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Michaël van de Poppe - 22 August 2022

Fei Protocol dissolvement drama

The Fei protocol's plan to exit the Tribe DAO has sparked new controversy in the DeFi space, with the Frax Finance founder alleging that FEI is refusing to refund those who lost money in an early exploit. 

After an initial proposal to refund users affected by the hack was passed but was not enacted on, DeFi users started to question Tribe DAO’s motives. Now, the Tribe DAO has put forward a new proposal where they outline their plans to give back only a fraction of what was lost in the hack. The new proposal passed after the most votes against the repayment stemmed from the Fei team members themselves.

We had a look at the situation and outlined it for you in this blog post. Enjoy the read!

Fei-Rari merge

In December 2021, Fei Protocol and Rari Capital merged to form the largest DAO-on-DAO merger in history. Following the merge the DAO had access to a whopping total of $2B to bootstrap the protocol. Thanks to Rari Capital's permissionless lending pools known as Fuse pools, anyone can create a pool to provide and borrow any ERC-20 asset.

According to the merger proposal, “the main bottlenecks to Fuse’s growth are bootstrapping pools with initial liquidity, and ensuring manipulation resistant oracles for long-tail assets. The Fei DAO can easily provide this initial FEI liquidity to solve the chicken-and-egg problem, and has already done so in 15 Fuse pools, including 8 of the top 10.”

DAO hack

All seemed well post-merge but things quickly turned sour. A hacker found an exploit in the Rari fuse pool contracts and used it to steal $80M from the protocol.

Rari Capital confirmed reports from several blockchain security companies on April 30 that about $80 million worth of cryptocurrency was stolen through their platform.

The Fei DAO proceeded to offer the hacker a bounty of $10M if he/she returned the stolen funds, but without success. 

Tribe proposal

Tribe DAO had an initial governance vote at the time the protocol was hacked on whether to reimburse the exploit victims. The DAO's majority voted in favor of this and the proposal passed. However, the reimbursement did not occur.

This is where things got fishy.

Fei Labs, a key member of the DAO, subsequently submitted another proposal stating that the best way forward for the Tribe DAO is to compensate hack victims, redeem FEI for DAI, and distribute the remaining protocol-controlled value (PCV) to Tribe holders. The catch was that people who were owed money would only get back a fraction of what they had lost. This time, the proposal did not pass.

The proposal does not sit well with everyone. Frax founder Sam Kazemian has slammed the proposal, calling it the most "egregious 'DAO/DeFi' situation" he has ever witnessed. He added that FEI has “enough PCV to redeem every stablecoin at the peg, repay every cent to victims, & STILL have ~$65m in value for $TRIBE holders to redeem & profit.”

The criticism stems from the provision in the proposal to compensate hack victims with 88.9 million unvested TRIBE tokens worth $16 million. This is significantly less than the $80 million lost in the hack.

It turns out that the votes against the proposal largely stem from the Fei team itself. Such behavior is highly questionable since it makes it look like the Fei team wants to secure a larger portion of the Fei treasury for themselves, without fully paying back the users and protocols who were affected by the hack.

Conclusion

It is clear that the current iteration of DAO structures is flawed. In many cases we have seen proof that token holders will always vote for what will be profitable for them, and not what the morally right thing to do is. The Fei team has stated that the proposals are just proposals. They are not definitive and are open for discussion. 

It will be interesting to see how this situation unfolds itself. We do not expect the current proposal to truly be passed and be the final decision. All we can do for now is see how the Tribe DAO reacts to the outcome of the current proposal and how they will adjust their strategy going forward.