The Golden Boys’ Gambit: What Compound DAO's Treasury Vote Reveals About Governance Risks

The Fine Line Between Strategy and Subterfuge

In the world of Decentralized Autonomous Organizations (DAOs), the distinction between a strategic move and a governance attack can be razor-thin. This reality was on full display in the recent saga at Compound DAO, where a group of five relatively obscure members, dubbed the “Golden Boys,” managed to secure control over 5% of the DAO's treasury. Their controversial proposal, which narrowly passed on its third attempt, has sparked a debate about governance, transparency, and the future of DAOs.

The Power Struggle: A Close Call at Compound DAO

The drama unfolded as the Golden Boys submitted a series of proposals to the DAO community, requesting that 5% of the DAO’s treasury be invested in a new yield-bearing instrument. On the surface, it seemed like a beneficial move for all token holders. However, the catch was that the funds for this financial instrument would be stored in a vault controlled not by the DAO, but by the Golden Boys themselves.

Unsurprisingly, this proposal faced significant opposition. Critics within the DAO community saw it as a governance attack—a self-serving attempt to seize control of valuable assets. Despite the resistance, the Golden Boys managed to push their proposal through on the third vote, winning by a narrow margin.

A Settlement and Its Implications

Amidst accusations of attempting to raid the DAO’s treasury, the Golden Boys ultimately agreed to a settlement with Compound DAO. They proposed creating a similar yield-bearing instrument, but with control remaining in the hands of the DAO, not the Golden Boys. In an effort to address the community’s concerns about security, they also implemented a Trust Setup function to mitigate the risk of vault theft.

This settlement, while resolving the immediate conflict, raises deeper questions about the nature of governance within DAOs. The Golden Boys' actions, though controversial, were not purely self-serving. Their approach had more in common with that of activist investors than with outright scammers, highlighting the fine line between innovation and exploitation in DAO governance.

The Broader Impact: Trust, Transparency, and the Future of DAOs

While the outcome of this governance struggle may seem like a win for Compound DAO’s token holders, who now have the opportunity to earn additional passive income, the incident casts a shadow over the concepts of trust, transparency, and democracy within DAOs. If this round of "golden boys" could navigate the system with relative ease, what’s to stop the next group from being less benevolent?

The comparison to activist investors is apt. Just as these investors can either enhance or devastate traditional companies, similar dynamics can play out within DAOs. The classic tale of corporate upheaval, as illustrated in Bryan Burrough’s Barbarians at the Gate, serves as a cautionary tale for DAOs, which must safeguard against governance attacks that could spiral out of control.

Guarding Against Governance Attacks: Legal Protections and Voting Reform

To prevent such governance dysfunction, DAOs must take two critical steps. First, they should consider incorporating as limited liability corporations (LLCs). This legal structure offers protection from personal liability for members and allows for flexible corporate governance design—essential features for DAOs. Several states, including Wyoming, Tennessee, and Vermont, have enacted specific legislation for DAO LLCs, making this a viable option for many.

Incorporation also has implications for voting behavior within DAOs. Notably, venture capital giant a16z, the largest vote delegator in Compound’s governance, abstained from the Golden Boys' proposal. Their lack of participation could have been driven by concerns over legal liability, as Compound DAO is structured as a general partnership.

This structure potentially exposes actively voting token holders to unlimited personal liability, a risk highlighted by the recent legal action against Ooki DAO. The Commodity Futures Trading Commission (CFTC) proposed holding all voting members of an unincorporated DAO personally liable for their participation, a threat that could deter deep-pocketed token holders from engaging in DAO governance.

Evolving DAO Governance: Participation and Innovation

The second crucial step for DAOs is to evolve their governance participation processes. The timing of the Golden Boys' proposal vote—over a weekend when participation was low—may have contributed to its narrow victory. To avoid such scenarios, DAOs should consider implementing weekend-free voting periods or requiring a supermajority to override this rule.

Another innovative approach could involve AI proxy voting, where AI models vote on behalf of token holders in their absence. While this concept is still in its infancy and raises numerous legal and practical questions, it could significantly enhance governance participation in DAOs. If properly integrated into a DAO’s bylaws and aligned with relevant state laws, AI proxy voting could become a game-changer in the quest for more robust and democratic governance.

Conclusion: A Wake-Up Call for DAOs

The Golden Boys’ narrow victory at Compound DAO serves as a wake-up call for the broader DAO community. Without strong legal protections and improved governance processes, DAOs remain vulnerable to attacks that could undermine their integrity and stability. The incident underscores the need for DAOs to evolve, ensuring they are equipped to handle the complexities of decentralized governance in an increasingly regulated environment.