by Nina Bambysheva, Maria Gracia Santillana Linares
Regardless of the recent rally, the crypto industry has been peddling the promise of decentralization, a new financial system without middlemen, for a decade; But with this Forbes investigative article, you may quickly recognize the obvious paradox of decentralization, which is almost equivalent to "fraud".
On November 2 last year, holders of a cryptocurrency called the Aragon Network Token (ANT) were told that their investments would be cashed out, whether they wanted to or not. The tokens were issued by the Aragon Association, a non-profit entity based in Zug, Switzerland, that writes software that helps run 7,500 decentralized autonomous organizations (DAOs) that manage $25 billion worth of crypto assets. The Aragon Society has also created its own DAO, with the lofty and eccentric goal of creating a court system to resolve disputes in the world, and holders of ANT will be eligible to serve as jurors.
The concept caught the attention of Tim Draper, a crypto-friendly venture capitalist. Tim has invested in great companies such as Hotmail, Skype, and his Draper Associates purchased $1 million worth of tokens in February 2020, but have since cashed out. Tim Draper tweeted at the time that this "new form of governance in Aragon" was "very exciting".
A crappy acquisition?
This may still be the case, except that ANT holders will not be involved anymore. They were kicked aside because the Aragon Association, the benchmark for decentralized finance, did something very central: it unilaterally decided to keep its assets out of the reach of corporate activists. A group, including hedge **ARCA Investments, wants to reduce the assets of about $200 million owned by the Aragon Association at the beginning of May to ANT 1$2.3 billion in market caps, when the token was trading just over $3, compared to just $2 two months ago. ARCA did not respond to our request for comment through its**.
Fearing that investors could eventually control more than 50% of the voting power, the association proposed a price of 00025376 Ether (about 5$76) to ANT, with holders having 12 months (until November of this year) to cash out. In this deal, at least $11 million, if not more, will go to a non-profit company founded by the Aragon Society. The association did not respond to a request for comment.
Not only that, but there may have been more twists to the whole thing. The disgruntled ANT holder managed to get $300,000 in the DAO and used the money to hire a law firm to oppose the strategy of the Aragon Society.
If it all looks like a pinnacle re-enactment of Wall Street's corporate plundering culture in 1980, it's because it was. The story of Aragon illustrates that the decentralization of finance and governance, where decisions are made by a large number of individuals rather than a handful of large organizations, can be just a utopian fantasy.
The challenge of utopia
Camila Russo, founder of The Definant, a publication focused on decentralized finance, said, "If you want to attract new investors and gain more legitimacy, decentralization is what you have to do in the crypto space." Many cryptocurrency businesses are nothing more than mimicking what already exists in traditional finance, but with an enticing high-tech narrative. ”
Founded in 2016, the Aragon Association aims to be a "digital jurisdiction for token governance", according to its one-of-a-kind crypto project charter. It aims to create a "decentralized court" that manages user conflicts outside of the programmable content of smart contracts (i.e., self-executing protocols that underpin decentralized finance). Its management software customers include Lido, the dominant crypto staking service, and virtual world provider Decentraland.
The association raised $25 million in May 2017 through the **ant token, and subsequently issued a manifesto announcing that it would create a free and open-source technology to govern the DAO, as its own"Fight for freedom"part. But it wasn't until January 2023 that the Aragon DAO was officially launched, with the aim of becoming the organization's governing body and custodian of its funds – including the ANT** earnings that are still held by the association.
Sources familiar with the inner workings of the group said that during that year, their goal was to slowly move assets to the DAO. "They were under pressure both internally and externally to become a DAO building technology for DAOs. ”
Ironically, the people who provide voting technology to decentralized organizations have found that full decentralization doesn't necessarily work. Anthony Leutenegger, CEO of Aragon X, a new company made up of a DAO development team, said: "We are very concerned about this attempt at a decentralized approach. Decentralization is a means to an end, not an end in itself. ”
Lletenger said that when the redemption period for ANT tokens ends, Aragon X will be restructured into a traditional Swiss non-profit company in November this year. He said that his team was not part of the board of directors of the Aragon Association and could not address the issue of the legitimacy of the dissolution of the DAO.
The company's justification for forcing ANT holders to withdraw was that Swiss law required it. In a May 9 blog post last year, the association said the activists were "a concerted organization" and that "there is evidence that the purpose of their involvement is to extract value from Aragon for financial gain." The Aragon Treasury was founded with the express mission of supporting builders in advancing decentralized governance infrastructure. ”
The intent is to make ANT a utility token under Swiss regulation, with the express purpose of "providing token holders with permissionless, trustless, and censorship-resistant decentralized governance participation to achieve the mission of the Aragon Project." According to the Aragon Association, the transformation of a social mission into a profitable enterprise could "lead to regulatory enforcement actions".
In an open letter, ARCA's stated that while the Aragonese Society's goals are "ambitious and noble", "in order to unlock future utility and governance value, its financial value must be recognized, or risk dissolution." "It advises the Aragon Association to buy ANT tokens to push up its **, similar to buybacks on the market.
Arca eventually got the buyback it sought, but found the terms to be "bittersweet". The deal provides $11 million in funding for a new nonprofit that will take over the intended status of the DAO, but it will become worthless if any ant is not tendered by November, and the Aragon Society will retain the funds. In an article published on its ** last November, ARCA estimated that 25% to 35% of the tokens in circulation would not be redeemed, leaving the new company with between $43.5 million and $61.4 million in assets. According to DuneAnalytics, more than half of the ANT tokens (about 17.4 million) have been turned over so far.
A new mess
Just after the Aragon Association transferred its first funds (a total of $300,000) to the Aragon DAO, the association had a dispute with the ARCA. The remaining ANT holders chose to partner with Patagon Management, an investment firm that had filed a lawsuit against the DAO's founding team, and provided it with $300,000 for the purpose of negotiating with or taking legal action against Aragon. The ANT tokens taken from the DAO "are directly harming the interests of investors without legal basis," and Patagon did not respond to a request for comment, posting on X, "In our view, this is a whitewashed, glorified theft." ”
Since the introduction of the first cryptocurrency, Bitcoin, in 2008, decentralization has been a driving philosophy for thousands of entrepreneurs and developers. Satoshi Nakamoto, the mysterious creator of Bitcoin, envisioned a peer-to-peer payment system that would rely on cryptographic proofs to verify transactions, replacing intermediaries such as banks and brokers.
This concept has spawned an entire industry, with a total value of almost $1 across all cryptocurrencies at the moment$7 trillion, which relies on a distributed ledger to exchange, track, and determine ownership of assets, including everything from physical assets such as *** and real estate to the digital currency itself. Companies such as JPMorgan Chase & Co., Samsung, and Tencent all use underlying blockchain technology for chain management, data security, and digital identity verification.
Just in 2021 and 2022, the peak of the latest bull run in cryptocurrency, venture capital investors poured nearly $50 billion into the blockchain-based economy, according to Pitchbook.
How did these companies end up in debt beyond their initial capacity? The answer is simple because they offer attractive high yields.
Blockchain-focused hedging** Dan Morehead, founder and managing partner of Pantera Capital, wrote in a July 2022 letter:"The agreement of all parties to transact openly and transparently on the blockchain, rather than behind the scenes by opaque, artificial, and potentially contradictory financial actors, is the vision we should strive to achieve, rather than clinging to an inefficient centralized financial system. "He believes that decentralized finance (DeFi) provides better protection for investors than centrally managed companies.
However, around the same time, cryptocurrency brokerage Voyager and digital lending firm Celsius filed for bankruptcy due to cryptocurrencies*** disrupting their business models. Mohyd argues that these failures are where DeFi excels — in the case of Celsius, for example, the company was forced to repay loans to lenders through smart contracts to preserve collateral — but argues that inflexible, automated protocols that don't allow changing conditions can't run an industry.
How did these companies end up in debt beyond their initial capacity? The answer is simple because they offer attractive high yields. While banks and their new-style neobank competitors offer interest rates ranging from 4% to 5% on high-yield savings accounts, DeFi lenders have as high interest rates as high as 20%.
But a series of hacks and crises at DeFi and across the industry, which culminated in the collapse of Sam Bankman-Fried's FTX in November 2023, shocked investors. According to data aggregator DeFi Llama, the amount of cryptocurrency held in DeFi projects currently stands at $54.7 billion, below the level of a mid-sized regional bank, compared to a peak of around $179 billion in November 2021. While the main reason for this decline is cryptocurrency, rising interest rates on low-risk assets such as US Treasuries have also weakened the appeal of DeFi as countries withdraw market support during the pandemic.
A bigger problem is that the concept of decentralization seems to be better in theory than in practice. One reason is that blockchain projects can be hijacked if an entity or group of allies controls more than half of the computing power or the right to verify network transactions. In this is called"51% attack"The bad guy can block new transactions or reverse settled transactions, or they can send the same token to multiple recipients, which can be fatal to the entire blockchain.
Similar things happened when it transferred its first tranche of ANT tokens to the DAO, the Aragon Association said in a May 9 blog post that it suffered "an organized social engineering and 51% attack." This is not exactly the same as an attack on the blockchain, as the DAO was supposed to be governed by its token holders, but the Aragonese Society's decision to take matters into its own hands to meet what it considers to be a legal requirement suggests that real-world concerns limit pure decentralization.
The complete decentralization of DeFi is illusory," economists at the Bank for International Settlements (BIS) wrote in a 2021 assessment of the sector. "DeFi platforms have a centralized element that usually revolves around the holders of 'governance tokens' (usually platform developers) who vote on proposals, which is no different from the shareholders of the company. ”
Earnings Agricultural Robot Advisors, Inc. yearnAndre Cronje, the founder of Finance, told Forbes in 2022 that decisions on major DeFi projects don't usually go through without the support of founders and financial backers. "Despite all the talk about decentralization, it won't be approved unless it goes through back-end channels. "
That year, researchers at the University of Luxembourg conducted a study of tokenized voting on 9 large DeFi projects and found their rights"Highly concentrated", and its exercise rate"Very low"。
Unlike ordinary voting, token holders are not obligated to notify of upcoming voting, and there is not even a mechanism to allow voting for those who store DeFi tokens on exchanges such as Coinbase.
The development of DeFi is much more concentrated than expected," said Russo of The DeFiant. "You'll see this centralization in governance (usually a small team making most of the decisions) and the distribution of token ownership – most of the tokens are owned by the team and a handful of venture capitalists. Then there's a kind of technical centralization, such as the presence of backdoors in smart contracts. ”
But she added: "This kind of drama of decentralization is not necessary. I think everyone understands that this ideal of decentralization is gradual", "You can't be completely decentralized from the beginning." I just wish all of these protocols were a more straightforward indication of how centralized they are. We have a way to develop in a more transparent way. ”
Legislators and regulators are also exacerbating the DeFi woes
In June, a U.S. judge ruled in favor of the Commodity Exchange Commission (CFTC), ruling that the decentralized collective Ooki DAO is required by law"people", so it is responsible for illegally operating the trading platform and illegally acting as a ** trader. The organization was ordered to pay $643542 and shut itself down.
Ian McGinley, CFTC Executive Director, said: "The founders created the Ooki DAO with the clear goal of operating an illegal trading platform. "This decision should be a wake-up call for anyone who thinks they can circumvent the law by adopting a DAO structure, intending to insulate themselves from law enforcement and ultimately putting the public at risk. ”
None of the DAO members responded to the subpoena or appeared in court, and the founders of its predecessor organization, Bzerox, who were identified as Tom Bean and Kyle Kistner in the default judgment, did not respond to our request for comment.
Multiple amicus brief submissions on behalf of Ooki argued that the DAO should not be treated as a single entity. The amicus curiae effort is so important because if DAO members come forward and say it'Hey, I'm a DAO member and I want to defend this matter', they will put themselves on target," said Gabriel Shapiro, a lawyer who was involved in submitting a brief in support of Ooki. What's more, he added, "100% of DeFi is illegal according to CFTC reasoning." Why? Almost all DeFi involves margin, financing, or leverage. ”
In addition to DAOs, authorities are also tracking down open-source software, such as Tornado Cash, a cryptocurrency mixer that allows users to hide digital transactions. In August 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned the service, claiming that since its creation in 2019, the service has been used to launder more than $7 billion worth of virtual currency, including 4$5.5 billion. A few days later, the Dutch authorities arrested Alexey Pertsev, one of Tornado's founders, on charges of money laundering. He is still in the Netherlands and his trial is scheduled for March.
The following year, U.S. prosecutors indicted two more Tornado developers, Roman Semenov and Roman Storm. According to blockchain analytics firm Elliptic, Semyonov is at large and is believed to be in Dubai, while Storm is under house arrest in his home in Washington, Coindesk reported. His trial is scheduled for September.
On January 22, Storm posted a paragraph on X in which he asked for donations to fund his and Pertsev's defense. "My team of lawyers and I will present a strong defense at trial, not just for my family, but for future software developers and financial privacy," Storm said. The donation, "Open Source is Not a Crime," has raised more than $500,000. Storm and Semyonov did not respond to requests for comment.
In this regard, the industry has also fought back. Marisa Coppel, senior legal counsel at the nonprofit Blockchain Association, said in a statement in the organization's second amicus brief in support of Tornado Cash:"OFAC's actions set a dangerous new precedent that greatly exceeded their authority and undermined the privacy rights of law-abiding Americans. Ofac must see Tornado Cash for what it is: it is a tool that anyone can use. Instead of sanctioning tools with legitimate purposes, OFAC should continue to focus on bad actors who misuse such tools. ”
Despite internal setbacks and regulatory resistance, decentralized systems remain popular in the cryptocurrency world.
Decentralization is more of a 'means to an end' – what can you do as a developer on these new platforms that you couldn't do before? Austin Green, co-founder of blockchain governance platform Llama, asked. After all, "the only way to achieve the best organizational structure is to try many different things and see what works and what doesn't." ”
Will Papper, co-founder of Syndicate, a blockchain-based infrastructure provider for internet products, said: "For a long time, decentralized technologies have always been less efficient and usable than centralized technologies. At the end of the day, storing data on a trusted system, such as a database, is always more efficient than storing data on a widely distributed 10,000 nodes. ”
This article is translated from. https:/www.forbes.com/sites/ninabambysheva/2024/01/30/exposing-the-myth-of-decentralization/?sh=2f3905e32235