The future of DAOs after FTX’s collapse

Though it was one of the largest crypto exchanges to date, on NOV 11, 2022, FTX filed for bankruptcy, and with that, severe fraudulent activities, mismanagement, and risky endeavours came to light.

John Ray III, FTX’s new CEO appointed to manage the FTX bankruptcy who previously oversaw massive bankruptcies, including Enron, strongly criticized FTX in a recent filing with the U.S. bankruptcy court:

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

Ray also noted:

From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.

The FTX bankruptcy filing revealed many misconducts in the company

It was a shocking revelation as many from inside and outside the blockchain industry believed Sam Bankman-Fried was a philanthropist and FTX and Alameda Research as legitimate and massively profitable entities (Bankman-Fried told Forbes that the profit was over $1 billion in 2020). In truth, he was actively conducting frauds and the companies actually lost $3.7 billion before 2022.

Influential vlog Nas Daily covered Bankman-Fried (in image) and his philanthropy. After the bankruptcy, Nas Daily released a video apologizing and explaining what happened with FTX and Bankman-Fried.

Need for DAOs

Unfortunately, this is not the first time users and investors have been deceived by opaque centralized entities and suffered severe losses. From Celsius to Mt. GoX, a lack of transparency, risk management, and accountability have been common issues behind socking downfalls. However, this is also an opportunity to appreciate the benefit and strengths of DAOs, such as increased transparency and accountability.

DAOs and Transparency

From accounting to the mechanism of the exchange, FTX was shrouded in secrecy, which was exacerbated by the fact that many in the top leadership team lived together and were involved romantically. According to the Wall Street Journal, “The lives of the people who ran FTX and its related companies were similarly blurred. Ten lived and worked together in a $30 million penthouse at an upscale resort in the Bahamas. The hours were punishing, and the lines between work and play were hard to discern. Romantic relationships among Mr. Bankman-Fried’s upper echelon were common, as was the use of stimulants, according to former employees.”

For DAOs, operations and mechanisms have much greater transparency. In MakerDAO’s example, its treasury and expenses can be checked on-chain. Even the compensation of each Core Unit member and recognized delegates can be tracked. This allows the community to have a clear view of both revenue and expenses.

Makerburn allows viewers to easily check both the treasury and expenses in MakerDAO

MakerDAO shares payment addresses and amounts for the community to track payments to recognize delegates

DAOs and Accountability

Although FTX had its exchange token FTT, the benefits were mainly limited to buybacks from the exchange’s profit, reduced exchange trading and withdrawal fees, and IEO participation. The only “governance” decision the holders could make was deciding what charity to donate a small portion of FTX’s profit. Of course, without transparency, whether the exchange actually had real profits to buy back and burn FTT in the first place is questionable. Similar to the CEL token of now bankrupt Celsius Network, FTT holders didn’t have the means to hold the team accountable for their actions.

On the other hand, DAOs allow accountability and, as a result, better risk management and better consensus with the community. One of the triggers for the FTX collapse was risky investments and FTT being used as collateral for the overwhelmingly large debt. In the DAO structure, such investments and the decision to increase the use of FTT as collateral would first go through discussions with the community. This setup encourages thorough due diligence and more reasonable proposals. Risky or unclear proposals are less likely to pass or get accepted by the community.

In addition, in DAOs, the community can hold the team or relevant players accountable. In the case of FTX, it’s implied that Bankman-Fried and several of his employees misused funds of the exchange. According to the filing with the U.S. bankruptcy court:

In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors. I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.

In the case of DAOs, if expenses were misused and/or responsibilities were unfulfilled, the community can hold the team accountable and remove them from such responsibility. The community can also reject or at least challenge the team’s proposal if they believe the team hasn’t done sufficient to fulfil their responsibilities.

For example, MakerDAO offboarded the Content Production Core Unit (department) and rejected several increases in budget requests for the same reasons. Another example is Sushiswap, where the community rejected the former Sushiswap’s CTO, Joseph Delong’s proposal to reward almost $1 million worth of rewards to the core team members.

The former Sushiswap’s CTO, Joseph Delong’s proposal to reward the core team got rejected through off-chain voting

DAO is Progress

DAOs, of course, are not perfect and have shortcomings and disadvantages. However, increased transparency and accountability can and will prevent disasters like the FTX bankruptcy.

Within DAOs, there are ongoing changes to further improve transparency and accountability. Tools like Snapshot make voting and governance participation more accessible, websites like Boardroom provide more information about governance. They also provide in-depth information about the activity of professional delegates like StableNode that help to improve governance and community involvement by adhering to strict standards and policies.

DAOs remain strong and will continue to play an essential role in the recovery and growth following this massive bankruptcy. As FTX falls, DAOs continue their rise.

Further readings

• Learn how to protect your DAO treasury in a bear market — “The State of Treasury Management for DAOs”
• Understand the attack vectors DAOs are exposed to — “Governance Attack Vectors”
• Insights into the emergence of professional delegation for DAOs and their value-driven approach — “What to expect from Professional Delegates”