How does DAO govern and survive under the bear market background?

How does DAO govern and survive under the bear market background?

On May 17 this year, Vitalik Buterin tweeted some contradictory views that have not been fully resolved in his value system. One of those contradictions, he argues, is between a love of decentralization and democracy and his tendency to agree with “the intellectual elite” rather than “the people” on many specific policy issues.

In fact, this contradiction is also reflected in the decentralized DAO encryption project. As the cryptocurrency industry continues to experience a sharp decline in capital and funding, community-owned, democratic cryptocurrency organizations and protocols have become increasingly fearful after large black swan events such as the LUNA crash and 3AC liquidation shook investor confidence and market sentiment was extremely frightened. How to survive in the market?

DAO concept

A DAO refers to a Decentralized Autonomous Organization, in short, an entity without centralized leadership.It is an organization run and governed by its community members, and unlike traditional companies, there is no hierarchy in a DAO, no CEO or board of directors, and its decision-making is completely democratized.

In his Ethereum white paper, Vitalik Buterin envisions how blockchain can be used to create a functional and decentralized organization, and how power and leadership can belong to everyone. He believes that a DAO is “a group of people interacting with each other according to a protocol specified in the code and enforced on the blockchain”, while the DAO that controls the treasury is “a living and autonomous existence on the Internet. entities, but also rely heavily on hiring individuals to perform certain tasks that automation alone cannot.”

Typically, DAOs operate differently from traditional organizations in several ways. For example, most DAOs have a built-in treasury that no one has access to without team approval. This means that everyone, from developers to regular team members, has a say in how the company is run and designed. In theory, DAO decisions are made bottom-up. However, real-life DAO governance has difficulty matching these idealistic concepts. For example, after the LUNA death spiral collapsed, some online investigators claimed that its founder, Do Kwon, secretly used a secret wallet to influence voting decisions and sway the outcome.

There are various modes for members to enter the DAO. Token-based membership is usually the most common way. Membership can determine DAO voting rights and other important rights and choices.Decisions in DAOs are governed by proposals, which are approved by a group vote. For most DAOs, the more tokens held by members, the more important their votes are. Obviously, this membership model means that large token holders have disproportionate power and influence in approving proposals. In fact, a community member with a lot of tokens can invalidate the opinions of other members. In this case, the degree of decentralization of the DAO is called into question.

Human governance under smart contracts

Companies around the world operate according to standard civilized principles, laws or social contracts. In a conventional organization, the backbone of the company is often a set of legal rules and documents that must be followed by all company employees. In contrast, the backbone of DAOs is smart contracts. A smart contract is a computer-written program stored on the blockchain that runs as long as certain conditions are met. They are used to automate the execution of the protocol so that all participants can immediately determine the outcome. Smart contracts have many applications in the blockchain industry and are also used to establish the rules of DAOs.

The DAO’s smart contracts are tamper-proof and publicly accessible. Because all smart contract information is public, no user can adjust the code without anyone noticing. Smart contracts cannot be changed unless they are voted on. This is what should ideally happen. But the actual DAO is a bit fragile, and the holes in the code are vulnerable to hacking. In fact, the first DAO in history was hacked due to a smart contract bug just three weeks after its creation, losing $60 million. Recently, DAOs such as Rari Capital, EasyFi, and ForceDAO have also been drained of funds due to code bugs.

DAO Governance in a Bear Market

The decentralized nature of DAOs presents unique opportunities and problems, giving everyone a voice, but it also comes with the risk of large token holders having significant influence over protocol proposals. While DAOs are an excellent tool for bringing inclusivity and diversity of thought in unprecedented ways, in times of uncertainty, diverse opinions and general uncertainty among community members can harm its development. The DAO may work well in a well-funded bull market, but in a depleted bear market, liquidity will become low, many of the DAO’s governance tokens lose value, and community members suffer significant losses. Under these stressful conditions, the DAO governance situation has also been called into question.

Merit Circle and YGG

For example, Merit Circle, a P2E Metaverse gaming protocol to sponsor and educate players interested in blockchain P2E gaming. It does this by lending players items from its treasury. The agreement also aims to increase public participation in blockchain gaming through efforts such as providing educational content and sponsoring scholarships.

Merit Circle is governed by the Merit Circle DAO, a token-based membership DAO where decisions are made through votes by MC holders. Merit Circle has raised $4.5 million in its private seed round, and one of its key investors is YGG, which donated $175,000 in seed round donations in exchange for the SAFT protocol and the MC generation of the 36-month linearly unlocked seed round currency. The SAFT agreement is a legal agreement between cryptocurrency developers and accredited investors, in which the project party uses a promise to issue encrypted tokens for a period of time in the future in exchange for investors’ capital.

On May 20, after the MC token took a major hit due to market conditions, a member of the DAO drafted a proposal to cancel YGG’s SAFT protocol, refund their initial investment, and remove their MC seed token.Although the proposal runs counter to the agreement between Merit Circle and YGG, has no legal basis, and would lead to a long and protracted legal battle if YGG chooses to pursue it, the proposal passed by an overwhelming majority.

While the drafters of the proposal claim that the reason for passing the proposal is due to the “lack of value” in the funding provided by YGG and is aimed at getting rid of “VCs who are indifferent to the project,” it is worth noting that the proposal was made just before the initial seed token unlocking was about to begin , and the MC token dropped significantly in value, making it easier to buy any VC’s seed tokens without taking up a lot of money in the DAO’s treasury.

Although the two DAOs agreed to an amicable split following the passage of a proposal to allow the Merit Circle DAO to acquire YGG tokens at a record low price, it raised the issue that DAO governance could conflict with traditional law, and the community Members may choose to cancel their contractual obligations with investors out of self-interest. The drafters of the proposal themselves also stated that YGG is also a P2E gaming protocol, and while promoting cooperation in this area, they are “competitors” rather than partners.When the wishes of the majority conflict with a legally-backed partnership agreement, who should have the final say? In the case of Merit Circle, the answer is DAO.

SOLEND and anonymous bigwigs

Solend is an algorithmic decentralized lending protocol based on the Solana blockchain. The protocol is a standard DeFi venture designed to allow users to earn interest on deposits or borrow assets. In June 2022, the agreement suffered a major crisis. Due to extreme market conditions, the Solana token value has dropped significantly and many loans are starting to approach margin calls. With a loan from the protocol’s largest user threatening to spark a wave of liquidations and potentially bring the protocol out of business, Solana is edging closer to margin requirements as its price continues to fall.

To address the issue, the protocol established a DAO and drafted a proposal that, if passed, would grant the protocol “emergency powers” ​​to temporarily take over the big man’s account and liquidate it off-exchange to avoid pushing Solana to dangerous limits. . The decision caused quite a stir in the cryptocurrency community, and what makes the whole thing even more controversial is that this DAO appears to have been created specifically for the issue. Although the proposal was extremely controversial, it was approved without a hitch, with more than 1.1 million votes in favor and just 30,000 against.

Unlike Merit Circle, however, the community’s views on this proposal are not aligned. In fact, more than 1 million votes came from a single user holding a large amount of governance tokens, who contributed 1 million votes, or 90% of YES votes, while thousands of other users strongly opposed the proposal. Without the support of the big man, the motion would not have reached 1.1 million votes and would never pass. After the decision was made, an outcry erupted in the crypto community, with many industry leaders arguing that decentralized platforms should not control users’ assets.

In response to the criticism, the Solend DAO declared the proposal invalid and proposed a second improvement proposal, extending the time to vote for or against the proposal to one day to allow “further participation.” Before the end of the first day, the big players who could pose a risk of liquidation finally decided to move funds from Solend and close their positions, which, combined with favorable market conditions for the broader market to just rebound, was a grudgingly handed over a satisfactory resolution.Despite averting a crisis, the actions of the Solend DAO have called into question the ability of DAOs to make sound decisions with a small number of users controlling a large number of governance tokens.

This raises a serious question. If a malicious actor manages to accumulate a lot of governance tokens and draft a bad proposal, how can such a proposal be stopped? Even though protocol developers can technically block, do they have the right to do so? This is also a problem that is difficult to solve in the current DAO governance.


The blockchain industry is a field of constant innovation and development, and the DAO is the most disruptive organization and the most successful attempt at scale by people to date. Since 2020, with the rise of Defi, DAO has rapidly gained popularity. However, in essence, most DAOs that exist today have not really experienced a bear market. With the pressure of the general economic environment, the crypto market continues to decline, and various crypto projects are continuing to lose income and liquidity. How these unstructured DAOs will respond to and navigate poor market conditions will become a very noteworthy industry issue.

Posted by:CoinYuppie,Reprinted with attribution to:
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