Potential Misuse of Funds - Furucombo

Announcements
1

What is the issue?

The Foundation has reviewed the STIP Analysis (ARDC Research Deliverables) prepared by @Blockworks and observed that certain protocols have misused (and/or retained leftover) STIP and Backfund STIP grants.

Which projects have misused funds?

The Foundation has followed up on projects that fall into the above category and has sought for funds to be returned.

Several projects that we privately contacted have cooperated and returned the funds without any issues. We want to take this opportunity to thank them for resolving potential issues in a quick and orderly manner. We would also like to thank the STIP & STIP Bridge multi-sig committees for their invaluable assistance in navigating subjective areas pertaining to whether certain actions should be (or not be) deemed as misuse of funds.

Unfortunately, there is only a single project that failed to return funds to the DAO. We are left with no choice but to publicly share this information with the DAO:

  • Furucombo (cc: @Blazar):
    • Furucombo has not published a final STIP report.
    • It appears they sent the 59.5K ARB from the STIP to Kraken accounts, making it unclear how incentives were spent.
    • Additionally, the project froze incentives towards ‘wash traders’, with users claiming they received significantly fewer rewards than expected.

Furucombo have notified us (and StableLabs) that the funds will be returned. However, after subsequent requests from us, the funds still remain in their possession.

What are the next steps?

Furucombo will have 1 week to present their case to the ArbitrumDAO as a reply on this thread.

If the project’s explanation is not to the Arbitrum Foundation’s satisfaction, and the funds (~59.5k ARB) are not returned within the same week, the Arbitrum Foundation will seek a vote from the ArbitrumDAO on the following:

  • Should Furucombo, including all founders, current team members, and affiliated contributors, be permanently banned from all future ArbitrumDAO programs?

There is also an option, assuming Furucombo is banned from the ArbitrumDAO, for the Arbitrum Foundation to further enforce the grant agreement signed with Furucombo and seek legal recourse to return the funds.

Lessons Learned

The DAO is still young, and it is natural for it to learn with time and experience. Based on the incentive programs to date, here are some lessons that the Arbitrum Foundation have observed, that can hopefully be taken forward into future programs:

  • Going forward, STIP rules should be more clearly defined on deadlines in which an incentive grant should be claimed by users and remaining funds to the ArbitrumDAO.
  • Funds should be distributed from addresses that are solely used for incentive programs and projects should avoid commingled of funds. Put another way, it should be very straightforward to follow via on-chain transactions how the incentives are distributed.
  • An incentive program should specify an authority, or a group of people, who are responsible for interpretation of the rules of the incentive program and whether a project has misused funds. To date, this responsibility has fallen on the appointed multisig, and the exact powers are not clear.
  • All projects must be encouraged and required to report any change to their incentive program to the ArbitrumDAO. If there is a material change, it should require approval from an appropriate authority for the incentive program.
  • On-chain analytic companies should be hired to help track the distribution of incentives in real-time. It may be wise to introduce tranches as opposed to simply streaming and further funds are only released if the protocol has carried out the will of their proposal.

For more information on the STIP Program, check out these resources:

19 Likes
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Thank you, Arbitrum team, for following up on this issue.

I hope that Furucombo users can get their funds back. :pray:

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I think it is important to take action. There should be a clear sign that if one does not follow the rules that there are consequences. Otherwise the DAO will simply be drained.
There should be clear rules and if a protocol doesn’t follow it should be warned and then banned if nothing is happening. In some cases it might even make sense to take legal action.
DAOs shouldn’t be a shop where you can get everything for free.

5 Likes
5

i agree with you @EzR3aL @Arbitrum , Let’s assume that the STIP program is implemented as a smart contract on the Arbitrum network, and that the contract has a function to distribute funds to projects that have been approved by the DAO. To prevent a project like Furucombo from misusing funds, the contract could be modified to include the following features:

Fund escrow: The contract could hold the funds in escrow until the project has completed its proposed work and has been verified by the DAO or a designated authority.
Milestone-based funding: The contract could release funds to the project only when specific milestones have been reached and verified by the DAO or a designated authority.
Conditional fund transfer: The contract could include conditions that must be met before funds are transferred to the project, such as the project providing regular updates or meeting specific performance metrics.
DAO-controlled fund release: The contract could give the DAO the ability to vote on whether to release funds to a project, and only release the funds if a certain threshold of votes is reached.
Fund clawback: The contract could include a mechanism that allows the DAO to “claw back” funds that have been released to a project if the project is found to have misused the funds or failed to meet its obligations.

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To prevent such situations, it would be worth everyone voting against the adoption of the STIP Bridge, which gave a grant to this project, already knowing about these problems.

Why was this project not excluded from that grant distribution?

2 Likes
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This project did not get approved by the DAO for STIP Bridge - Snapshot

1 Like
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Beyond banning them from the DAO, there should be legal action against those misappropriating funds.

Is there any committee on legal affairs responsible for prosecuting offenders in crypto-friendly jurisdictions on behalf of the DAO? If there aren’t any, it is time we started one. What do you think? @Immutablelawyer

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All STIP projects that received funding from the DAO already concluded grant agreements with the Arbitrum Foundation.

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The Arbitrum Foundation is now seeking a decision from the ArbitrumDAO on this matter:

https://snapshot.org/#/arbitrumfoundation.eth/proposal/0x07bea6e32d32b4d3ed20faec6950c3546e2319bc2497716c53ee05995d4a00eb

1 Like
11

We think Furucombo should 100% be banned from the DAO. While still relatively small, actions like this need action or else future situations will only get worse.

Going into the future, it might be worth experimenting or setting up a code of conduct council that hears decisions like these. As the DAO grows, there will certainly be more and more disputes like this and a council will have the resources to properly analyze and pursue them so the foundation can do other more pertinent and important things.

12

Voting in favour of banning furucombo here.

Would like to provide also some more color to this beside what has been already stated above.

All the stakeholders here (foundation, organizers of stip/ltip, council/advisors, protocols) to their best to create program that have an impact and are fair and trasparent. To do so, there is A LOT of work from everyone, including protocols who take time to devise proper mechanisms to distribute incentives and implement them, prepare biweekly report, create dashboard to have precise data analysis etcetera.
Not complying is simply inadmissible considering the effort that everybody puts in these programs.

1 Like
13

Voted in favour of banning Furucombo from all future incentive programs.

Additionally, since we imagine that this would be a breach of the Grant Agreement counter-signed with the Arbitrum Foundation, we would like to action taken by the Arbitrum Foundation to attempt to recover these funds.

Hence our questions are the following:

i. Does this amount to a breach of the grant agreement with the Arbitrum Foundation? (We assume so, but haven’t looked at any STIP Agreements hence this has to be clarified);

ii. What legal recourse does the Arbitrum Foundation intend to take in this regard? (bare minimum, we should at least send a judicial/legal letter to the recipient - who did KYC/KYB with the foundation and thus, who the Foundation knows the identity thereof, to further draw a line here).

Our concern is that if this breach remains unenforced by the Arbitrum Foundation, then there is no major disincentive to not misuse funds in the future. Albeit voting in favour of banning Furucumbo from all future incentive programs, we’d like to point out that such a decision is just a consensus check, and naturally not legally binding in nature.

Kind regards,
Joseph,
Axis Advisory

14

I support the proposal to ban Furucombo from the ArbitrumDAO.

  1. Misuse of Funds: Furucombo misused 59.5K $ARB of its Backfund STIP grant, as evidenced by the STIP Analysis from Blockworks.
  2. Lack of Accountability: Furucombo failed to publish a final STIP report and sent funds to Kraken accounts, making the expenditure of incentives unclear.
  3. Inadequate Response: Despite being given a deadline to present their case and return the misused funds, Furucombo did not respond.
  4. Impact on the Community: Furucombo’s actions, including freezing incentives towards ‘wash traders’, resulted in users receiving significantly fewer rewards than expected.
  5. Consequences: The proposal seeks to permanently ban Furucombo and its affiliated members from all future ArbitrumDAO programs to ensure accountability and integrity within the DAO.

This decisive action is necessary to maintain trust and ensure proper use of DAO resources.

15

I voted in favour: Furucombo should be banned. The situation went so far that the Arbitrum Foundation was forced to make a public statement about it, which is something I imagine they would try to avoid.

We should also make public the list of protocols that returned ARB funds. Although they did it when prompted, they were misused in the first place. The Foundation should publish this so that delegates can compare it with Blockwork’s report.

1 Like
16

Fairness is a fundamental principle of the DAO, and some cheaters deserve to be punished.

2 Likes
17

It is sad to see that this type of event is a concern needing to be dealt with when Arbitrum needs to be focused on growth above all else right now with the DeFi competition growing stronger every day in the scaling space.

That being said, I feel @olimpio’s comment:

We should also make public the list of protocols that returned ARB funds. Although they did it when prompted, they were misused in the first place. The Foundation should publish this so that delegates can compare it with Blockwork’s report.

Is spot on, and this should be the follow up procedure without a doubt. I have no information as to the specific situation regarding Furucumbo other than failing to respond is a large concern from my perspective.

Looking forward to see how the Arbitrum DAO navigates and pivots to implement better safeguards in the future.

1 Like
18

So, in the spirit of keeping things fair and square, I support the proposal to give Furucombo the boot. It’s time to send them packing, like a magician without a rabbit.

19

As already mentioned and now made it visible by my vote to ban Furucombo.
This is a non aligned behavior and should be punished.

20

I voted in favor of banning Furucombo from receiving any future incentives from the DAO. I expect the Arbitrum Foundation to pursue the return of tokens through legal actions as they KYCed the Receiver, to avoid any future misuse by other protocols.

Furucombo should return all the tokens plus penalty fees to the DAO if they decide to seek any future token incentives

21

I support banning Furucombo and their team from all future DAO programs. Appreciate Blockwork’s investigation on the misuse of funds.

Would be interesting to see what other repercussions could be adopted in the future, just a ban from future initiatives is not enough of a disincentive to not misuse funds.