The collapse of the stablecoin TerraUSD as well as of the underlying cryptocurrency Terra Luna (LUNA) lead to massive losses for the involved investors. The value of TerraUSD depegged from the value of the US-dollar and Luna tokens are now only worth a fraction of a US-dollar cent. The core function of the project – the pegging of TerraUSD to the US-dollar via an algorithmic solution – did not work. The collective trust of investors and the market is now severely impaired. The project founders therefore approached the Terra community last week with a plan that aims to revive the project. The voting on the reviving plan was conducted via the validators of the network and each LUNA token that was delegated to a validator represented one vote. These kinds of governance votes are often a dilemma for operators to whom third-party tokens have been delegated. While certain delegators push the validators to approve the governance measure, other push for an opposing voting behavior. How should the operator of the validator act in these cases?

No Right on Specific Voting Behavior Without Contractual Agreement

Delegators are not entitled to demand a certain voting behavior from the operator of a validator under German law, if there is no prior contractual agreement regulating these matters between them and the operator of the validator. The absence of such a specific agreement is generally the case, especially because the operator of the validator usually has no specific knowledge about the individuals that delegate tokens to him. The delegation of dPoS-compatible crypto units is generally conducted by the delegator by choosing a validator in the respective wallet software. The operator of the validator merely receives the information that crypto units have been delegated to him. An individual and specific contractual agreement concerning a certain voting behavior is generally not concluded in these cases since there is no real communication between the involved parties. Therefore, a specific promise of the operator of the validator towards the delegators to vote in a specific way or even to vote at all in case of a governance vote is usually not made. The situation is quite different in cases in which the operator of a validator in some form communicates to the delegators – e.g. via his website, e-mail or messenger service – that he intends to vote in these cases in a specific way. In these cases, there may be a contractual relation between the involved parties that may also require the general observing of the delegators interests by the operator of the validator in the form of contractual ancillary obligations.

Clear and Consistent Communication is Important

Operators of validators have the lowest risk in connection with governance votes if they communicate in a clear and consistent way with their delegators. It may be advisable to operators of validators to not take part in governance votes, because the interests of different delegators with regards to the results of a governance vote may be contradictory to each other and to communicate this intention – if possible – beforehand to the delegators. Delegators that have a specific interest in the outcome of a governance vote are then able to withdraw their crypto units from the validator and make sure that the votes associated with their units are used in the way they desire. Otherwise, there is the risk that delegators who suffered a disadvantage from the outcome of a governance vote may try to hold the operator of the validator liable for damages resulting of that outcome.

Attorney Lutz Auffenberg, LL.M. (London)