Two Gaming DAOs Skirmish Over Funding Deal Turned Sour

The two most prominent gaming-focused decentralized autonomous organizations, Yield Guild Games and Merit Circle, have been embroiled in a near week-long dispute over a seed funding deal allegedly gone sour. The conflict has piqued the interest of many industry pundits, raising questions about the intersection of law and decentralized governance.

Merit Circle DAO Proposes Ousting YGG

A member of the Merit Circle DAO has proposed revoking the group’s early-investment deal with Yield Guild Games.

The two biggest play-to-earn gaming guilds have been struggling to find a compromise for nearly a week after a member of the Merit Circle DAO posting under the pseudonym HoneyBarrel submitted a governance proposal to null its early funding deal with Yield Guild Games. Citing the lack of “value add” that YGG had allegedly failed to provide to Merit Circle as the primary reason, the proposal suggested unilaterally canceling YGG’s SAFT (Simple Agreement for Future Tokens) and returning the gaming guild’s initial investment back. It said:

“The Merit Circle DAO needs seed investors who are adding value. This is something that the team, community, and investors agree upon. I have demonstrated that YGG does not fit into this criteria. They are competitors who are only interested in extracting value, and profit, from the DAO, and their actions go against the ethical principles that Merit Circle upholds.”

HoneyBarrel then proposed terminating the financial obligations that Merit Circle DAO has with YGG by refunding YGG its 175,000 USDC seed investment and removing its seed tokens. In response to the proposal, the YGG DAO published an official statement today, countering that the legal agreement with Merit Circle Ltd had no “value-add” conditions and represented a simple capital for equity exchange. It said:

“This seed funding was provided in exchange for future tokens to be deployed according to a pre-defined vesting schedule. There were no conditions in the SAFT that relate to “value-add” services. It only called for the investment of capital.”

Furthermore, YGG argued that it “had in fact provided meaningful value to Merit Circle,” although it was under no obligation to do so, and reassured the Merit Circle community that it planned to continue doing so in the future.

Although the Merit Circle DAO is yet—if ever—to vote on HoneyBarrel’s proposal, its community members’ overarching sentiment seems to be largely in favor of it. “I agree with Honey and will vote Yes [In favor of nulling the SAFT with YGG] in this matter,” one of the most liked comments in the thread read. Sad Cat Capital, a venture capital firm involved with the Merit Circle DAO, also said that it would be voting in favor of the proposal because it was disappointed with YGG’s response, which allegedly demonstrated “how little value they have added over the past 7 months.”

Governance Proposal Sparks Debate

Beyond the two DAOs, the debate has spilled over to the broader crypto community, with several industry experts chiming in with their takes on the matter. Miko Matsumura, an early-stage investor and builder who has admittedly invested in YYG, said on Twitter today that Merit Circle’s potential deviation from the contract with YGG would set a terrible precedent for DAOs. He said: 

“I believe it is a terrible precedent for @MeritCircle_IO to be allowing their DAO to vote on breaching signed contracts both from a legal and ethical perspective. It destroys the trust in DAOs if they can simply vote to break agreements on a whim.”

Notable cryptocurrency researcher Hasu also expressed concerns over the possibility of DAOs overturning legally-binding promises that the legal companies behind the projects have made in the past. “Seeing a DAO so nonchalantly consider contract breach should tell you all you need to know about ‘governance of the people and why it doesn’t work,” he said.

On the other hand, some community members have raised opposing concerns, arguing that DAOs should be able to decide on all matters involving the underlying projects. “If the community feels strongly to cancel their SAFT, why shouldn’t they? A decentralized project can and should take on a life of its own. This is part of decentralized governance,” one user said on Twitter today.

The skirmish between YGG and Merit Circle is likely the first governance dispute between two DAOs involving legal elements that spill outside the crypto sphere and into the real world.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.