Decentralized autonomous organization

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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][3] A DAO's financial transaction record and program rules are maintained on a blockchain.[4][5][6] The precise legal status of this type of business organization is unclear.[7]

A well-known example, intended for venture capital funding, was The DAO, which launched with $150 million in crowdfunding in June 2016, and was nearly immediately hacked and drained of US$50 million in cryptocurrency.[8] 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[edit]

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.[4][5][9] This approach eliminates the need to involve a mutually acceptable trusted third party in any decentralized digital interaction or cryptocurrency transaction.[5] 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.[4]: 42 [5] In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.[4]: 42 [10]

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.[4][11][12] Decentralized autonomous organizations aim to be open platforms where individuals control their identities and their personal data.[13]

Issues[edit]

Social[edit]

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.[6]

Legal status, liability, and regulation[edit]

The precise legal status of this type of business organization is generally unclear,[9] and may vary by jurisdiction. On July 1, 2021, Wyoming became the first state to recognize DAOs as a legal entity.[14] American CryptoFed DAO became the first business entity so recognized.[15] Some previous approaches to blockchain based companies have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities.[7][16] However, this is strictly limited to assets which are investment contracts, where all investors and uninvolved in the DAO and where the asset represents and equity interest in the DAO under U.S. v. Howey. Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership.[17] 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.[17] Many DAO's are completely legal under the binding precedent of SEC v. W.J. Howey and the Securities Act of 1933, which clearly limits the definition of security to only investments where the profits are intended to come solely from the efforts of others. Often, DAO's operate where there are no profits controlled by a central entity, the assets are totally decentralized, or where personal profits for participants come from their own work in the DAO, in such cases the asset is not a security under U.S. Law. In fact there is nothing inherently illegal about DAOs or blockchain more generally. Additionally, progressive states, such as Wyoming now recognize DAOs as legal entities, similar to the legal status of an LLC or Partnership.[18]

Security[edit]

A DAO's code is difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralised 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.[6] Although safeguards aimed to prevent gaming shareholders' votes to win investments,[7] 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[edit]

Name Token Use cases Network Launch Status
Dash (cryptocurrency) DASH Governance, fund allocation [25] Dash (cryptocurrency) May 2015[26] Operational since 2015[27][28][29]
The DAO (organization) DAO Venture capital Ethereum April 2016 Defunct late 2016 due to hack[30]
Augur (software) REP Prediction market, Sports betting, Option (finance), Insurance Ethereum July 2018 Operational
Steem Data distribution, Social media, Name services, Industrial Steem March 2016 Operational
ConstitutionDAO[31] PEOPLE Purchasing an original copy of the Constitution of the United States Ethereum November 2021[32] Operational

See also[edit]

Notes[edit]

  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[edit]

  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. ^ "DAO explained: What is a Decentralized Autonomous Organization?". morethandigital.info. Retrieved 18 October 2021.
  4. ^ 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.
  5. ^ a b c d Hodson, H. (20 November 2013). "Bitcoin moves beyond mere money". New Scientist.
  6. ^ a b c "The DAO of accrue: A new, automated investment fund has attracted stacks of digital money". The Economist. 21 May 2016.
  7. ^ a b c Popper, N. (21 May 2016). "A Venture Fund with Plenty of Virtual Capital, but No Capitalist". New York Times.
  8. ^ Price, Rob (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016.
  9. ^ a b Wright, A; De Filippi, P. (10 March 2015). "Decentralized Blockchain Technology and the Rise of Lex Cryptographia". SSRN 2580664.
  10. ^ 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. 229. pp. 3–17.
  11. ^ Pangburn, D. J. (19 June 2015). "The Humans Who Dream of Companies That Won't Need Us". FastCompany.
  12. ^ Evans, J. (1 August 2015). "Vapor No More: Ethereum Has Launched". TechCrunch.
  13. ^ 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 ...
  14. ^ "Decentralized Autonomous Organizations Find a Home in Wyoming". JD Supra. Retrieved 9 July 2021.
  15. ^ "Wyoming becomes first US state to legally recognise DAO". finance.yahoo.com. Retrieved 9 July 2021.
  16. ^ "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities". US Securities and Exchange Commission. 3 June 2014.
  17. ^ a b Levine, M. (17 May 2016). "Blockchain Company Wants to Reinvent Companies". Bloomberg View: Wall Street. Bloomberg News.
  18. ^ "SF0038 - Decentralized autonomous organizations". www.wyoleg.gov. Retrieved 28 November 2021.
  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. ^ "ConstitutionDAO". www.constitutiondao.com. Retrieved 17 November 2021.
  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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