The recent governance attack on Compound DAO has left many in the crypto community scratching their heads. The "Golden Boys," a group of five relatively unknown token holders, submitted proposals to the DAO community for a yield-bearing instrument that would benefit all token holders. However, there was a catch – the proposal included a quirk that treasury funds for the new financial instrument would be stored in a vault controlled by the Golden Boys, not the DAO.
The Fine Line between Activist Investors and Scammers
Drawing a distinction between the methods of a scam artist and an activist investor is vital to understanding and preventing governance shakedowns. While the Golden Boys’ behavior was initially met with skepticism and allegations of a governance attack, it ultimately turned out that their efforts were an unexpected bonus for Compound DAO’s token holders.
What Constitutes a Governance Attack?
Governance attacks are typically characterized as self-serving exploits that enrich the attacker to the detriment of other parties. However, in this case, the Golden Boys’ behavior doesn’t quite fit the bill. Their actions had all the hallmarks of an activist investor, not a scammer.
The Consequences of Governance Dysfunction
The incident raises doubts about how much organizational trust, transparency, and democracy DAOs actually have. Furthermore, even though this DAO drama ended on an amicable note, what happens when the next round of proverbial golden boys aren’t so nice?
Protecting DAOs from Governance Attacks
Activist investors can be white knights who maximize shareholder value, but they can also be bullies that drive companies into the ground. DAOs need to have protections in place – like legal agreements and voting participation mechanisms – to ward off activist investors and prevent governance attacks.
Two Critical Steps to Limit Governance Dysfunction
To limit governance dysfunction, DAOs should implement two critical steps:
1. Incorporate as Limited Liability Corporations (LLCs)
Incorporating DAOs as LLCs has several benefits, including protecting members from personal liability and allowing for custom corporate governance design. States like Wyoming, Tennessee, and Vermont have already enacted specific DAO LLC legislation.
The Benefits of LLCs
- Protection from Personal Liability: By incorporating as an LLC, token holders are protected from personal liability in the event of a lawsuit or other financial issues.
- Custom Governance Design: LLCs allow for custom governance design, enabling token holders to create a governance structure that meets their specific needs.
2. Evolve Governance Participation
DAOs should evolve governance participation by implementing changes such as:
Weekend-Free Voting
Voting periods should not occur over weekends when participation is expected to be abysmal. This simple change can help prevent governance dysfunction and ensure that token holders are engaged in the decision-making process.
Proxy Voting by AI
DAOs could experiment with AI proxy voting, where AI models are trained to vote for any given issue in a token holder’s absence. This novel method comes with plenty of unanswered questions but has potential to increase governance participation.
Conclusion
The attack on Compound DAO’s governance may be the first of many more if changes are not made to governance participation and design. By incorporating as LLCs and evolving governance participation, DAOs can protect themselves from governance attacks and ensure that token holders are engaged in the decision-making process.
About the Author
Agnes Gambill West is a guest columnist for Cointelegraph and an affiliate senior research fellow with the Mercatus Center at George Mason University. She’s the co-chair of the North Carolina Blockchain Initiative, an appointee to the North Carolina Innovation Council, and serves on the Business and Consumer Payments Advisory Council for the Federal Reserve Bank of Richmond.
Disclaimer
This article is for general information purposes only and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
