Hello, DAO? I have some questions.

by Gabriel Garcia Marengo for Unsplash
by Gabriel Garcia Marengo for Unsplash

I’ve been trying to get a handle on the concept of The DAO (and all DAOs in general), and I have a ton of questions. So I’m going to throw them out there, because maybe you have the same questions. Maybe you even have some of the answers. That would be great. Please share.

  1. First (actually, these are in no particular order), I notice that we rapidly moved from “Digital Autonomous Corporation” (coined back in late 2013) to “Digital Autonomous Organization”. I get why. A “corporation” is a legally constituted entity which has to abide by certain regulatory and financial rules. An “organization” is a collective that is organized. Since a DAO seems to be a collection of rules and tasks, with some degree of organization, the name makes sense. What I don’t understand are headlines like “The DAO: How the Employeeless Company Has Already Made a Boatload of Money” (from The Observer), “Can A Company Be Run Without Leadership, Management Or Employees? $150m Invested In The DAO Says Yes” (from Forbes), “The Tao of “The DAO” or: How the autonomous corporation is already here” (from TechCrunch), and “Chiefless Company Rakes In More Than $100 Million” (from The Wall Street Journal). From what I gather, the DAO is not a company, or a corporation. It has not been constituted as such, and I have not yet come across one (maybe they do exist) that even claims to be a company. So why the leap from “organization” to “company”? Other than the pressing need for attention-grabbing headlines, of course.
  2. Since DAOs are not technically companies, can they legally issue shares? Yes, I know that technically they’re not issuing shares, most of them operate on a “token” basis for their crowdsales. But, operationally, is there much of a difference? Except that one has a lot of enforceable rules and regulations designed to protect the investor, and the other doesn’t. Since financial regulatory bodies do like their investor protection laws, how long before they deem token sales as an investment worthy of heavy regulation? And when that happens, what will happen to current token holders? Or token issuers?
  3. Has anyone seen anything that resembles a business plan? I’m not averse to risk, but I’d like my investment to have some sort of scenario at least thought of, other than best case = lots, worst case = dunno. Right now the “business plan” seems to be along the lines of “let’s kickstart the Ethereum ecosystem with a crowdfunded investment pool”. It’s a good idea: all Ethereum-linked business will benefit if the platform grows and extends. But that’s a conceptual, almost ideological bet rather than an investment one.
  4. In the case of The DAO, if the ether (contributed in exchange for tokens) is distributed to viable investments (those that receive enough votes to qualify), does that not reduce the amount of ether backing the issued tokens? Does that not make the tokens worth less?
  5. Unless of course you assume that the future value of the investment will be higher than the invested amount. But, let’s be real, the world of apps and “startups” is fraught with investments with no return. Even trained and seasoned VCs get it wrong most of the time. Why do we believe that a collection of untrained enthusiasts will do any better?
  6. Perhaps the “profits” will come from the increase in value of ether, pushed by the increased activity in Ethereum, financed by the funds of The DAO. But that is a financial profit rather than an operating profit. Different concept, different motivation. And, if token holders start to “cash out” as the currency moves up, would that not push down the price? And the value of the tokens?
  7. Will the DAO be subject to taxation? If so, what? Which? Where? And if not, does that mean that it is possible to evade taxes by setting up DAOs? I can’t see the regulators liking that.
  8. The proposals submitted to The DAO for funding have to specify (again, if I understand correctly) how much ether they need to produce or create their product or service. Now, unless they can pay for the services that they need in ether, which unfortunately is still very unlikely, they’re going to need to convert it into some sort of officially recognized fiat currency. And even if they can pay for their services in ether, their suppliers are going to need to convert. And, the exchange rate of ether is not exactly stable. So, given that the project creators understand how much local fiat currency they would need, how do they know how much ether to ask for? They apply the current exchange rate and pray that it holds for the duration of the voting and execution?
  9. If the price of ether crashes, the project will probably no longer be viable. Can a project be cancelled and funds returned if that happens? Can token holders get their money back if the market environment changes?
  10. With projects receiving ether and cashing out in order to do what they need to do,would that not apply downward pressure to the price of ether?
  11. What about quality control? And delivery control? The “contractors” (those who submit successful proposals) get the funds whether they end up delivering or not, right?
  12. Let’s say a really great proposal comes along that needs, for example, $20 million (or $10 million or $50 million, the amount is not important). Let’s say the smart contract stipulates that the funds are disbursed in stages, $5 million each month. After receiving the first $5 million, imagine that the “contractors” (the ones who submitted the proposal) disappear. True, the fund can then find another “contractor” to finish the work. But contractor A has stolen a good chunk of the funds’ money. And say this happens a few times. Since code is not a legally recognized language in any jurisdiction that I know of, does that mean that there is no legally binding contract? And therefore no breach of contract? Does that mean that there is nothing that law enforcement could do to recover the funds?
  13. Let’s imagine that one of the proposals gets funded and turns out to be an efficient and novel service that adds value to the network. Who would own the intellectual property rights? If I understand correctly, The DAO “owns” the projects, and pays the “contractors” (the ones who submitted them) to make them happen. Who gets to file the patent?
  14. If a token holder is not happy with the investments the DAO is funding, he or she can “fork” the DAO by withdrawing their tokens from the main one, and forming another. There are certain conditions that need to be fulfilled for this to come to pass, but they don’t look onerous, and it’s not hard to imagine an ecosystem populated with many DAOs that started as part of this one. So, the funds have split into several DAOs. To which do the projects submit their proposal?
  15. And what happens if something goes terribly wrong with one of the funded projects? Say an Ethereum app manages to delete data, or execute something that causes a loss somewhere. Who is liable? That matters to the person or persons who were hurt by that action. And it matters a lot to lawyers.
  16. I could go on for quite a lot longer, but I’ll end with the ultimate question: how safe is our invested money? What are the chances of a hack? I know that the DAO has procedures in place to prevent malicious attacks. But what about an outright hack? Or a hack of the funded projects? People who know about this assure me that the code is solid. But as we’ve seen, very few systems are totally hack-proof. And the cost to the entire system, not only in terms of ether (and the equivalent fiat currency) but especially in terms of reputation, could set development back by years.

The idea is exciting, and I hope that it is a great success. I hope that it helps us to see how we can change processes and structures, and that we can gradually move towards a new form of business logic. But I fear that the risks are very high, and that so much can go wrong. The attention that the surprise success has brought is not necessarily a good thing. It would be preferable, much, to let us test this concept far from the glare of public scrutiny. To make mistakes, to iterate and to build on small triumphs. As it is, the project has the world’s attention. And knowing how the press love their failures, if it doesn’t live up to expectations, the fallout will be unreasonably severe.

(This article was originally published on Medium.)

The DAO: Investments Meet the Invisible Hand

A new way of running an investment fund

So, this is new. Or is it? The concept of a distributed autonomous organization (a DAO) has been talked about ever since bitcoin enabled rudimentary smart contracts. The launch of alternative cryptocurrency Ethereum pushed the chatter up several notches with their smart contract-friendly platform. And over the past week it seems that DAO-talk has become mainstream. Yet few know what they are, how they work and why they are so interesting. Because few have been put into real-world practice. And none have attracted significant public attention. Until now.

Backing up a bit, let’s briefly talk about Ethereum. Ethereum is a public distributed blockchain, similar to that of bitcoin, but with operational differences and a more intense focus on smart contracts. Its virtual currency is ether, which is used to power the mini-programs embedded in the transactions on the network. Executing a loop or completing an if-then statement will cost a certain (tiny) amount of ether. Ether can be mined as a reward for validating blocks of ether transactions, or it can be purchased on digital currency exchanges, just like bitcoin. Ether is still at a fraction of bitcoin’s market capitalization ($1.2bn vs $6.9bn), but its liquidity and value seems to be building.

A Distributed Autonomous Organization is what the name says: an organization that does not have a hierarchy, and functions pretty much on its own. No CEO, no Executive Directors, no central chain of command. Therein lies the “decentralized”. No administration staff, marketing executives or sales representatives. Therein lies the “autonomous”. There aren’t even any incorporation papers. The functions the company needs to fulfil are written in code and automatically executed when the time comes. The filing of accounts, the sending of emails, the disbursement of payments – there is no one person asking that these be done, and no one in charge of doing them. They just get done, because they are written in code. It runs itself. It exists as long as there is an internet connection.

What kind of organization can run like that, I hear you ask? Obviously relatively simple ones, such as a crowdfunding campaign (if enough money is collected, ship the product), voting (if enough votes are gathered, such-and-such happens), etc. But also more complicated scenarios have been implemented, such astransport management, content distribution, cloud storage… And even more complicated ones are possible. Just think of everything a business does, and ask yourself, how would I go about automating this?

So why have so few been put into real-world practice? Because the concept is relatively new, and the execution is risky. We can’t count on bitcoin for this (for now), as the protocol does not allow complicated scripts, and the currency’s scalability problem has not yet been overcome (although some DAOs run on topof bitcoin, which means they run off-chain but connect to the bitcoin blockchain for verifying and locking in).

Ethereum does give us that capability. With Ethereum we can program functions, with if/then/else queries and conditional responses. With Ethereum we can create all sorts of DAOs.

Such as the one launched with little fanfare at the end of April. Although often called the “Ethereum DAO” in the press, Ethereum neither owns it, nor did it develop the software. That credit goes to Slock.it, a Germany-based developer of blockchain IoT solutions. On the 30th of April they announced in their blog the activation of the confusingly named The DAO (a bit like naming your company, “The Company”), an automated association whose purpose is to invest in Ethereum applications. And they invited the community to participate by purchasing DAO tokens with Ethereum’s currency ether. DAO tokens give holders the right to vote in the investment decisions. Which makes The DAO, In effect, a crowd-sourced, crowd-run investment fund.

from the Ethereum Community Forum - DAO

In just 20 days, it has become the world’s largest crowdfunded project, by far. Up until now that honour has been held by the video game Star Citizen, which to date, as far as I know, has raised almost $110 million (the actual amount fluctuates in line with the ether exchange rate). As of this morning and with only two hours to go (the campaign ends today), The DAO had accumulated almost $130 million of ether (although this valuation fluctuates in line with ether’s exchange rate), which accounts for 15% of all ether ever mined. It also is now the most funded cryptocurrency startup ever, beating Coinbase’s $75m, Digital Asset Holding’s $60m and Blockstream’s $55m. And The DAO funds did not come from institutional investors. They came from ordinary crypto enthusiasts.

The blown-away success of the campaign has even surprised the developers. In an interview with the Wall Street Journal, Slock.it’s founder Stephen Tual said that they had hoped to raise perhaps $20 million.

What will the DAO do with the funds? Once the crowdfunding closes on the 28th of May, it will start accepting proposals from developers for their ideas for Ethereum applications, services, etc.. The token holders will then get to vote on which proposals will receive funding. The successful projects then reward The DAO with a percentage of the revenue from their deployed service (or some similar arrangement – each proposal specifies the terms of the funding and the terms of the payout).

This is similar to a VC fund, but without the VCs, without the high salaries, without the paperwork and without the interminable meetings. And, obviously, with ideas limited to projects on the Ethereum blockchain (for now).

Why has it attracted so much interest? Most of the PR has come after the fact, with headlines over the past few days heralding a new form of funding and a new way of developing. The bulk of the interest has not come from professional investors, but from the cryptocurrency community, a rapidly increasing collection of individuals all over the world that are fascinated by the potential of this new distributed consensus system.


Yet there are increasing concerns that this may be over-blown hype. First, the legality is still dubious. Who owns the funds? Who owns the ideas? Holding tokens does not make you a shareholder, so while you can vote, you don’t technically own a share of the profits. Can The DAO be hacked? How good will an untrained “crowd” be at spotting worthwhile investments? Would it be possible for someone to buy lots of tokens and then fund their own business idea with The DAO’s money? What if the ether exchange rate crashes?

Whether The DAO ends up a success or not, it is testing new waters, and opening our eyes to what could become possible through automated transactions and governance. It is showing us the power of the community, and the interest in change. And it highlights the potential of cryptocurrencies and blockchains to show us a new way of looking at business. Whatever happens, things are about to get very interesting.

(This article was previously published on LinkedIn.)