Governor Note: The Fei Unwind

Key Insights

• Fei Labs intends to wind down Tribe DAO and has returned all unvested tokens to the Tribe DAO treasury.
• The repayment of Rari Fuse hack victims remains a core dispute in DAO negotiations, with stakeholders fighting over the distribution of the proposed reparations budget of 57 million TRIBE.
• Fei Labs has suggested that the wind down happens over three phases: Consolidation (of PCV), Rari Fuse hack reimbursement, and final redemption of PCV.

Introduction

On Aug. 19, 2022, Fei Labs posted TIP 120: Return Unvested Tokens as an on-chain vote, marking their last participatory effort in the Tribe DAO. With over $200 million worth of assets controlled by the protocol, the DeFi ecosystem may witness the most significant DAO unwinding to date. There are many stakeholders to consider, millions of dollars at stake, and little precedent.

How this unwind will unfold is yet to be determined. Fei Labs has only initiated the discussion with its publication of TIP 121: Proposal for the future of the Tribe DAO to Tribe DAO’s Forum. Between large asset sales, shifting liquidity, various stakeholders, and a complex voter profile, we aim to articulate the variety of options and trade-offs at play.

TIP 121: Context

On Apr. 30, 2022, the Rari Fuse protocol suffered an exploit that resulted in the loss of $80 million across seven Rari Capital Pools. The Rari pools were halted, and the Tribe DAO was left with a difficult choice to either refund the repayment of the victims using Fei PCV or refuse repayment and leave Rari Fuse lending pools in debt. On May 15, 2022, the community approved FIP 106 and tasked the Tribal Council with refunding affected users using Tribe DAO funds. However, a bloc of FEI insiders, investors, and core contributors aimed to protect FEI protocol PCV and vetoed the proposal once it was published on-chain by the Tribal Council. As a result, the proposal proceeded to a Tribe DAO on-chain vote: TIP 112. Ultimately, the final on-chain proposal was rejected, overturning the outcome of FIP 106. The DAO voted against a reimbursement, stalling the Rari Fuse protocol and protecting FEI PCV.

TIP 121: Proposal for the Future of Tribe DAO

TIP 121 outlines a plan for Fei Labs to unwind the current PCV positions, compensate users of the Rari hack, and develop a process for FEI and TRIBE holders to claim their share of the PCV. The proposal describes three components: Consolidation, Fuse Hack Victim Payment, and Final Redemption.

Consolidation

The DAO’s first step is to vote on the recently proposed TIP 121A, which will signal the method for consolidating $220 million worth of Fei Protocol PCV. This includes withdrawing and burning remaining protocol-owned FEI in Fuse ($1.1 million), Compound ($2 million), and Aave ($10.1 million). While the valuation appears relatively straightforward, complications around the consolidation of assets remain to be solved. Due to liquidity issues, community members will be faced with difficult decisions concerning the unwinding of stETH. In addition, Tribe DAO holds a variety of DAO governance tokens. The Messari team has noted holdings of LQTY, INDEX, FOX, vlAURA, veANGLE, and stkAAVE, which will be consolidated pending future governance decisions.

Fuse Hack Victim Payment

After the Final Consolidation, the DAO will vote on what and how to distribute the remaining underlying assets. The Rari Fuse hack victim reimbursement is a major point of emphasis throughout TIP 121, and Fei Labs suggests that Tribe DAO reimburse the victims of the hack using the 57 million TRIBE remaining in the RGT peg exchanger. The TRIBE in the peg exchanger will be distributed using the 7-day time-weighted intrinsic value of TRIBE. The proposed distribution plan would distribute funds equally to each affected address, capped at the dollar value lost. This should benefit retail victims but would likely leave the largest victims of the Rari hack vulnerable to losses.

Fei Labs has also stated that they do not believe users who purchased Nexus Mutual Insurance should be included in a Fuse hack payment, as many of them have already sought reimbursement with Nexus.

(Note: Following the Rari hack payment, the distributed TRIBE will be considered “redeemed” and will no longer be counted in the circulating supply total for the Final Redemption.)

Final Redemption

The final step to halting Fei Protocol operations is to allow FEI and TRIBE holders to redeem their tokens for DAI and the remaining PCV. Once the DAO has voted and passed contracts to be used for redemption, there will be an on-chain vote to revoke governance powers of all forms. At the conclusion of this vote, TRIBE and FEI will effectively become redemption receipts. All remaining FEI holders will be able to exchange their FEI for DAI at a 1:1 rate, and TRIBE holders will be able to exchange their TRIBE for a share of the remaining PCV. The exact value TRIBE holders will receive remains unclear, even with multiple community members attempting to calculate the intrinsic value with the information given. Regardless, the value will remain contingent on how the DAO decides to compensate the Rari hack victims, and the price of TRIBE at the time of redemption.

Intrinsic Value of TRIBE = (PCV  -  User Circulating FEI) ÷ Circulating Supply of TRIBE

TIP 121: Impacts

While the proposal attempts to wind down the DAO equitably, not every stakeholder agrees with the proposed solution.

Winners and Losers

FEI holders appear to be the most likely winner of the wind down. They'll come out relatively unscathed as they can redeem FEI for DAI at a 1:1 rate, only paying some gas for the transaction. The winners should be decided by the pipeline of proposals to come, as those will determine which victims of the Rari hack are made whole and what funds remain for TRIBE tokenholders.

Given the proposed Rari reimbursement distribution plan, large victims of the Rari hack are a clear second priority to retail. Sam Kazemian, the founder of Frax Finance, was one of the first to speak out via Twitter on the flaws in the proposed reimbursement. Sam claims that TIP 121 would reimburse only 2% of Frax's $12.3 million loss, 3% of Olympus Dao's $8.9 million loss, and around 20% of Balancer and Vesper's $1.2 million losses.

Another large victim of the Rari hack, Olympus DAO, plans to expedite OIP 112 through its governance process and begin offering incentives to TRIBE holders who delegate their voting power to Olympus. Olympus intends to use the voting power to vote in favor of full repayment to all Fuse hack victims. With the voting incentives sourced from the hack reimbursement, the bribes will only be paid if a vote to reimburse all hack victims is passed.

If that weren't enough, FEI Genesis participants have also chimed in, stating that they have endured losses similar to or greater than those of the Rari victims. It doesn't help that the Tribe token has fallen 90.81% since its ATH in April 2021. Considering the losses of Genesis participants, it's unclear whether any group will be made whole when the dust eventually settles.

Matthew Graham of the Governance House also expressed concerns about TRIBE holders redeeming smaller tokens currently held by the DAO. Matthew reasons that when redeemers exchange their TRIBE for INDEX, FOX, and LQTY, they will generate a significant sell pressure for these tokens spreading collateral damage across external communities.

Large Stakeholders

The proposal will also impact the investors of Fei Protocol's series A, who collectively invested $19 million at a rate of $0.38 per TRIBE. There has been no clear direction for early Fei Protocol investors, who make up 5% of the total token supply and are subject to a four-year linear vesting schedule. Thus far, most of FEI Lab's team members appear to be for both TIP 120 and 121. Lead delegates and voters, including Erwan Beauvois, have demonstrated support on-chain. However, it remains to be seen how the FEI Labs voter bloc will react when a proposal to reimburse Rari Fuse victims inevitably surfaces. The same voter bloc was behind the veto and defeat of the Rari reimbursement, including Buckley Ventures (an early FEI Labs investor) and two additional FEI protocol core contributors.

An Ethical Wind-DAOn

Stakeholders, Tribe DAO, and Fei Labs agree on the need for an ethical wind down. Whether that is achievable or not remains a topic for debate. There is arguably no precedent for a successful wind down at the scale of the Fei Protocol. Some community members, including the founder of Compound Robert Leshner and the co-founder of Lido Cobie, have advised Fei to haircut investors and prioritize repayment to creditors, including hack victims.

While Tribe DAO may be the largest DAO from a treasury standpoint, it is not the first DAO to face an unwinding. Historically, when the market cap of a DAO's governance token falls sharply below the value of the DAO’s treasury, it creates a perilous dynamic between tokenholders and a DAO's core contributors. On March 27, the Lobis DAO faced a similar proposal that allowed LOBIS tokenholders redemption against the treasury. Lobis succeeded in deploying a redemption contract and set a precedent others have since considered, including Yam Finance and Rome DAO. In both cases, the endeavors were controversial, with core team members battling to keep the protocol alive while tokenholders fought to redeem their holdings against the treasury. If previous unwinds are any indication, the fate of the proposal will fall in the hands of voters. TRIBE tokenholders, regardless of their opinions, will need to accrue either voting power or political pressure to exert their will.

Next Steps

TIP 120 passed on Sunday, Aug. 21, 2022, and executed on Aug. 22, 2022, effectively returning all of Fei Labs’ unvested tokens to the treasury. The main components of the Consolidation step were posted in the Tribe DAO forum, along with a non-binding signal vote on Snapshot Aug. 23, 2022. The reimbursement and final redemption proposals are expected to follow in the coming weeks. Should these votes pass, a final vote revoking all governance power in Tribe DAO is expected to appear in late September or October. The proposal(s) may require additional time depending on security audits and acceptance of the proposals.

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