"Creditors" first or "shareholders" first, Tribe DAO's repayment proposal triggers a trust crisis

Author: AChai, Chain Catcher

One of the largest DAO organizations, Tribe DAO, has proposed to shut down the protocol and liquidate assets, becoming one of the most controversial proposals in the crypto community recently. Various parties in the industry have raised multiple questions about the proposal, even labeling it as a greedy "fraud." The situation continues to evolve, and although there is no conclusion yet, it provides a good starting point for discussing the "fundamental law" of liquidation for DeFi/DAO organizations.

On August 20, Joey, the founder of Fei Protocol, announced a proposal regarding the closure of the Tribe DAO protocol and liquidation on the Tribe DAO governance forum. The plan aims to initiate a liquidation plan, calculating the weighted price of 57 million TRIBE (currently valued at $9.12 million) over a 7-day period, releasing the corresponding FEI or DAI in the pegged exchange to be evenly distributed among the victims of the hacking incident (approximately 28,380 ETH stolen, worth about $80 million at the time, currently valued at $45.4 million). The assets controlled by the DAO, such as stETH and ETH (valued at approximately $140 million), will be proportionally distributed to TRIBE token holders. Any approval of the proposal requires a vote from TRIBE token holders, which is expected to take place in the coming week.

The key part of the proposal lies in the compensation mechanism for the victims of the hacking incident. Since the project chose to average the repayment amount to each address (according to comments, the average repayment amount is about $230,000), this means that users with lower losses will receive full compensation, while those with higher losses will only receive a small portion, and the three addresses with the highest losses can only receive 2-6% of the compensation.

Despite having enough funds to repay all stolen assets, Tribe DAO chose to prioritize the interests of token holders as "shareholders," which has sparked strong dissatisfaction from various parties in the industry. This has led to discussions on governance forums and Twitter from many well-known figures in the industry, including Compound founder Robert Leshner, who raised multiple questions and expressed dissatisfaction regarding the priority of repayment and the omission of important data indicators such as PCV (protocol-controlled value). The general consensus is that Tribe DAO has chosen to prioritize the interests of TRIBE holders over those of the creditor hacking victims.

Before discussing the controversies surrounding this proposal, we need to briefly review what exactly happened with Tribe DAO. What were the incentives and controversies surrounding the liquidation?

It all started with a merger. At the end of December last year, after an overwhelming majority vote of support from both communities, the algorithmic stablecoin protocol Fei Protocol merged with the DeFi lending protocol Rari Capital to form Tribe DAO, combining two protocols worth billions of dollars.

Shortly after the merger, on April 30 of this year, Rari Capital's pool on Fuse was hacked, resulting in the theft of approximately 28,380 ETH, with losses of about $80 million. Among them, Frax Finance and OlympusDAO lost $13 million and $9 million, respectively.

@samkazemian posted the compensation situation for the victim addresses

At this time, Tribe DAO held over $100 million in assets and held a governance vote, resulting in TRIBE holders overwhelmingly voting to compensate all hacking victims. This governance vote to compensate hacking victims was once regarded as a moral benchmark.

However, it was puzzling that this approved compensation proposal was not executed. A few weeks later, on June 16, Fei Labs claimed that the voting results were perplexing and proposed that the previous proposal was invalid and needed to be voted on again. After this vote, the results completely reversed, and the DAO opposed repaying the hacking victims.

Regarding this violation of repayment, Frax Finance founder @samkazemian stated that he had previously raised relevant questions in the community and promised that any repayment to FRAX would be permanently used to provide FEI-FRAX liquidity to support their peg, but received no response. When asked to hold a meeting for discussion, the FEI team also chose to remain silent.

Two months later, FEI finally emerged, announcing the aforementioned Tribe DAO liquidation proposal. This liquidation proposal seems to be a compromise based on the public opinion from the previous two votes. Although it mentions compensating hacking victims, it only compensates a small portion and requires a vote from TRIBE holders to decide.

The debate centered on whether all Rari hacking victims should receive full compensation before TRIBE holders receive full compensation. The core of this debate can be summarized as how to design the priority of repayment: should it be to creditors represented by hacking victims or to shareholders as token holders?

Compound founder Robert Leshner stated in the proposal comments that "creditors" should be fully repaid before others benefit. "It doesn't matter whether the hacking victims are smart contracts/protocols or EAO. All users should be treated equally and not discriminated against." It cannot be that just because TRIBE indicated in a previous vote not to use PCV to compensate hacking victims (while the protocol was ongoing), it now chooses not to use PCV (during the winding down) to compensate.

In response, the project with the largest losses, Frax Finance founder @samkazemian, called it the most "low" governance in DeFi history, stating, "FEI has enough PCV to redeem every pegged stablecoin, repay every penny to the victims, and still have about $65 million in value left for TRIBE holders to redeem and profit. But FEI chose to pay a negligible amount to FRAX and Olympus, causing victims to suffer 95% of the hacking losses."

Dragonfly partner Haseeb also found this approach disappointing and sarcastically asked, "Is a hacked fund considered a debtor?" Many comments in the community and on social media mentioned that this is a "greedy" fraudulent act.

Community member Waple argued that in such cases, to unite all stakeholders, the principle of creditors > shareholders should be followed. Theoretically, equity/token holders should also bear the risks of the hacking incident while potentially benefiting from Fei/Rari tokens.

However, there is controversy over whether "hacking victims are creditors." Community member HittingBOMBS argued that "hacking victims lost assets due to risk, which does not represent a debt." At the same time, users who take risks using Fuse or other lending protocols like Aave, Composite, or Maker must be prepared to bear the losses from vulnerabilities, and since the DAO is dissolving, returning to hacking victims for future prospects or "goodwill" has little significance.

In response, Waple countered that using DeFi products should not expose end users to significant risks. Victims can bear "liquidation risk, illiquidity risk," etc., but not the risk of inadequate due diligence. If users lose confidence in the DAO for not compensating hacking victims, then no one will use the products/services offered, which would lead to a death spiral for the DAO.

Although there is some controversy, the voices from the community indicate that most members lean towards assuming the repayment priority of creditors > shareholders. According to Frax Finance founder @samkazemian's calculations, if FEI repays each hacking victim, redeems all FEI in the peg, and then proportionally distributes the remaining treasury to TRIBE holders, TRIBE, valued at $0.16, would return $1 billion to holders, which would be a perfect outcome.

So who is opposing the repayment to hacking victims? Community members provided a clue: analyzing the snapshot of the second vote result reversal in June shows that the opposing votes exceeded the supporting votes by 15 million, and the top five opposing votes came from insiders/FEI team/early investors, accounting for over 15 million votes. This means that the FEI team and early investors are manipulating governance for their own interests, first ignoring the community's vote to "support repaying hacking victims using PCV" and manipulating the results until they are satisfied.

Additionally, the Fei team has been accused of insider trading. Community member Onigiri stated, "10 hours before the proposal was released, the Fei team may have purchased about $500,000 worth of TRIBE, and hopes the SEC will investigate this and prevent these addresses (and related addresses) from participating in the vote."

The questioning of the Fei team's manipulation of voting governance continues to escalate, with many well-known figures in the industry, including Compound founder Robert Leshner, Polygon co-founder Sandeep, Dragonfly executive partner Haseeb, Frax Finance founder @samkazemian, and Getro co-founder Raulsann, discussing it in the community or on Twitter.

Amidst the doubts, Fei Protocol founder Joey also tweeted again, stating that "any specific point in the proposal can be changed, and each point needs time for discussion and voting." Joey also mentioned that he personally would not vote on this proposal. However, the trust crisis in this governance has spread, with comments sarcastically asking, "Will other members of the Fei team vote on this proposal?"

Currently, the final outcome of the proposal is undecided, and there is still more room for discussion and decision-making. Regardless of the outcome, the Tribe DAO closure and liquidation proposal raises a crucial question for the DAO industry: how to determine the liquidation mechanism when a DAO dissolves, prioritizing creditors or shareholders? If TRIBE token holders insist on passing the proposal due to their interests, how will this affect regulatory bodies and the public's perception of DAOs?

As community voting is set to open in the new week, this incident may further evolve and attract more attention, potentially becoming one of the milestone cases in DAO history.