An overview of the Fei Protocol's downfall — a result of disputes, vetoes and lack of trust that created a domino effect.
- Fei Protocol, a decentralized stablecoin protocol, faced a hack causing significant damage.
- Fei team proposed winding down the project and redeeming tokens for protocol assets.
- Different stakeholders were impacted differently, with FEI holders benefiting the most.
- Challenges for DAO governance include aligning incentives, balancing efficiency and democracy, and handling conflicts.
- Successful DAOs require clear communication, community engagement, and trust among stakeholders.
The Fei-Fuse Hack
The veto triggered another on-chain vote by the Tribe DAO, where the proposal to reimburse the victims was rejected by the majority of Tribe holders. This was seen as a betrayal by the victims and the community. The Fei team did not communicate or negotiate with the victims or their supporters, despite their attempts to reach out and offer solutions.
In August 2022, the Fei team announced that they were winding down the project and proposed a plan to redeem FEI and TRIBE tokens for protocol assets.
Challenges for DAO Governance
The situation highlighted some of the problems, challenges and lessons for DAO governance:
Aligning the Incentives and Interests of Different Stakeholders
Users, investors, developers and partners are all stakeholders in a DAO. The difficulty of aligning their incentives was illustrated by the conflict between FEI holders and hack victims over the reimbursement proposal. FEI holders wanted to protect their treasury value and the stability of FEI, while hack victims wanted to recover their losses. The veto of the initial proposal by a group of FEI insiders also showed a lack of alignment between the core contributors and the wider community.
Balancing Between Efficiency and Democracy
How to design voting mechanisms, quorum requirements, delegation options and veto powers are essential questions to DAO governance. An example of this was the multiple votes that took place on the Tribe DAO platform. The first vote was done using a snapshot tool that was not binding on-chain, which allowed the Fei team to veto it. The second vote was done on-chain using a quadratic voting system that gave more weight to smaller holders. The final vote was done on-chain using a simple majority system that did not allow any veto. The different voting systems had different implications for the outcome and the legitimacy of the decisions.
Handling Conflicts and Disputes
Resolving disagreements, enforcing accountability and preventing malicious attacks are key parts of DAO governance when things go south. The hack exploited a bug in the Fei-Fuse code that was not audited or tested properly, and it triggered a series of disputes between the Fei team, the Rari team, the hack victims and their supporters. The Fei team did not communicate or negotiate with the other parties effectively, which led to more frustration and resentment. The hack also exposed some vulnerabilities and risks in the protocol design and security.
Principles of Successful DAOs
There certainly are successful DAOs out there, even if their degree of decentralization is questionable:
Future successful DAOs will need to follow several principles if they want to be successful.
Clear and Transparent Communication
DAO members should share relevant information, provide feedback and explain the rationale for their decisions with the rest of the community in order to build trust, avoid misunderstandings and foster collaboration. The lack of communication in the FEI Protocol dissolution led to heated discussions and left several stakeholders unhappy after the solution was passed.
High Level of Community Engagement
DAO members should participate in the decision-making process, contribute to the DAO goals, and interact with other members to improve the quality of decisions and foster innovation. FEI failed at aligning the interests of hack victims and those of the protocol founders, leading to the eventual rift.
Fostering Trust and Cooperation Among Stakeholders
DAO members should work together towards a shared vision, support each other and resolve conflicts peacefully. Still, on-chain governance has a long way to go as the Fei Protocol example showed. While decentralized governance does indeed offer a lot of potentials, it also comes with cooperation tradeoffs, which can lead to DAOs falling back on centralized problem resolution.