Lessons From a DeFi DAO Divorce

The marriage between the FEI and RARI token communities was an early experiment in sharing economic incentives. Now TribeDAO is splitting up, after a bitter period of governance disputes.

AccessTimeIconSep 20, 2022 at 5:22 p.m. UTC
Updated May 11, 2023 at 5:33 p.m. UTC
AccessTimeIconSep 20, 2022 at 5:22 p.m. UTCUpdated May 11, 2023 at 5:33 p.m. UTCLayer 2
AccessTimeIconSep 20, 2022 at 5:22 p.m. UTCUpdated May 11, 2023 at 5:33 p.m. UTCLayer 2

It’s a bit of deja vu for victims of the $80 million Rari/Fei attack last April who today voted to disburse funds “making them whole.” The marriage between the two decentralized finance (DeFi) protocols, Rari Capital and Fei Protocol, will also be dissolved, marking the beginning of the end to what was once one of DeFi’s most celebrated unions.

Last year, TribeDAO, the parent organization of the algorithmic stablecoin issuer Fei, merged with decentralized lending protocol Rari Capital. It was a massive moment for DeFi, involving two rising star developer teams, billions of dollars in capital and a proof-of-concept for on-chain M&A through protocol politicking.

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Rari gained a fast-growing stablecoin, FEI, while the Fei Protocol gained access to Rari’s borrowing and lending pools. And neither project had to dissolve their distinct dev teams. (It’s worth stating that FEI suffered stability issues at launch and, as one of the few fully crypto-backed (or algorithmic) stablecoins, was always on the more “experimental” end of the spectrum.)

A16z’s Jeff Amico at the time called the merger “a new primitive to align incentives between Web3 communities going forward.” RARI token holders were given the opportunity to swap their holdings for TRIBE, earning staking in the powerhouse project – and allowing both protocols to operate under a shared vision and shared economic interest.

Divided tribes

All was going according to plan until Rari’s core product, an “open money market” called Fuse, was attacked. Fuse enabled anyone to create liquidity pools to trade any number of Ethereum-based tokens, often against the FEI stablecoin. On April 30, it was hit with an $80 million re-entrancy attack, all but draining the project’s liquidity.

A vote was called to reimburse victims of the attack using Tribe’s treasury. It passed with high participation and about 75% of voters in favor. But details of the payout scheme were scant in the initial vote, and once there was a better sense of who would be paying for whom, Fei’s leadership reneged on the vote.

Fei leadership called for another vote a few days later, after declaring the initial “snapshot” process non-binding because it wasn’t “on-chain.” Rari’s victims would still be reimbursed under a new plan, but only partially. This, of course, led to months of bickering, personnel changes and calls to dissolve the Fei-Rari union.

Sam Kazemian, the founder of Frax Finance (which lost about $12 million in the Fuse attack), called it “a new low for DeFi.” Fei, which had earlier raised $1.3 billion in ETH, had the reserves to make all of the attack’s victims square, but began to question whether it’d be the right move considering a worsening “macro-economic” environment and industry-wide market rout.

Today, the decentralized autonomous organizations (DAO) are more or less back where they started, after a series of four governance votes over the past months. It’s a story of partisan politics, self-interested voting and the challenges of community governance in an age where decisions are supposed to follow pre-programmed code.

The final vote passed with 99% in favor of the plan, with no ability to veto the decision. FEI holders will be given an escape hatch to cash out for another stablecoin, DAI, while TRIBE holders will receive pro-rata shares of the DAO's assets. Shared governance is being dissolved.

If there is a wider lesson to the Rari-Fei breakup, it’s one of disaster preparedness. Governance will always be a messy issue, especially in times of crisis. DAO mergers are not impossible going forward, but it’s becoming clearer that supposedly unified communities can fracture whenever there are multiple economically incentivized groups. There’s no shared understanding of what’s fair when money is on the line. So maybe there’s a market for DAO prenups.

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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.