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The DAO Decoded

Basics

What is a DAO?

The DAO stands for Decentralized Autonomous Organization. One such vision was proposed by Mike Hearn, a former bitcoin developer and thought leader in the space. Tech giants and traditional car manufacturers are in an arms race to develop driverless cars and these could be on the road in as little five years, depending on who you ask. Mike proposes the following blending of bitcoin and driverless technology as being a possibility in the future:

You tap your location into an app on your phone…

A driverless car pulls up right next to you and whisks you off to your destination. The cost of the journey is automatically debited from your crypto account and collected by the car.

After you’ve gone, the car uses some of its profit from your trip to head to a charging station to top up its energy for the next rider.

Excluding the initial programming work before it was deployed to the streets, that car wouldn’t need outside help to determine how it operates.

Pretty cool, no?

Mike used that imaginary use-case as an example of how bitcoin could be involved in bringing about the genesis of leaderless companies in the future: Decentralized Autonomous Organisations (DAO). This was one of the visions that set the community buzzing in the early days of bitcoin’s evolution.

The thinking was that if bitcoin can rid us of financial middlemen, then maybe companies too can have their rules of operation baked into code and run on a Blockchain, free from the typical hierarchical management structures we’re used to. Companies have rules and regulations they’re supposed to follow set both internally and externally, so one could argue that the DAO concept is not too far off what we already have.

The core difference, however, is that in a DAO the rules are hard-coded and are thus enforced digitally. This could be setting aside a certain percentage of earnings for a cause, or determining a process by which such a rule could be changed.

In the abstract, this is akin to how a normal company works. The big difference is that the rules of normal companies are not imposed in bits and bytes.

The Original DAO

The highest-profile attempt at creating a real Decentralised Autonomous Organisation was born in 2016 by Christoph Jentzch. The company he founded was imaginatively called “The DAO”.

The idea was relatively simple: it was to be a vehicle for crowdfunding. Potential funders were to buy shares (called DAO Tokens) with Ether, and these tokens granted the owners voting rights on which projects would get funded, in proportion to the number held.

The sale of the DAO tokens formed the pool of capital that was then deployed to the projects that the token-holders voted on.

The idea was that this model improved on traditional corporate governance by:

  1. Allowing anyone with an internet connection to buy and hold DAO tokens
  2. Letting the DAO creators choose whatever the rules that were voted on, executed by smart contracts.

Within the smart contracts were rules covering where the funds were sent, when they were sent, how many and what the minimum number of voters were required to agree on a project were.

To cut a tumultuous story short, the company imploded in a matter of months after having raised $150 million in Ether!

 

Security

While many in the community believe the DAO concept can work for an organisation where any decision-making process needs to be made, The DAO experiment proved that complications can arise with “unstoppable”, cryptographically guaranteed, democratic code…

Philosophically, the idea is great, no doubt. However, it is difficult to change smart contracts underpinning a DAO when it’s on the Ethereum blockchain. While this ensures against the rules being tampered with by anyone, it also means that if there’s a bug in the code running the DAO you’re in a sticky situation. Christoph Jentzch and his team were powerless to stop funds oozing out of the DAO when hackers spotted the bug and siphoned off a cool $80m of Ether.

Fortunately, Ethereum’s core developers reversed the transaction history and returned funds to contributors, but this was a controversial move which lead to some anger within the community.

How to handle a similar situation in the future? That’s still up for debate

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