Can you put a price tag on decentralized governance? For Nouns DAO, the answer was $27 million in crypto.

DAOs are the cryptocurrency movement’s version of a company – but with more democracy and (ideally, theoretically) zero leaders. Anyone who buys a DAO’s crypto asset – in Nouns DAO’s case it’s an NFT – gets to vote on how the group spends its money and makes decisions. But the bylaws of these groups are ever-evolving, and can get messy real fast.

Things got messy in Nouns DAO. The NFT experiment lost over half its $50 million treasury last week to a subset of its own disgruntled investors. They split from Nouns DAO; to use the crypto term, they took the “fork” in the road.

The fork was the culmination of months of contentious discussions around running Nouns DAO, a well-known crypto club with plenty of internal drama. There was a heated discussion whether to even allow forks; ultimately the community made the decision to allow them on the ground that the option would improve overall governance – as a political innovation, a form of protection for any dissenting movements and a step toward greater decentralization. Its designers believed it could be adopted by other DAOs too.

But what happened next – an extremely expensive fork – is now being characterized by some observers as a backfiring. Instead of protecting Nouns DAO from 51% attackers – a core fear of every decentralized crypto project – it attracted them. Savvy arbitrageurs came around and have since played Nouns DAO’s governance game for profit.

“This Nouns DAO fork could serve as a cautionary tale,” said Jillian Grennan, who studies DAO design as a finance professor at the University of California, Berkeley, Haas School of Business.

The tale offers lessons for how DAOs navigate dissenting opinions, an issue that is certain to resurface with more projects sincere about pursuing radical decentralization. Few have done so with the commitment of Nouns DAO. At the very least the episode offers a case study in what can go wrong when money-management gets decentralized in a blockchain-enabled experiment.

A CoinDesk review of Nouns community blog posts, Discord messages, Twitter spaces and interviews with more than a dozen members revealed that the fork was the result of internal politics as much as the product of concerns over security and decentralization.

Nouns DAO raises money to bankroll whatever its members want to fund by auctioning a colorful JPEG – the Nouns NFT – once a day. Wednesday’s auction netted nearly $49,000 in ETH for the DAO, for example. That’s how its not-tiny treasury came to be.

The fork amounted to a divorce between two long-warring factions in the community.

“In Nouns there’s largely two camps of people: the book value camp and the meme value camp,” said Hong Kim, co-founder of crypto investment company Bitwise and a member of the Nouns Foundation’s six-person board.

The meme value camp, the original impetus for Nouns DAO, sought to proliferate Nouns in popular culture by funding tens of millions of dollars worth of guerilla-marketing campaigns, as well as infrastructure to support the Nouns project. Their more colorful projects ranged from outlandish – $90,000 to name a rare species of frog discovered in Ecuador – to notorious – a failed $174,000 effort to launch a 3D printed Noun to the International Space Station.

“Nouns spent millions of dollars on dumb s*** with unproven people,” the pseudonymous BigshotKlim told CoinDesk in a Telegram message. He’s the artist behind Nouns’ oversized red glasses, called noggles, who himself has received tens of thousands of dollars via commissioned projects from the DAO.

All that spending angered the second group, who took a more green-eyeshades approach, project members said. The book value camp believed the NFTs should at least trade equal to each one’s share of the treasury. To them, Nouns DAO’s prolific spending (CoinDesk estimated the DAO has spent over $26 million on marketing) was squandering. Some thought they could manage the project better – especially amid the prolonged crypto bear market.

“The two sides were very much existentially triggered by each other, assuming bad intent and everything,” Kim, who is known in the community as Noun 40, said. “We ultimately felt, ‘How does crypto solve this? How does Bitcoin and Ethereum address this issue?’”

The two largest, most valuable and most important public blockchains have a history of forking when different camps disagree on the blockchain’s future. Bitcoin’s multiyear civil war over block size spawned Bitcoin Cash in 2017. And in Ethereum’s early days, the crippling DAO hack was essentially discarded through a controversial fork away from the original chain, now known as Ethereum Classic.

While political, blockchain forks are also technological: they happen when a network’s underlying computing power splits between supporting two different histories. DAOs don’t have an equivalent means to manage a divorce.

Perhaps the closest thing is “ragequit” proposed by MolochDAO in 2019. This mechanism allows DAO members who disagree with project direction to quit the original club and take their share of the money into an offshoot.

Rage quitting was the talk of Noun town on Dec. 20, 2022, when the project’s two core engineers, Elad Mallel and David Brailovsky, introduced the controversial mechanism in a Twitter Spaces hosted by Noun Square, a media collective funded by Nouns DAO. They pitched it as a security backstop against a 51% attack, in which evil-doers who have seized majority control can force through malicious proposals, such as sending themselves the entire treasury.

“If such an attack occurs, everybody else that isn’t the attacker can quit. And not only are they leaving with the assets, they’re also making it way less lucrative for the attacker,” Mallel said in the Twitter Spaces.

He and Brailovsky positioned rage quitting as an alternative to Nouns DAO’s existing defense against malicious proposals: a veto held by Nouns Foundation board members.

Kim, who as one of those board members has a say in veto power, said the Nouns community wasn’t concerned the foundation might “go rogue” with its veto, but just the possibility was something to fret overA foundation veto is seen as a point of centralization in a DAO that flies the flag of decentralization. (Even now those closest to Nouns DAO said they seek to vanquish the veto in the hopes of using alternatives like forking instead.)

The forking mechanism was implemented in August as part of Nouns DAO’s V3 upgrade. A person familiar with Nouns DAO’s technicals said the design tried to maximize forking’s usefulness as a theoretical escape hatch while minimizing the opportunity for financial exploitation.

Under the new rules, any Nouns NFT owner can call for a fork in response to a proposal they don’t like. Their call only takes action if 20% of community-held Nouns NFTs join them. Once the forkers clear this 20% threshold, all of Nouns DAO freezes for seven days of no spending, and only debate – stay or go? The leavers then peel off with their share of the assets into a fork DAO that mimics Nouns DAO’s original governance rules, albeit with an important addition: a rage quit. Members of the fork DAO can quit and claim their funds at any time.

Not long after the rules took effect, a disgruntled Noun owner called for a fork and quickly cleared the threshold, putting all those presumptions to the test. This was no 51% attack, but rather a culmination of the political infighting between two warring tribes. The memers and the book value believers were about to split ways.

It was also a moment to rejoice for a third group, one that obseverts said was completely unaligned with the long-term believers in Nouns DAO. After eight months of gradually accumulating power and influence, it was time for the arbitrageurs to show their might and exit Nouns DAO en masse.

“What makes this fork particularly fascinating is the existence of two disparate factions: those genuinely dissatisfied with Noun DAO’s strategic choices and a group of arbitrageurs who view the fork as a simple financial trade-off,” said Grennan, the professor.

For some investors in the project, rage quitting was the plan all along.

The arbitrageurs are crypto investors who bought Nouns NFTs below “book value” on the bet that they might later redeem them at a higher price in a rage quit. Some of them paid attention to Nouns DAO around the time of last year’s rage quit talk. Then they started buying. Most of the Nouns NFTs auctioned in 2023 were bought by arbitrageurs, according to Kim.

“Talks of the fork gave more power” to the activist investors, said the pseudonymous Nouns DAO community member TheBower, who writes a newsletter about Nouns DAO governance. He said the activists “started to have a significant” hold on Nouns DAO to the point that conducting a fork became necessary – if only to shake them off.

The majority of forkers had cashed out of their off-shoot group by press time, taking with them 62% of the $27 million treasury. Each Nouns NFT they quit netted them 35.5 ETH: about the same as a 2024 BMW 5 Series sedan. Some had bought their NFTs at prices of 27 ETH or lower.

While rage quits were new to Nouns DAO, they were familiar to many of the arbitrageurs. Some of them are prolific activist investors who hunt the crypto space for opportunities to buy DAO assets that are trading below book value. Once in, they pressure the DAO’s power brokers to provide a redemption mechanism – a rage quit – for disgruntled investors.

The single-largest forker, a prolific, pseudonymous crypto trader named Blurr, told CoinDesk they had watched Nouns DAO from “day 1” but only embarked on their 44 Noun acquisition spree in August, “when it was clear they’d have to” let a fork happen.

“It was always a game of value maximization from all parties,” Blurr said. Blurr rejected arguments that Nouns’ seven-figure NFTs were ever anything other than an investment play, and blasted Nouns DAO’s aggressive spending. The trader got $4 million in various cryptocurrencies from the fork DAO, according to blockchain records.

The arbitrageurs’ financial gamesmanship levied expensive consequences for the remaining members of Nouns DAO. Their pot for paying to sponsor movies, donate to charities, commission children’s coloring books, rename frogs, and even pay the developers, just got $27 million smaller.

Nouns DAO’s inner core is not dissuaded by the treasury loss. One prominent community member who asked to remain anonymous said the group knew there was a risk actors might play the fork for financial gain. That person said the risk was worth it “to push the envelope” of DAO design.

The Nouns community – remainers and forkers alike – is still coming to terms with what led up to the mess and debating whether it was a success.

Kelly Werder, an instructor at Florida Gulf Coast University who teaches classes on cryptocurrency and is active in Nouns DAO, where she remains, believes the group “did not spend enough” of the treasury to dissuade arbitrageurs from exploiting the book value discount and rage quit.

But the pseudonymous Toady Hawk, who stayed in the original Nouns DAO and runs its Nouns Square media collective, was more open to giving forkers who didn’t rage quit their chance to run “a more fiscally prudent” version of the DAO.

Grennan, the Berkeley finance professor who studies DAO design, said Nouns DAO’s forking experiment “underscores the need for more nuanced governance structures to accommodate diverse stakeholder interests without compromising the organization’s long-term vision.”

“In the big picture, this one-off example demonstrates that while DAOs offer exciting prospects for community-based governance and crowd wisdom, the crowd is only sometimes correct,” she said.