Our experts assessed whether decentralized autonomous organizations can be recognized as an official form of business governance. After the Arbitrum blockchain project token voting scandal

The issue with the multi-million dollar funding of the Arbitrum project developers’ fund has resulted in a conflict with the owners of its tokens. And it set a precedent in the field of decentralized management of blockchain services.

A DAO is a decentralized, autonomous organization that is governed by the voting of the owners of the blockchain project’s management tokens using smart contracts. Any token owner can independently put forward a proposal for the development of the project. Or vote for other proposals. Most often, they concern the distribution of specially reserved funds – the project treasury .

Before the release of their own token and Arbitrum’s sensational Airdrop, the developers often stressed the need for a decentralized autonomous organization (DAO). In which ARB token holders will be able to choose by voting the directions of the project’s development, including the distribution of budget funds. The only function of ARB tokens is to be able to vote and put forward their own proposals for consideration by the DAO. This is because their owner receives no other technical benefits when interacting with any project in the Arbitrum ecosystem.

Scandal at Arbitrum

Last week, the Arbitrum Foundation. which includes project developers and cronies, put forward a proposal to allocate 750 million ARB (about $1 billion in U.S. dollar equivalent) to the foundation’s own controlled purse for future grants. As well as to cover its administrative and operating expenses. The amount seemed to be too high to the participants. Therefore, about 80% of ARB token holders voted against the proposal.

As it turned out later, even before the voting was completed and without the approval of the participants of the DAO. These funds had already been transferred from the project’s coffers. And some of them were converted into dollars on exchanges or issued as a loan to large market makers. Arbitrum Foundation managers were quick to release a statement saying that the vote was only meant to “ratify a decision that had already been made.” And that further angered both the participating token holders and the cryptocurrency community at large.

The project team’s behavior shows a lack of thought into the financial strategy. Of course, any project needs funds for operating expenses. But they need to be reported on in advance, not post-facto. This is a decentralized organization. Therefore, the opinion of the community must be taken into account. This will be a lesson for the team for the future, our experts say.

Under pressure from FAO members and faced with a wave of negative responses on external resources. Arbitrum Foundation was forced to accept the community’s terms and refuse the offer. And subsequently splitting it into several separate ones and changing the terms in favor of greater transparency. In official publications, the developers acknowledged “communication problems.”

Our experts believe that this event clearly shows how a decentralized autonomous organization can identify problems. Such as corporate abuse, financial manipulation and ineffective financial planning.

Positive and negative aspects of DAO

The Arbitrum Foundation situation has set a precedent and provoked a wave of discussion about the effectiveness of the DAO as such. Despite the lack of a legally recognized form, decentralized organizations are created around many large blockchain projects. And votes from their token owners tend to matter a lot indeed. The process is similar to the decision-making process of shareholders of companies in traditional businesses.

The incident highlights some of the vulnerability of the voting process within a DAO. As well as the mechanism for governing DAOs through voting in general. Due to the lack of conditions enshrined in legally binding documents, questions inevitably arise. For example, is it possible to oblige developers to execute the decision of voting token owners. And on what, apart from the credibility of the project alone, the voting mechanism holds in principle.

Our experts believe that such situations undoubtedly attract the attention of public and government authorities. It can be assumed that they can contribute to the development of a proper legal regulation in the DAO sphere. They can also encourage community and, in particular, investors in such projects to verify the information in more detail. At the same time requiring guarantees of execution of decisions made by a general vote in the DAO.

Opinions of our lawyers

According to our lawyers, the DAO model itself still looks “too utopian for our world”. However, transparency and speed of decision-making are important advantages of DAO. This is due to voting on the blockchain. However, our experts list serious disadvantages. And the main ones are the almost complete lack of legal regulation.

Because in the case of problems, fraud and abuse, the affected persons simply have nowhere to turn. And it is not clear how to get their money back. Decentralization and autonomy from the law are good exactly until they violate the rights of the individual. And then he will seek protection and restoration of his rights through traditional legal mechanisms.

Prospects for DAO development in the ordinary world

Our experts believe that DAO is unlikely to become a recognized legal form of organization in the coming years. This is despite the fact that crypto-assets are already in the legal field in many places. This governance structure makes it difficult to distribute responsibility.

So far, it is just a kind of community, a club of interest. But the potential of this form is very large. Because DAO takes into account the interests of all community members and helps choose the development path for any project.

Of course, progressive company owners will appreciate these advantages and use DAO mechanism. If such a mechanism will be in the legal field. Therefore, our experts believe the co-existence of DAO along with the usual forms of organization is possible. But if it will be properly regulated.