The Tao of DAO
The DAO, or 'Decentralised Autonomous Organization,' is a business model that breaks all conventions about how a company works. It combines the ideology of decentralized organizational power with major tech innovations and crowdfunding. In doing so, it opens the door to a potentially radical new era of commerce, law and politics and with them a host of new risks. The DAO is the largest ever crowdsourcing project, yet employs no-one. It works by
DAO opens the door to a potentially radical new era of commerce, law and politics
allocating a digital currency called 'Etheruem' (invented by a coder named Vitalik Buterin when he was a mere teenager) to projects worthy of investment, a bit like an automated venture capital fund.
Insinuated by its name, parallels can be drawn between the DAO and an ancient philosophy known as Taoism. The Tao (pronounced the same) refers to the spontaneous way the universe works according to the spiritual philosophy of Taoists. While the ways of the Tao technically cannot be described with words, they are alluded to in metaphors. For example, a cherry tree, without any assertion of will, grows deep roots and its branches grow tall. As if by doing nothing, the tree silently forms cherries. Without claim or praise; it fulfils its purpose. This is 'nonaction'. The cherry tree is governed by the universal laws of nature. Similarly, the DAO is automated by its own laws; its immutable algorithms. Nothing needs to be done by the organization, yet nothing in the DAO's cyber universe is left undone.
Launch of a leaderless collective
When it launched, the leaderless collective raised a record-breaking $150 million via crowdfunding from 20,000 individuals who believed in the investment potential that the DAO was offering. To invest, one buys 'ether,' a cryptocurrency trading for around $11.76 each as of 10/10/16, and then exchanges these for voting shares called 'DAO tokens'. The investor can use these tokens to vote on projects on the DAO's platform that they believe to be worthy of investment. When sufficient votes are received, the projects, which have their own unique smart contracts, fulfill their stated objectives.
These objectives may be to generate a return for the DAO, create products and services the DAO can use, or may simply be used to support charitable causes. Any returns are either reinvested or distributed to token holders, depending on votes of the token holders.
Conceptually, using smart contracts enables the disintermediation of lawyers because the contracts are undisputable and enforce themselves. In reality though, this immutability can cause big problems. If the code that creates such a contract contains a defect, it can be manipulated for self-interest by a hacker with very few remedial options available to the victims. The DAO's designers were criticized for launching too hastily, without carrying out necessary security checks.
The criticism was prophetic: in June 2016, two months after launch, the DAO was hacked and $60 million of Ethereum was stolen as vulnerability in the DAO’s code was exploited. This was not the only theft of
DAO is the largest ever crowdsourcing project. It works by allocating a digital currency called ‘Etheruem’
a digital currency. Bitfinex, one of the largest exchanges for Bitcoin, was hacked in August 2016 with $71 million being stolen, sending the price of a Bitcoin plunging 20%. Stealing from a DAO isn’t even necessarily illegal as some argue the DAO operates independently of legal systems. This gives investors very little security if things go wrong. The token holders in the DAO are given code name, as shown in the ownership graph on the next page, giving them complete anonymity, making it very hard for any national government to know who to prosecute.
This attack may well prove to be the death knell for the DAO, but the concept is far from dead. It would not be the first time that a groundbreaking concept has failed in its first iteration. In 1997, seven years before the launch of Facebook, a social networking site named SixDegrees.com offered its users a platform to create profiles, invite friends, view other’s profiles and organize groups. At its peak, the site attracted 3.5 million members but pushy marketing e-mails began to put off users. The site ultimately failed but the idea of social networking went on to change the world.
New form of corporate governance
If the design flaws can be ironed out, decentralized autonomous organizations could have profound implications for society. Beyond being a disruptive model of venture capital, the DAO offers an example of a radically new form of corporate governance. The DAO’s white paper outlines two fundamental problems with corporate governance: (1) people do not always follow the rules and (2) people do not always agree what the rules actually require. Their solution is to automate and formalize governance rules by embedding them in the code that automates the platform and also allow investors to "maintain direct real-time control of contributed funds." With perfect financial transparency and no human decision makers to be tempted by self-interest, the agency risk between a corporation’s management and its shareholders would vanish.
An entity that IPO's as a DAO could allow shareholders to participate in organizational governance directly and regularly, rather than once a year by proxy vote or AGM attendance, improving the stewardship a company receives. It could create wealth creation opportunities for anyone with an internet connection, even those at the bottom of the pyramid. For example, a business with this DAO structure could IPO to 100 million shareholders, each contributing just a few pennies.
The flexibility in the design of the decentralized structures will allow people to build entirely new applications that couldn’t have been built on top of conventional financial and legal infrastructure1. This new model, where investors vote on which contracts to fulfill, could lead to organizations that simply contract out tasks on behalf of a highly active shareholder base—no employees are needed.
The DAO was ultimately conceived with a desire to find a way of making more decentralized decisions. For example, one alternative that emerged after Brexit was a website called referendum.nl, which offers a glimpse of the benefits of direct democracy when combined with 'range voting', where voters
DAO was ultimately conceived with a desire to find a way of making more decentralized decisions
can express the strength of their conviction.
Further down the line, there could come a point when artificial intelligence, such as IBM Watson, which is designed to find the best possible answers by analyzing vast quantities of data, becomes a more attractive alternative to the votes of the disillusioned public. There are certainly a lot of sustainability issues created by the short-termism in policies that are inherent in a four-year political cycle. Tweaking these models and harnessing technology to achieve long-term/bipartisan/international agreement on intergenerational issues such as climate change would be a great way of addressing society’s toughest challenges.
What is clear is that developments in this area will be important to monitor but there are teething problems to resolve before these ideas are applied elsewhere and enjoy mass adoption. The coded design of these new structures must undergo rigorous testing to iron out the vulnerabilities that have plagued the DAO since its inception. With headlines of robbery and lawlessness, it feels more like the Wild West than a viable alternative to traditional governance but the DAO's rapid ascension into the forefront of the tech world’s consciousness is a watershed moment for autonomous organizations. Less than a year old, this innovative model already has a rich story and imitators will follow.