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| By Beth Canova |
Marija Matić, editor of Undiscovered Cryptos, has let me in on a bit of controversy in a corner of the crypto space that could have far-reaching implications in how decentralized autonomous organizations (DAOs) operate.
Yield Guild Games (YGG, Unrated) is a play-to-earn (P2E) gaming guild that invests in online games where players can earn cryptocurrencies for completing quests and missions.
YGG gives players without blockchain expertise a way to profit from the juggernaut growth of blockchain gaming without having to invest in avatars, land or other tokenized in-game assets. These items are required to play games and can be expensive. YGG invests in these assets from promising games in their early, seed stages and rents them out to players, through a system called “scholarships,” increasing access to this new space.
But there’s more to YGG than just buying and renting out NFTs at a profit. It also invests in other opportunities in the P2E space, such as governance tokens of promising games or DAOs.
One such opportunity was in Merit Circle (MC, Unrated), a competing P2E guild. YGG was one of the early investors in Merit Circle, which turned into a shrewd move — its $100,000 initial investment grew to a hefty $3.5 million as of a few weeks ago.
That’s a 35-to-1 return!
To become an early investor, YGG promised financial support in exchange for MC tokens, which would be locked for the following 36 months. All this was recorded and signed by both guilds in a Simple Agreement for Future Tokens (SAFT) investment contract.
It's important to understand that, unlike traditional companies, there's an unwritten expectation for early crypto investors to provide additional support beyond their initial investment. Examples can include marketing, creating content, bringing new investors, sharing deal flows, helping tokens get listed on exchanges, contributing with interesting ideas, etc.
This is to ensure investors truly believe in the project and are willing to assist in its growth … and prevent them from dumping their tokens the moment they're unlocked — i.e., cashing out their gains and moving on.
But no project has publicly called out their investors for proof of their support. That is, until Merit Circle.
A majority of early MC investors responded quickly, summarizing all their previous contributions and future plans to support the DAO.
Why? Because they want to be seen as responsible investors … and don't want to sour their reputations in the broader community.
To prove their commitment, these investors agreed to hold their MC tokens for the next year or so … despite those tokens starting to unlock. They even listed their wallet addresses to prove they'll stay true to their word.
But when it comes to YGG, the Merit Circle community believes it hasn't provided the same value as other investors. And that's a concern for them as YGG has other P2E interests … making it a competitor, as well.
To punish such transgressions, MC community members demanded a vote to confiscate YGG's $3.5 million investment, refunding only its original $100,000 seed capital, a proposal called MIP-13. The community’s opinion is vital to Merit Circle, since DAOs depend on their community’s majority support for any decision to be made.
This was a radical and aggressive proposal. And, in my opinion, an overreach.
It's true that crypto communities sometimes feel taken advantage of by clever venture capitalists. But if existing SAFT contract language is flawed — and it may well be — then the answer is to insist on composing better, more equitably written contracts before accepting money from investors.
Whether or not YGG provided the value it was expected to — compared to the contributions of other investors — is a moot point if there's no contractual obligation to do so. And to levy such a harsh punishment over an expectation, rather than obligation, is an extreme response.
It also sets a dangerous precedent — one that could alienate future investors.
Even so, MIP-13 has now been voted in by the MC community. However, it also gives the parties a three-week window to negotiate a counter-proposal — which they have now done.
Merit recognized the dangers the precedent of MIP-13 could set.
Merit Ltd. — the Gibraltar-incorporated counterpart of the DAO, which is controlled by executives of Merit Circle and early investors — admitted that what they saw occurring in MIP-13 brought them into an uncomfortable situation: “On the one end is our agreement with an early stakeholder and contributor; on the other end is our community and the absolute power of the DAO.”
So, a joint counterproposal was issued on Sunday for MC DAO to buy out YGG and one other early investor. In it, MC DAO would agree to purchase back 5,468,750 MC tokens (priced at 32 cents each) — roughly equal to $1,750,000. Legal releases would also be signed, protecting all sides from future litigation.
It makes perfect sense for MC DAO to accept this proposal. If rejected, it would be difficult to understand all the reputational, financial and legal consequences it would face.
And a decision like this — to revoke a seed investment — would have an enormous impact on the whole ecosystem, beyond just Merit Circle. The cancellation or refund of a SAFT is something novel and very delicate, with potentially far-reaching implications.
The settlement, however, allows both Merit and YGG to put the entire situation behind them … without going through a costly court battle.
And it has the benefit of turning this into a learning opportunity DAOs. They’re getting stronger, and that’s a good sign! They are, after all, the next step into true, decentralized governance.
These hiccups of nascent industry are purifying the space and leading to better decentralized future for us all.
Merit and YGG DAO said that they have a lot of governance improvements in mind that should avoid explosive situations like this in the future and will help mitigate the potential doubts parties could have around agreements with DAOs.
This situation will certainly pioneer the way for all other DAOs going forward.
Best,
Beth Canova
