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Decentralized autonomous organization

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This article is about a type of organization. For the former organization that followed this approach, see The DAO (organization).

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Examples

A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC),[a] is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government.[1][2] A DAO's financial transaction record and program rules are maintained on a blockchain.[3][4][5] The precise legal status of this type of business organization is unclear.[6]

A well-known example, intended for venture capital funding, was The DAO, which amassed $150 million in crowdfunding in May 2016, and was hacked and drained of US$50 million in cryptocurrency weeks later.[7] The hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. Most Ethereum miners and clients switched to the new fork while the original chain became Ethereum Classic.

Background

Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track digital interactions across the internet, hardened against forgery by trusted timestamping and dissemination of a distributed database.[3][4][8] This approach eliminates the need to involve a mutually acceptable trusted third party in any decentralized digital interaction or cryptocurrency transaction.[4] The costs of a blockchain-enabled transaction and of the associated data reporting may be substantially offset by the elimination of both the trusted third party and of the need for repetitive recording of contract exchanges in different records. For example, the blockchain data could, in principle and if regulatory structures permit it, replace public documents such as deeds and titles.[3]: 42 [4] In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.[3]: 42 [9]

Vitalik Buterin proposed that after a DAO is launched, it might be organized to run without human managerial interactivity, provided the smart contracts are supported by a Turing-complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling such DAOs.[3][10][11] Decentralized autonomous organizations aim to be open platforms through which individuals control their identities and their personal data.[12]

Membership

Open Membership

Some DAOs operate with a fully open membership policy. In these cases, joining a DAO is as simple as joining their Discord server.[13]

Token Gated Membership

Some DAOs limit membership via token gating. In this model, the DAO member must authenticate that he or she holds the DAO's NFT membership token in his or her crypto wallet before he or she may enter the DAO's Discord server or website. Token gating allows for a membership that is fixed in size but can automatically change over time as people transfer the NFTs. Due to blockchain transaction fees, this flexibility comes at a cost.

Contribution

Just like a C-corp, the output of a DAO is wholly dependent on the output of its members. How and what contribution entails varies greatly from DAO to DAO. There are many tools used to track member's contributions. These tools allow the DAO to compensate its members with funds from its treasury. The treasury can hold any type of token, including stablecoins and the DAO's own governance token.

Governance

Governance tokens

DAOs can create a governance token to coordinate its governance. These tokens are equivalent to shares in a traditional corporation. Governance is conducted through a series of proposals that members vote on through the blockchain.[14]

Voting power

There are many ways to set up the relationship between governance token allocation and voting power. Some examples are:

Voting delegates

A DAO can set up a voting delegation system. For example, the ENS DAO put out a Call For Delegates when they set up their governance token. In such a system, an individual wallet may sign, on the blockchain, that they would like to delegate their voting power to a delegate of their choice for future DAO proposals.

Issues

Social

Shareholder participation in DAOs can be problematic. For example, BitShares has seen a lack of voting participation, because it takes time and energy to consider proposals.[5]

The precise legal status of this type of business organization is generally unclear,[8] and may vary by jurisdiction. On July 1, 2021, Wyoming became the first US state to recognize DAOs as a legal entity.[15] American CryptoFed DAO became the first business entity so recognized.[16] Some previous approaches to blockchain based companies have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities.[6][17] Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership.[18] Known participants, or those at the interface between a DAO and regulated financial systems, may be targets of regulatory enforcement or civil actions only if they are out of compliance with the law.[18]

Security

A DAO's code is difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralized code. Corrections to a DAO require writing new code and agreement to migrate all the funds. Although the code is visible to all, it is hard to repair, thus leaving known security holes open to exploitation unless a moratorium is called to enable bug fixing.[19]

In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date.[20][21] Researchers pointed out multiple problems with The DAO's code. The DAO's operational procedure allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly.[5] Although safeguards aimed to prevent gaming shareholders' votes to win investments,[6] there were a "number of security vulnerabilities".[22] These enabled an attempted large withdrawal of funds from The DAO to be initiated in mid-June 2016.[23][24] On July 20, 2016, the Ethereum blockchain was forked to bail out the original contract.

List of notable DAOs

This is a dynamic list and may never be able to satisfy particular standards for completeness. You can help by adding missing items with reliable sources.
Name Token Use cases Network Launch Status
Dash DASH Governance, fund allocation [25] Dash (cryptocurrency) May 2015[26] Operational since 2015[27][28][29]
The DAO DAO Venture capital Ethereum April 2016 Defunct late 2016 due to hack[30]
Augur REP Prediction market, Sports betting, Option (finance), Insurance Ethereum July 2018 Operational
Steem STEEM Data distribution, Social media, Name services, Industrial Steem March 2016 Operational
Uniswap UNI Exchange, Automated Market Making Ethereum November 2018 Operational[31]
ConstitutionDAO PEOPLE Purchasing an original copy of the Constitution of the United States Ethereum November 2021[32] Operational

See also

Notes

  1. ^ Depending on English dialect, it may also be spelled decentralised autonomous organisation. The terms decentralized autonomous company, distributed autonomous organization, etc., have also been used.

References

  1. ^ Prusty, Narayan (27 April 2017). Building Blockchain Projects. Birmingham, UK: Packt. p. 9. ISBN 9781787125339.
  2. ^ The Decentralized Autonomous Organization and Governance Issues Regulation of Financial Institutions Journal: Social Science Research Network (SSRN). 5 December 2017.
  3. ^ a b c d e Vigna, P.; Casey, M. J. (27 January 2015). The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order. St. Martin's Press. ISBN 9781250065636.
  4. ^ a b c d Hodson, H. (20 November 2013). "Bitcoin moves beyond mere money". New Scientist.
  5. ^ a b c "The DAO of accrue: A new, automated investment fund has attracted stacks of digital money". The Economist. 21 May 2016.
  6. ^ a b c Popper, N. (21 May 2016). "A Venture Fund with Plenty of Virtual Capital, but No Capitalist". New York Times.
  7. ^ Price, Rob (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016.
  8. ^ a b Wright, A; De Filippi, P. (10 March 2015). "Decentralized Blockchain Technology and the Rise of Lex Cryptographia". SSRN 2580664.
  9. ^ Norta, A. (18 August 2015). "Creation of Smart-Contracting Collaborations for Decentralized Autonomous Organizations". Perspectives in Business Informatics Research. Lecture Notes in Business Information Processing. Vol. 229. pp. 3–17.
  10. ^ Pangburn, D. J. (19 June 2015). "The Humans Who Dream of Companies That Won't Need Us". FastCompany.
  11. ^ Evans, J. (1 August 2015). "Vapor No More: Ethereum Has Launched". TechCrunch.
  12. ^ Deegan, P. (2014). "Chapter 14—The Relational Matrix: The Free and Emergent Organizations of Digital Groups and Identities". In Clippinger, J. H.; Bollier, D. (eds.). From Bitcoin to Burning Man and Beyond: The Quest for Identity and Autonomy in a Digital Society. Amherst, Massachusetts: Institute for Institutional Innovation. pp. 160–176. ISBN 978-1-937146-58-0. creating an operational and autonomous Trust Framework [that can i]ntegrate with a secure discovery service in the form of a Decentralized Autonomous Organization ...
  13. ^ read, Aragon • 6 min (11 November 2021). "How to Join a DAO". Aragon's Blog. Retrieved 15 January 2022.{{cite web}}: CS1 maint: numeric names: authors list (link)
  14. ^ "What Are Governance Tokens?". academy.shrimpy.io. Retrieved 15 January 2022.
  15. ^ "Decentralized Autonomous Organizations Find a Home in Wyoming". JD Supra. Retrieved 9 July 2021.
  16. ^ "Wyoming becomes first US state to legally recognise DAO". finance.yahoo.com. Retrieved 9 July 2021.
  17. ^ "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities". US Securities and Exchange Commission. 3 June 2014.
  18. ^ a b Levine, M. (17 May 2016). "Blockchain Company Wants to Reinvent Companies". Bloomberg View: Wall Street. Bloomberg News.
  19. ^ Peck, M. (28 May 2016). "Ethereum's $150-million Blockchain-powered Fund Opens Just as Researchers Call For a Halt". IEEE Spectrum. Institute of Electrical and Electronics Engineers.
  20. ^ Vigna, P. (16 May 2016). "Chiefless Company Rakes in More Than $100 Million". Wall Street Journal.
  21. ^ Waters, R. (17 May 2016). "Automated company raises equivalent of $120M in digital currency". Financial Times.
  22. ^ Popper, N. (27 May 2016). "Paper Points Up Flaws in Venture Fund Based on Virtual Money". The New York Times.
  23. ^ Popper, N. (17 June 2016). "Hacker May Have Taken $50 Million From Cybercurrency Project". New York Times.
  24. ^ Price, R. (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016.
  25. ^ Duffield, Evan (22 April 2015). "Self-sustainable Decentralized Governance by Blockchain". dash.org/forum.
  26. ^ Duffield, Evan (14 May 2015). "GitHub commit adding Dash DAO feature". github.com/dashpay. Retrieved 7 April 2021.
  27. ^ Duffield, Evan (28 August 2015). "Budgets Are Live". dash.org/forum.
  28. ^ Engelhorn, Philipp (7 September 2015). "First 3 Superblocks!". dash.org/forum. Retrieved 7 April 2021.
  29. ^ "First Blockchain DAO payout". blockchair.com/dash. 7 September 2015. Retrieved 7 April 2021.
  30. ^ Finley, Klint (18 June 2016). "Someone Just Stole $50 Million from the Biggest Crowdfunded Project Ever (Humans Can't Be Trusted)". Wired. ISSN 1059-1028. Retrieved 16 November 2019.
  31. ^ "OpenOrgs.info". openorgs.info. Retrieved 15 January 2022.
  32. ^ Roose, Kevin (17 November 2021). "They Love Crypto. They're Trying to Buy the Constitution". The New York Times. ISSN 0362-4331. Retrieved 17 November 2021.
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