DAO scandal. Does blockchain voting stand a chance outside the crypto world

DAO scandal. Does blockchain voting stand a chance outside the crypto world

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Author: Robert Strickland (crypto expert)
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DAO scandal. Does blockchain voting stand a chance outside the crypto world
Experts have assessed whether decentralized autonomous organizations can be recognized as an official form of business governance after the Arbitrum blockchain project token holders' voting scandal

The multimillion-dollar funding issue with the Arbitrum project's developer fund has spilled over into a conflict with its token owners, setting a precedent for decentralized blockchain governance.

A DAO (decentralized autonomous organization) is a decentralized autonomous organization that is governed by the voting of the governance tokens of a blockchain project through smart contracts. Any token holder can put forward a proposal for the development of the project or vote on other proposals. Most of the time, they concern the allocation of specially reserved funds - the project treasury.

Before the release of their own token and the sensational Arbitrum's Airdrop, the developers often stressed the need to create a decentralized autonomous organization (DAO), where ARB token holders will be able to choose the direction of the project development, including the distribution of budget funds, by voting. The ability to vote and submit proposals to the CAO is the only function of ARB tokens, the holder of ARB tokens receives no other technical benefits when interacting with any project in the Arbitrum ecosystem.

"Communication Problems."
Last week, the Arbitrum Foundation, which includes the project's developers and cronies, put forward a proposal to allocate 750 million ARBs (about $1 billion in dollar terms) to a wallet controlled by the foundation itself for future grants and to cover its administrative and operating costs. The amount seemed greatly overstated to participants, and about 80% of ARB token holders voted against the proposal.

As it turned out later, even before the vote was completed and without the approval of the participants of the DAO, the funds had already been transferred from the project treasury, and some of them were converted into dollars on exchanges or issued as a loan to major market makers. Arbitrum Foundation managers were quick to release a statement saying that the vote was only meant to "ratify a decision already made," and this further angered both the participating token holders and the cryptocurrency community at large.

"The behavior of the project team is indicative of a lack of financial strategy. Of course, any project needs funds for operating expenses, but they should be accounted for in advance, not after the fact. This is a decentralized organization, and the opinion of the community must be taken into account. This will be a lesson for the team for the future, "- says co-founder of ENCRY Foundation Roman Nekrasov.

Under pressure from the participants of the DAO and faced with a wave of negative reactions on external resources, the Arbitrum Foundation was forced to accept the terms of the community and abandoned the proposal, subsequently breaking it into several separate and changing the terms in favor of greater transparency. In official publications, the developers acknowledged "communication problems."

According to 0xprocessing co-founder Nikita Vassev, users will not abandon Arbitrum because of one bad incident. The network already has an infrastructure lined up with billions of dollars worth of assets. "But I would like to emphasize that the project team made a big mistake, and they will be reminded of it for quite some time. I foresee problems with approval of allocation of funds in the future," the expert specifies.

According to him, the incident clearly shows how a decentralized autonomous organization can expose problems such as corporate abuse, financial fraud, and ineffective financial planning.

Pros and cons
The Arbitrum Foundation situation set a precedent and provoked a wave of discussion about the effectiveness of VAOs per se. Despite the lack of a legally recognized form, decentralized organizations are created around many large blockchain projects, and the voices of their token holders do tend to carry weight, similar to the decision-making process of shareholders of companies in traditional businesses.

The incident highlights some of the vulnerability of the voting process within the CAO, as well as the CAO governance mechanism through voting in general, says Andrei Tugarin, head of GMT Legal. Due to the lack of conditions enshrined in legally binding documents, questions inevitably arise. For example, whether it is possible to oblige developers to execute the decision of token holders who voted, and what, apart from mere trust in the project, the voting mechanism is based on in principle.
"Such situations undoubtedly attract the attention of society and government agencies. It can be assumed that they can contribute to the development of proper legal regulation in the sphere of CAOs. They may also encourage society and, in particular, investors in such projects to verify information in more detail, demanding guarantees that the decisions made at a general vote in a CAO will be implemented," Tugarin argues.

According to the lawyer, the FAO model itself still looks "too utopian for our settled world. But transparency and speed of decision-making thanks to blockchain voting are important advantages of FAO, something that traditional companies lack. However, the expert lists serious disadvantages, the main of which is the almost complete absence of legal regulation and "a certain detachment from the traditional legal field."

"In the case of problems, fraud, and abuse, the affected persons simply have nowhere to turn, it is not clear how to recover funds," Tugarin explains. - Decentralization and autonomy from the law are good as long as they do not violate a person's rights. Then he will seek protection and restoration of his rights through traditional legal mechanisms.

"Progressive funders will appreciate it."
"As an idea, the DAO is very appealing to me. It is in the delicate balance between the interests of various participants in a single system it is possible to find the right path of development," says Roman Nekrasov. But, in his opinion, DAO is unlikely to become a recognized legal form of organization in the coming years, despite the fact that crypto assets are already in the legal field in many places. This governance structure makes it difficult to distribute responsibility, the expert explains.

"It's still just a kind of community, a club of interest. But the potential of this form is very large. The AAO takes into account the interests of all community members and helps calibrate the development path of any project," Vassev adds.

According to Tugarin, with the introduction of crypto assets in the legal field, the existence of a CAO along with the usual organizational and legal forms is quite possible. This form of organization can give businesses transparency and speed in making operational decisions and making payments.

"Progressive funders will appreciate such advantages and will take advantage of the FAO mechanism if such a mechanism is in the legal field. Therefore, the coexistence of ABO along with the usual forms of organization we consider possible, but if it will be properly regulated, "- summarizes the lawyer.

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