Decentralized autonomous organization

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A decentralized autonomous organization (DAO), sometimes labeled a decentralized autonomous corporation (DAC), is an organization that is run through rules encoded as computer programs called smart contracts.[1]:229 A DAO's financial transaction record and program rules are maintained on a blockchain.[1]:229[2][3] There are several examples of this business model. The precise legal status of this type of business organization is unclear.[4]

The best-known example was The DAO, a DAO for venture capital funding, which was launched with $150 million in crowdfunding in June 2016 and was immediately hacked and drained of US$50 million in cryptocurrency.[5] This hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. This decentralized bailout was made possible by a majority vote of the blockchain's hash rate.

Background[edit]

Decentralized autonomous organizations have been seen by some as difficult to describe.[4] Nevertheless, the conceptual essence of a decentralized autonomous organization has been typified as the ability of blockchain technology to provide a secure digital ledger that tracks financial interactions across the internet, hardened against forgery by trusted timestamping and by dissemination of a distributed database.[1]:229[2][6] This approach eliminates the need to involve a bilaterally accepted trusted third party in a financial transaction, thus simplifying the sequence.[2] The costs of a blockchain enabled transaction and of making available the associated data may be substantially lessened by the elimination of both the trusted third party and of the need for repetitious recording of contract exchanges in different records: for example, the blockchain data could in principle, if regulatory structures permitted, replace public documents such as deeds and titles.[1]:42[2] In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.[1]:42[7]

Buterin proposed that after a DAO was launched, it might be organized to run without human managerial interactivity, provided the smart contracts were supported by a Turing complete platform.[8] Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling DAOs.[1]:229[9][10] Decentralized autonomous organizations aim to be open platforms where individuals control their identities and their personal data.[11]

Examples[edit]

Examples of DAOs are Dash, The DAO and Digix.io[12] A value token called DigixDAO finished its crowdfunding campaign and the token began trading on exchanges on 28 April 2016,[13][14] MakerDAO.[15]

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.[3] However, more recently Vega DAO has come up with a proposed solution to voter apathy in decentralized organizations by using the concept of Futarchy which uses prediction markets to make decisions on proposals.

Legal liability[edit]

The precise legal status of this type of business organization is unclear;[6] some similar approaches have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities.[4][16][17] Although unclear, a DAO may functionally be a corporation without legal status as a corporation: a general partnership.[18] This means potentially unlimited legal liability for participants, even if the smart contract code or the DAO's promoters say otherwise.[18] Known participants, or those at the interface between a DAO and regulated financial systems, may be targets for regulatory enforcement or civil actions.[18]

Security[edit]

The code of a given DAO will be difficult to alter once the system is up and running, including bug fixes that would be trivial in centralised code. Corrections for a DAO would 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][22] However, researchers pointed out multiple issues in the code of The DAO. The operational procedure for The DAO allows investors to withdraw at will any money that has not yet been committed to a project; the funds could thus deplete quickly.[3] Although safeguards aim to prevent gaming the voting of shareholders to win investments,[4] there were a "number of security vulnerabilities".[23] These enabled an attempted large withdrawal of funds from The DAO that was initiated in mid-June 2016.[24][25][26] However, after much debate, on the 20th July 2016, the Ethereum community arrived at a consensus decision to hard fork the Ethereum blockchain to bailout the original contract.[27]

See also[edit]

References[edit]

  1. ^ a b c d e f Vigna, P; Casey, MJ (January 27, 2015). The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order. St. Martin's Press. ISBN 9781250065636. 
  2. ^ a b c d Hodson, H. (20 November 2013). "Bitcoin moves beyond mere money". New Scientist. 
  3. ^ a b c "The DAO of accrue: A new, automated investment fund has attracted stacks of digital money". The Economist. 21 May 2016. 
  4. ^ a b c d Popper, N. (21 May 2016). "A Venture Fund With Plenty of Virtual Capital, but No Capitalist". New York Times. 
  5. ^ Price, Rob (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016. 
  6. ^ a b Wright, A; De Filippi, P. (March 10, 2015). "Decentralized Blockchain Technology and the Rise of Lex Cryptographia". SSRN 2580664Freely accessible. 
  7. ^ Norta A. Creation of Smart-Contracting Collaborations for Decentralized Autonomous Organizations. 18 August 2015 Perspectives in Business Informatics Research. Volume 229 of the series Lecture Notes in Business Information Processing pp 3-17
  8. ^ Buterin, V. (20 September 2013). "Bootstrapping A Decentralized Autonomous Corporation: Part I". Bitcoin Magazine (News). Retrieved 23 May 2016. 
  9. ^ Pangburn, DJ. (19 June 2015). "The Humans Who Dream Of Companies That Won't Need Us". FastCompany. 
  10. ^ Evans, J. (1 August 2015). "Vapor No More: Ethereum Has Launched". www.techcrunch.com. 
  11. ^ Deegan, P. (2014). "Chapter 14—The Relational Matrix: The Free and Emergent Organizations of Digital Groups and Identities". In Clippinger, JH; Bollier, D. 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 asserting itself as a publicly accessible Portal Trusted Compute Cell (TCC) with APIs that... ...intended to provide a powerful new self-deploying and self-administrating infrastructure layer for the Internet, which gives individuals control over their identities and their data, and which enables the formation and self-governance of Decentralized Autonomous Organizations, Authorities and Enterprises to enable the creation and exchange of "digital assets." 
  12. ^ Aitken, R. (23 April 2016). "Digital Gold 'Done Right' With DigixDAO Crypto-Trading On OpenLedger". Forbes. 
  13. ^ "DigixDAO Token Trading to Launch on Gatecoin". Smith and Crown. 27 April 2016. 
  14. ^ Quentson, A. (4 May 2016). "Gold Backed Digix Raises Millions in Hours on Ethereum Blockchain Crowdsale". CryptoCoinNews. 
  15. ^ https://makerdao.com/
  16. ^ "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities". U.S. Securities and Exchange Commission. 3 June 2014. 
  17. ^ Hinkes A. The Law of The DAO. CoinDesk. May 19, 2016 The Law of The DAO
  18. ^ a b c 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. ^ del Castillo, M. (12 May 2016). "The DAO: Or How A Leaderless Ethereum-Based Organization Raised $50 Million (Even Though No One Quite Knows What It Is)". CoinDesk. Retrieved 13 May 2016. 
  21. ^ Vigna, P. (16 May 2016). "Chiefless Company Rakes In More Than $100 Million". Wall Street Journal. 
  22. ^ Waters, R. (17 May 2016). "Automated company raises equivalent of $120M in digital currency". Financial Times. 
  23. ^ Popper, N. (27 May 2016). "Paper Points Up Flaws in Venture Fund Based on Virtual Money". New York Times. 
  24. ^ Popper, N. (17 June 2016). "Hacker May Have Taken $50 Million From Cybercurrency Project". New York Times. 
  25. ^ Price, R (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016. 
  26. ^ Cimpanu, C. (June 18, 2016). "DAO Ether Trading Platform to Shut Down Following Ongoing Cyber-Heist - DAO creator says platform is shutting down". Softpedia. 
  27. ^ https://blog.ethereum.org/2016/07/20/hard-fork-completed/