Blockchain

A DAO smash and grab?

Photo by redcharlie on Unsplash

Let’s imagine a successful DAO that has a strong community and builds a nice community pot, perhaps one that is used for funding schemes that are aligned with the goals of the DAO. Would it be possible to organise a smash and grab on the pot?

This may not be so fanciful as we can draw on the experience of the 1990s in the UK when there were a slew of demutualisation of building societies which converted into banks. The path was set in 1986 when legislation was passed to allow building societies to demutualise if they could gain sufficient support from their members. The legislation opened up the demutulisation movement and it was driven by short term rewards. People opened an account with a building society which gave them voting rights and this was done with as little as £100. There was then a motion to demutualise the building society which would payout a windfall in shares which could immediately be sold for profit, in some cases a cash bonus or a combination of both. The carpetbaggers would move onto the next building society and the next potential windfall.

Where did this windfall come from? It was the buffer, contingency funds build from previous generations and capital paid for by the members or account holders.

There are still mutually owned Building Societies, and not all of them converted to Banks and shareholder ownership. So how did they survive? To prevent a flood of new members who had the sole aim of demutualising for a short term profit, the terms and conditions were amended for new customers with a clause that meant that in the event of the building society demutualising any windfalls or gains were donated to a designated charity. This removed any short term incentive to convert the mutual to an organisation capitalised by shares.

Photo by Nicola Nuttall on Unsplash

Could this ever happen to a DAO? The conditions for this to happen would be that people could invest a nominal sum in tokens (let’s say £100) and there is one token one vote, the DAO is successful in creating a community fund or has a foundation that accrues a pot of money through the sale of tokens.

Clearly in the early days of building a DAO this is less of a concern, there is focus around bootstrapping, building a community and creating community value.

What if a bunch of people organised themselves to join a DAO and began submitting governance proposals to change the constitution? Clearly they would need a majority of voters to go along with their plan, and given the known issue of voter apathy the threshold values in voting become important. The prize of closing down a DAO or voting to convert it to a regular company capitalised by shares could be a tidy windfall to the members or token holders of a DAO.

The appetite for DAOs is strong and is driven by people who believe in the values of a DAO and what they stand for. As the DAOs become more mainstream and potentially accrue significant value, they become a tempting “pot” for short term gain and it becomes worthwhile for people to get organised. An influx of new token holders or members could dilute the core “believers” or perhaps persuade the “believers” with slightly less conviction of the rewards to convert to the cause.

Not all DAOs are vulnerable, there are many voting mechanisms that do not necessarily adhere to one token one vote and potentially make the DAOs more resistant to a carpetbagging initiative.

Photo by Samuel Sng on Unsplash

What mechanisms are available to defend a DAO from a campaign to raid the community pot? On paper there is a cost to submit a proposal, and to achieve a majority there needs to be a significant pot to be shared amongst the token holders or it will not be worthwhile.

Given DAOs often do not have a legal entity behind it and token holders do not agree a set of terms and conditions as they would when opening a building society. In this scenario it cannot be some form of legal defence.

Mechanisms such as “golden tokens” with extra voting power or a “super votes” from certain addresses are non starters as it instantly breaks the Autonomous aspect of DAO by centralising control.

There could be a mechanism that only allows voting on disbursements or changing the constitutional structure of the DAO where the token holder has held the tokens for a minimum time period to prevent an influx of new token holders with a short-term agenda. This is a blunt instrument and could have unintended consequences?

The place that needs attention is the constitution around closing a DAO to ensure that there are a distinct set of cases, such as the DAO no longer being supported by miners or validators, or inactivity for 3 quarters, or financial insolvency. This may be too rigid, and there are perhaps some nasty edge cases.

The simple “poison pill” is a mechanism that whatever the reasons a DAO is closed then any outstanding capital held in tokens are transferred to a list of charities that are aligned to the DAO. The mechanism cannot be altered by a proposal, and the charity list has the constraint that it can only amended to add or remove charities that are aligned with the DAO goals.

Conclusion

Drawing on the experience of the demutualisation of the building societies where short-term incentives drew in people to precipitate the changes from mutual organisations to banks capitalised by shares, there is a small risk to DAOs where the organisation is decentralised and owned by the token holders.

Care should be taken in the voting mechanisms and the constitution, and if there are edge cases where it may be possible to engineer a short term gain what we have learned from the demutulisation of building societies is that it will happen.

Removing an incentive for any short-term gain by ensuring that any potential windfalls go to charity rather than token holders has shown to work in protecting building societies.

TgradeFinance

Author TgradeFinance

More posts by TgradeFinance

Leave a Reply