‘Raider’ Investors Are Looting DAOs – Names and Aragon Share What They’ve Learned

Decentralized management of autonomous organizations is difficult. Specifically, decentralized onchain token voting.

Vitalik Buterin, the creator of Ethereum, rejects this because of the problems with what is essentially an unbridled democracy.

Politics, money and the wrong incentives mean that tokens are often launched for their own benefit rather than the benefit of the DAO.

One of the dangers of this type of governance is that any party that accumulates enough votes can do whatever it wants – to anoint itself, sell off its assets, or change its mission altogether.

Core team members who have been there since the beginning see people gaining control of projects as “DAO raiders” involved in hostile takeovers to hijack parts of The DAO. But “invaders” may see themselves as hacktivist investors to shape the DAO's mission.

Raiders vs. Nouns and Aragon

In the year In 2023, DAO hackers—or hacktivist investors—take over Nunes DAO and Aragon DAO, playing the arbitrage management game for profit. They bought more tokens – with the voting rights attached to them – and got to do what they liked.

The reason for the arbitrage opportunity is that NFT names and Aragon tokens can be bought below their book value or net asset value relative to their proportionate share of the DAO treasury.

Ironically, the Nonce raiders proposed to eliminate the possibility of arbitrage by extracting the Nonce treasury, thereby reducing the book value of each name.

These raids and concerns about good governance led to the withdrawal of $27 million from NGOs and the loss of leadership in Aragon. Today, Nunes is making a comeback, albeit with a smaller treasury. Aragon, which is focused on smaller products, will live on as a new charity with the cash left over from the liquidation.

“We all want to believe we're friends, but there are people who want to attack a group — any group — and collectively managed assets can be exploited,” said Eyal Etkovic of DAO analytics firm DeepDAO.

As we have seen recently, working proactively to prevent this kind of exploitation is a very important development for DAOs. We are not naive about this now.

So, what can other DAOs learn from these “hacktivist” attacks?

DAO raid names

In the year Founded in 2021, Nouns DAO is a community that sells one NFT per day forever. The DAO voter names decide to allocate funds to various projects. Funding to date includes paying $90,000 to give “DAO names” to rare Ecuadorian frog species. DAO has funded programs that provide children with free eye exams and glasses.

In the year In 2023 names DAO was crushing it with super cool branding, boxy glasses and good spending.

Gammy, who is a very active member of Nons DAO, told the magazine that in mid-2023 he introduced his investor DCF GOD to join the DAO Prophouse.

Then DCF GOD began “collecting nouns NFTs and constantly critiquing nouns,” Gammy recalls. “I thought that was strange.”

Each names NFT has one DAO governance vote attached to it. Against the backdrop of the bear market and NFT prices, DCF GOD and his bandits amassed enough voting rights to propose a liquidation of the Nones treasury.

In a properly functioning market, the value of the treasury should be at least equal to the market cap of the management tokens.

So, in hindsight, Gammy says, “the arbitrage opportunity was obvious to anyone looking at our portfolio and the number of names.”

DCF GOD declined to comment on this story and appears to have deleted related tweets. However, in 2010, He appeared on Holyheld's Web3 Primitives podcast in 2023, where he stated that “DCF stands for Discounted Cash Flow” and noted that whoever can get the most prizewinners to vote in DAOs wins.

“As an investor, if you own tokens, your job is to vote. That's why we have DAOs and we have tokens. Then if you don't vote them and you just wait for the groups to come up with proposals, then you don't when those groups spend the treasury or use the money for something you don't like. Really, the right to complain.” don't have .

“Remember, the team is getting paid to be there, and investors are paying to be there,” he said.

The invasion did not happen in a vacuum

As the invasion (or what you call it) of the emerging DAO became mired in politics, Gammy was at the center.

“DAO names started in a bull market, with excessive excitement at the time. And then, and when we entered the bear market, arbitrage opportunities came up because tokens were regularly traded on secondary markets,” says Gami.

I myself have been deleted by Nouns from people who don't want to spend money.

The DAO proposed paying 700 Ether (worth $1 million at the time) to renovate several skate parks around the world and add Nonce branding.

The money was in a wallet dedicated to the Gnars DAO treasury, which is backed by NOUNs and held by Gnars, a functional sports accelerator.

Skateparks are usually built by local municipalities and do not generate revenue, although Names DAO could earn money from branded skateboards and other merchandise.

The idea was controversial and a split quickly developed between free-spending proponents and newly minted activist investors.

After the highest voter turnout in Nouns DAO history, Skatepark's vote was lost on one wallet address and “was definitely suspicious,” Gammy says.

The DAO hackers accused Gammy of being a fraud for proposing a skatepark plan with nothing in return.

Gammy marveled at the book's value arguments, saying, “Names have never been an investment vehicle. It's an experiment for rich crypto dudes.”

When Nonce launched, it was “mostly crypto-wells and botched purchases.”

“Then there was a lot of confusion about how to proceed. The raiders then proposed to leave the DAO.

Not long after, in September 2023, $27 million left Nons' coffers after disgruntled investors, so upset with the proposal, designed a “fork” to give opponents a way out.

The Raiders played the arbitrage game for good profit.

Aragon DAO raid: Tokenomics is not fit for purpose

In the year In 2017, two young coders, Luis Cunde and Jorge Izquierdo, envisioned Aragon as a nation-state governed by its tokens onchain.

The Aragon Association – a Swiss non-profit organization launched in 2017 – was a pioneer. In the year In 2018, it released the second grant program in Ethereum history and went on to support Expresso, Prism, and Snapshot. Aragon was a committed key player in building the DAO governance and instrument models.

“Aragon had an engineering team with a 2017–2019 vision. But in 2021, once of Aragon [engineering] Team out, that's where the root of these problems came out,” Aragon's current CEO, Anthony Luteneger, told the magazine.

He explains that the Aragon Token was meant to be used for the Aragon Govern and the Aragon Court, which were essentially failed projects in administration.

“The brand is designed to add utility to those particular products,” he said. “These products didn't work, so the tokens ended up in no-man's land. This gave attackers an opportunity to exploit them.”

He believes that the “invaders” acted very deliberately and did not have the interests of the Aragon DAO at heart.

“Calling them activist investors is a lie,” he says.

The raiders reached 2023 in May and set aside 51% of the token supply, giving them the final voting power.

Like the names, “Invaders” used early Tokenomic designs due to unclear product lines and DAO goals. A later change made Tokinomics no longer fit for purpose as the planned transfer of management from the Aragon Society to the Aragon Dao created arbitrage opportunities.

The main token launch, managed by the Swiss charity Aragon Association, has raised more than $200 million in Ether's value by 2021.

DCF GOD suggests that both sides go too far with their rhetoric: the Aragon group claims that they are 51% under attack, and the activist investors argue that the Aragon group is wasting money.

“The truth is, to quote the quote ‘win the argument,' both sides need to create as much drama and fanfare as possible.

In October 2023, a group of six addresses that control most of the supply between them submitted a management proposal to sell Aragon Treasury.

They had the tokens and successfully minted over 86,000 ETH, spending around $163 million, even though the DAO leaders publicly protested against them.

The DAO hackers were clearly opportunists, but internal tensions within Aragon's nonprofit board increased their chances.

In the end, 86,343 ETH were sent to the redemption contract, and 87% of the treasury was released from the Aragon ecosystem in non-native assets, basically non-profit and DAO. There is enough money left to continue building a more modest project.

Lucky people take advantage of opportunities

“The DAO hackers are not activist investors,” says Leutenegger, “Leaving a company for big money at the expense of many stakeholders is not activist investing,” says the all-time famous activist investor Bill Ackman.

In Lex Friedman's recent podcast with renowned activist investor Bill Ackman, Ackman explained that activist investing is about how public companies should be and believing that there is long-term value in that company.

Ackman argues that true activists seek long-term success with the board for the long-term benefit of the company.

Gami from Nouns urges other DAOs to take Tokinomics and management as a career.

“Most people get burned in crypto because they don't have enough skepticism,” he says. He pointed out that “secondary market purchases, even if they do not go into the Treasury with voting rights,” could lead to a majority vote.

Like Luteneger, he also suspects the raiders are activists.

“All's fair in love and war, but the virtues are that DAOs are suggesting that we fix them. But in reality, they enrich themselves, take the money and run. They cover their entire path and run for the next opportunity.”

“To be clear, I totally disagree with the DAO hackers. I despise what is happening to us, but it is a warning to builders: if there are arbitrage opportunities, they will.

Solutions are emerging.

DAOs are still an absurd concept. The DAO concept has lost its utopian appeal as an alternative corporate structure. Yet, the Daos persist.

While the bear market of 2023 may have shut down many DAOs, onchain governance is still a thing. In fact, DAOs are growing financially, and not just because crypto markets have taken off and boosted treasuries. Solutions to difficult management problems are also emerging.

Optimistic dual management increases resilience

One of the solutions that emerged was an optimistic dual administration.

Optimistic governance means that variables retain veto rights or can modify protocol in certain circumstances, leaving proper checks and balances in place. This governance design provides veto protection to key stakeholders, such as the development team, which allows the teams to function effectively.

“DAOs can be designed for the right mechanism, such as optimistic governance with a veto mechanism. Now customers are coming to us in large numbers,” says Leutenegger.

Aragon Ecosystem Leader Ivan Fartunov told the magazine that Lido Protocol and Zora's optimistic dual-governance structures are prime examples of improving liquidity token management issues.

The challenges have been widely noted, from projects struggling to make changes because token holders can't vote, to special interest groups prioritizing short-term price appreciation over protocol utility.

In short, building in a brilliant spirit means that core teams don't need to come up with a proposal for everything they do. Optimistic dual governance is a method of introducing checks and balances between those working on the project and those with capital on the line, such as token holders or protocol users.

Fartunov explains, “It's definitely not a silver bullet, but it's a very promising implementation for many coils and diff infrastructure use cases. We don't see it as an end-state solution, so we're building Aragon OSx to allow onchain organizations to evolve with a modular and flexible contract framework.

Tokenomics is not an exact science – the key is to create a Tokenomics strategy around a single goal. A self-enforcing open source immutable DAO reduces the DAO's ability to change course.

“Incentives for DAO participants should be designed to achieve a goal, including course corrections,” Leutenegger says.

Avoid risk-free value in the treasury

DAO hackers are, according to Gammy, “the cult followers of risk-free value trading.

RFV is the rate of return greater than the rate of interest an investor would earn on an investment with zero risk. In this case, selling the treasury was a better investment than building a DAO.

Therefore, tokenomics allowed them to earn money with less risk due to the simple DAO voting system.

“If you don't have risk-free value, there's no reason to go into a DAO and try to buy tokens,” Leutenegger says.

But highly liquid brands can be a poisoned chalice, Leutenegger explains:

“Another defense mechanism for DAOs is managing your liquidity. If you own a token and have a lot of liquidity. While this is a good thing for traders to trade, it also means that your token can be bought in bulk without high price volatility, which also leaves you open to attack.

Tokens work differently than stocks, Leutenegger says. “You cannot do public procurement. Treasury management is critical to ensuring that you don't have a risk-free asset that leaves the DAO open to short-term attacks.

In Aragon's case, a return was created to encourage holders to redeem their tokens, avoiding the distraction of ANT speculation from Aragon's mission.

Tokens will have until the end of 2024 to participate in the redemption before the remaining ETH tokens are allocated to fuel the new DAO's growth.

Many treasuries belong to a specific protocol, and it's important to map out who can access the funds, DeepDAO's Eithcowitch told the magazine.

DeepDAO has identified three cryptocurrencies that mitigate risk-free value risks:

Protocol Funds: Locked in contracts for specific protocol actions like automated rewards, airdrop funds, etc. Private funds under DAO management: Locked in DAO smart contracts while owned by private users (eg, staking). Private placements to investors are not considered. Project Funds: Officially associated with the DAO project but not through the protocol or DAO management (e.g. legal basis or pre-DAO deployment).

Map selection groups

“Government attacks are real, and you need to be proactive and stop them if possible,” says Eitkowicz, adding that onchain strategies can help, such as metrics to identify which groups dominate governance and attack the DAO.

“Basically, Snapshots and a multisig wallet is a viable solution, even if purists don't like it,” Eithcowitch argues. “Optimism has made a tool to measure the amount of energy in the DAO. Other DAOs are doing the same.

In addition, DeepDAO is now creating the Voter Discovery Report – a novel solution that measures a number of factors, including governance centrality and decentralization.

It also launches the Power Groups tool, identifying which groups tend to vote together the most.

For example, if seven to eight wallets or NFTs vote together on 70-80% of resolutions, that group has more power than an individual. It can also identify conflicts of interest, such as one party having a large stake in both DAO A and DAO B and then voting to favor DAO A over DAO B.

Participatory incentive alignment is critical.

The press had a field day with Aragon's story, but building startups officially with pre-production token holders is tricky. DCF's god view is that these activist investors were the act.

“Your job as a token owner is to come up with ideas for things you want.”

After the DAO invasion, Aragon's new product team, AragonX (separate from the new Aragon Foundation), is helping with custom DAO builds for projects locked in at $1.5 billion TVL or more.

Polygon is now building its administration. Therefore, one of the largest projects in the history of Ethereum is managed by Aragon.

Leutenegger argues that DAOs need to get incentive alignment right off the bat, and launching a token before it's product-market fit can be a mistake.

“I think the DAO space is a little confused right now. DAOs fail to design incentives to achieve goals, and you have to create the right alignment of incentives and design the right course correction.”

It is a mistake to crowd out the wisdom that should be the result of an alignment of incentives. You have a common goal, but you may differ on how to get there.

Leutenegger argues: “The conflict in the DAO is a social question, for example, with Nouns the question is how does onchain governance affect this? Stopping Rage with a portion of the treasury is an onchain method we install to allow opponents to exit properly. Aragon now knows how to build these types of tricks.

Now Gammy's deal: “I want people to learn from these things. It would be nice if we had some way to prevent these people from stealing half our treasure.

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Max Parasol has worked as a crypto and AI researcher at the RMIT Blockchain Innovation Hub, as a lawyer, in private equity and as part of an ambitious early stage crypto startup.

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