“That’s Our 2 Satoshis” — A Real-Time Example of Investing in DAOs

Jeff Dorman, CFA
Apr 10, 2023

Thats Our 2 Satoshis Logo

Source: TradingView, CNBC, Bloomberg, Messari

More Issues at DAOs and a New Form of DAO Dissolution
By Alex Woodard, Research Analyst
Last October, we wrote about the FEI Labs (Tribe) dissolution and the disingenuous aspects of the wind-down that were not in the token holders’ best interest. Currently, another ongoing DAO dissolution, Rook (previously KeeperDAO), is giving the Tribe dissolution issues a run for their money. Rook is a maximal extractable value (MEV) protection protocol that captures and redistributes MEV to users who generate it. (If you are interested in diving into the complex workings of MEV, we suggest this article.) Unfortunately, though ROOK was an interesting product, the situation deteriorated compared to its much larger competitor, Flashbots. In Q3 2022, volumes reached $41M; in Q4 2022, volumes were $23M; and in Q1 2023, volumes were just ~$9M—a decline of ~78% in just 6 months. 
Besides the low-usage product offering, 2 other issues have led to the community pushing for the dissolution of Rook DAO: 
1) Lack of product roadmap: The team has continuously discussed upcoming product releases but fails to outline them to the community, claiming they are under NDA. 
2) High burn rate of $6.9M annually: This equates to an average of $300K per contributor on a low-to-pre-revenue early-stage product. Given that just 11% of these salaries were paid in ROOK, there is a clear lack of alignment with token holders and a consistent treasury drain. Though unhappy and contentious, the community still voted in favor of this budget. 
Incubator DAO Phase 1 Is Where This Gets Wild
The day after the budget passed, the team released the initial Incubator DAO proposal on the Rook forums—it has since been deleted but is visible on this web archive page. This proposed spin-off DAO would manage $10M in assets to “explore new concepts for the ROOK token.” The goal was to remove ROOK token’s connection to the MEV product offerings and allow the team to build without the overhang of the DAO. However, for token holders, the initial Incubator DAO proposal meant that the day after the community agreed to pay the team to continue building out the product offering, they would lose all connection to it. That wasn’t all, though; the team would also take the majority of the $50M treasury:
Twitter, DCF GOD
It’s startling that this was a serious proposal presented as a benefit to token holders.
Dissolution Proposal and a Bad Case of Governance
On March 23, 2023, 2 days after the initial Incubator DAO proposal, a community member released a full dissolution proposal citing the value destruction for ROOK token holders by the Rook team, treasury bleed from salaries, and the Incubator DAO proposal. Given the $50M treasury and a ROOK token with just a $13M market cap, the proposal would have returned $55 per ROOK versus the $14 where it was trading when the proposal was released.
Because of the significant upside and the apathy toward the Rook team, we would have expected this proposal to pass. However, Rook’s governance structure elects “Syphons” that review and provide a recommendation for each governance proposal. Unfortunately, 3 of the 5 Syphons are Rook contributors. They immediately stated that they would reject this proposal and likely never would have made it to a vote (a team member controlling Rook’s snapshot has to push a proposal to a vote). 
DeFi aims to replace the current financial system, and DAOs aim to be more inclusive than typical corporate governance. So it is ironic that Rook has managed to create a governance structure that is a weird cross between non-independent board members and a biased ISS/Glass Lewis.
A Creative Solution: Spin-off DAOs
Given the lack of viability of a full dissolution, the community found a creative solution by revisiting the “Incubator DAO.” They negotiated with the team to allow 55% of the assets to flow to the spin-off DAO. In exchange, the team gets 45% of the assets, allowing a multiple-year runway; all the IP; all future revenues generated; and the elimination of the DAO overhang. Though still an incredibly amicable deal for the team, this is probably the best deal token holders can get. It would value ROOK at $44 per token, which is a huge win for the community (ROOK traded as low as $12 just a few weeks ago).
One Last Bit of Shenanigans 
As part of the spin-off DAO deal, the team agreed that they would not vote with their ROOK holdings, would not participate in the dissolution of the Spin-off DAO, and would not sell their tokens. This makes sense considering the team will likely receive equity or already has equity in “Rook Labs.” However, after agreeing, one of the team members decided to sell some of their ROOK, essentially double-dipping and hurting the community (increasing the supply of ROOK that would have a claim on the spin-off DAO).
Twitter, DCF God
Community members caught the sale because they were tracking team wallets. Following heated discussions in the Discord channel, the team member agreed to repurchase the ROOK they sold. 
Final Thoughts
The vote to create the spin-off DAO is ongoing until Tuesday but is currently 75K ROOK in favor and 35 ROOK against.
While DAO shenanigans are always entertaining, and a win for token holders is always good, the issues that led the DAO to this point provide important lessons:
1) Equity and token misalignment 
During the negotiation process, the Rook team stated several times that they already owned the IP of the products. This raises the question: what were token holders paying the team to build?
2) Awful regulatory environment for tokens
The team declined buybacks up to book value, citing legal risks (even though they have done buybacks in the past). Though “legal risk” is often used as a shield to avoid providing value to token holders, the ongoing lack of legal clarity in the U.S. has left the majority of governance tokens in limbo.
3) Overall poor governance structure
If DAOs and governance processes are supposed to be a more inclusive form of corporate governance, we should probably learn from what doesn’t work in traditional corporate governance. In crypto, there are “dual-class shares” in the form of equity in the teams combined with tokens (see dYdX), and there are non-independent boards (see Syphons in Rook DAO). Overall, there is a complete lack of alignment between the teams developing the products and the token holders who are supposed to govern them.
The solution for these issues across DeFi and DAOs is unclear, but token holders will continue to bear the brunt until there is a fix. Building is hard. Community management is hard. Governance is hard. But being transparent, forthcoming, and looking out for the token holders who have supported the project with their capital, time, and ideas is not that hard.


And That’s Our Two Satoshis!
Thanks for reading everyone!   
Questions or comments, just let us know.
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Michael Dershewitz - Chief Operating Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Robert Valdes-Rodriguez, CFA- Vice President, Research
Alex Woodard - Associate, Research
Christopher Macpherson - Associate, Trading and Operations
Andrew Masotti - Associate, Trading and Operations
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