Decentralized Autonomous Organizations (DAOs) are entities that operate through rules encoded as computer programs known as smart contracts. DAOs are decentralized and autonomous in nature. They emerged with the Ethereum blockchain and represent a new way of organizing ourselves in the digital society. Some compare them to the commercial companies of the digital era.
The first DAO, “The DAO,” was launched in April 2016. It was designed as a decentralized venture capital fund for cryptocurrency and blockchain projects. Investors could buy DAO tokens with Ether (ETH) and gain the right to vote on investment proposals.
In June 2016, an attacker exploited a vulnerability in its code, draining a significant amount of funds (about $50 million in ETH at the time). This incident led to the Ethereum hard fork, resulting in the creation of Ethereum (ETH) and Ethereum Classic (ETC).
MakerDAO was launched in 2015. Among other functions, this DAO aims to maintain the stability of its stablecoin, DAI, which is pegged to the US dollar value. MakerDAO uses a complex system of smart contracts to manage the issuance of DAI. It operates entirely in a decentralized manner.
March 12, 2020, is known in the world of crypto assets as Black Thursday. The cryptocurrency market experienced a massive price drop, with Ethereum losing about 50% of its value in less than 24 hours. This sudden drop triggered a series of liquidations on the MakerDAO platform, as the value of the ETH collateral deposited by users to generate DAI fell below the required safe levels.
As a consequence of Black Thursday, MakerDAO faced several lawsuits. Plaintiffs claimed that the massive liquidations that occurred during the event caused them significant losses. Specifically, the lawsuit focused on the allegation that MakerDAO’s automated auction system, which was supposed to orderly and fairly liquidate collaterals, failed due to market extreme volatility and congestion problems on the Ethereum network. This led to some collaterals being liquidated at significantly low prices, in some cases to zero, without users having the ability to intervene or protect their investments.
Plaintiffs also alleged a supposed lack of transparency by MakerDAO, given that adequate warnings about the potential risks associated with extreme market volatility were not provided.
The lawsuit sought compensation for their losses, arguing that the organization behind MakerDAO had the responsibility to ensure the fair and efficient operation of the liquidation system.
MakerDAO agreed to settle for $1.16 million with investors seeking compensation for financial losses suffered after the “Black Thursday” collapse in March 2020, as reported by “Blockworks.co”.
Plaintiff Peter Johnson filed the class action lawsuit one month after the collapse. The case was filed by numerous investors who claimed that the MakerDAO Foundation and related entities misrepresented the risks of collateralized debt positions on the platform. The total losses were estimated at $8.3 million.
MakerDAO allows users to take out overcollateralized DAI loans using crypto assets like ether (ETH). Those assets can be liquidated if the value of their collateral falls below a certain point, as happened unexpectedly on Black Thursday. ETH plummeted up to 45%. The native token of MakerDAO, MKR, sank about 60% at the same time. The total crypto market lost nearly a third of its value.
Both parties reached a settlement agreement, despite the Maker Foundation denying any wrongdoing or legal violation.
The MakerDAO liquidation case was initially dismissed in February 2023 by Judge Maxine Chesney of the U.S. District Court in California.
As a result, a third amended class action was filed — this time against only Maker Ecosystem Growth Holdings, now known as Metronym. But the parties and their lawyers got together for a mediation session and came to an agreement the same day. After this, both parties signed a term sheet to put their agreement in writing. The plaintiff agreed to settle the matter in exchange for a one-million-dollar payment.
The Maker company agreed to enter the agreement “solely to eliminate the uncertainty, burden, and expense of further litigation, and to put the released claims to rest, finally and forever,” said Johnson’s counsel.
We believe that in cases like MakerDAO’s, the best way to resolve them is through specialized arbitration, as carried out by BACS. The advantage of submitting cases to a specialized arbitration court is to generate legitimacy and trust. By submitting to a recognized and respected jurisdiction for dispute resolution, a DAO can increase its legitimacy and trust among its members and third parties (investors, business partners, etc.). This is especially important for new DAOs looking to establish and grow.
Additionally, submitting to an arbitration court can help ensure that the DAO is complying with applicable laws and regulations, mitigating the risk of legal litigation or sanctions.
Specialized arbitration courts, like BACS, offer more flexible procedures than traditional courts and may be better suited to address the technological and operational particularities of DAOs. Moreover, arbitrators are often experts in the specific fields in question, which can result in more informed and relevant decisions.
Arbitration can offer confidential procedures, which is advantageous for DAOs that wish to keep certain details of their operations or disputes private, something not always possible in traditional litigation.
Arbitration awards are generally easier to execute internationally than national court decisions, thanks to treaties like the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This is crucial for DAOs, which by nature operate without geographical borders. In the case of BACS, awards are executed with smart contracts.
In summary, submitting to a specialized arbitration court like BACS can offer DAOs a more tailored, effective, and legitimate way to handle disputes and fulfill legal obligations, which is crucial for their operation and expansion on a global scale.
