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DigixDAO: A Divorce Story

A case study for voting systems and cryptonative arbitrage

This post was imported from an existing Medium article, published on February 2020

DGD/ETH Timeline of the Digix Dissolution (TradingView)

In the following article, “Digix” refers to the project in general, “Digix Global” refers to the team behind Digix, and “DigixDAO” refers to the DAO structure governed by DGD token holders. “Treasury” refers to the DAO’s spendable Ether that was raised in the ICO.


  • In January, the Digix community (DGD token holders) were given a chance to vote for the project’s dissolution and will walk away with the project’s Treasury proceeds.

  • Parties who took risk on DGD and closely followed the vote technicals were able to attain as much as a ~48% spread between DGD and the underlying ETH of the DAO.

  • The DigixDAO dissolution event is an important milestone that shows the governance space is maturing and stakes are getting higher.

Note: For convenience, the background of the DigixDAO dissolution vote has been moved to the end of the article. For full context, or if you are not familiar with DigixDAO, please start with the “Background” section below.

51% DAO

As a quick refresher, a team-sponsored proposal to return the DigixDAO Treasury —around 386,000 Ether raised in the ICO — to DGD token holders was put forward for a vote in January. DGD token holders could stake their tokens (signal to vote) and vote yes, no, or abstain. The two requirements for the dissolution vote to pass were reaching quorum (total votes denominated in DGD stake must be greater than 40% of total DGD staked) and reaching quota(simple majority greater than 50% must vote yes). Please see the “Background” section at the end of the article for more details.

As a live vote that is registered on the Ethereum blockchain, we were able to parse the DigixDAO contract data to measure voter behavior. Our analysis called data from a private subgraph GraphQL implementation and the DigixAPI. [1] [2]

Voting Power

Because the DigixDAO voting system is 1T1V (one-token-one-vote), we looked at the voters that were committed to vote on the dissolution proposal and their respective stakes. For a more in-depth dive in applying voting theory to on-chain voting systems, see Jake Brukhman’s piece on the Banzhaf voting index.

After filtering by the top eligible voters by stake, the voting power concentration became apparent.

Top 25 Voters by Stake (full list here). Orange highlights top four. `
  • cumulative_stake: cumulative sum of stake starting with highest

  • cumulative stake % of quorum: cumulative_stake / quorum (408K)

  • cumulative stake % of quota: stake / cumulative_stake

  • cumulative stake % of quorum (bottom_up): cumulative sum of stake starting with lowest / quorum (408K)

For the quorum to be reached (determined to be 408K DGD based on stake), it would only require the top four voters to participate in the reveal phase. Even more glaringly, the cumulative stake % of quorum (bottom_up) shows that the quorum would not be reached even if every other voter outside the top four had voted while the top four abstained.

For the quota, if we assumed that the top four voters all voted the same way, they would command the majority voting power (greater of 53% of the vote.)

Thus, the top four voters, if treated as a coalition of 440K stake, completely controlled the vote by both (a) establishing or preventing quorum by voting or abstaining, respectively, and (b) controlling the quota and thus single-handedly being able to determine the proposal outcome. (In voting theory, such a critical voter is known as a dictator.)

y-axis: cumulative stake % of quorum

The 468K Coalition

Note that our core assumption was that the set of highlighted addresses were part of the same coalition, which was not a strong assumption at the time. There was no way to determine who the top addresses belonged to specifically or whether the non-Digix Global team were in control of these addresses or not.

Interestingly, a deeper look into the blockchain led to a discovery of a potential coalition, which was comprised of the following addresses.

> 0x2479f13aa8cb50ce134fee0f32e837493a115699
> 0xdb569e2a5af89d492bda0d2bd567c5e5c525c94e
> 0x7006e83f868f1ff893053c100a5cfb39ef586002
> 0x741eb925138c2906ca870fd1100ccf4e8e7893e9
> 0xc203f2019054fce9635b4581c00fef50b91c9851
> 0xd5b4f094d0414bed35cb63820895085db8e6687c

We noted that a set of participating addresses had locked their tokens and staked into the DAO contract in consecutive transactions, each minutes apart. [3] This set of addresses had also sent large batches of DGD tokens between each other since the ICO. Some addresses in the set had also shared the same exchange deposit/withdrawal address. [4][5][6]

Top 25 Voters by Stake (full list here here). Green highlights the addresses in question.

Based on Etherscan alone, we do not know the specific identities behind these addresses. However, from our model above, we know that a coalition of 440K stake is sufficient to control the vote. The set of addresses in question, if treated as one coalition, commands a total stake of ~468K, which is above the 440K threshold. Treating this set as one voting coalition is applicable to the above model because of material impact from a coordinated set of behaviors.

On January 18, 2020 @ 3AM UTC, the commit period ended — thereby locking in the set of voters in the list above. If the set of addresses in question were in fact a coalition, they would understand that the dissolution would be guaranteed since they were certain of their grip on the vote’s outcome. Any price below the value of DGD based on the underlying ETH of the DAO (0.193 DGD/ETH) would be money left on the table. Around the same time, the general DGD/ETH market spiked from 0.14 to 0.17 (a 21.4% return). Whether or not these buyers were the coalition members themselves or other interested third-party participants is unknown.


The existence of the 468K Coalition was revealed on January 20th 2020, as evidenced by the revealed spike in yes votes. The set of addresses in question — which was initially flagged for committing to vote in the same time window — are shown to have also coordinated their invoking the reveal_vote function consecutively in the DigixDAO contract within a 20 minute window. [7]

Timeseries of total reveal votes in favor of yes
“Reveal, vote yes” function of the 468K Coalition

Given the voting weight analysis and the voting results, it’s clear that the before the vote’s end that the dissolution would pass, as there would not be enough stake to overturn the simple majority. From here, we expect that the DGD/ETH smart contract will be published at the end of the quarter, at which point DGD holders can exchange their tokens for the underlying Ether.


Governance of the Long-Term View. The DigixDAO’s successful dissolution reveals that this form of decentralized governance worked as designed but not without quirks. On-chain data will continue to play a major role in understanding the state of these networks — and in some cases may reveal potential activism from arbitrage-focused funds. Unfortunately, in this case the Digix community opted to dissolve the project due to lack of progress. But in the future, projects and stakeholders with longer-term horizons will have to appeal to the long-tail of stakeholders and make cases against such dissolutions.

Investor Spectrums. While Digix may have been saddled by the old ICO era’s baggage, teams today have taken a step back from fully decentralized funding models. Instead, teams are selling equity structures in early stages of projects. By doing so, today’s teams have to position the role of the founding company within a network, and how those value flows play seem to be initially determined by the equity investors and then eventually the token investors of a network. As these networks gradually broaden and mature their set of holders, alignment of incentives and distribution will require the appropriate actors to help bootstrap these networks and companies in the early stages. The correct value exposure along this front may also eventually fall across various risk spectrums and its appropriate investor classes.

Asset Market Infrastructure. Because of the ICO structure and the DGD token distribution, the liquidity on the books was relatively sparse. A healthier order book, along with lending and borrowing markets, may create more robust arbitrage opportunities in the future for such governance systems. In this case, because the arbitrage was in ETH terms, a fund could frame the opportunity as doubling down on an ETH-long position — or, a savvy fund could also hedge against ETH market exposure during the duration of the trade to earn the pure upside in dollar terms. In the future, exchange support for token voting will inform stakeholder awareness and contribute to voter participation and turnout.

In retrospect, the Digix project was one of the first to define the asset-backed token model. Today, we can view it a predecessor to asset-backed tokens we see proliferate in the form of stablecoins. DigixDAO was also the second major DAO project in the world. This case study tells a story of unique cryptonative arbitrage — where cryptoeconomics of the DAO and the speculative markets have worked against each other to cause dissolution. [8] The Digix case-study is one to look back on as we begin to see the proliferation of networks and their asset dimensions.


A Vision Reset

The Digix project sought to represent ownership of real-world assets on the blockchain as ERC-20 digital assets. Digix built an infrastructure and back end to represent gold-backed tokens denominated as “DGX”. [9] According to the Digix whitepaper, a DGX token holder could redeem their tokens for gold bars from the Digix network at participating repositories.

To fund this vision, Digix Global conducted one of the first Ethereum-based ICOs in Q1–2016. The project raised ~466,648 Ether (valued at ~$6MM USD at the time of the sale) and sold 1.7MM DGD tokens (of the total 2.0MM total token supply). [10] The ICO was the second major Ethereum-based ICO following Augur’s ICO in 2015, and sold out in 9 minutes.

The value proposition for DGD was that DGD holders could vote on proposals to be funded by the Treasury (the Ether raised in the ICO). These proposals would advance the Digix ecosystem and create more demand for DGX. Any transaction and demurrage fees collected on DGX volumes would be passed back to DGD holders. [11]

Four years later, in 2019, the equation facing Digix and DGD holders changed.

US KYC. Digix Global enacted KYC to bar US participants from participating in DigixDAO’s platform. [12] This would limit the total addressable voter base.

Fee Fundamentals. Low usage of the DGX platform drove lackluster fees from the perspective of DGD buyers and holders. A quick look at the DAO Rewards Manager contract shows that only around ~1,000 DGX (~$50K USD at publication date’s DGX price) has been sent to be disbursed amongst the DAO since DigixDAO launch (2019 March). Compared to the valuation of the DGD staked for voting in the DAO (around half of total supply) prior to the dissolution, this would have netted <1% on a USD basis. [13]

Ether Treasury Value. Most importantly, the underlying Ether reserves in the treasury had multiplied in value. Relative to the Ether price paid at the time of the ICO (~$11), Ether prices had increased tenfold and the Treasury’s Ether still maintained around 80% of the original ICO balance. The market value of the Treasury (or the “book value” of the DAO), in dollar terms, had ballooned (from ~$6MM to ~$60MM) relative to the market value of the underlying DGD governance asset. [14] [15]

Path to Dissolution

DGD has historically traded below the DAO’s book value, which is simply the Treasury amount in Ether divided by the total circulating DGD supply. The prevailing assumption was that DGD holders did not have a direct claim to the Treasury, only around how the Treasury spent the money. This is, however, just semantics because there is no reason that the DAO cannot “spend” the money as a refund to DGD holders. This distinction came to light in Q3–2019.

In August 2019, a community member created a proposal in the DigixDAO to return the Ether treasury for DGD tokens, titled “A Proposal For A DGD To ETH Burn Function.” [16] Up until this point, the treasury reserves were being used to fund marketing, community hiring, and business development. Given the changing circumstances noted above, this proposal allowed the set of aggrieved DGD holders to walk away from the project. This was not the final dissolution vote that has been widely discussed.

Interestingly, the proposer did not seek to drain the entire treasury, but rather provide an alternative path for incentive alignment. On social channels, community members expressed frustration with the progress of the project and were keen to vote in favor of partial dissolution. [17]

Below is the vote breakdown — the relevant rows are quorum, yes , and no .

quorum is the minimum required amount of revealed votes denominated in DGD stake cast in the Reveal Phase.quota is the ratio of total yes vote stake to total no vote stake. quota is set to 50%, a simple majority voting rule.

Both the quorum and quota must be satisfied in order for the proposal to pass.


The vote achieved quorum but only achieved a ~32% quota and failed.

A closer look at the voting data, however, reveals that three of the four Digix Global team wallets had committed and revealed votes no against the proposal. It was the first DAO proposal that the founding team had voted against. [18] [19] [20]

The combined stake of these three Digix Global team addresses was 124,019 DGD (of the 175K no votes), which if netted out of the no vote, would actually have resulted in the proposal passing in favor of the yes camp. This pointed to a clear tension around views of the DigixDAO treasury management.

Dissolution Proposal

Following the failed vote, to their credit, the Digix Team responded to community sentiment and dynamics and have decided to put a sponsored rolling burn proposal called Ragnarok [21].

This team-sponsored proposal allowed a mechanism to burn DGD for pro-rated ETH in the treasury. The ratio of the treasury holdings to the total supply of DGD tokens roughly came out to ~0.193 ETH/DGD, and the fully-diluted market value of DGD was trading at ~50% discount to said book value (or “NAV”) around the time of the announcement.

While the team stated they were against the dissolution, they had signaled paths to acquiescing to the community.

  • The Digix Global team sponsored the dissolution proposal and its parameters. The team drafted the official proposal and deployed the smart contract enabling DGD/ETH burn.

  • The Digix Global wallets stated that they would abstain from the vote but staked towards the quorum. The Digix Global stake (166K DGD) added a 40K order to the quorum minimum.

  • Even if the proposal were to fail, the dissolution would be up for vote for every quarter as a consistent forcing function.

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