‘Raider’ investors are looting DAOs — Nouns and Aragon share lessons learned

Governance in decentralized autonomous organizations is hard. Especially so with decentralized onchain token voting. Ethereum creator Vitalik Buterin famously rejects it due to the difficulties of what is essentially an unbridled democracy. Politics, money and misaligned incentives mean tokenholders are often out for their own benefit rather than the good of the DAO. One danger of this sort of governance is that any party that amasses enough voting tokens can essentially do whatever they like — whether it’s to anoint themselves king, sell the assets or completely change the mission.Core team members who’ve been there from the beginning see outsiders who gain control of projects as “DAO raiders” engaged in a hostile takeover to strip the DAO for parts. But the “raiders” might see themselves as hacktivist investors out to reshape the DAO’s mission. Raiders vs. Nouns and Aragon In 2023, DAO raiders — or hacktivist investors — took control of Nouns DAO and Aragon DAO by playing the arbitrage governance game for profit. They bought up loads of tokens — with the attached voting rights — and were able to do what they liked.  The arbitrage opportunity happened because Nouns NFTs and Aragon tokens could be bought for below their book value, or net asset value, relative to their proportional share of the DAO’s treasury.Somewhat ironically, the Nouns raiders then proposed to eliminate the arbitrage opportunity by spending down the Nouns treasury, thus lowering the book value of each Noun.These raids and governance threats led to the extraction of $27 million from Nouns and leadership spills at Aragon. Today, Nouns is bouncing back, albeit with a smaller treasury. A smaller product-focused Aragon lives on in the form of a new nonprofit with the leftover funds from the liquidation.“We want to believe we are all friends, but there are always people that want to attack a group —any group — and assets managed together are potentially exploitable,” says Eyal Eithcowich from DAO analytics firm DeepDAO. “Working to consciously prevent such exploits, as we’ve seen recently, is a very important development for DAOs. We are no longer naive about that.” So, what can other DAOs learn from these “hacktivist” attacks? Nouns DAO raid Founded in 2021, Nouns DAO is a community that releases one NFT daily for sale in perpetuity. Nouns DAO voters then decide to allocate funds to various projects. Fundings to date include paying $90,000 to name a rare Ecuadorian frog species, “Nouns DAO.” The DAO has also funded programs that provide free eye exams and glasses to children.  By 2023, Nouns DAO was crushing it with high-profile cool branding, boxy glasses and do-good spending. One of the Nouns that is for sale each day. (Nouns DAO) Gami, a very active member of Nouns DAO, tells Magazine that in mid-2023, he introduced investor DCF GOD to join the DAO’s Prophouse, where voting proposals originate.DCF GOD then “began accumulating Nouns NFTs while constantly criticizing Nouns,” recalls Gami. “I thought that was weird.”   Each Nouns NFT has one DAO governance vote attached. With the bear market and crashing NFT prices, DCF GOD and his raiders accumulated enough voting rights to propose liquidating the Nouns treasury. In a properly functioning market, the treasury value should be at least equal to the market cap of the governance tokens. So, in hindsight, Gami says, “the arbitrage opportunity was obvious to anyone who looked at our treasury and the number of Nouns.”  DCF GOD declined to comment on this story and appears to have deleted relevant tweets. However, he appeared on Holyheld’s Web3 Primitives podcast in 2023, where he explained that “DCF stands for discounted cash flow” and pointed out that in DAOs, whoever can get the most holders to actually cast their votes wins: “As an investor, if you hold tokens, your duty is to vote. That’s why we have DAOs and we have tokens. Then, if you are not going to use them to vote and you’re just going to wait for the teams to put up proposals, then when those teams drain the treasury or use the funds to do things you don’t like, you don’t really have the right to complain.” “Remember, the team is paid to be there, and investors are paying to be there,” he said. Raid did not occur in a vacuum The raid (or whatever you call it) emerged as the DAO was engulfed in politics, with Gami at the center.  “Nouns DAO started in a bull market, with over-the-top excitement at the time. And then, and as we entered a bear market, arbitrage opportunities emerged as tokens got sold regularly on secondary markets,” Gami says. “I myself was nearly canceled in Nouns by the people not keen to spend.”  He proposed that the DAO pay 700 Ether (worth around $1 million at the time) to refurbish numerous skate parks around the world and add Nouns branding.The money was to have been h

Jul 5, 2024 - 00:31
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‘Raider’ investors are looting DAOs — Nouns and Aragon share lessons learned

Governance in decentralized autonomous organizations is hard. Especially so with decentralized onchain token voting.

Ethereum creator Vitalik Buterin famously rejects it due to the difficulties of what is essentially an unbridled democracy.

Politics, money and misaligned incentives mean tokenholders are often out for their own benefit rather than the good of the DAO.

One danger of this sort of governance is that any party that amasses enough voting tokens can essentially do whatever they like — whether it’s to anoint themselves king, sell the assets or completely change the mission.

Core team members who’ve been there from the beginning see outsiders who gain control of projects as “DAO raiders” engaged in a hostile takeover to strip the DAO for parts. But the “raiders” might see themselves as hacktivist investors out to reshape the DAO’s mission.

Raiders vs. Nouns and Aragon

In 2023, DAO raiders — or hacktivist investors — took control of Nouns DAO and Aragon DAO by playing the arbitrage governance game for profit. They bought up loads of tokens — with the attached voting rights — and were able to do what they liked. 

The arbitrage opportunity happened because Nouns NFTs and Aragon tokens could be bought for below their book value, or net asset value, relative to their proportional share of the DAO’s treasury.

Somewhat ironically, the Nouns raiders then proposed to eliminate the arbitrage opportunity by spending down the Nouns treasury, thus lowering the book value of each Noun.

These raids and governance threats led to the extraction of $27 million from Nouns and leadership spills at Aragon. Today, Nouns is bouncing back, albeit with a smaller treasury. A smaller product-focused Aragon lives on in the form of a new nonprofit with the leftover funds from the liquidation.

“We want to believe we are all friends, but there are always people that want to attack a group —any group — and assets managed together are potentially exploitable,” says Eyal Eithcowich from DAO analytics firm DeepDAO.

“Working to consciously prevent such exploits, as we’ve seen recently, is a very important development for DAOs. We are no longer naive about that.”

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

Nouns DAO raid

Founded in 2021, Nouns DAO is a community that releases one NFT daily for sale in perpetuity. Nouns DAO voters then decide to allocate funds to various projects. Fundings to date include paying $90,000 to name a rare Ecuadorian frog species, “Nouns DAO.” The DAO has also funded programs that provide free eye exams and glasses to children. 

By 2023, Nouns DAO was crushing it with high-profile cool branding, boxy glasses and do-good spending.

One of the Nouns that is for sale each day. (Nouns DAO)

Gami, a very active member of Nouns DAO, tells Magazine that in mid-2023, he introduced investor DCF GOD to join the DAO’s Prophouse, where voting proposals originate.

DCF GOD then “began accumulating Nouns NFTs while constantly criticizing Nouns,” recalls Gami. “I thought that was weird.”  

Each Nouns NFT has one DAO governance vote attached. With the bear market and crashing NFT prices, DCF GOD and his raiders accumulated enough voting rights to propose liquidating the Nouns treasury.

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

So, in hindsight, Gami says, “the arbitrage opportunity was obvious to anyone who looked at our treasury and the number of Nouns.” 

DCF GOD declined to comment on this story and appears to have deleted relevant tweets. However, he appeared on Holyheld’s Web3 Primitives podcast in 2023, where he explained that “DCF stands for discounted cash flow” and pointed out that in DAOs, whoever can get the most holders to actually cast their votes wins:

“As an investor, if you hold tokens, your duty is to vote. That’s why we have DAOs and we have tokens. Then, if you are not going to use them to vote and you’re just going to wait for the teams to put up proposals, then when those teams drain the treasury or use the funds to do things you don’t like, you don’t really have the right to complain.”

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

Raid did not occur in a vacuum

The raid (or whatever you call it) emerged as the DAO was engulfed in politics, with Gami at the center. 

“Nouns DAO started in a bull market, with over-the-top excitement at the time. And then, and as we entered a bear market, arbitrage opportunities emerged as tokens got sold regularly on secondary markets,” Gami says.

“I myself was nearly canceled in Nouns by the people not keen to spend.” 

He proposed that the DAO pay 700 Ether (worth around $1 million at the time) to refurbish numerous skate parks around the world and add Nouns branding.

The money was to have been held by Gnars, an action sports accelerator incubated and funded by NOUNs, in a designated wallet for Gnars DAO’s treasury. 

Skate parks are usually built by local municipalities and do not generate revenue, although Nouns DAO could have made money from branded skateboards and other merch.

The proposal was contentious and divisions quickly emerged between the free-spending supporters and newly joined activist investors, who were arguing for more prudent spending.

After one of the highest voter turnouts in Nouns DAO history, the skatepark vote was lost by a single wallet address and was “definitely suspicious,” says Gami. 

The DAO raiders accused Gami of being a scammer for proposing the skatepark plan with no returns.

Gami was surprised by the book value arguments, saying, “Nouns was never an investment vehicle; it’s an experiment for rich crypto dudes.”

When Nouns was launched, it was “mostly crypto whales and degenerates buying.”

“Then, there was much confusion on how to proceed. Then the raiders made a proposal for an off-ramp to rage quit the DAO.”

Shortly after, in September 2023, $27 million exited the Nouns treasury after disgruntled investors, professing upset over the very proposal, designed a “fork” to give dissenters an exit ramp.

The raiders played the arbitrage governance game for a tidy profit.

Aragon DAO raid: Tokenomics not fit for purpose

In 2017, two young coders, Luis Cuende and Jorge Izquierdo, envisaged Aragon as a nation-state governed by its tokenholders onchain. 

The Aragon Association — a Swiss non-profit foundation launched in 2017 — was a pioneer. In 2018, it launched the second grants program in Ethereum history and went on to fund Expresso, Prism and Snapshot. Aragon was a committed key player in building DAO governance and tooling models.

“Aragon circa 2017–2019 had a visionary engineering team. But in 2021, when the Aragon One [engineering] team left, this is where the foundation for these problems emerged,” Aragon’s current CEO Anthony Leutenegger tells Magazine.

He explains that the Aragon token was meant to be used for Aragon Govern and Aragon Court, which were basically on-governance projects that failed. 

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“The token was designed to add utility to those specific products,” he says. “Those products didn’t work out, so the tokens ended up in no-mans land. This gave the raiders an opportunity to exploit.”

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

“It’s disingenuous to call them activist investors,” he says.  

The raiders arrived in May 2023 and managed to corner 51% of the token supply, giving them ultimate voting power.

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