- Activist investors say DeFi project is draining treasury at expense of HEC token holders.
- Fantom-based Hector contends group linked to RFV Raiders is trying to take over the DAO.
- Project team tries to fight off rebels by censoring forum posts and imposing governance restrictions.
Hector Network may not be the biggest name in DeFi. But it does boast one of the most dramatic standoffs in the marketplace.
Over the last few months, a group of unhappy community members at Hector Network DAO have been accusing the project’s management team of “slow-rugging” the venture by draining its coffers of value at the expense of tokenholders.
A steady paycheck
Moreover, the activist investors contend the pseudonymous team is moving the project towards centralisation and suppressing dissent.
“The team has demonstrated, over the course of 18 months, through various actions both mentioned here and in the Community Discord, that their number one priority isn’t the token holders,” a pseudonymous community member who goes by Lilbagscientist told DL News. “They are more concerned [with] keeping a steady paycheck.”
‘The team has demonstrated that their number one priority isn’t the token holders.’
— Lilbagscientist
In contrast to a hard rug where the developer team runs off with the project’s funds, slow rugging is when a team fails to deliver useful products that create value for token holders. As a result, the team steadily drains the treasury by dispensing high salaries to team members and leaving token holders with worthless “coins.”
The clash between the Hector team and its critics is just the latest governance crisis to befall a DeFi protocol. Hector Network is a Fantom-based DeFi ecosystem project.
It’s a fork of OlympusDAO and includes a stablecoin market, crypto lending, and a decentralised exchange among other projects. Its governance token, HEC, has skidded more than 70 percent in the last 12 months compared to a 50% surge in ETH.
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Hector Network’s project team has accused the dissenters of trying to take over the DAO and is restricting access to the DAO and censoring forum posts and instituting governance restrictions.
“The Hector Network has been under a coordinated attack by a social engineering group,” the team stated last week.
The Hector team declined to comment for this article. A spokesperson referred DL News to the team’s June 14 statement laying out its defence against the allegations.
At the heart of the conflict is the DAO’s treasury, which has lost 82% of its value and fallen to $18 million since late 2021, DefiLlama data shows.
Raiders of the lost DAO
The Hector team says the rebels are part of a group of investor activists called the Risk Free Value (RFV) Raiders. They are known for launching hostile takeovers of DeFi projects believed to be slow-rugging investors.
The RFV Raiders have been linked with hostile takeover attempts of several DAOs, including Rook DAO, Rome DAO, Temple DAO, and most recently Aragon DAO.
Their goal is to return value to token holders of DAOs with treasuries that exceed the market capitalisation of their native tokens. (Members of the activist investor group have not taken on the name RFV Raiders but told DL News they are “concerned community members.”).
‘The Hector Network has been under a coordinated attack by a social engineering group.’
— Hector Network team
The activists then acquire governance tokens and push for votes to dissolve the DAOs, liquidate their treasuries, and share the funds with token holders, including themselves.
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Hector Network DAO seems ripe — the token’s market capitalisation is only $8.7 million, which is less than half the treasury, DefiLlama data shows.
In the June 14 post, the Hector team said the dissenters have manipulated the DAO’s governance process and orchestrated the defeat of a vote in April that would have transformed the DAO into an offshore legal entity.
Loads of disagreement
The rebels are now pushing for the dissolution of the DAO by telling token holders that ownership of HEC would give them a percentage stake of the treasury, the Hector team said. This is wrong, the team said, and will not let holders redeem funds via a governance vote.
“HEC is a utility token that conveys certain governance rights, but does not give holders any ownership rights to the project or the project treasury,” the team said last week.
The dissenters disagree. They point to the DAO’s own documents that state the organisation is supposed to be “community-led.”
‘HEC is a utility token that conveys certain governance rights, but does not give holders any ownership rights to the project or the project treasury.’
— Hector Network team
They also alleged that some of these documents have been edited or deleted, with the original texts now available only via archived versions previously saved by community members.
The dissenters lampooned the Hector team’s failure to deliver value for investors despite spending $14 million every six months since the DAO’s inception. They say the community has been helpless to stop the “reckless spending.”
The Hector Network team responded by cutting its budget to $1.8 million for the next six months while also instituting a program to buy back and burn its tokens using revenue generated from transaction fees.
‘They have rugged governance’
RFV Raiders usually advocate for a simple solution — liquidate the treasury assets and share the funds among investors. They have enjoyed some success in forcing project teams to be more accountable. In April, the group was able to force a “rage quit” process in the Rook DAO community that ended up with token holders divvying up its treasury among themselves.
The group helped prevent the Aragon Association from taking the project’s $186 million treasury from community control.
The Hector Network team is scrambling to avoid a similar fate.
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It recently blocked new owners of its governance tokens from voting in future community polls even though it may disenfranchise holders from future participation in the DAO’s decision making.
“This rule is specifically designed to safeguard against a repetition of vote sabotage by actors with nefarious intentions, such as the RFV Raiders, which used several wallets to purchase large quantities of HEC to outvote long-standing members of the Hector Network community,” the team said.
The activists say the team has removed the voting power of wallets who recently bought and staked the project’s governance tokens.
“All HEC that [was] locked since April 1st now would have zero voting power in any governance,” Devlarp64902, a community member, said on the Hector Community Discord.
This move drew fire from the activist investors who said it was another attempt by the project team to centralise the DAO.
“This has been changed without any governance vote, despite the precedent of [more than] 60 previous Hector governance votes,” Devlarp64902 said. “They have rugged governance, and intend to hold a vote excluding token holders.”
Draining the treasury
The Hector Network team also enacted a strict social media policy to remove accounts “propagating false information.”
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Cut off from the forum, the activist investors are forced to pass its messages to the broader Hector Network community through other means. The group maintains the parallel Hector Community Discord and has also taken the fight to Twitter.
“Without the coalition, the community discord, the ‘RFV Raiders’ etc. There wouldn’t be a thing stopping the team from continuing draining the treasury,” Lilbagscientist said. “Because the OG investors are outnumbered, both in attendance and capital as demonstrated in the Discord.”
On-chain sleuthing
Some previous tussles between activist investors and DeFi project teams have ended in a compromise settlement. Members of the parallel Discord Community told DL News that brokering a deal between both parties would be a better way of ending the standoff than resorting to lawsuits.
They see a lawsuit as the last resort, and one that may drain considerable time and resources from both parties.
While the Hector Network team is pseudonymous, some members of the activist investor group say a little on-chain sleuthing could be used to reveal their identities.
“Behind the pseudonyms of their online personas, are real people who call the shots and choose to break their own promises made to investors over the last one and a half years,” Lilbagscientist said.
To share tips or information about DAO governance please contact the author at osato@dlnews.com.
