Should DAO's have Poison Pills and Other Protective Governance Questions

Transcript

can everyone hear me all right okay um crypto and uh google my name is hilary kivitz i'm not going to do this talk in french okay okay um so i'm going to talk about dows and hostile takeovers and walk through some ideas for how we might shore up governance on daos to counteract hostile takeovers

um so as we all know daos have emerged as a new form of collective governance where communities set the rules and those are encoded on the blockchain so unlike corporations that are managed by a board of directors dows manage themselves they not only the participants not only own the assets but they also own the day-to-day decisions and the overall management but just like corporations dows can be subject to malevolent um to uh to malevolent actors where those actors actually take advantage of the architecture of the dao

to profit at the expense of the dow so we all know that wall street has a long history of of raiders and activists and other short-term opportunists and carl icahn is probably the most infamous of those and that's him and back in 2018 he said that cryptocurrencies were ridiculous that he wouldn't touch it but more recently he said that he was going to get into bitcoin in a big way i don't know what that means for doubts but the problem

is that we are going through a period right now where there are very low token values combined with pretty low governance participation and that is the perfect breeding ground for hostile activity so let's take a look at this chart it came from deep dow and it's a little it's a few days old so the numbers might be outdated um for the recent surge in pricing but it serves our purpose still so currently if you look today i think it's about 9.4 billion that are locked in treasury on dows and if you look at the distribution most of those dows have less than a million

dollars in their treasury but there is still a significant number that are over 10 million and more that are over 100 million so those are values that start to catch people's attention now let's turn over to now let's move over to governance engagement so here you see that there are 3.8 million governance token holders outstanding but only about 685 000 active voter proposals active voters and proposal makers so that's just about 18 engagement not very high then you move over to

the um you move over to how many holders are on each of those dows and you see that most of them have fewer than 100 holders so that's good news because that means that most of them are pretty closely held in a small group of people but then there's about 16 percent that are greater than a thousand holders and about five percent that should say greater than ten thousand holders so five percent have more than ten thousand holders and those are the ones that we should probably focus on because they're going to be more movement in the hostile arena in that area now let's look at the specific numbers relating to the top dows so this is organized by the top dows by treasury

value um and this again is deep dow so uniswap has about 2.9 billion locked on the treasury but according to coin market cap and that measures the float so not the maximum issuance of the tokens there's about 5.1 billion dollars uh of market cap on the token so that is pretty fine because they've got 2.9 billion treasury and far more um if market cap so it'll be difficult to uh you know to to take over a network like that but move down to bitdow and there you see that they have 1.1 billion in their treasury

and they've got about 288 million of market cap on their tokens so that's a much smaller number gnosis has about 880 million on their treasury and about 376 million of market cap on their token and polka dots got 303 million 7.2 billion on their treasury so they're in a pretty good position so let's focus on bitdow and ganosis then just for now you can see the makeup of their tokens in the middle column but then move over to the right and you see that for bit dao there are 19 and about 19 and a half thousand governance token holders but only 47 are

active members and then go down to gnosis and there are 18 000 governance token holders and only 1.6 000 are active members so that's less than one percent so what can exploiters do in crypto in a situation like this well they can and this is you know this is this has all been well tried i mean i think vitalik wrote an arc an article specifically on this back in 2017. but attackers can engage in self-dealing and conflicts of interest

uh for instance they can fork a network and that actually happened in 2018 i think most people know about justin's son and tron trying to take over steemit that was forking of a network where he didn't have a community on tron but he had the technology and steemit had a strong community and he was able to negotiate a block trade of steemit tokens in a private sale and then and then collate those with tokens held by centralized exchanges with whom he had a relationship so the facts are a little unclear as to what those exchanges knew when they agreed to collate the tokens but at the end of the day what it meant was that he was able

to get more than 50 percent of the vote and execute on his plan the second thing that people can do where there's a conflict of interest in self-dealing is that they can raid treasuries um and and take the locked assets so recently in 2000 earlier this year in february build actually was rated in just that way they had actually a really small market cap and they had about two hundred thousand dollars of tokens circulating but their treasury was five hundred thousand and you wouldn't normally think that that was something you know that would catch the attention of a hostile raider but somebody did end up being able to get

enough to control a vote on the governance contract to authorize unilateral unilateral minting of the tokens and was able to exploit that to drain the liquidity pools and the treasury the next thing is empty voting and that really is decoupling of the financial interest in the tokens from the vote so that can happen in a number of different ways but something that's pretty common is that you'll see before some key governance votes on some of the platforms high borrowing activity on some of the decentralized platforms and you can track that on morpho you can look at it on ether scan and see that it happens on morpho or compound or you

know any of those lending platforms the mechanics is that the exploiter would borrow the token execute on the vote then repay the token the loan on the token and really be long only the fees to borrow it the other way is that you can hedge away your financial interest in the token that happens on wall street all the time where you can enter into a hedge transaction where you really have no long exposure on the underlying token but you still have the vote and in those instances you know somebody might want to do it because they want to they they own controlling shares or significant portions in a competitor project and so they want to create havoc on

that competitor to augment their own projects so there's conflicts of interest that come into play and there's various ways to exploit around those and then the last is vote buying and green mail however rarely is it obvious who the bad actors are and i think in a free market it's fair to say that it's not always clear who's malicious and what the right outcome should be so on the one hand you could say that these are just expensive bug bounties on the other hand that's probably not conducive to welcoming a diverse and broad set of of capital onto the mar into the ecosystem

it makes people feel a little unsafe when you could get burned in these type of ways so the other type of situation are cases where it's really not clear whether reasonable minds would think that one outcome was better than the other or who the good actor is and who the bad actor so for instance back in february ondo tried to propose a reorganization for a sushi swap which as we know is one of the most decentralizes is one of the most decentralized exchanges and they were doing it for their own strategic reasons and the details are probably longer than we can get into here but i think if you go read the

discord in the forums i'll let you decide for yourself where you think that you know the the right outcome should have been in that case so in a world where it's not clear who's the right at who's in the right what can we do we can rely on process rather than outcome so that means that we can have disclosure plus some protective provisions and that that should lead to better decisions and i think one of the key stones in in the tradify world is that good governance should balance deterring

purely exploitative behavior while not creating undue friction or entrenching poor management and underperforming teams so most dao frameworks already have governance protections such as these so they've got quorum requirements or high vote thresholds they have time phased voting cooldown and lock periods and they have community guardians who can act in the case of an emergency and sometimes they have extra protections for certain fundamental decisions but i want to ask should we go a little further and start building into web 3 governance into web 3 governance some of the protective concepts that we find in traditional finance

so in that toolkit in that toolkit we'll find an array of tools including disclosure requirements controlling shareholder obligations fairness standards burden shifting poison pills and voting cutbacks and i want to take a walk through each of these to see what it might look like to adopt them in the web 3 context so in terms of disclosure some ideas would be to try to build platforms that integrate off chain data to provide

composite information to wallet for wallet participants so for instance sec style edgar disclosures that go into off-chain data that could be important for people making decisions when they're casting votes you could create identity proxies with reputational indicators and there already are some dows that are doing that so for instance dx dao has rep tokens and eip 5114 has the concept of the soul-bound nft these are both crypto that are they're not transferable you can only earn them by having certain behaviors on the network and then you can't sell them to anybody and those

would entitle you to votes so that's an example of building in reputational markers into wallets to help people figure out who's the good actor and who's the nefarious one you can perhaps this is you know a thought experiment could you create tamper-proof oracles to detect borrowing activity on d5 platforms prior to a key vote so oracles that track ether scan and transactions with those um platforms and that would deal with empty voting the last might be to incentivize c5 platforms to provide data on lending activities now i think that that's probably a dim

prospect but maybe the last resort for that would just be to plain old regulate them as they maybe should be the next item in the toolkit of tradfi would be something called controlling stockholder obligations and in the context of web 3 it's really a question of whether whales and significant token holders have a responsibility to the rest of the token holders in terms of their behavior and what obligations do they have so for instance that doesn't necessarily mean a more than 50 vote somebody with 10 percent or 20 or 30 percent could end up being in control when they aggregate when they aggregate

their votes with other allies so at what point should those trigger i don't know but it's an open question whether somebody in that position should have additional obligations to just a regular token holder for instance you know within the tradfi context those holders would have requirements to provide additional information to token holders if they were making proposals so for instance maybe in the web3 context standardized templates for improvement proposals when they relate to fundamental issues should request more information regarding the plans or potential conflicts of interest for the proponent and maybe some key financial metrics

you could also implement something called the majority of a minority vote basically that would mean that you don't count the votes of the conflicted controlling member so you would basically nullify the tokens in their wallet for that vote put the burden on the on the whale or on the proponent to provide information that relates to the fairness of what they're suggesting and what they're proposing that's another idea and then a last idea to avoid the steemit situation would be to require that the c5 platforms either not vote token that they hold for their customers or if they are going to do it that first

they disclose it and second that they vote pro rata alongside the rest of the community vote so that they're not actually changing the outcome with the block of tokens that they hold another tool is poison pill could we could we put a poison pill in a smart contract and how does it work so these are pretty controversial and powerful deterrents in tradify basically it would be a hard coded in the governance documents and you can't remove it by a simple vote and it creates massive dilution for the exploiter the last would be maybe a concept of voting cutbacks and you do see this in financially regulated areas so for

instance in the bank company holding act in the u.s and under insurance laws and similar uh financially regulated areas there are sometimes statutory limits on how many on on for instance being able to vote a maximum of 10 no matter how much you own in a network and so i'm not saying that that is um that that would be appropriate for all instances but maybe there is some systemically important platforms that should consider those kinds of cutbacks so that you don't have significant holders controlling the outcomes on those platforms if we think that they're a public good or they're important to the ecosystem

so a few observations i think that we can all tell that these proposals would increase friction and slow down key decisions question is that bad maybe not certainly having that type of friction might enable more diverse sources of capital to come on platforms and sometimes the outcomes from these votes are not apparent until long after after the tokens have hit have have been cashed out on tornado cash or have been long gone so friction maybe isn't the worst thing you can tell that some of these proposals would require wallet monitoring and some sort of web 3 proxy for identity and i do think that some of

those projects are being worked on and hopefully they'll come to market soon question whether any of this could be built self educate self executing on chain i think one thing that's becoming clear if you can see where the winds are blowing is that external forces are going to bring this type of regulation and this type of requirement at some point and so it might behoove dow platforms to think about implementing them preemptively in the way that they want to see it happen as opposed to waiting it for it to happen from outside i think one um indicator of this is i don't know if anyone's seen recently but in california there is a class action lawsuit about whether dow holders are

general partners and therefore have liability to all the other token holders and that would include the developers that built the platform so you know court cases settle out and they lose and we don't know but the fact that that kind of theory is being set forth i think should set off a warning for folks that are designing dow governance that maybe it's time to look more closely at some of these protective provisions that yes they do create more friction but perhaps in some contexts they could be appropriate questions okay thank you for having me [Applause]

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