Merlyn Labs

Merlyn Labs is a gaming studio and governance organization founded and operated by Flook, a longtime Arbitrum DAO contributor and Domain Allocator for the Questbook grants program.

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Name (organization or individual): Merlyn Labs

Wallet Address or ENS: 0x0eB5B03c0303f2F47cD81d7BE4275AF8Ed347576

What area are you most interested in contributing to? choose up to two tags:

• DeFi development on Arbitrum
• Gaming development on Arbitrum

Please share your stance on overall goals for the DAO:

The following tenants should be observed for maximum DAO efficacy:

• Decentralization and democratization of viewpoints
• Empowerment of high agency individuals with minimal conflicts of interest
• Consistent and transparent throughput of communication between:
  • Arbitrum Foundation
  • Offchain Labs
  • Arbitrum Builders
  • DAO Delegates
  • Arbitrum Community Members
• Aggressive onboarding and support of application and infrastructure builders
• Thoughtful and targeted token incentive structures with a focus on long-term stability and returns
• Respectful and logical debates that lead to forward-looking alignment among participants
• A culture of collaboration and teamwork

With these tenants in mind, the following goals for the DAO emerge naturally:

• Talented builders are attracted to and continuously supported both monetarily and otherwise when they build on Arbitrum
• Participants have an open forum for debate and discussion that leads to higher-quality output of proposals and programs
• The DAO assists in continuing to secure more TVL, Transaction Volume, Orbit Launches, Consumer Applications, DeFi innovation, Institutional adoption, etc., for the Arbitrum Ecosystem.

Please share your stance on issues that were raised previously, in other communities, as described below:

1. How would you vote?

• We would vote against the proposal.
• A key problem is the lack of oversight of the grants being administered by the program. The proposal is for a general-purpose data analytics program, but the program is administered by a single service provider with no competitive procurement process.
• Flipside is also not a neutral party but rather one of many data analytics providers. The ideal administration of a grants program of this kind should belong to an independent entity. Keeping grants at arms length from service providers decreases the risk of regulatory or industry capture.
• Procurement contracts should also have clear terms, verifiable milestones, and the ability for the community to terminate the agreement.

2. What amendments would you make to the proposal if any?

• Given the competitive landscape of data analytics providers, UniswapDAO (or the Foundation) should have considered establishing a grants program not preferencing any single vendor and instead held a Request for Proposal (RFP) to appropriately evaluate the submissions from respective parties. This RFP could then be governed by an independent Oversight Committee with more frequent reviews (e.g. quarterly) to ensure that the grant had been delivered as such.
• Alternatively, if the proposal was designed as a commercial agreement between the DAO and a single vendor, it should have been stated and framed as such, with the requisite terms, success metrics and cessation clauses expected of such an agreement.
• Moreover, proposals for use of funds should have limited terms and scope of engagement. Onus should be on the proposing team to submit additional extension proposals in the event there is voter apathy.

3. How would you approach the tradeoff between centralization of authority and the ability to get things done?

• Balancing decentralization and pragmatic execution is a difficult challenge for DAOs. More often than not, DAOs and distributed collectives fall short due to dogmatic adherence to ideals without real focus on tangible outcomes. Participants argue over subjective interpretation of ideals, rather than advance and iterate towards a ‘north star’ in the face of ambiguity.
• As with many things, decentralisation is a spectrum. Where a matter falls on this spectrum will change, based on the context - nuance matters. We believe in contextualised, pragmatic decentralisation. One which keeps true to the spirit of decentralisation, but optimises for tangible outcomes that meaningfully advance ArbitrumDAO towards its medium to long term goals.
• Clearly defined success measures and review mechanisms to keep those in charge accountable will serve to ensure ongoing alignment of interests and values. In this case, a truly independent review board should have been in place to keep Flipside accountable.

Sample Voting Issue 2: FEI/RARI

Outside the flipping of the vote, how would you choose to handle this situation?

• We believe that the DAO should have implemented a full reimbursement, treating FUSE LPs as creditors that should be fully repaid before anyone else. Fuse LPs offered capital as collateral for loans and did not expect abnormal returns associated with TRIBE tokens, therein resembling creditors.
• Standard practice for traditional finance deals with an organization’s liquidation by relinquishing control of remaining assets to creditors to make them whole before equity stakeholders. Users with the lowest risk/reward positions should have priority in claims over stakeholders of greater risk/reward. Order of priority for claims in this situation should be as follows:
  • FEI stablecoin holders (who resemble depositors)
  • FUSE LPs (who resemble creditors)
  • TRIBE token holders (who resemble equity shareholders)
• In this situation, Fei Protocol was being liquidated, and the PCV fully covered all impacted victims with enough residual amounts to redistribute some back to TRIBE holders afterwards. The order of operations for the disbursement of funds should have been to cover all FEI stablecoin redemptions, cover all FEI creditor liabilities, then distribute the remaining assets pro-rata amongst TRIBE holders.
• Pro-rata distribution is important here because the reimbursement should treat all creditors equally in the event that PCV was insufficient to cover all hack victims’ claims, in line with standard bankruptcy procedure. DAO smart contract wallets and individual wallets (EOAs) faced the same risks and upsides as creditors and should therefore have been treated equally in the reimbursement.

Please elaborate on what instances you believe it is right to refund and which are not.

• Norms in traditional finance help to elucidate how the nascent DeFi space should handle claims of this matter. However, DeFi has some peculiarities that make a blanket application of traditional finance principles inappropriate. For example, the Fei/Rari protocol merger created a lack of clarity in priority of claims between TRIBE and FUSE LPs.
• This confusion resulted from TRIBE tokens and FUSE LP tokens both having characteristics resembling debt and equity:
  • Governance tokens such as TRIBE promise no dividends or explicit return (only voting rights) and therefore are not perfectly analogous to equity
  • Fuse LPs participate in lending pools that resemble debt. However, they also earn governance tokens as incentives, akin to a bonus equity incentive.
• Moreover, it is not clear-cut the extent to which Fuse LPs should be viewed the same as traditional creditors.
  • Lending products in DeFi go to great lengths to advertise themselves as easily accessible products while often brushing over the magnitude of counterparty risk (liquidation bugs) and smart contract risk. In this sense, one could argue that retail users of DeFi should be viewed as retail users in need of protection like other creditors.
  • However, FUSE is undoubtedly a complex financial product on-face, requiring an understanding of stablecoins, AMMs, and lending pool liquidation mechanisms in order to participate. It is reasonable to suggest that participants in FUSE are categorically different than traditional creditors and do not deserve the same standard of protection as retail users.
  • Most DeFi users are also aware of smart contract risks given the industry’s track record thus far, and the high-yields on these platforms are commonly seen as the price of accepting the risk of smart contract error. Bailing out high-risk yield farmers in this situation might constitute a moral hazard and set a bad precedent for the overall DeFi industry.
• The situation is further complicated by the ambiguity where the TRIBE token sits in this seniority spectrum.
  • If following the SEC’s view that “all tokens are equity/securities,” then the DAO should reimburse hack victims first since creditors come before equity stakeholders.
  • However, the answer also depends on how the tokens were distributed and the risks undertook in order to receive those tokens.
    • Airdrop recipients, for example, undertook no risk and arguably have the least seniority. TRIBE was airdropped to those who first bought FEI stablecoins using DAI.
    • One could also argue that investors should be treated similar to equity because they received the token at a heavily discounted price compared to other holders.
• We maintain that the DAO should have fully refunded the hack victims first. The simplest solution here is the best, opting for the most direct parallel in traditional finance. It would have been impossible for the community to untangle the web created by the Fei/Rari Merger and the lack of clarity about creditor/depositor relationships in FUSE.

Languages I speak and write: English

Disclosure of Conflict(s) of Interest:

Merlyn Labs operates as a gaming studio on multiple chains, but most significantly on Arbitrum. Flook is a Domain Allocator in the Questbook grants program. If at any point these COI’s interfere with a DAO vote, Merlyn Labs will abstain from voting.