Adam Hardej

Jun 16, 2022·Newsletter

DAOs are dumb sometimes

DAOs are dumb sometimes

A DAO voted to back out of an investor agreement and it sets an unsettling precedent for similar types of investments going forward. Here are the basics:

  • Yield Guild Games ("YGG") is a decentralized autonomous organization ("DAO") for investing in non-fungible-tokens ("NFTs") used in virtual worlds and blockchain-based games. Andreessen led their financing almost a year ago.
  • Merit Circle is basically the same thing as YGG, just smaller.
  • YGG was one of the earliest investors in Merit Circle.
  • YGG signed a Simple Agreement for Future Tokens ("SAFT") with the early Merit Circle leadership that outlined a plan to award YGG tokens in the future in exchange for their early investment in Merit Circle.
  • In May of this year, a vocal member of the Merit Circle DAO decided that YGG wasn't doing enough to help Merit Circle and submitted a proposal to the DAO that they void the SAFT.
  • The proposal was voted on and passed with 106 for and 16 against.
  • In an attempt to salvage the situation, Merit Circle's early leadership spoke with YGG about coming to some sort of settlement and submitted a new proposal to the DAO that would award YGG 30% of the previously agreed upon tokens.
  • That proposal passed unanimously.
  • Earlier this week, YGG and Merit Circle released a joint statement that explained their path to that point and that no further action would be taken.

As someone who is personally excited about the potential of decentralized solutions - this was disappointing to see. That being said, this was also bound to happen eventually and exposes some of the issues with DAOs. Part of the beauty of DAOs is that no one is in charge. A lot of the problems with DAOs spawn from the fact that... no one is in charge.

In this specific situation, there are no repercussions for the DAO member by the name of "Honey Barrel" that instigated this movement and wrote the proposal. Although they are technically tied to the success of the project through token ownership, they can always sell and walk away - leaving Merit Circle leadership and other holders to deal with the fallout.

With millions having been poured into DAOs by giants like Andreessen, Union Square Ventures, Sequoia, and Paradigm it's hard to imagine this won't add to the perceived risk of SAFT investments into DAOs going forward.

I first found out about this story through a thread by all-star web3 founder and friend of Stonks, Tim Connors. There was also a longer article written by Margaux MacColl of The Information.

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