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The Biggest Shutdown in DeFi History: The Cause and Potential Impact of the Tribe DAO Proposal Shutdown

Decentralized Autonomous Organizations (DAOs) have struggled to grow in the bear market and continue to face many challenges.

There are still obvious limitations in DAO governance, a recent example being the proposal to shut down Tride DAO by Fei Labs, one of the entities behind the development of the Fei protocol, on August 19.

It is to be expected that many DAOs will fail like other startups, however the proposal to shut down Tribe DAO caused significant controversy in the community. This article reviews the series of events that brought the Tribe DAO to this point, and the broader implications for the DAO as a whole.

  1. Fei Protocol merged with Rari

Tribe DAO was created in December 2021 through the merger of Fei Protocol, the issuer of the U.S. dollar-pegged FEI stablecoin, and Rari Capital, the entity behind Fuse, a protocol designed to enable users to create independent currency markets.

The merger unites the emerging fields of DeFi lending and stablecoins. The market is so confident that even in preparation to close, FEI has a circulating supply of $735 million, while Fuse has a TVL of over $1.1 billion.

  1. Fuse Vulnerability and Repayment Vote

In April 2022, Fuse was attacked to lose nearly $80 million, resulting in bad debts in several of the largest Fuse pools and the inability of lenders to withdraw assets. The victims of this attack are not only individual users, but also some DAOs, including Frax, Olympus, and Babylon Finance.

The Tribe DAO initially intends to compensate victims with protocol control value PCV (PCV is an asset used to back FEI, controlled by TRIBE holders). 75% of the votes voted in favor of repaying victims in full, and the preliminary snapshot vote has passed.

Before the final on-chain governance vote, however, things changed. Fei Labs objected to the repayment, and TRIBE holders opted not to repay affected depositors.

  1. Proposal to discontinue production

On August 19, Fei Labs published a proposal to shut down the Tribe DAO. Under the proposal, FEI holders would be able to exchange their stablecoins for DAI at a 1:1 ratio, and victims would receive $57 million in TRIBE compensation ($11.3 million at current prices), while the rest of the DAO Assets will be distributed proportionally to TRIBE holders.

The proposal was met with strong opposition from Tribe DAO stakeholders as victims did not receive full damages. For example, under the current proposal, DAOs such as Frax and Olympus would receive only 2% and 3% of their respective $12.3 million and $8.9 million in asset losses.

Controversy further intensified, according to community members calculations, even after redemption of FEI and full compensation of depositors, Tribe DAO has enough assets to fully compensate all affected parties from the hack, while still being able to return a certain amount to token holders , the TRIBE token value will be $0.16.

It’s worth noting that while the proposal could be amended prior to passing governance, currently TRIBE holders may have higher liquidation priority than exploited victims.

In addition to “D” in DAO, “A” is equally important

The impact of the Tribe DAO incident on the industry is enormous, and it could be a precedent for how to deal with such issues, and there is still a long way to go in terms of treating victims as creditors to get compensation.

In a typical bankruptcy proceeding, creditors have a higher priority in liquidation than equity holders and are enforced by the legal system. This means that if a company collapses and liquidates its remaining assets, creditors will be compensated before shareholders. It is currently impossible to determine whether the victims are the true creditors, and therefore whether the community is legally obligated to repay the victims in full before distributing the treasury funds to the token holders. Despite the continuous strengthening of supervision, there is currently no relevant legal precedent in the DeFi industry.

Reflecting on the future, DAOs should not leave these issues to the whims of after-the-fact governance, but set clear event governance procedures in the protocol. While much of the industry’s focus is on the “D” and “O” of DAOs, this case shows that “A” automation is just as important.

Rather than having token holders and community members compete against each other, or, in the worst case, the courts to make key judgments, liquidations can be enforced by smart contracts approved by token holders and community consensus.

summary

Given how immature DAOs are, we may be a long way from this state of automation. The mere promise of creating more automated repayment mechanisms in the future will not help solve the problems the community faces today, but as usual, the industry will become more resilient and autonomous after overcoming these challenges.

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