Crypto whales like Humpy are gamifying DAO voting, but there’s a solution.

Contrary to their name, many decentralized autonomous organizations are not autonomous, and control is often centralized among large token holders who have the power to influence governance decisions.

A whale or small group of holders controlling around $17 million in tokens could attack a protocol that controls over $2 billion in user funds.

Ironically, the inaction of other whales is also a problem. Their enormous voting power can protect the protocol from governance attacks, but it is often wasted doing nothing in the background.

“The amount of money needed to attack these governance protocols is not that large, as participation in the current DAO governance setup is very low,” Luca Prosperi, CEO of M^0 Labs, told the magazine.

In several recent cases, DeFi whales have acquired significant tokens and influenced governance decisions to get what they wanted.

Humpy’s controversial proposal highlights flaws in DAO governance.

The most notorious example was when a cryptocurrency whale named Humpy proposed that the Compound DAO allocate $25 million worth of COMP tokens to a yield-generating protocol controlled by their group, the Golden Boys.

After two failed attempts, Humpy’s third attempt was successful on July 28. Michael Llewellyn, a compound security advisor, suspected the proposal was made to hold the vote on a weekend when turnout was low.

This proposal was ultimately rejected in favor of a lucrative product controlled by Compound, but this situation could have been avoided if influential voters had voted actively.

Humpy’s group has accumulated about 325,333 COMP in the open market, just 75,000 short of the quorum threshold of 400,000.

On Compound, a16z holds the highest voting power with 333 delegates. 361,000 COMP represents 90.25% of the quorum.

Despite these facts, VC firms rarely vote on governance decisions, even to thwart proposals that other users view as “governance attacks.”

But there’s probably a good reason for that.

Dan Hughes, founder of DeFi platform Radix DLT, told the magazine, “If you have that many votes, you either have to vote honestly on (almost) everything or not vote at all.”

“Voting on only a few proposals sends a signal of interference or agenda. It may not. If your position is abstinence, you should not be delegated and should delegate your vote to several third parties.”

Humpy sat on several walls before Compound.

Diego Alvarez, chief strategy officer for Ethereum’s layer 2 network Cyber, does not consider Humpy’s Compound proposal a “governance attack” given the subsequent communication, compromise, and eventual resolution.

“It was a bit opaque in some ways, but not outside the scope of the DAO, because it happened within the DAO’s systems and processes,” he says.

But the compound wasn’t Humpy’s first rodeo.

The whale is also known to have made similar governance “moves” on DeFi protocols Balancer and Sushi.

The Balancer Saga ended with a “peace treaty,” but the fight between Humpy and Sushi left dirty dishes in the sink.

Jared Grey, then Sushi’s “head chef” (now head of Sushi Labs), and his operations team faced a huge backlash in March 2024 when they proposed transferring Sushi’s financial assets to Sushi Labs, a UK corporation incorporated in October 2023.

The move was called a “hostile takeover” by former Sushi developer Naim Boubziz, but Gray defended it as an attempt to protect the protocol from Humpy’s alleged governance attack.

“(During the discussion) he made several legal threats against me and the team,” Gray told the magazine. “He delegated some of his stake to SushiCitizens, a group of disgruntled former Sushi contributors and community members (led by Boubziz). He pressured the operations team in every way he could to get the results he wanted.”

Gray said Humpy used Sushi Citizens as a spokesperson to make “covert governance proposals” and post “inflammatory tweets” about Sushi’s operations.

Gray claims that “the deal he proposed to Sushi DAO and its operations team originally involved increasing the token supply from 750 million, with two-thirds of the newly minted tokens going to a pool of his choice and one-third going directly to support his Golden Boys project,” adding that his team did not agree to the deal.

Humpy responds

In response to their claims and arguments, Humpy asked the Magazine “how” and “who” should determine that a governance proposal is secret. The whale also defended SushiCitizens as a legitimate concern DAO member.

“Legal action is absolutely legal in a democracy. Unfortunately, I have not taken legal action against this dishonest team,” Humpy told the magazine.

“Under the false pretense that Sushi was under attack, the core team transferred most of the DAO’s reserves to a UK company whose ultimate ownership was held by the team of members and their lawyers,” they say.

Humpy did not say whether he thought Compound and Balancer’s recent proposals were a governance attack.

DAO governance discontent of various shapes and sizes

Governance issues that demonstrate siloed control among wealthy insiders have been observed even in the largest DAOs.

“If you look really closely, there’s a very small group of people who are not appointed, who make all the decisions,” said M^0 Labs’ Prosperi.

He recalls a proposal from MakerDAO in 2022 that was dominated by a small group despite strong community support.

“I called for more checks and balances in the DAO, and while all major shareholders voted in favor at the time, it wasn’t enough to win over the DAO founders.”

Governance issues aren’t limited to large DAOs.

In 2023, a group of “hacker beasts” known as “DAO Raiders” took over Nouns DAO and Aragon DAO by consuming their governance tokens in an attempt to amass influence.

The raid left Nouns with a governance crisis and $27 million in debt, but Aragon was reorganized into a non-profit.

Compulsory Voting System

Prosperi and M^0 have a system in place to “punish” non-participators, ensuring that governance token holders do not waste their voting power.

“If you don’t participate, your voting power on the protocol will be gradually diluted,” he said.

However, one reason investors shy away from voting is the risk of legal consequences that may arise from interfering with the DAO’s decisions.

In June 2023, the U.S. Commodity Futures Trading Commission won a legal case against Ooki DAO for operating an illegal trading platform. The result included fines and a ban on trading and registration.

Although only the founders should be liable, the courts have classified DAOs as general partnerships, meaning that members can also be liable.

Meanwhile, the DAO that operates Mango Markets recently voted in favor of a settlement with the U.S. Securities and Exchange Commission over securities violations, seeking to resolve the allegations without admitting or denying wrongdoing.

The SEC has not yet taken up this proposal.

Complete decentralization is not realistic.

Radix’s Hughes says DAOs distribute decision-making responsibility among token holders, but in practice they fail because of real human behavior.

“The only practical solution I can think of is to have a redelegation model,” he said.

“When tokens are redelegated to trusted, more active voters, they can vote on your behalf, which can better represent the majority opinion.”

Prosperi remains optimistic about the future of DAOs, noting that governance issues are more common in “first-generation” DAOs based on Compound’s governance model.

He says that the design became a blueprint for early DeFi governance because of Compound’s success in generating yield, not its governance quality.

Many traders purchase governance tokens like COMP for speculative purposes rather than active participation, which leads to inactive voters.

The new protocol is learning from the flaws in the initial DAO design.

Prosperi’s M^0 shows that it makes sense to separate governance tokens from fungible investment tokens to punish inactive delegates.

Cyber’s Alvarez suggested that a “security committee” could exercise veto power over proposals during governance raids, a concept adopted by newer DAOs such as Optimism and Cyber’s DAO.

Compound introduced a similar feature called “Guardian” on August 17th, and the proposal passed with overwhelming support. Even a16z voted in favor.

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Yoon Yohan

Yohan Yoon is a multimedia journalist covering blockchain since 2017. He has contributed as an editor to Forkast, a cryptocurrency media outlet, and has covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. In his free time, he enjoys cooking and experimenting with new recipes.