The Ends of Aragon

The young woman stares at you through a door. Her eyes narrow; her head lowers. Then a hand draws the door closed. Clearly, something sinister is afoot. It’s capitalism, a man’s reedy voice-over informs you.

After Aragon raised $25 million from its token launch in 2017, one of the first things they did with that money was commission a revolutionary-chic video with fat cigars, grainy samizdat, and a group of determined young people trekking Frodo-like towards a big blue blockchain door. It’s vaguely ridiculous, but also endearing. I feel wistful as I watch it. Here was Aragon in its youth. And now, it is on the verge of ending.

Joshua Tan leads research at Metagov, a governance research collective.

Two young hackers, Luis Cuende and Jorge Izquierdo, started Aragon on the heels of the first DAO. Aragon was the first DAO platform: a tool to help people start their own DAOs. Riding a surge of enthusiasm for crypto, they crowdfunded a bunch of cash and produced some code. The code managed to get some stuff done, like secure Lido’s governance and thus effectively a third of all stake on Ethereum. But team turnover, governance paralysis, and operational missteps caused the product to fall behind the rest of the industry.

While the product foundered, funds from the token launch were managed by the Aragon Association, a Swiss nonprofit, and grew to over $200 million in value due to the rally in eth. During a planned governance transition from the Aragon Association to the Aragon DAO, some activist investors (or “governance raiders,” as some like to call them) bought up control of the DAO and started lobbying for the liquidation of the treasury controlled by the nonprofit. This attack — exacerbated by internal tensions in the nonprofit board — triggered some complex legal and financial maneuvers, resulting recently in the exit of about $75 million from the ecosystem as well as the effective liquidation of the nonprofit, the DAO and the token. For now, a diminished Aragon lives on in the form of a new nonprofit to be funded by a reserve of funds from the liquidation.

How did Aragon get here?

In one telling, Aragon is the story of how a group of kids learned the hard way that building a new world order isn’t quite as straightforward as writing a white paper or cutting a slick video. There’s a flourish of dramatic irony and a hint of Greek tragedy: a project advertising a revolution against capitalism brought low by unchecked capital, where the seeds of its downfall were planted in its crowning moment of success.

The depressing lesson for other builders: get rich, get out.

I don’t like this story. It’s easy and lazy — easy because it’s so typical of projects in crypto, and lazy because all cynicism is lazy.

In another telling, Aragon is a high-tech corporate thriller featuring a shadowy web of venal anons, a stuttering battle over community opinion, and eye-popping sums of money gained and lost. Aragon’s story laid bare a hard truth: that DAOs are as susceptible to power plays as any traditional entity.

But it also highlighted ways in which governance actually works on-chain and ways it could work better.

Aragon, the DAO, was deployed, organized, and incentivized like a corporation, and many of the arguments for liquidation flowed out of the way we justify decisions about corporations and other for-profit concerns. Aragon was underperforming; its book value was worth more than its market cap, thus it should be liquidated. In this sense, the actions of the raiders were foreseeable and justifiable, just as well-functioning capital markets should have a place for activist investors.

I would love if this crisis could be an opportunity to re-examine the roles of such activist investors, just as the Curve Wars or the recent fallout between Aave and Llama have given us opportunities to re-evaluate the roles of professional delegates. Wall Street responded to the hostile takeovers of the 1980s with a raft of poison pills (mechanisms that discourage any one shareholder from obtaining too large an interest in a company) and other policies that concentrated power in executive teams and reduced the dynamism of capital in those markets. But those are not the only options to guard against “DAO raiders.” For example, we could introduce more disclosure and staking guardrails for large investors or install community-managed buyouts that create a decentralized version of “white knight” defenses where a preferred investor buys out the raider.

The lesson: much has been said about the limitations of coin voting, but if you do have coin voting, you should do it well. DAOs are not corporations, but the DAOs that are corporations should invest in good corporate governance. Decentralization cannot be an excuse for exploitation.

Two technologies

At its deepest level, Aragon is a tale of two technologies.

Aragon DAO had codified through its token a set of corporate incentives: token holders wanted to maximize returns, team members wanted to advance their careers, the underlying blockchain operators wanted their fees.

But the Aragon Association, a Swiss nonprofit, was organized around a mission, with a board legally and ethically responsible for fulfilling that mission. What did the nonprofit owe, legally and ethically, to the token holders in Aragon DAO? Asked less often: what did token holders in a particular smart contract owe to the mission of a Swiss legal entity? Did that smart contract have a mission, too?

Aragon’s governance could not resolve the underlying conflict between profit and mission, but its failure was not foretold. Modern corporations have both boards and “tokens.” Many such boards are charged with missions beyond making a profit, from Patagonia to Bosch to OpenAI, while the “tokens” help define the underlying incentives of the management team and backstop the ambitions of both the board and the team against the reality (and opportunities) of the market.

Governing these entities is not an easy task. Incentives can be built directly into code and into law, but mission statements, even when written into bylaws or the cap table, are only as strong as a board’s will or a team’s culture. Missions also change; often, they need to change.

The governance challenge is especially difficult over composite entities: a nonprofit that owns a for-profit corporation, a foundation that funds a development team, or a DAO sitting more or less uneasily within a legal wrapper. But it is doable; it has been done.

Back in 2017, Aragon’s token launch was carried out by an Estonian nonprofit. The money was then transferred to and managed by a Swiss nonprofit. Now, between $10 to 50 million will be transferred into a third nonprofit, pending the results of the liquidation.

This new Aragon, sans founders, sans token, will need to decide what to do and then to build an organization—a board, a team, and governance—that can do it. So what will it do?

Most obviously, Aragon could continue doing what it was already doing: fund a development team to keep building on top of the existing open-source Aragon stack — in which case the team will have to face some hard questions about the sustainability of the product and the size of the market.

It could turn into a foundation that invests in a broad range of DAOs and DAO projects, becoming to the DAO ecosystem what Uniswap Foundation is to Uniswap — but without the benefit of Uniswap’s product-market fit. Aragon could reorganize as a high-tech research lab for DAOs akin to DeepMind or OpenAI, rather than a product shop, with all the attendant spinout possibilities — as it was starting to do with its ZK team.

On the crazier end of options: it could use its treasury to leverage buyouts of DAOs and DAO tooling, becoming a kind of national bank for DAOs. Or, it could pull back from funding altogether and just focus on communicating values and fostering an open-source community, like the Linux Foundation, or what Bitcoin Foundation was trying to do for Bitcoin.

What Aragon cannot do is operate like a blank check for a small group of insiders. It has a mission. Fortunes and careers can be made and lost within the scope of that mission. Markets will rise and fall. DAOs may go on to own 50% of the world economy, with Aragon leading the way. Or DAOs might prove to be a gleam on the bubble of crypto. But the mission remains; it is why Aragon remains. The lesson is simple: if you’re a nonprofit, act like a nonprofit.

It’ll take a while for the new Aragon to figure things out. In the meantime, it should build a brain trust. Perform an act of goodwill. Nurture a dream.

Good luck. You’re going to make it.