Merit Circle and seed investment company Yield Guild Games (YGG) have agreed to a $1.75 million settlement after ordinary investors voted to kick YGG off the project.
On grounds that YGG was not “adding value” to Merit Circle, members of its DAO overwhelmingly voted “to terminate the financial obligations [of] the Merit Circle DAO.” The DAO further proposed that YGG would only receive a refund of their initial $175,000 investment, collecting a grand total profit of zero dollars and zero cents.
That community vote placed its development team, Merit Circle Ltd, in a highly precarious position. According to Merit Circle they were obligated to carry out the wishes of the DAO, but the vote had approved a course of action which it calls a “clear contractual breach.”
Merit Circle DAO effectively ordered Merit Circle into a legal dispute with its own investors.
Be[In]Crypto spoke with Clayton Roche, Head of Communications and Community at optimistic oracle provider UMA, to make sense of the dispute. Roche told Be[In]Crypto that difficulties arise when contracts attempt to straddle different domains such as the legal world and Web3.
In such circumstances, the rules of engagement remain opaque and mistakes can be made.
“If there is a disagreement, it is not clear in which world it could be resolved, or if the right parties could even be called to the table,” said Roche who worries about the implications of suddenly cutting investors out. “If things went badly, we might see DAOs or investors hesitating to work together in the future due to situations similar to this case.”
Roche was not the only party to identify wider risk for crypto projects and their DAOs. As Merit Circle scrambled to resolve the issue, the DAO’s decision to effectively rug pull its seed investors was playing badly on social media.
“I am not a member of this DAO, nor super familiar with YGG, but it’s hard to see this as anything other than a horrendous stain on the reputation of web3,” said Tim Connors in a Twitter thread that garnered over 1,500 retweets.
Connors, who is the CEO of education platform 101.xyz, went on to add, “if we want this industry to continue to thrive, then we’ll need to collaborate with the off-chain world too. That includes honoring legal agreements with investors.”
Thankfully for all parties, in a joint statement released this Tuesday, Merit Circle and YGG announced that they had managed to reach an agreement.
“While the legal question is one that could probably be argued at length, both parties agreed it was better to settle,” they said in a statement published to Medium.
The settlement awarded YGG $0.32 for every Merit Circle (MC) token they held, netting the company $1.75 million on their initial $175,000 investment. While this is a significant sum, it is still many times less than YGG would otherwise have been entitled to.
MC tokens are trading at $0.7341 as of press time.
Although DAOs have been utilized in the cryptosphere for a number of years, their proliferation is a relatively new phenomenon. As with any new system or technology, there are still some wrinkles to iron out.
The dispute between Merit Circle and YGG may be the first of its kind, but it is unlikely to be the last time that community members accidentally trample over legal ground. In such instances, litigation seems almost inevitable. It’s the kind of issue that DAOs will naturally wish to avoid.
“The best solution would be to make the contracts entirely DeFi native,” says Roche. “With the help of an optimistic oracle, it’s possible to write contracts that are enforced on-chain and stipulate strategic support, including what happens if that support is not offered. This makes the entire process transparent and enforced in a single realm.”
Minus the elegance of an onchain solution, credit must go to the teams at Merit Circle and YGG who managed to extract themselves from a potentially nasty dispute and with both parties relatively unscathed.
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