The Aragon Association prompted outrage this week when it seized $200 million belonging to its own four-month-old Aragon DAO.
The Swiss nonprofit that builds technology to streamline the creation of DAOs — or blockchain-based digital cooperatives — was attempting to defend the money from a group of activist investors led by asset management firm Arca.
Arca called on the Aragon Association to return money to investors via a buyback by purchasing tokens the nonprofit had issued in a multimillion-dollar crowdfunding event in 2017.
‘Their goal is to target treasuries and manipulate the price of tokens for financial gain, at the expense of the organisation’s mission’— The Aragon Association
Advocates of decentralisation immediately cried foul. Chastened, Aragon on Thursday issued a mea culpa, saying it will give the money back via a “gradual transfer approach,” and will negotiate with Arca and other activist investors.
At stake is the very notion of DAOs’ token-based governance. DAOs — some of which manage billions in user deposits — are starting to resemble their publicly traded corporate cousins in that they’re learning to balance the need to raise capital with the desire to honour their founding mission amid mounting scrutiny from regulators.
“If you are under the SEC’s gun, you were under the gun the second you issued a public token,” Arca co-founder and chief investment officer Jeff Droman told DL News.
“If you don’t issue a token, you can do whatever the hell you want. The second you issue, or airdrop, or sell a token and it is a publicly traded instrument, you now become a fiduciary to those token holders.”
The ‘arbitrage play’
Some DAOs have become an attractive target for activist investors, who follow a Wall Street strategy in which they buy up a big stake — in this case, tokens with voting rights — to overhaul how the organisation is run.
With DAOs, one could profit by buying enough tokens to wield a majority say and then vote to distribute its treasury pro rata among token holders.Such a tactic is “a pure arbitrage play,” Zach Rosenberg, an attorney and principal at Degen Legal, told DL News.
“If the market cap of the token is way in excess of the treasury, there’s no real concern here” because an activist attack “doesn’t make economic sense,”Rosenberg said.
The Aragon Association has $186 million in assets, according to DefiLlama data. The market capitalization of its ANT token, however, is just above $124 million.
That discrepancy signals “untapped potential and value,” Dorman said. “It’s the market’s way of telling that company or project, ‘We don’t think you are being a proper steward of those assets.’”
The Aragon Association is the most recent crypto organisation to face accusations of mismanagement due to that discrepancy. The Ethereum-based Rook DAO splintered last month after investors who had purchased ROOK tokens clashed with management.
On May 2, leadership at the Aragon Association began to fear their organisation might meet a similar fate. Messages from relatively new members began to flood forums dedicated to Aragon technology and governance, according to the Association.
Some of those members had played a role in the controversy at Rook, and had spent the past several months accumulating ANT tokens, granting them voting rights in the Aragon DAO. That day, six accounts were banned from the Aragon channel on messaging app Discord.
‘Simply lining up soldiers doesn’t mean an attack’— Jeff Dorman, Arca
A week after the ban, the Aragon Association accused Arca and other activist investors of staging a “coordinated attack” on the DAO, citing the messages and the stockpiling of ANT.
“Their goal is to target treasuries and manipulate the price of tokens for financial gain, at the expense of the organisation’s mission,” the nonprofit wrote.
The association announced a plan to “repurpose” the Aragon DAO. The DAO would run a grants program, distributing money to other, nascent DAOs with insufficient startup capital. Rather than transfer the entire $186 million treasury to the Aragon DAO – a transfer previously approved by ANT holders — the Association would move the money in batches on an as-needed basis.
“Fiduciary duty compels Aragon Association to secure these funds from those seeking to access them for their own financial gains,” the Association wrote.
That characterization was a “complete overreaction,” Dorman said.
“We want to be active participants in governance, push for our plan as well as others that may increase transparency, increase the speed at which the treasury is transferred over to the DAO,” he said.
“Simply lining up some soldiers doesn’t mean an attack. There was absolutely no action here. A proposal hadn’t even been written yet. This was the equivalent of somebody walking into a bank with a note that said, ‘I was thinking about withdrawing $80,’ and instead of talking to the person, the bank tellers immediately called the police, went into the vault, stole all the money, set fire to the bank and went to another country. And opened a new bank that nobody could access.”
“It essentially illustrates that it was all illusory from the beginning,” Rosenberg said. “If the team can step in and say, ‘Well, we’re just going to take the DAO treasury assets and stuff them in this association, and there’s nothing you can do about it,’ the DAO never had control over anything.”
The Aragon Association has since apologised for suggesting it could “repurpose” the DAO, an independent entity over which it has no legal or practical control, and for banning accounts from its Discord channel. Those accounts have since been reinstated.
The Aragon Association will eventually move the entire treasury to the DAO, spokesperson Jessica Smith told DL News. By moving that money slowly and in batches, however, the Association is “prioritising the technical security of the Aragon DAO to ensure a safe deployment.”
Moreover, coordination among activist investors along with “the nature of the attack, and their stated intentions” could invite scrutiny from the likes of the securities regulators, Smith said.
That risk “does not prevent efforts to close the gap between the book value and market cap, it just needs to be carefully executed,” she added.
That argument is a “crutch for greed and irresponsibility,” Dorman said.
“Once you decide that you are going to take money from people, and once you decide that you’re going to have a token that trades publicly, whether you’re a security or not, is already determined,” he said.
Whatever the legal risk, the decision to withhold money promised to the Aagon DAO riled crypto natives, who took issue with the association’s suggestion that people who had bought ANT to gain control of the DAO and strip-mine the treasury were not true members.
“If a user comes out here with their money and they buy votes in the form of tokens and they go make a proposal … that is their right as a token holder,” Getty Hill, founder of GFX Labs, a participant in several DAOs, told DL News. “If there’s someone who disagrees with that, then that is the right of the person disagreeing to go and accumulate more votes to form an opposition.”
Aragon co-founder Luis Cuende is not involved in day-to-day operations at the Aragon Association, but he has waded into the debate, joining Arca’s call to buy back ANT.
In a proposal shared on Aragon’s governance forum, Cuende suggested buying back 11% to about 15% of the supply of ANT tokens at an estimated cost of $30 million.
The Aragon Association did not shoot down the possibility in a statement to DL News.
“Buybacks may be permitted if they are voluntarily, not pre-announced, and for the benefit of the purpose of the project,” it said. “Whether a proposal complies with these conditions is determined by the Aragon Association (AA) on a case-by-case basis.”
Meanwhile, in its Twitter mea culpa, the association said it had reinstated banned accounts.
However, we won’t stand for hostile and coordinated attacks, particularly not ones that involve social engineering. Not last week, not today, and we hope to raise awareness to these types of practices that affect not only us, but the industry as a whole.— Aragon 🦅 (@AragonProject) May 11, 2023
“We won’t stand for hostile and coordinated attacks, particularly not ones that involve social engineering,” the association wrote. “And we hope to raise awareness to these types of practices that affect not only us, but the industry as a whole.”