There are many benefits to creating a DAO, for both software developers and investors alike. With the nascent nature of blockchain technology, there is no set way for a DAO to operate. There likely won’t be consensus on an optimal way of running a DAO until enough time passes to show what worked and what failed, and even then, there may still be multiple methods of governance.
What is a DAO?
If you’re new to blockchain-based enterprises, a DAO, or Decentralized Autonomous Organization, is similar to a corporation, but without a board of directors. The purpose of a DAO is to increase transparency and efficiency when it comes to group administration. The idea is to take the power out of the hands of a few, and distribute it to the community. This level of transparency, and group administration, allows for a more fair and balanced system than with a small board of governors.
The appeal behind a DAO is mainly its decentralized nature. With no central authority, or single point of failure, the organization is more resilient than a traditional corporation. A DAO is run by a distributed network of participants, which makes building them on Ethereum a popular choice. Through utilizing smart contract technology, the organization’s core values and rules can be locked into the blockchain. This would allow for the organization’s infrastructure to be self-deploying and self-administrating. Then, participants are able to vote on different issues, projects, and the overall direction for the organization.
This is a highly democratic style of governance, and many DAOs support it through voting with your stake. When a user enters into a DAO, they would do so through buying tokens. In converting your Ether to a DAO’s tokens, you’re purchasing voting power. This is similar to holding stock in a traditional company. The more stock you hold, the stronger your vote. When a proposal within a DAO is put to a vote, members would vote either yes or no, and the balance of their token account would be added to the Yea or Nay accumulator.
Due to the transparent and immutable nature of blockchain, voting is an open and trustworthy process in a DAO. Though a DAO is only as strong as the code in which it’s written, which is how the fiasco involving “The DAO,” a specific DAO, occurred.
The DAO Attacked
The DAO was an investor-directed venture capital fund, built on an open-source code, run on Ethereum. It was a stateless (worldwide), autonomous entity, having no managerial structure or board of directors. It actually set the record for largest crowdfunding project in history, aside from political campaigns, eventually taking in about $160,000,000. Those assets were in the form of 11.5-million Ether (ETH), held by 18,000 stakeholders. All in an organization without a single employee.
Then, many investors’ worst fear came true: a vulnerability was found in The DAO’s code that allowed a hacker to drain one third of The DAO’s funds. This sparked a debate in the Ethereum community about rectifying the situation, which eventually led to a hard fork, to return the stolen funds to investors. The decision to hard fork created a split among community members, and Ethereum Classic was born.
While the hacking of The DAO didn’t help to foster trust in a decentralized way of conducting business, the community was able to move past it. Assets were recovered through hard forking the network. Given Ethereum’s point of development at the time of The DAO hack, the network was able to hard fork for corrective purposes. According to creator, Vitalik Buterin, the likelihood of a hard fork occurring outside of protocol purposes, will, more than likely, diminish over time. The DAO attack proved the need for a more thorough auditing of code before future ventures go public.
This setback served as a learning experience and, fortunately, did not halt the growth of other DAOs, which have continued to spring up. One type of DAO, inherently less susceptible to the type of attack The DAO experienced, is known as a zero dollar DAO, or commonwealth. A commonwealth is a type of DAO that never holds funds.
Benefactory is a zero dollar DAO. They’re a decentralized crowdfunding platform that doesn’t store all their funds in one place. A user would be able to fund individual projects, and the commonwealth would only keep track of the user and the total amount given to a project. So your money goes to whatever project’s contract you’re supporting. Through the use of a voting contract, your contributions, tracked through the commonwealth, are what give you your voting power. That means you don’t need to just put your money in a large pool to get a share of voting power, you invest directly into an idea or project you believe in.
Other DAOs have slightly different systems of governance, like SuperDAO. They’ve developed Pokereum, a decentralized poker Dapp, and Dappsery, a blockchain advertising marketplace. They use a tiered, reputation-based system to delegate power. If the Poker app wants to add a new game type, or change something fundamental about the code running the Dapp, any move would have to be decided by the collective group.
At the innermost layer of their “onion model” of governance is their “constitutionalDNA,” which locks their mission statement, vision, and contractual values into the blockchain. Next is the reputation-based layer of “Merits,” comprised of all active participants who earn Merits for impact-based contributions. So the more you do for the DAO, the more power you earn. This layer is also subdivided into smaller committees with specialized knowledge and interests.
The final layer of governance is simply membership, in the form of tokens. Owning tokens is a user’s proof of membership, as well as an indication of participation. A member wouldn’t just sit back and collect tokens, they would earn them through beneficial activities like involvement in checks and balances processes, or dispute resolution.
Digix Global is a DAO, built on Ethereum, dealing with blockchain digital assets. What’s really interesting about Digix is they deal in physical commodities, specifically gold bullion. A participant would simply purchase DGX gold tokens with their Ether. It’s actual gold, in tokenized form. The gold bars sit in designated “securitized custodial vaults.” This is a gold-backed cryptocurrency, much like where the USD drew its strength from when the gold standard was used. While part of the beauty of blockchain is not having to trust a third party, Digix does rely on an established auditor to provide quarterly audits of every gold asset in their “Safe House” vaults. Inspectorate Bureau Veritas, the auditor, was established in 1828. When it comes to transacting on the blockchain in Digix, those transactions are beyond trustworthy: they are immutable. Due to gold’s long term stability, and the blockchain’s decentralized nature, Digix hopes to provide relief from the volatility inherent in many digital, and fiat, currencies.
While corporations will most likely be around for many years to come, decentralized autonomous organizations provide the transparency and efficiency that would truly benefit investors. Though when it comes to legal liability, only time will tell. There isn’t much precedent regarding a DAO’s ability to indemnify its user base in the same way a corporation or LLC can protect its shareholders. With a DAO being built on every participant involved, it would be in everyone’s best interest to maintain the integrity of the organization in all regards. However they choose to govern themselves, regardless of the specific method, each DAO participant either succeeds together or fails together.