Source:《The DAO Takeover Playbook: The New DeFi Strategy》by IGNAS,DEFI RESEARCH

Compiled by: Katie Gu

When a DAO is dissolved, the remaining funds are distributed to token holders, and some DAOs are more valuable when closed than when in business. This is exactly what happened with the dissolution of the MEV project RookDAO. ROOK token holders voted to close and distribute a treasury worth $25 million. Following this decision, the price of its token increased fivefold. The price surge was mainly due to the treasury value exceeding the total market value of ROOK tokens.

Keep in mind that not all ROOK token holders will redeem their tokens. The ROOK example is just part of the “new play” currently being played out by DeFi DAOs in Deep Bear.

In this article, we will explore the strategy of how DAOs can be profitable even if they are dissolved, and analyze the potential risks of DAOs in such events. This strategy is controversial, DYOR.

What is Slow Rug?

Those in the industry should be familiar with the "rug pull," which is an exit scam in which the developer suddenly drains the project's funds for personal gain. But there is also "slow rug," a more subtle version in which funds are slowly drained over a longer period of time, usually disguised as legitimate operating expenses such as salaries.

For example, Rook Lab, which consists of 22 DAO contributors, receives $6.1 million per year ($300,000 per contributor). However, the team has been unable to provide a roadmap or goals, even as the protocol’s transaction volume has dropped by about 78% in just six months.

“Slow rug” is more complicated than it seems, because the DAO faces several problems in this case:

Legal clarity: DAOs exist in a legal grey area, leading to uncertainty in operations, fund management, and taxation; Legal compliance relationships: Managing legal relationships with individuals and organizations around the world is complex due to varying jurisdictions; Limitation of liability: Potential liability for DAO token holders is an issue, with the option of setting up a legal entity, mutual fund, or compensation fund; Governance: Balancing efficiency with decentralization and transparency in governance is a major challenge; Talent management: Talent recruitment, onboarding, and management in DAOs can be difficult due to the lack of a legal entity to which contracts can be entered and the self-directed nature of the role.

How do we police teams that are not adding value to token holders?

Some DAOs have taken responsibility by “dissolving in place.” For example, the Fei Core Team (Tribe DAO) decided to dissolve and distributed $220 million from its treasury to token holders. At the time of the vote, TRIBE was valued at just $66 million, but now trades at $128 million.

In both the Rook and Tribe cases, the dissolution of the DAO was beneficial for token holders. But what happens when core team members boycott a governance vote? This is where things get interesting.

Aragon DAO Attacked, Risk of Being Disbanded for Profit?

The recent Aragon DAO was attacked by a coordinated group known as the "No Risk Value (RFV) attackers" who were associated with the dissolution and liquidation of Rook DAO. Aragon pointed the finger at Arca Capital Management, a large asset management company. There is evidence that Arca's involvement was intended to gain financial benefits from Aragon.

On May 2, a large number of new members flooded the Aragon Discord channel and sent private messages to multiple contributors, exerting pressure to transfer funds from Aragon Association to Aragon DAO as soon as possible. These members are allegedly involved in the asset takeover of RookDAO. They spent several months accumulating ANT tokens, which gave them voting rights in AragonDAO. Eventually, Aragon Association banned suspicious Discord users. Every banned user interviewed by CoinDesk was a member of Rook. Rook dissolved its DAO last month after activist investors called on the Rook project to return capital to its token holders.

The “RFV attackers” describe themselves as “crypto vultures” and are reportedly a sophisticated, well-resourced, and coordinated group. They are allegedly “responsible for the destruction of Rook DAO, Invictus DAO, Fei Protocol, Rome DAO, and Temple DAO.” Notably, a member of the group has been sentenced to prison for his role in the Mango DAO exploit. Most recently, the group led the financial takeover of Rook DAO, using social engineering tactics to attack the organization, successfully disbanding the DAO and liquidating half of the treasury for financial gain. In response, the Aragon Association announced plans to “reposition” AragonDAO as a funding project for emerging DAOs. The association will now transfer funds in batches, rather than the entire treasury at once.

The RFV attacker was motivated by the difference between the Aragon treasury’s assets worth about $189 million and the lower market cap of the ANT token. The market cap of its ANT token is $128 million, which is lower than its treasury’s assets worth about $189 million. In a DAO, one can buy enough tokens and vote as much as one wants. DAOs at risk are those whose tokens are trading at a discount to the value of their treasury assets. Conversely, if the tokens are trading at a premium, the risk of assets being taken over is lower.

In an interview with DL News, Arca's co-founder and CIO Jeff Dorman said that this is a clear signal from the market to the company or project that "the market believes that Aragon is not managing these assets properly." Jeff Dorman further explained: "If you don't issue tokens, you have complete autonomy. When you issue, airdrop or sell tokens and trade them publicly, you have a fiduciary responsibility to those token holders."

Profits from taking over assets

Is it a takeover or a seizure? Depending on the beneficiaries, opinions may differ. The "tactics" of the RFV attackers ultimately attracted a lot of criticism.

However, it also provides a unique way to arbitrage in DeFi. Here’s how the strategy unfolds:

Identify a DAO whose treasury assets are worth less than the market value of the project’s tokens; Purchase enough project tokens to gain influence over DAO decisions; Use that influence to vote in favor of dissolving the DAO; If the vote passes, the DAO’s funds are distributed to token holders.

In the case of Aragon, that last part is very important. If you buy tokens and the core team ends up ignoring the majority vote, you could end up with governance tokens that don’t actually have the right to vote.

Furthermore, pulling off a true takeover is much harder than it sounds. You have to buy the tokens without causing a massive spike in the token price, especially in the face of issues like slippage and liquidity. Then there is the due diligence process and governance proposals to deal with. If that is not enough to pull off the takeover, then there has to be a PR campaign to convince other token holders to support your proposal.

While the name “Risk-Free Value (RFV) Attacker” might suggest that it’s low risk, this is not a risk-free strategy at all. But the 5x surge in the ROOK example also shows that it can lead to huge gains.

How to identify risky DAOs?

Assuming the trend of making money from dissolving DAOs persists, and the RFV attacker and Arca continue to target new DAOs, our first priority will be to identify DAOs whose treasury assets are worth less than their respective token market caps.

There are tools that can be used to identify them, such as Token Terminal and DeFiLlama. TokenTerminal has a treasury database of 67 projects. We can even add the circulating (or fully diluted) market cap to immediately see which DAOs are at risk.

At the time of writing this article, I found that out of 67 listed projects, 23 projects have a treasury value greater than the circulating market value of their respective tokens.

Here are a few of the projects, along with their treasury value and circulating market capitalization:

BitDAO: $2.5 billion vs $735 million

Ethereum Name Service: $773 million vs $274 million

Stargate: $226 million vs. $124 million

Aragon: $187 million vs. $129 million

Venus: $83 million vs. $77 million

Instadapp: $61.6 million vs. $25 million

Wombat Exchange: $5,530 vs $8.9 million

Hop Protocol: $53 million vs $7.8 million

Euler: $41.6 million vs $31.8 million

Gearbox: $38 million vs. $7 million

Tornado Cash: $34.9 million vs. $10 million

The picture changes if we consider fully diluted valuations, but these tokens are not in circulation and therefore cannot be used for voting.

The problem with TokenTerminal’s data is that it takes the project’s own tokens into account in its calculations. Whereas DefiLlama provides the total funding value excluding the project’s own tokens.

Here is the latest list of companies with at least $10 million in treasury assets:

BitDAO: $822 million vs $735 million

Olympus DAO: $215 million vs $206 million

Aragon: $187 million vs. $129 million

Wonderland: $89.5 million vs. $10 million

Parrot Protocol: $50 million vs $8 million (MC data from DefiLlama)

JPEG'd: $41 million vs. $14 million

Klima DAO: $30.6 million vs. $17 million

Hector Network: $22.9 million vs. $10 million

Jade Protocol: $21 million vs $8.4 million

However, there is a key data missing from this list. We need to consider the proportion of tokens owned and vested by users, as often a large proportion of tokens belong to the team or VCs. Therefore, the final list of potentially risky DAOs is even shorter than the list above. Interestingly, DCF GOD recently mentioned OHM on Twitter.

Note that when analyzing a DAO at risk of dissolution, we need to perform further due diligence, taking into account factors such as token slippage, actual community-held tokens, governance structure, etc.