New way out for DAOs in the bear market: Is closing down more profitable than struggling to survive?

Slow Rug: A new form of arbitrage.

This article is from Substack, the original author is IGNAS | DEFI RESEARCH, translated by Katie Gu of Odaily Star Daily.

When a DAO dissolves, the remaining funds are distributed to token holders. Some DAOs may end up being more valuable after dissolution than while they were in business. Such was the case with the dissolution of the MEV project Rook DAO. ROOK token holders voted to close and distribute the $25 million treasury. As a result, the token price increased fivefold. This price surge was primarily due to the treasury being worth more than the total market capitalization of the ROOK token.

It should be noted that not all ROOK token holders will redeem their tokens. The ROOK example is just part of the “new play” currently being enacted by DeFi DAOs in the bear market.

In this article, we will explore strategies for profiting from DAO dissolution and analyze the potential risks to DAOs in such events. This strategy is controversial, so DYOR.

What is “Slow Rug”?

Crypto insiders should be familiar with the term “rug pull.” A rug pull is a scam in which developers suddenly drain project funds for personal gain and exit the market. But there is also the “slow rug,” which is a more subtle version in which funds are slowly drained over a longer period of time, often disguised as legitimate operating expenses such as salaries.

For example, Rook Lab, which is made up of 22 DAO contributors, receives $6.1 million per year ($300,000 per contributor). However, the team has been unable to provide a roadmap or goals, even as the protocol’s trading volume has fallen by about 78% in just six months.

Slow rug is more complex than it appears, as DAOs face several issues in this situation:

  • Legal clarity: DAOs are in a legal gray area, leading to uncertainty in operations, fund management, and taxation;

  • Legal compliance relationships: Due to different jurisdictions, the legal relationships between management and individuals and organizations worldwide can be complex;

  • Liability limitations: The potential liability of DAO token holders is an issue that can be addressed by establishing a legal entity, a joint fund, or a compensation fund;

  • Governance: Balancing efficiency with decentralization and transparency in governance is a major challenge;

  • Talent management: Recruitment, onboarding, and management of talent in DAOs may be difficult due to the self-directed nature of DAO roles and the lack of legal entities that can sign contracts.

How do we monitor teams that are not adding value to token holders?

Some DAOs take responsibility by “dissolving in place”. For example, the Fei core team (Tribe DAO) decided to disband and distribute $220 million from its treasury to token holders. At the time of the vote, TRIBE was valued at only $66 million, but now trades at $128 million.

In both the Rook and Tribe cases, the dissolution of the DAO was beneficial to token holders. However, what happens when core team members resist governance votes? That’s where things get interesting.

Is Aragon DAO under attack and at risk of being “dissolved for profit”?

The recent 51% attack against Aragon DAO by a coordinated group known as “Rug Frat Victims (RFV)” is related to the dissolution and liquidation of Rook DAO. Aragon has pointed the finger at a large asset management firm, Arca Capital Management, with evidence suggesting Arca’s involvement was to gain economic benefit from Aragon.

On May 2nd, a large influx of new members flooded the Aragon Discord channel and sent private messages to multiple contributors, pressuring them to transfer funds from the Aragon Association to the Aragon DAO as soon as possible. These members were reportedly tied to the asset takeover event that occurred in Rook DAO, where they spent months accumulating ANT tokens, giving them voting power in Aragon DAO. Aragon Association ultimately banned the suspicious Discord users, and every banned user CoinDesk interviewed was a member of Rook. Rook dissolved its DAO last month after investor advocates called on the project to return capital to its token holders.

The “RFV attacker” describes themselves as “crypto bald eagles” and is reported to be a complex, well-resourced, and coordinated organization. They are said to be “responsible for the destruction of Rook DAO, Invictus DAO, Fei Protocol, Rome DAO, and Temple DAO.” Notably, one member of the group was recently sentenced to prison for their involvement in exploiting a vulnerability in Mango DAO. Recently, the group led the financial takeover of Rook DAO, attacking the organization with social engineering tactics, and successfully dissolving the DAO and liquidating half of its treasury for economic gain. In response, the Aragon Association announced plans to “reposition” Aragon DAO as a funding project for emerging DAOs. The association is now transferring funds in batches, rather than transferring the entire treasury at once.

The motivation behind the “RFV attacker” attack was the difference between the value of Aragon’s treasury assets, worth about $189 million, and the lower market value of ANT tokens. The market value of their ANT tokens is $128 million, which is lower than the value of their treasury assets. In a DAO, enough tokens can be purchased to vote according to one’s wishes. The DAOs that face the risk are those whose token trading prices are lower than the value of their treasury assets. Conversely, if tokens are traded at a premium, the risk of asset takeover is lower.

In an interview with DL News, Jeff Dorman, co-founder and CIO of Arca, said that this is a clear signal from the market to the company or project that “the market believes Aragon has not properly managed these assets.” Jeff Dorman further explained, “If you don’t issue tokens, you have complete autonomy. When you issue, airdrop or sell tokens and trade them publicly, you have a fiduciary responsibility to those token holders.”

The Profit Method of Taking Over Assets

Is it takeover or expropriation? Depending on the beneficiaries, opinions may differ. The “tactics” of the RFV attacker ultimately drew a lot of criticism.

However, it also provides a unique arbitrage opportunity for DeFi, and here is how the strategy unfolds:

  1. Identify DAOs whose asset value is lower than the market value of the project token;

  2. Buy enough project tokens to gain influence over DAO decisions;

  3. Use this influence to vote in favor of dissolving the DAO;

  4. If the vote passes, the DAO’s funds will be distributed to token holders.

In Aragon’s case, the last part is crucial. If you buy tokens and the core team ultimately ignores the majority vote, you may hold governance tokens, but have no governance rights, and these governance tokens actually have no voting rights.

In addition, achieving a real takeover is much more difficult than it sounds. You have to buy tokens without causing a significant increase in token prices, especially when dealing with issues such as slippage and liquidity. Then there is the due diligence process and governance proposals to deal with. If this is not enough to complete the takeover, then a public relations campaign must be conducted to convince other token holders to support your proposal.

Although the name “Risk-Free Value (RFV) Attacker” may suggest that the risk is low, it is not a risk-free strategy at all. However, the 5-fold increase in the ROOK example also shows that it can bring huge returns.

How to identify risky DAOs?

Assuming the trend of making money by dissolving DAOs continues, and RFV attackers and Arca continue to target new DAOs, our primary task will be to identify DAOs whose treasury assets are worth less than their respective token market values.

There are some tools that can be used to identify them, such as Token Terminal and DeFiLlama. TokenTerminal has a treasury database for 67 projects. We can even increase the circulating (or fully diluted) market value to immediately see which DAOs are at risk.

At the time of writing this article, I found that out of the 67 launched projects, the treasury value of 23 projects is higher than their respective circulating market values.

Here are some of the projects and their treasury values and circulating market values:

  • BitDAO: $2.5 billion vs $735 million

  • Ethereum Name Service: $773 million vs $274 million

  • Stargate: $226 million vs $124 million

  • Aragon: $187 million vs $129 million

  • Venus: $83 million vs $77 million

  • Instadapp: $61.6 million vs $25 million

  • Wombat Exchange: $55.3 million vs $8.9 million

  • Hop Protocol: $53 million vs $7.8 million

  • Euler: $41.6 million vs $31.8 million

  • Gearbox: $38 million vs $7 million

  • Tornado Cash: $34.9 million vs $10 million

If we take into account fully diluted valuations, the situation will change, but these tokens are not in circulation and cannot be used for voting.

The problem with TokenTerminal data is that it takes into account the project’s own tokens in its calculations. DefiLlama provides the total value locked without considering the project’s own tokens.

Below is the latest list of treasury assets with at least $10 million:

  • BitDAO: $822 million vs $735 million

  • Olympus DAO: $215 million vs $206 million

  • Aragon: $187 million vs $129 million

  • Wonderland: $89.5 million vs $10 million

  • Blockingrrot Protocol: $50 million vs $8 million (MC data from DefiLlama)

  • JPEG’d: $41 million vs $14 million

  • Klima DAO: $30.6 million vs $17 million

  • Hector Network: $22.9 million vs $10 million

  • Jade Protocol: $21 million vs $8.4 million

However, this list is missing a key piece of data. We need to consider the proportion of tokens that users own and are attributed to them because a large proportion of tokens are typically held by the team or investors. Therefore, the final list of DAOs with potential risks may be even shorter than the list above. Interestingly, DCF GOD recently mentioned OHM on Twitter.

Note that when analyzing DAOs facing dissolution risk, we need to conduct further due diligence, taking into account factors such as token slippage, actual community-held tokens, and governance structure.

Disclaimer: All Blocking articles represent the author’s views and do not constitute investment advice
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