A Case without Merit
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May 25th, 2022

There’s a new spat in DAOland that raises interesting questions at the confluence of law and code.

To sum it up, Merit Circle, a DAO in the gaming industry, received funding from YGG —a competing platform— as part of their last round. There was an expectation of non-financial value to be contributed by investors, and it is argued YGG hasn’t delivered this part of the deal. As a result, some DAO members are seeking to cancel the agreement and return YGG’s seed investment. While a minority opposed the proposal, it seems that the overall sentiment is in favor it.

If you haven’t had a chance to read the forum thread, I recommend you to read the OP, the initial responses and the first dissenting comment by “BambinoValue”.

Also, note that the forum thread isn’t just a conversation. It’s a proposal whose intent is to lead to an executable vote by DAO members.

Now, what to think of it?


It seems to me that there’s a collision between the legacy business world, based on legal agreements and representatives with legal duties, and the DAO world that puts more value on code and empowered communities.

Ideally, the two sides should act in synergy. In this case, we see them antagonizing in a somewhat destructive manner.

According to the OP, YGG didn’t provide the value they were expecting to. In a traditional setup, there are provisions in place in order to make sure that parties actually deliver their material contribution to a deal: partial payments, escrow, penalties, dispute resolution processes, etc.

What is striking here is that neither the OP nor the people voicing their support to it seem interested in learning about the actual terms of the deal. They are just feeling 1) righteous and 2) empowered to break the deal.

The whole case is a theatrical representation of Lessing’s pathetic dot theory, which describes the “four forces that constrain our actions: the law, social norms, the market, and architecture”. In a digital world, the equivalent of architecture is code, hence the famous “code is law”, a call for embedding constitutional principles into the fabric of the internet.

The basic illustration of the pathetic dot theory - L. Lessig - CC.BY-SA 2.5
The basic illustration of the pathetic dot theory - L. Lessig - CC.BY-SA 2.5

The initial driver of the deal was market-based (the implicit price of the token purchase), then stakeholders diverged according to how they value the law —the actual agreement— vs social norms —discussing whether what YGG provided was deserving to be an investor, regardless of the actual terms of the deal. After hastily concluding against YGG, without due process nor adversarial procedure, most of the vocal community members seem happy to break the deal —and they can (code/architecture).

I understand the frustration of DAO members facing a blatant abuse of the spirit of the agreement, if not of its letter. I also appreciate that social norms are so powerful in DAO-run communities that participants are really held accountable and can’t hide behind tricks of the law.

However, we want communities, not mobs.

As a few people pointed out on Merit’s forum, breaking the seeds agreement might lead to dire consequences for the project, and even for the industry in general.

If DAO members don’t see themselves as compelled to respect the commitment that was made on the behalf of Merit, what are the chances that others enter into SAFT or similar agreements? What’s the point of signing a contract when the party you’re signing with plans to morph into an entity that may or may not apply it, depending on their mood swings?


Another stunning aspect of this thread is the total disregard members seem to have for the people who actually signed the token purchase agreement on the behalf of Merit, and who may be personally liable for breaking it.

Again, who would want to take the risk of being a legal representative of a company that turns against you, once it decentralizes into a DAO? Founders and leaders already expose themselves to regulatory risks. Should they also be wary of being betrayed by the very same people they hand over their governance power to?

Some may argue that trustlessness should remain the most important principle when entering into a deal with a crypto project. Seed investors shouldn’t have to trust the early company nor the DAO to allocate them tokens, founders shouldn’t trust the investors to deliver whatever they promised in addition to their funds, DAO members shouldn’t be trusted to make decisions that comply with regulations or earlier contractual commitments, etc.

Instead, incentives should be designed so that they remain active until every commitment is fulfilled, and code should be used to enforce them.

Yes?

I understand the ethos, but is it realistic to expect such a maximalist view of trustlessness to be applied to every collaboration a project entails?

Is it economically efficient? There are transaction costs associated to trustlessness.

And is it desirable?
Do we want to frame every joint effort into an ironclad procedure?


Circling back to the case at hand, here are my takes.

When the law applies, acknowledge it

DAO members would be well inspired to take into account the existence of the law and the consequences of infringing it, in the interest of the project itself, and of some of its participants (known representatives exposed to lawsuits).

Negating its existence won’t make it disappear. It’s one thing to favor legitimacy over legality, and another one to behave like law had become irrelevant because we have DAOs. It will come back to bite us all.

When the law doesn’t apply, its spirit might

All legal systems guarantee, at least in theory, that the accused retain certain basic rights, like the right to present a defense, to confront accusers, or to appeal.

Disputes in DAOs should be approached with the same guarantees in mind, if not in code.

A public conversation in a public forum is a step toward this goal. It’s hardly enough. Social practices for conflict management and dispute resolution are available, and there are even training sessions specifically designed for DAO members, offered by GravityDAO. For on-chain maximalists who dislike both legal arrangements and personal trust, use decentralized jurisdictions like Kleros!


Thanks to Phil for telling me about the whole story 🙏

Cover image: The Murder of Powell / C.S.R. Photograph. Retrieved from the Library of Congress.

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