- 1inch DAO delegates want to direct revenue to the collective.
- They say the DAO has no funds to fulfil its mandate.
- At the same time, 1inch Labs is trying to spend the DAO's treasury.
1inch’s decentralised governance is under threat.
That’s according to delegates at 1inch DAO, the crypto collective behind the Ethereum decentralised exchange aggregator, who say 1inch Labs, the for-profit firm that built the protocol, is cutting the DAO off from the revenue it needs to function.
“The DAO has effectively become a front for portraying a sense of decentralisation,” Abdullah Umar, head of governance at Arana Ventures, one of the proposal’s co-authors, told DL News. “It’s appropriate for the DAO to now reclaim a portion of the value being created on top of its infrastructure.”
Arana Ventures and fellow delegate StableLab have proposed a financial revitalisation plan to once again divert a portion of the revenue the 1inch protocol generates to the DAO, a move they say will transform it from a spending-only body into a self-sustaining financial entity.
1inch Labs previously directed some fees generated through trades placed on 1inch to the DAO, but this was ended over two years ago in an attempt to make the protocol more competitive.
It’s become a hot-button issue because the 1inch DAO is supposed to decentralise the protocol’s governance. Its 1INCH token, which gives holders the ability to vote on changes to the protocol and how its resources are allocated, trades at a $350 million market value based on that premise.
But currently, the decentralised autonomous organisation has little funding or power to effectively govern 1inch, the delegates say. The result, Umar says, is that 1inch Labs and the 1inch Foundation, a non-profit that contributes to the growth of 1inch, call the shots, with the DAO being little more than a cash cow for their spending.
Change of heart
The situation is yet another example of the issues that plague DAOs. Originally envisioned as a way to democratise and decentralise projects, they are often criticised for just giving DeFi projects a veneer of those two aspects.
1inch Labs launched its DAO over two stages. The second stage began in November 2021 and aims to give 1inch DAO direct control over the 1inch network.
At the time, 1inch Labs said the DAO would be able to control the revenue split of 1inch’s aggregation and liquidity protocols through voting.
Fast forward four years, and 1inch Labs and the 1inch Foundation are now reluctant to give up any of the $5.3 million in annual revenue 1inch generates to the DAO.
In a response to the proposal and in comments to DL News, the two organisations said they share the DAO’s ambition to become financially sustainable and strategically independent.
Yet they argue that the current revenue flows are essential to enabling 1inch Labs and other infrastructure participants to operate, and that reducing them by giving funds to the DAO could “unintentionally fracture critical service delivery.”
They also said the DAO doesn’t need additional revenue beyond the small number of 1inch tokens it receives because it doesn’t hold any operational responsibility for the 1inch protocol’s underlying infrastructure, and hasn’t provided a plan for how it would use any potential revenue.
“There are other potential revenue sources that can be explored without undermining the ecosystem’s performance and the ability of its current providers to keep functioning,” a 1inch Labs spokesperson told DL News.
One-way flow
The lack of revenue hasn’t stopped 1inch Labs from benefiting from the DAO’s treasury to fund its initiatives, though. Those the firm has attempted to or successfully secured funding for include the development of a hardware wallet, numerous event sponsorships, and marketing expenses related to a partnership with actor Bruce Lee’s family company.
“This one-way flow, money out with no money in, is rapidly depleting the treasury,” Arana Ventures and StableLab said in their proposal.
The two delegates aren’t the only ones to complain about the situation.
In June, an anonymous 1inch governance participant said it would not support an events grant proposal from 1inch Labs’ governance lead Jordan Reindl due to the DAO not having any revenue to sustain itself.
“This is effectively raiding the DAO treasury,” the participant said. “We would be in favour of this if the DAO had a sustainable revenue source.”
Reindl eventually withdrew the funding proposal after talking with the 1inch Labs team.
Balancing act
Time for 1inch DAO is quickly running out. Based on the DAO’s current outgoings, it will only survive for two years without any additional revenue, Arana and StableLab said.
The pair’s proposal seeks to divert specifically the fees the 1inch protocol charges on limit orders, and surpluses generated through matching trades, back to the DAO.
Currently, entities called resolvers who match trades on 1inch get to keep any surplus over what the user who submitted the trade said they would accept. For example, if a user asks to swap one Ether token for $4,200 USDC and a resolver can find someone willing to swap for $4,150, they get to keep the surplus $50.
This system incentivises resolvers to quickly fulfil 1inch users’ trades at their designated prices. Taking the surpluses away could result in a worse service for users.
“The goal is to find a sustainable equilibrium, one where resolvers remain profitable and incentivised, while the DAO earns enough to fund its roadmap,” Umar said.
“This isn’t about extracting rent. It’s about evolving from a growth-at-all-costs model into a more durable, value-aligned system.”
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
