishing” non-participants.

“If you don't participate, you're gradually depleted of voting power for the protocol,” he says.

However, one reason investors refrain from voting is because they risk potential legal consequences by joining the DAO's decisions.

In June 2023, the US Commodity Futures Trading Commission won a legal case against Ooki DAO for operating an illegal trading platform. The consequences include fines and restrictions on business and registration.

While only the founders are liable, the court classified DAOs as general partnerships, meaning members can be held liable.

Elsewhere, the DAO behind Mango Market has voted in favor of a settlement with the US Securities and Exchange Commission over securities law violations, hoping to resolve the allegations without admitting or denying the charges.

The SEC has yet to approve the proposal.

Completely decentralized is not realistic.

DAOs distribute decision-making responsibilities among token holders, but this fails in practice due to human behavior in real life, says Radix Hughes.

“The most realistic solution I can come up with is to find a rehabilitation model,” he said.

“If tokens are taken to more active voters who you can trust, they can vote on your behalf, and that can represent the sentiment of the majority.”

Prospery is optimistic about the future of DAOs, noting that governance issues in “first-generation” DAOs are based on a compound governance model.

This pattern, he says, was the success of compounding revenue, not the quality of management, that was the design of early Diffie management.

Many traders buy management indicators like COMP to speculate instead of actively participating, which leads to inactive voters.

New protocols are learning from the flaws of the original DAO design.

Prosperi's M^0 separates governance tokens from fungible investment tokens, making it reasonable to penalize inactive delegates.

Cyber ​​Álvarez suggests that a “security council” could reject proposals during a governance raid, a concept favored by new DAOs such as optimists and cyber DAOs.

Campus introduced a similar feature called “Guardian” on August 17, and the idea has received overwhelming support – even a16z has supported it.

Subscribe

A very engaging read in Blockchain. It is given once a week.

John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.