Report: AADAO and Cosmoverse 2024 Dispute
I. Problem Statement:
A dispute arose between the Atom Accelerator DAO (AADAO) and Cosmoverse (grantee) regarding an $80,000 initial payment for a $100,000 approved grant. The transaction coincided with AADAO’s transition from ATOM-based to USDC-based disbursements. The conflict centers on two separate disbursements, each presenting distinct issues:
- March 20, 2024: AADAO erroneously sent 80,000 USDC to an incompatible Kraken CEX address (Payment 1)
- May 23, 2024: AADAO sent an additional 80,000 USDC as a “temporary loan” to support Cosmoverse’s operations while attempting to recover the first payment (Payment 2)
The situation was exacerbated by:
- Lack of clear communication between parties
- Absence of proper documentation and loan agreements
- Cosmoverse’s delayed objection to the loan classification
- Disagreements over fault and responsibility for the errors, with AADAO acknowledging procedural shortcomings but Cosmoverse refusing to accept any role, particularly with respect to their decision to use a CEX address
The dispute escalated when the community became aware of a “temporary loan” issued to grantees. This raised questions as to why the loan was issued, and under what terms. Further complications arose when Cosmoverse contested the loan classification of the funds they received as Payment 2, and argued the loan must be reclassified as a grant due to their perceived lack of fault in the initial transaction error with respect to Payment 1.
II. Timeline
- February 26, 2024: Cosmoverse applied for 2024 funding, the online application form asked for an ATOM address (cosmos12m4dshpc5qqvrafw46pu6rg4743aswljupx445). According to AADAO records, this address was marked as twice verified.
However, AADAO records failed to explicitly establish that verification pertained to ATOM transactions only, rather than USDC disbursements.
Coincidentally, AADAO updated their application form to request USDC addresses on the same day Cosmoverse applied, but the form with amended changes prompting applicants to provide a USDC address was published hours after Cosmoverse’s submission.
- March 12, 2024: Fabian from Cosmoverse re-establishes in AADAO/Cosmoverse shared Telegram chat they are sharing an ATOM address. While he does not mention it’s a Kraken address, Fabian (Cosmoverse, CFO) does allude to the address being the “same as last year”.
In 2023, AADAO utilized the referenced CEX ATOM address to transfer funds to Cosmoverse.
While there are discussions regarding payment distribution for the $100,000 approved grant, there are no corrections from AADAO contributors alerting Cosmoverse that the team has migrated to a USDC disbursement system.
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March 20, 2024: AADAO transferred 80,000 USDC to a Kraken CEX address provided by Cosmoverse, which was incompatible with USDC transactions.
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March 21, 2024: Joint recovery efforts begin.
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April 12, 2024: Acknowledgement of working outside of normal business operations to send funds “quicker”
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April 24, 2024: AADAO confirms they will make some kind of funding available to Cosmoverse, asks for Noble USDC address.
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April 2024: Due to the inaccessibility of the March 20th funds, AADAO conducted deliberations regarding the provision of a loan for Cosmoverse. The decision to authorize the loan was formalized through a team vote.
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May 23, 2024: AADAO transferred an additional 80,000 USDC to Cosmoverse, with the transaction labeled as a “temporary loan” via DAODAO. Post-disbursement, AADAO sent an email to Cosmoverse expressly establishing the sent funds as a loan, not a grant:
Dear Recipient:
Due to the ongoing issues with Kraken, we are providing you with a temporary loan to support your project’s continuity. This one-off payment has been processed and is now available in your verified wallet. Please verify the transaction with the hash provided below:
This loan is a part of our commitment to assist our ecosystem partners during this challenging period. It is essential to understand that this financial assistance is a loan, not a grant, and will require repayment under terms that will be outlined in our subsequent communications.
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May 23 - July 31, 2024: During this period, Cosmoverse did not object to the loan classification of the funds they received. While they did not specifically respond to the email regarding Payment 2, there are references to Cosmoverse’s direct acknowledgement and understanding that the financial arrangement for Payment 2 is a loan.
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July 3, 2024: AADAO sends Cosmoverse a message in shared TG: “…it’s crucial that you make a concerted effort to address this issue. Please be reminded that we loaned the second amount, and it is owed back to us and to the community. We need full team commitment in retrieving the funds. We did a favor by loaning it, but it is absolutely imperative that we recover the funds. Your cooperation is essential”.
Cosmoverse replies that they are still reaching out to Kraken support on a weekly basis, and forwarding all email interactions to grants@atomaccelerator.com
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July 10, 2024: AADAO says that the matter is being escalated to Oversight, and urgently needs Cosmoverse to push a resolution with Kraken. Cosmoverse claims there have been “no updates” from Kraken, and their support “stopped responding to us entirely”.
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July 25, 2024: Cosmoverse and AADAO plan a call to discuss joint recovery efforts; Cosmoverse asks AADAO to add Grace, elected member to AADAO Oversight to the call.
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July 28, 2024: Community attention regarding the “temporary loan” adds urgency to forthcoming discussions. Cosmoverse specifically requested the elected member to AADAO’s Oversight – me, to observe and help facilitate discussions between the parties.
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July 29, 2024: I published a memorandum in the Cosmos Hub Forum that I would be conducting a thorough review, and will subsequently deliver a comprehensive incident report.
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July 30, 2024: AADAO asks if Cito can help with recovery efforts through a campaign on socials. Cosmoverse responds, “Cito doesn’t need to get involved when it’s not his area of responsibilities”.
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July 30, 2024: I learned that no formal loan agreement, MOU, or any written documentation delineating the terms of the purported loan had been executed. When asked about this omission, both parties conceded that they had not prioritized structuring loan terms. Their rationale for this was predicated on the reasoning that such documentation would only become necessary in the event that fund recovery efforts proved unsuccessful.
Both teams demonstrated a reliance on the presumption of recovery, and delayed defining the terms of their financial arrangement.
III. Negotiations
Three discussions occurred between AADAO and Cosmoverse teams on August 1st, 7th, and 14th, 2024:
- August 1, 2024: The initial call aimed to establish an understanding of events from both parties’ perspectives and to delineate basic terms of Payment 2’s financial arrangement. It was revealed that Cosmoverse had received three transactions from AADAO in 2023, all paid in ATOM to the same CEX address provided in their 2024 application. Cosmoverse shared 2023 documentation demonstrating their team clearly indicated the address as custodial, explicitly stating in one instance their inability to verify it due to lack of key control. AADAO’s acceptance of this arrangement lends credence to Cosmoverse’s assertion that the failure to note the address as custodial represents lack of completeness with AADAO’s internal record-keeping.
Regarding Payment 2, Cosmoverse disclosed to AADAO that they urgently required funds, as lack thereof was impeding their pre-production work. They assert that at no point between Payment 1 and Payment 2 did they request a loan. According to Cosmoverse, communications from AADAO only indicated a willingness to provide funds to alleviate financial pressure if recovery was not achieved in April. Crucially, Cosmoverse contends that the designation of Payment 2 as a loan occurred only the day of, and after the funds were disbursed, and believes what they received was another grant. Cosmoverse expressed they were “surprised” by the email establishing Payment 2 as a loan and therefore said nothing
AADAO maintains that the funds were provided as a loan, not a grant, and claims they communicated this fact. The transaction was executed in “good faith,” resulting in an absence of formal documentation by both parties.
I questioned Cosmoverse why there was a lack of follow-up to the email establishing Payment 2 as a loan, especially given their purported surprise at the post-disbursement email defining the arrangement as a loan. I noted that common sense would dictate seeking clarification if the idea of a loan was curious and or objectionable upon receipt of the email. Cosmoverse then characterized the arrangement as a “loan for Kraken to repay,” further complicating the interpretation of the transaction’s nature. Kraken is not the “borrower” here – it is Cosmoverse.
Notwithstanding the allocation of responsibility for Payment 1 incident, it was emphasized by me that the absence of any objection upon receipt of the funds and the accompanying email, coupled with Cosmoverse’s failure to seek clarification of loan terms and conditions, could reasonably imply acceptance of both the loan itself and the pending terms associated therewith.
Unable to reach a conclusion regarding the nature of the funds, with Cosmoverse maintaining that Payment 2 is a grant and AADAO insisting it’s a loan, a subsequent call was scheduled. I requested supporting documents, any materials to support their respective claims.
- August 7, 2024:
Based on a preliminary fault analysis, derived from document reviews, AADAO records, chats, and interviews with various team members, I shared that AADAO committed more procedural errors than Cosmoverse with respect to Payment 1:
- Insufficient documentation specifying which cryptocurrency each verified wallet was approved to receive.
- Omission of a test transaction prior to sending the initial payment amount.
Conversely, Cosmoverse’s utilization of CEX addresses demonstrates poor judgment, and does not absolve them of full responsibility. Given their extensive experience and expertise in crypto as marketers and educators, it seems reasonable to expect that they would understand the risks associated with using a custodial wallet for such transactions. In this context, AADAO’s failure to explicitly caution against using a CEX address appears to be a level of guidance that should not have been necessary. At the same time, one can argue there was insufficient caution against using CEX addresses as interactions between the two in the pilot year shows AADAO making accommodations in this regard.
Irrespective of fault distribution concerning Payment 1, both parties share responsibility for the financial arrangement regarding Payment 2:
- Both parties share responsibility, regardless of fault distribution for Payment 1.
- Financial arrangements, by nature, involve mutual assent and responsibility.
- In a loan scenario, both the creditor and borrower have obligations: a. They share responsibility for establishing clear terms. b. They must jointly define the repayment obligation.
- This shared responsibility is particularly crucial when public funds are involved.
While Payment 2 lacks a formal Memorandum of Understanding (MOU) or any documentation clearly establishing the funds’ status as a loan prior to the transfer – a post-disbursement email was sent immediately after the transfer of funds explicitly defining the provision of funds through a loan. Cosmoverse’s two-month silence following this communication could reasonably be construed as tacit acceptance, significantly undermining their current claim that what they agreed to is effectively another grant and not a loan. I also shared the observation that Cosmoverse appears to have accepted ambiguous loan terms and used the funds under ambiguous circumstances when it suited their immediate needs, only to challenge this ambiguity and use it against AADAO when the repayment obligation is being made a tangible concern.
In an attempt to productively move the conversation towards compromise rather – I suggested potentially restructuring Payment 2 as a $40,000 grant and $40,000 as a non-interest-bearing loan, repayable over six months with a flexible start date. It was emphasized that this distribution was merely conceptual and illustrative. Cosmoverse rejected this proposal.
AADAO subsequently proposed repayment through services rendered – “work off the debt rather than paying back USDC.” Cosmoverse indicated they would consider this option with their team, contingent upon establishing the principal amount of the debt.
Post-meeting developments were concerning. Cosmoverse refused to authenticate the meeting minutes and mischaracterized the preliminary analysis referenced in the documents as a “verdict”, despite clear language in the document communicating the analysis is both preliminary and comments in the call are part of a conversation that is non-binding or declarative. They also expressed concerns about my perceived bias in the shared analysis and requested my exclusion in future discussions.
In retrospect, Cosmoverse’s fundamental misunderstanding of financial terms and concepts, particularly the fact that contingent repayment precludes classification as a loan, significantly impeded productive dialogue during this call. This lack of clarity in financial terminology hindered the progress of discussions and highlights the importance of literacy financial terms used during negotiations.
- August 14, 2024: AADAO proposed a new solution, forming the basis for the subsequent Memorandum of Understanding (MOU).
Oversight did not attend, but a recording was subsequently shared with me for review.
IV. Memorandum of Understanding (MOU)
On August 15, 2024, AADAO and Cosmoverse executed an MOU with the following key provisions:
- AADAO to transfer $80,000 worth of ATOM from their bonus allocation to the Grants wallet
- Reclassification of the March 20 disbursement (Payment 1) as a “non-interest-bearing loan” (Clause 4a)
- Reclassification of the May 23 disbursement (Payment 2) from a loan to a grant
- Continuation of joint recovery efforts
V. Oversight Analysis of MOU
For transparency, the Memorandum of Understanding (MOU) executed on August 15th, 2024, is appended to this report. Upon review and consideration of Oversight’s review and recommended changes for the MOU, AADAO and Cosmoverse will be revising the MOU to improve its structural clarity.
The revised MOU aims to improve:
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Accurate Terminology: The term “loan” has been replaced with “repayable grant” in clause 4, to more accurately reflect the nature of the transaction and align with accounting classifications and considerations.
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Timeline Specificity:
- Clause 3 will include a specific end date (December 31, 2024) for joint recovery efforts, with provisions for continuation if AADAO’s mandate is renewed.
- Clause 5 will specify a deadline (October 31, 2024) for AADAO to transfer funds to the Grants wallet.
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Contingency Planning: The MOU now addresses scenarios where AADAO’s mandate is not renewed or if AADAO is disbanded, specifying that Cosmoverse will lead recovery efforts in such cases.
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Clarity on Ongoing Efforts: The document will clarify that joint recovery efforts will continue beyond the October 31, 2024 date mentioned in clause 5, addressing a potential point of confusion regarding the persistent obligation of joint recovery in the original MOU.
These improvements address several key issues Oversight identified in the original MOU:
- Ambiguity around timelines
- Misclassification of the transaction as a “loan”
- Contingencies for changes in AADAO’s operational status
- Relationship between different clauses (particularly 3, 4, and 5)
Additionally, AADAO will submit a new proposal on DAODAO to correct the “temporary loan” proposal and establish the transaction as a “repayable grant,” emphasizing the conditional repayment and original grant intent.
The revised MOU, once finalized, will be made public for review, ensuring continued transparency in this process.
VI. Conclusion
Core Issue
A defining problem for their dispute stems from AADAO and Cosmoverse’s mutual mischaracterization of their financial arrangement as a “loan.” This misrepresentation, originating on May 23rd, was inadvertently repeated again in the August 16th MOU. The terms of their agreement do not meet the standard definition of a loan, as:
- There is no definite repayment obligation for Cosmoverse.
- Fund remittance to AADAO is entirely contingent on an uncertain joint recovery effort.
Implications
- The continued use of inaccurate terminology misrepresents the true nature of the financial arrangement.
- This mischaracterization can challenge the agreement’s enforceability.
- A “loan” versus “contingent liability” e.g., “repayable grant” have different accounting and financial reporting implications.
- Precision is also needed for social reporting where public funds are involved
Key Learnings
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Use accurate financial terminology that precisely reflects the nature of the arrangement, avoiding ambiguity.
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Ensure all financial arrangements are clearly defined and accurately represented before any transactions occur.
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Implement protocols for verifying understanding of financial terms and concepts between all parties involved, while understanding the implications of their use.
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Be mindful that misunderstandings can escalate when imprecise language is used and uncritically accepted, leading to disputes.
AADAO’s Response
- Implementation of a new protocol requiring all grantees to send USDC test transactions to the AADAO Grants wallet for address verification before any transfers are made. This measure will be applied consistently across all grantees and transactions, addressing a critical oversight in the March transfer.
- The transition of Delisse Gamboa from a part-time to a full-time role as AADAO Operations Associate in mid-June. This change has contributed to improved information management and operational consistency within AADAO’s distributed and asynchronous work environment.
- AADAO’s decision to transfer $80,000 from the team bonus allocation to the Grants wallet demonstrates their commitment to direct accountability and their effort to preserve positive relationships with the ATOM community and grantees. This action minimizes the economic impact on the grantees and the Grants program while acknowledging their role.
Signed MOU by AADAO and Cosmoverse
August 16, 2024
