Fortress DAO is doomed. The question is how it dies.
The crux of the matter is that this particular decentralized autonomous organization (DAO) isn’t really decentralized at all, and its investors are paying the price for getting in on a governance token, FORT, that has power in rhetoric only.
Fortress is an also-ran fork of Olympus DAO running on the Avalanche blockchain with a mere $14M in its treasury (a shadow of the more than $500M+ still backing Olympus’s OHM), but feelings are running very high right now over what should happen with that money.
The problem is that the $14M isn’t really in its treasury anyway. It’s in a separate project, one that was funded by the Fortress DAO treasury, but is now completely in control of its chief technical officer, Avraham Eisenberg, who has shown no interest in giving it back.
Community members that spoke to The Defiant predicted the matter could very well find its way to court. But for now, code is very much law and that particular law is not on the Fortress DAO community’s side.
But the story also raises a question much larger than this tiny DAO: Does its inevitable collapse foreshadow future meltdowns at other DAOs whose governance does not, in fact, run on-chain?
That Fortress DAO is doomed in a matter of months is something that no one The Defiant spoke to disagreed with. Not the retail investors who want to close it now or the primary developer who built it, Eisenberg, who refuses to comply,.
Fortress DAO followed Olympus DAO and Wonderland and forked the code of Olympus to make a “reserve currency” on Avalanche. Much like those projects, it promised to flatten the world of investing, creating an opportunity open to regular people and pulling an end run on the fat cat investors that have become so unpopular in crypto Discords.
These projects were meant to go out and build or invest or supply liquidity in ways that had a bright future, a future with such much potential that their tokens would be worth far more than the underlying assets the tokens governed. But those underlying assets would also create a floor for how far the tokens’ value could, in theory, fall.
Nothing about that narrative has really held up recently.
But the implications go further. Anyone paying attention knows that many of crypto’s DAOs aren’t really that decentralized. Sure, they all have a governance token, but the power to spend money and change code still, in all too many cases, actually rests in a small group of insiders who have control of a mult-sig wallet that makes decisions. Just because groups like this tend to honor their communities’ wishes now, doesn’t mean they always will.
It’s like a small republic that spent too much money on their military. At a certain point, the legislature only remains in charge as long as the generals let them say they are. In nations, those with the guns have the actual power. On the blockchain, those who can sign transactions do.
So clashes of communities and multi-sigs could one day break out all over decentralized finance, but Fortress DAO has reached that breaking point now. It remains to be seen if we later say the project reached it early.
Because Fortress DAO is small, there are only a few parties to the conflict. The community investors and the small team that built it. Most of the founding team has gone silent, the community members say, with only its technical staffer, Eisenberg, remaining. We spoke to a few of the investors, looked at the documentation of the conflict online, and spoke to Eisenberg himself.
None of the parties disputed this point: As things are going right now, Fortress will die in roughly five months as its hardwired supply expansion dilutes the value of FORT to the point where it automatically closes. As things stand now, if it takes that long it will drive returns for its founding CTO until it hits that trigger.
There is much, much more to this story that The Defiant is leaving out, but we are sticking to these two core threads: what’s in Fortress DAO’s treasury and who controls its smart contracts. As one former community manager, who goes by Curiously Cory in the Fortress DAO world said over Telegram, “There’s an astounding level of subterfuge and spy games happening revolving around the drama.”
Half the Treasury
Here’s the crux of the dispute between Eisenberg and FORT holders: Close enough to 100% of Fortress DAO’s treasury is held in a interest-bearing stablecoin spun up and governed by Eisenberg called Fortress USD (FUSD). That stablecoin runs basically like a hedge fund, with profits distributed out to FUSD holders in intermittent rebases, as Eisenberg described it.
Until Jan. 28, the $14M FortressDAO treasury was held in the Magic Internet Money (MIM) stablecoin. When the scandal about the alleged true identity of Frog Nation Chief Financial Officer, Sifu, rocked everything he was associated with, including the Abracadabra project which made MIM. The token looked shaky, Eisenberg said, so half the treasury was moved into FUSD and half into the very stable stablecoin, USDC. Then on Feb. 11, the USDC was swapped into FUSD as well (these dates are according to a timeline provided by Cory).
The shifts can be seen clearly on FortressDAO dashboard, which has a graph showing which assets are in its treasury. For a while, it was mostly MIM with part of the assets in a pool on Trader Joe, an Avalanche automated market maker, earning trading fees. Then it diversified a bit, bringing in USDC and FUSD. Now it is basically entirely FUSD, with just a little bit in that Trader Joe pool.
For Fortress DAO, its treasury is ostensibly controlled by its governance token, FORT, which is what people get when they put funds in Fortress DAO. It isn’t really, though. More on that later.
FORT continually expands its supply, which dilutes FORT, but the dilution goes to FORT holders, so that would be fine if Fortress DAO’s assets were growing in value. But, since it’s not growing (or at least not much) and no one has any faith in it fundamentally, that expansion of FORT’s supply is a sure slow death for reasons that will become clear.
What is FUSD?
But first, if Eisenberg controls FUSD, that means that he basically controls all of Fortress DAO’s trustworthy assets, its so-called “protocol controlled value” is not really in the protocol’s control. The assets with a track record, USDC and MIM or whatever they have, are in fact in a separate smart contract completely in Eisenberg’s control.
Regardless, Fortress DAO was built from the beginning to shut down if the value of FORT hit $1. At that point, it would just share out all its assets to FORT holders, pro-rata. Since the value of Fortress DAO’s assets are growing more slowly than its supply is expanding, that end is sure to come.
The project’s dashboard shows it having just under 150 days to go at the current rate of supply expansion. Despite granting that its demise is inevitable, Eisenberg dismissed as illegitimate any attempt to close out Fortress DAO now.
So what is FUSD? Tough to say. That relates to what FortressDAO is.
These Olympus forks are all meant to gather up a bunch of assets and then do something with the money that makes them grow.
There’s a vote on Snapshot that ended in mid-December to fund the creation of FUSD out of the Fortress treasury. The community seemed to believe that it was funding the creation of a project it would control, giving Fortress DAO a small amount of inherent value. But Eisenberg built the thing, controlled all its smart contracts and he says that it is his and his alone. If he controls the keys, there’s nothing anyone can do.
Indeed, he describes FUSD as entirely his project. “My general pitch was that it’s basically modeled after a lot of the CeFi lenders,” Eisenberg said. “But it also gives you a token on-chain that represents, effectively, your deposit.”
So setting aside the question of who should own FUSD, is it a good place for all the DAO’s funds to go?
Well, how FUSD makes money is opaque. Eisenberg told The Defiant both that there was no reason for community members to worry about FUSD because it’s fully backed, but he also admitted that closing out all of FUSD’s positions now would mean losing millions of dollars, because of exit fees on many of the positions he’s taken.
“My goal is to make money, and if I’m able to produce yield, then I make money that way,” he said. By Eisenberg’s own admission, any deposits in FUSD that aren’t from the Fortress treasury have been negligible. Without Fortress’s $14M, FUSD would be nothing.
He said the positions he has taken with the funds are largely yield farming strategies. In many cases ones where the underlying assets have been swapped for something else. There’s also a certain amount of over-the-counter (OTC) trading he has been doing as well.
He’s farming those assets and keeping a portion of their yield. So far, he said, he’s paid out to FUSD holders once, a 2% return in only a month, which of course isn’t bad in a world where many savings-like instruments earn much less than 2% in a year.
Eisenberg argues that this makes it better for Fortress to hold FUSD than something like USDC, because it earns a return, which extends the runway.
But why bother to extend the runway when no one believes that Fortress can last?
Eisenberg compared Fortress’s slow unwinding to the plummeting values of all the forks that followed Olympus DAO.”There’s nothing really unique about the situation,” he said.
Asked if he could see an outcome in which FortressDAO could turn things around, he said early on they thought it could be a very big thing if it got a lot of capital, but that seems hopeless now. “The markets turned out differently,” he said.
It’s better, he contends, to hold FUSD and let him try to earn FORT holders money, than to just keep MIM and let the project drift to its doom. “That runway gets a little bit extended if FUSD pays out those yields,” Eisenberg said. “That’s how I see this ending.”
All of which is why current holders would rather just unwind it now.
Xibumi is a former member of the staff of Fortress who has been keeping the community updated in its Discord. He also bought FORT in the very first sale. He pushed for an immediate redemption of all the assets early this year, but he failed to make it happen. He shared with The Defiant a message he wrote in the Discord on Feb. 2:
“The redemption plan was an ideal end to this project, where many people would end happily,” he wrote. “I apologize for everyone who trusted me and stayed here because of me. I had a learning of a lifetime in 2 months here.”
The truth is, no one can force a shutdown of Fortress DAO. The true problem for FORT holders who are not Eisenberg: FORT was never truly a governance token. “From a technical perspective there’s no on-chain governance for Fortress,” Eisenberg said.
FortressDAO is run by a multi-sig. That multi-sig has all the actual power in FortressDAO. Forcing a vote on Fortress DAO’s Snapshot page is useless unless the multi-sig honors it. There is however a separate vote on Snapshot set up by a community member asking Eisenberg to leave, and 245K FORT have voted in its favor.
This condition is hardly unusual across various DAOs. It’s surprising more haven’t ended up in a similar place.
“If the community trusted Avraham the calls for redemption would be fewer. In fact, Wonderland serves as an example. Wonderland trades under backing price yet the community recently voted not to redeem,” Mark Davie, the community member who first alerted The Defiant to the issue, wrote in an email.
But the real power in Fortress DAO isn’t even its own smart contracts, it’s the assets. The real assets, the assets that could actually be traded outside of the Fortress DAO ecosystem, all the $14M worth of stuff that left its smart contracts and went into FUSD.
So, Eisenberg has everyone over a barrel, because all the real FortressDAO assets are inside FUSD and FORT holders have no direct power to make him give those funds back.
Supporters of many other DAOs may be in a very similar situation, it’s just that no one has held them out over a barrel yet.