KIP Draft: Dissolution of the DAO

KIPs Inactive
1

KIP Draft: Dissolution of the DAO

Proposal

Proceed with the dissolution of the DAO and distribution of the ROOK-governed treasury (https://debank.com/profile/0x9a67f1940164d0318612b497e8e6038f902a00a4) to ROOK governance token holders.

Background

Summary

ROOK DAO currently suffers from a profound misalignment of interests between the management team and ROOK governance token holders.

This misalignment has been reinforced by the design and implementation of a vicious gatekeeping mechanism by the current management team, in a way that enables them to veto and control any community-led proposal that wouldn’t fit their objectives.

Despite an alarming lack of product growth (79% decline of product usage volume over the last 6 months) and product development, the team is currently burning ~$6.1M per year from the DAO treasury, with an average yearly compensation of $300,000 per contributor (with ROOK equity only representing 11% of this compensation).

This results in value destruction at an unreasonable scale for ROOK governance token holders, without any recourse for the ROOK token holders to stop this transfer of wealth from their treasury to the management team. As evidenced by the latest team’s proposal, they no longer desire to operate in a DAO structure, and therefore we need everyone to be able to leave equitably.

This proposal intends to suggest the dissolution of the DAO and distribution of the ROOK-governed treasury to ROOK governance token holders, in a pro-rata format, resulting in each ROOK token receiving ~$54.9 per token.

Analysis and Rationale

  • The ROOK DAO governance is a farce and has been hijacked by the management team who designed and implemented a gatekeeping mechanism to ensure the team can profit freely from the ROOK-governed community treasury without needing to deal with governance from ROOK holders.

  • Currently, each proposal needs to be approved by sophons, including proposals that would remove them and elect new sophons. The current sophon committee is composed of 5 members, from which a majority of 3 are team members. This pernicious governance mechanism excluded ROOK token holders from the governance process, and secured the inability of external reviewers to challenge the current management team.

  • The leadership team is failing to grow the protocol and isn’t suited to lead the DAO anymore. In Q3 2022, volume was $41.6M, in Q4 2022, volume was $23.1M, to this date, in Q1 2023, volume is $9.1M, a decline of ~78% in 6 months.

  • The current burn rate of the 22 DAO contributors is $6.1M per year, with an average annual compensation of $300,000 per contributor. This could be justified by a large proportion of these salaries being paid in vested ROOK tokens, but you will be surprised to hear that only 10% of this compensation is paid in ROOK tokens.
    Their justification? Price was going down. So after making sure they received enough ROOK tokens to secure each governance vote, they decided to maximize their individual return by increasing the proportion of compensation received in stablecoins.

  • In regard to product development, there has been no publicly available and widely distributed information published about ROOK management team roadmap, and no objectives identified. This lack of basic business acumen demonstrates how far the management team is from product and market realities, while piling up cash from salaries and trying to cut ROOK token holders from the governance process.

  • This is a terrible use of the DAO treasury and should be immediately interrupted before the whole treasury is siphoned.

  • There is a profound misalignment between DAO contributors, sophons and ROOK governance token holders. While ROOK governance controls a DAO-owned treasury of ~$44M, the project is currently valuing the project below $10M, a 75% discount to the governance token-controlled cash reserves of the DAO.

  • The reason for this huge discount is the fact that the team remains unaccountable to this day, and is comfortable prioritizing their returns over the central role that the ROOK token was designed to have in the protocol governance. Additionally, this reflects the poor expectations the market has for this team to be able to convert a community-owned treasury of $44M into a protocol that will have a higher valuation.

Implementation

A smart contract will be created to allow ROOK holders to swap their governance tokens for a pro-rata share of the DAO treasury.

On ratification of this proposal, the DAO treasury will transfer the totality of the funds to the smart contract.

Specification

Prior to ratification of this proposal:

  1. Development of a smart contract that allows ROOK token holders to swap and burn their governance tokens in exchange for a pro-rata share of the DAO treasury.

On ratification of this proposal:

  1. Transfer the totality of the funds from the current DAO treasury to the newly developed smart contract.
4 Likes
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This proposal is a logical and viable option considering the present condition of the protocol.

2 Likes
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Have you considered potential legal ramifications of this type of action? Do you believe that this would not violate securities law or that if it were in violation, that it’d be unlikely for action to be taken against ROOK tokenholders?

I’m not a lawyer so don’t know the legal specifics but I’ve definitely gotten the sense that that’s the strongest argument against this type of action, regardless of all of the other points (which I do not entirely agree with). Specifically as a tokenholder, I wouldn’t want to put myself in legal jeopardy.

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I am in support of this proposal - I resonate with all points stated above

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I’m not a lawyer so don’t know the legal specifics but I’ve definitely gotten the sense that that’s the strongest argument against this type of action, regardless of all of the other points (which I do not entirely agree with). Specifically as a tokenholder, I wouldn’t want to put myself in legal jeopardy.

This is my feeling as well.

Have you considered potential legal ramifications of this type of action?

I recommend that @Wismerhill do some legal homework on this proposal idea and come back with an update. Sophons and voters would be crazy to knowingly put people in legal jeopardy.

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I think it preposterous to believe that an american securities law would be enforced upon thousand of worldwide, anonymous, smaller holders, on a tiny semi-abandoned project of > $10m market cap.

DAO dissolution has been practiced several time and not once has it been prosecuted, specially not to tiny projects as rook, and, eventhough I’m not a lawyer, the past year of leeching from the treasury could also be considered against the law, as the Rook team held tokens and built up governance with the sole purpose to profit off of it.

I support this proposal wholeheartedly, profit aside, is the right thing to do.

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DAO dissolution has been practiced several time and not once has it been prosecuted

When other people do something, it does not suddenly become equivalent to something else or legal. It’s possible those other scenarios are not relevant, not equivalent, and/or also illegal.

eventhough I’m not a lawyer

…

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That’s fine for you to believe but acknowledges the crux of the point - there is legal risk that some might not be willing to take. Tokenholders can collectively vote to commit this action but need to know the risks that it entails and I believe that that background is lacking from this proposal in its current state (note that I’ve also requested more legal info for the other proposal as well).

If you want to make a legal claim as to how the past year is “considered against the law,” please provide legal evidence as to what laws have been broken. Not being a lawyer, I can’t say firmly one way or another but throwing out accusations without grounds to back them up is unproductive.

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The Rook Quarterly reports cover updates from all branches of contributors. The objectives of of the project is clear, secure as much volume as possible. The last product launch fell short as you mentioned, the next two product launches aim to fix the lack of volume.

Using the DAO Treasury to advance the Rook Protocol is a perfectly fine use to me. Do you have any specific ways you would like to see the Treasury used in its current state?

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A few observations that seem important:

  1. Team doesnt want to operate in a DAO anymore (or at least a large enough fraction counting the CTO)
  2. A large component of holders do not trust the team to operate in holders best interests and want out.
  3. Another subset of holders want to stay on and try to be a part of this
  4. Guard has devised a complaint way for people to leave (JZ prop)

Therefore, I think there are two pieces that can come together. We do the spinout DAO at a reasonable price so people can exit. Reasonable is cash value plus modest premium for losing governance control of the tech. People who want to stay and team then keeps the rest of the treasury and also the tech. Stayors and team independently determine next steps for Rook token and project after split. Leavors determine their next steps for spinDAO after split as well. I’d estimate that this will end up being roughly 40/60 on leave vs go (based on other votes) so team will have like 3 yrs of runway plus all the tech that should print. Win-win folks

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I feel like everytime we talk about distributing treasury, the core team talks about legal risk while they are siphoning $7m/year.

Lol the legal risk is theft right now

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If the bottleneck is the legal risk taken by token holders who decide to redeem then:

  • redemption is not mandatory (i.e some token holder can stay, other can leave)
  • redemptors sign a disclaimer that this is their choice and only choice and they acknowledge the legal risk associated
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If a DAO is classified as a general partnership, every token holder takes on legal liability for other token holders’ actions so the scope of legal action isn’t limited to JZ, the team or even sophons. Maybe you can write some legal disclaimer (I’m not a lawyer, etc.) but it’s not as simple as it might seem. Offering the option for potentially illegal activity might be questionable enough.

I’d recommend taking a listen to a call Guard did a couple days ago: Craig Recording. He points out there may be some legal avenues to take but also talks about why there are legal concerns.

I can’t speak to all of his intentions but I think JZ’s proposal was very much focused on keeping things legal. Perhaps a compromise can be worked out (such as tedward’s) that does not venture into potential securities issues.

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One of the main purposes of the treasury is to advance the protocol. People have to be paid to do work on groundbreaking stuff, their time is not free. This is just a very short sighted KIP in my opinion from people who are just looking to make a quick buck.

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@Stile @j_z Have you considered the potential legal ramifications of this type of action?

There are multiple ways to address this issue. One of them would be the one proposed in @j_z proposal with the creation of a new DAO, and the agreement of the current DAO to transfer the ROOK-governed treasury to this new DAO, in order to explore potential new options with a higher degree of flexibility.

Eventually, if it makes sense for the current management team to go private but keep the current DAO structure, they could decide not to opt-in to this newly formed and funded DAO, and negotiate to keep some part of the treasury and to separate the ROOK token from the current DAO.

This would end up being a dissolution of the ROOK-governed DAO, but would allow the current DAO structure to keep its organization and team in place.

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We understand the legal risks. But frankly a lot of other DAO have done similar things, and when $40m treasury is in the balance, the r/r for the token holders is clear.

You can’t have a zero-risk approach in crypto, and trying to minimize the risk shouldn’t a good reason to assfuck token holders.

Again I think that with the following proposal legal risk is already highly minimized

  • redemption is not mandatory (i.e some token holder can stay, other can leave)
  • redemptors sign a disclaimer that this is their choice and only choice and they acknowledge the legal risk associated
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How do you propose we go about finding a premium that satisfices all parties involved?

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What you’re describing sounds very similar to the Incubator DAO proposal. Spinout DAO, Incubator DAO, Ragequit DAO, etc, it’s all the same thing. It’s basically the new DAO plus a proposal. Then whoever’s left can do what they want with it.

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I would like to detail how this implementation could happen:

Create Equitable DAO to govern the received totality of treasury assets from ROOK DAO treasury, governed by pROOK, a governance token created by burning ROOK for pROOK.

Equitable DAO Inception

At launch, the Equitable DAO will inherit the governance of the current DAO. It will require at least 4 multisig signers and 4 sophons. At least 2 sophons should not be multisig signers. Sophons and multisig signers can’t be contributors or former contributors of ROOK DAO. Sophons and multisig signers can only be eligible if they sign an agreement to the governing principle of Equitable DAO.

Nominations for signers and sophons will be by open solicitation, and people will be able to self-nominate. There will be a public vote to elect signers and sophons from among the nominated candidates.

A multisig wallet must be created to serve as the treasury for the Migration DAO. The elected signers will be added to the multisig, and any non-elected signers (including the creator of the multisig) must be removed.

Multisig, signer, and sophon addresses must be listed on this proposal before it goes to vote.

The Equitable DAO will be governed by one key principle:

  • Equitable DAO sole mission is to distribute value equally and use its treasury only to allow a ragequit process

The Equitable DAO will be governed by pROOK.

No Double DAO Rule

Current ROOK DAO team members won’t be allowed to participate in Equitable DAO governance. Therefore, they won’t be allowed to become multisig signers or sophons.
ROOK tokens currently owned by the DAO in the DAO treasury and Strategic Reserve won’t be allowed to migrate to pROOK, as they are currently owned by all ROOK governance tokenholders.

Migration

It is envisioned that there will be a 3 month period during which a smart contract will allow ROOK holders to burn their ROOK tokens for pROOK tokens. This 3 months migration window could be extended for another 3 months, to be decided by the pROOK governance. At the end of the migration window, no ROOK can be burnt for pROOK.

During the 3 months of migration window, there will be no expenditure or use of the treasury, in order to allow the migration to be conducted properly. At the end of this 3 months window, Equitable DAO will create a smart contract to allow all pROOK holders to claim their pro-rata ownership of the treasury assets.

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Thanks for the proposal and offering a viable alternative of a strategic overhaul of the DAO.

What would be the voting and path election be?

For example, I’d guess there would be active holders who may want to rage quit, others (team members) who would stay on one other path - and then there may be those who simply don’t vote or elect at all?