Slow Rug: The "tactical" closed DAO is dividing up investors...

DAO bankruptcy, is it really "liquidation" or a real scam?

Written by: Xiao Sa Legal Team

Sister Sa's team always believes that DAO, as a kind of thing born out of the close combination of traditional legal system and emerging technology, has many aspects such as establishment, operation, decision-making, liquidation, shareholder capital contribution and liquidation, and benefit distribution, which are difficult for traditional corporate entities. The flexibility, transparency and autonomy that can be achieved, and at the same time, the technical trust mechanism generated by the blockchain greatly reduces the company's regulatory and compliance costs. In general, DAO is a new type of "legal entity" that is likely to be widely accepted in future business activities, and even has the potential to reshape the form of future business entities.

However, recently, there has been a fraudulent form of establishing a DAO for the purpose of illegal possession, and then slowly "extracting" the DAO's operating funds through inflated expenditures and fabricating false debts, and finally shutting down and liquidating the DAO under the pretext of "poor management" , known as "Slow Rug". Compared with the traditional pull rug, this kind of fraud is more concealed and has a longer period. Investors often suffer large losses without knowing it, and suffer heavy losses in the boiled frog scam.

Today, Sister Sa’s team will tell you about some characteristics of Slow Rug and how to protect your rights through legal means.

**DAO bankruptcy, is it really "liquidation" or a real scam? **

The development of emerging things cannot be smooth sailing. No matter how good an idea or project is, if it is not managed well, it may be closed down and liquidated in the short term. In fact, bankruptcy liquidation is not uncommon. The bankruptcy system plays an important role in adjusting the market economy and is a key component of the legal system of the market economy. A mature economy allows business entities to use due bankruptcy procedures and liquidation methods to force the liquidation and distribution of all their property when the debtor becomes insolvent, and to fairly pay off creditors. Ultimately, the bankruptcy system not only solves the plight of the bankrupt in poor management and continuous losses, but also provides maximum fair compensation to creditors.

In 2022, due to various factors such as the global economic downturn and the immature development of DAO itself, several once glorious DAO projects will be shut down and liquidated. Among them, Tride DAO, Panda DAO and other projects with wider influence The shutdown is embarrassing.

However, since DAO is an emerging organizational form that has not yet been accepted by most countries and regions, only the states of Wyoming, Utah, and the Marshall Islands have introduced relatively experimental legislation. How should DAO go bankrupt? , reorganization and liquidation are basically legislative blanks.

In practice, the bankruptcy liquidation of Tride DAO, Panda DAO and other projects basically follows the following set of procedures:

(1) The founder or an influential community member sends information about the shutdown and liquidation on social media;

(2) Negotiate with investors and other community members and publish liquidation plans and compensation plans;

(3) Initiate formal shutdown and liquidation proposals in the community;

(4) Community voting;

(5) After the vote is passed, the investor applies for liquidation;

(6) Investors obtain assets after liquidation;

Although such a relatively simple and direct bankruptcy liquidation procedure follows the principle of code is law to a large extent and can complete the DAO liquidation in a relatively short period of time, it cannot guarantee the fairness and fairness of the liquidation, which often arouses doubts from the community. In addition, because DAO itself lacks the support of legal norms, if there are problems after liquidation, such as missing property, liquidator abuse of power and improper settlement, etc., investors often cannot get relief through legal channels, let alone if DAO itself is a Slow Rug scam situation.

For example, in the Tribe DAO shutdown and liquidation event in August 2022, there was a dispute over whether the "creditors" or "shareholders" should pay first. The liquidation of the entire DAO project even triggered a serious crisis of community trust. At that time, the founder of Fei Protocol announced the closure agreement and liquidation proposal on the social platform, planning to release 57 million TRIBE (valued at about 9 million US dollars at the time) at a 7-day time-weighted price, release the corresponding FEI or DAI, and distribute them equally to hackers The victim of the incident (approximately 28,380 ETH was stolen), distributed assets such as stETH and ETH controlled by DAO to TRIBE token holders in proportion.

This compensation mechanism has been widely criticized. Since the funds are distributed equally to each address, this means that users with low losses will receive full compensation, while users with high losses can only receive the same amount of compensation. serious injustice. In addition, Tribe DAO chose to give priority to repaying token holders as "investors" (also called "shareholders"), and the level and proportion of repayment to creditors was too low, which caused a lot of controversy.

Slow Rug may be defrauding in the name of DAO

As mentioned earlier, a very novel and highly concealed DAO fraud method has emerged. After raising funds in a deceitful way, DAO’s poor management causes serious losses, insolvency, and even false hacker attacks to cause asset losses ( In fact, the managers colluded with hackers to steal and transfer DAO assets) and other reasons to liquidate DAO. Compared with the traditional Pull Rug, this kind of method is relatively rare, the cost of fraud is high, the cycle is long, but it is extremely concealed and it is difficult to retain evidence.

In fact, this kind of behavior is not the first in the encrypted world, and similar things have already been done in traditional commercial economic activities. Article 162-2 of my country's "Criminal Law" [False Bankruptcy Crime] stipulates: Companies and enterprises that conceal property, assume fictitious debts, or transfer or dispose of property by other methods, causing the capital to fail to meet the bankruptcy conditions stipulated by the law. A company or enterprise is unable to pay off due debts or is insolvent under the false appearance that it applies to the people's court for bankruptcy or is declared bankrupt by creditors, causing the company or enterprise to enter bankruptcy procedures prescribed by relevant laws, causing serious damage to the interests of creditors or others as a result of.

But it should be noted that the crime of false bankruptcy is not exactly the same as Slow Rug. The objects violated by the crime of false bankruptcy are complex objects. On the one hand, it infringes upon the legitimate rights and interests of creditors or other interested parties; Among them, the former is the main object. Therefore, in the traditional sense, we believe that the crime of false bankruptcy mainly infringes on the legal interests of creditors. In addition to the possibility of infringing on the interests of creditors during the liquidation process of DAO, Slow Rug infringes more on the interests of investors, that is, "shareholders". The distribution of property after DAO entered the liquidation process has seriously violated the interests of investors.

Sister Sa's team believes that Slow Rug may constitute a variety of crimes, and we will analyze them one by one.

(1) The crime of embezzlement

According to the provisions of Article 271 of the "Criminal Law" [Crime of Occupational Embezzlement], this crime refers to the staff of a company, enterprise or other unit taking advantage of their position to illegally occupy the property of the unit as their own. large amount of behavior.

In Slow Rug, a common method is that key members of the community or other persons with convenient and influential positions collude with members outside the DAO and steal DAO assets through false transactions to fill their pockets; By fabricating non-existent jobs or exaggerating their own workload, they have obtained a lot of "salary" or other benefits from the DAO.

(2) Crime of theft & destruction of computer information system

According to the provisions of Article 264 of the "Criminal Law" of our country [theft], this crime refers to the theft of public or private property for the purpose of illegal possession, theft of a relatively large amount or repeated theft, burglary, theft with a murder weapon, and pickpocketing of public or private property. property behavior. According to the provisions of Article 286 of the "Criminal Law" [Crime of Destroying Computer Information System], this crime refers to the violation of state regulations to delete, modify, increase, or interfere with the functions of the computer information system, causing the computer information system to fail. Normal operation with serious consequences; violation of state regulations, deletion, modification, or addition of data and applications stored, processed or transmitted in computer information systems, and serious consequences; intentional production and dissemination of computer viruses and other destructive Programs, behaviors that affect the normal operation of the computer system and have serious consequences.

(3) Crime of False Bankruptcy

As we have mentioned above, the crime of false bankruptcy is stipulated in Article 162-2 of my country's "Criminal Law". The purpose of this crime is to prevent enterprises from avoiding debts or infringing on the rights of others through false bankruptcy.

It should be noted that "concealment of property" in this crime refers to transferring or hiding the property of a company or enterprise so that it cannot be effectively disposed of in accordance with bankruptcy procedures, or not disclosing its financial information, which will damage the property of the company or enterprise. False records are made in the property list and balance sheet, and the actual amount of property of the company or enterprise is deliberately concealed or reduced by means of concealment such as underreporting or underreporting.

At the same time, this crime is a resultant crime, and the consequences of "seriously damaging the interests of creditors" are also required to constitute this crime. Specifically, due to the false bankruptcy of companies and enterprises, the huge debts of creditors that should have been repaid cannot be repaid; the wages of employees, labor insurance fees and national taxes owed by companies and enterprises cannot be repaid; , The legitimate rights and interests of other shareholders of the enterprise are damaged, etc.

**How to judge that DAO is doing Slow Rug? **

Slow Rug is a highly concealed behavior, but we can check it with some clues to prevent ourselves from falling into the trap of fraud or get out of the trap in time.

According to the family, Sister Sa's team believes that the current Slow Rug generally has the following characteristics:

(1) The resumes of some active community members of DAO are unknown or false;

(2) DAO is increasingly showing a trend of "centralization" (of course, centralization is a common malady in DAO at present, and it cannot be determined that DAO is Slow Rug on this basis);

(3) The main expenditure of DAO is unreasonable or suspicious;

(4) The income and output of some DAO members are seriously disproportionate;

(5) The depletion speed of DAO "vault" resources is significantly abnormal;

(6) The long-term operation of DAO is not smooth, and the expected goal has not been achieved, and there is no possibility of achieving the goal in the future;

In short, Slow Rug has various characteristics that are difficult to sum up in one word, and it needs to be combined with the operation of DAO cases under different circumstances to make a comprehensive judgment. If Chinese investors believe that the DAO project has the possibility of Slow Rug, they need to consider leaving traces of all actions, voting resolutions, and speeches of major active members of DAO, so as to protect their own rights and interests through legal channels as evidence in the later stage.