The DAO: An experiment in responsibility
By Daniel M. Ryan
Let's say you're a fella that's enthused by a young and hot cryptocurrency named Ethereum . You and your techie buds plan to improve the world by getting into the smart-lock business, producing locks that open up automatically once they're paid a certain amount of Ethereum. You start off by proposing to crowdfund your smart-lock startup. Naturally enough, you present it to the cryptocurrency community – many of which find the price chart of Ethereum to be hot, hot, hot. Not surprisingly, you get a warm reception.
But along the way to your startup dream, you get a brain flash. What about a smart contract, a working piece of code distributed in the Ethereum blockchain, which will allow other folks to propose crowdfunding ventures of their own? A program, whose execution is verified by each node in the Ethereum ecosystem as part of their responsibilities to verify the integrity of Ethereum's blockchain ledger, which will automatically disburse Ethereum to any crowdfundee Contractor that manages to wangle a majority vote from a quorum of stakes? This flash of uber-techie inspiration sounds like something that would emerge from the haunts of folks who wait for the Singularity and live their virtual lives in science-fiction forums. It sounds like an idea ready-made for Skynet jokes.
And yet, it's real. The start-up is Slock.it and its founders' brainchild is called The DAO. An acronym of Decentralized Autonomous Organization, DAO is one of those acronyms that doesn't appear in your favourite acronym dictionary but will. And the Slock.it folks, whose own crowdfunding proposal is being made through The DAO, have been ambitions enough to brand their own creation with the generic name.
The DAO has already gotten press from Fortune, the Wall Street Journal, the Financial Times, Bloomberg, CNBC and The Economist: media outlets with readership demographics even the New York Times drools over. Why did this blockchain contraption blitz the usual haunts of the aspirational 17%? For a very old-fashioned reason. As I write, it's raised more than $150 million. Nothing attracts press like success.
Not only is it comfortably #1 in Wikipedia's list of the biggest crowdfundings, but it's also blasted way past the amount raised by its host cryptocurrency Ethereum. The DAO is on track to raise ten times what Ethereum raised.
In 2014, Ethereum was the biggest crowdfunded cryptocurrency project by far. It raised more than 31,500 Bitcoins in its presale, of which a blinding 3,700 was raised in the first twelve hours.. Among those were a few Bitcoin whales who threw six figures' worth of Bitcoin to get the first-day price of 2,000 of Ethereum's ethers per Bitcoin.
Since then, from August of 20i4 to today, Ethereum's market cap has soared from its implied presale value of $18.4 million to over $1 billion. That's how it's been able to facilitate a crowdfunding that's already eight times the dollar value of its own. The only way to buy shares, officially "tokens," of The DAO is with Ethereum ethers.
[Disclosure: I passed on the Ethereum presale, for a reason that in retrospect was dumb, but I do own 10,000 tokens of The DAO which I bought for 100 Ethers.]
Why is this flavour of the aspirational-17%'s month of any interest to a Conservative? Because The DAO, as a crowdfunding mechanism, heralds a new era of hands-on responsibility for one's funds. If you buy tokens in The DAO, you're not only buying an opportunity but also a responsibility. In order to make money, in order to take a cut of future profits from any future projects that get funding from it, The DAO's stakeholders have to affirmatively approve them. According to the hard-coded by-laws, no project gets funded unless it secures a majority vote from a quorum totalling 20% or more of the tokens. So, if The DAO's stakeholders sit in their armchairs and wait for something to happen, nothing will. The Ethereum owned by it will just sit there. Unless enough stakeholders motivate themselves to approve contractor projects, The DAO will be nothing more than a de facto closed-end fund that holds ethers.
Of course, the prior history of corporate governance says that the large stakeholders will be the movers and shakers and the small stakeholders will go along for the ride. The DAO is not a democracy in the political sense: a quorum is 20% or more of its tokens, not of its holders, and its coded by-laws follow the same rules as for a corporation. One token, one vote; the more tokens you own, the more votes you can swing.
The DAO has curators whose job is to validate the contractor proposals and the corresponding smart contracts that would disburse the raised funds and pay The DAO its proposal-specified share of profits (if any.) Interestingly, curator s act like a rudimentary regulatory body: it's made clear that they're expected to neither approve nor disapprove any proposal. Their jobs are confined to making sure that the associated smart contract is coded properly and to verify a contractor's legitimacy. Essentially, they're a body of volunteer regulators: their role is as new as blockchain governance and as venerable as a volunteer police force.
The curators are all Ethereum heavyweights, which has induced some people to wonder about collusion. The DAO does allow for curators to be hired and fired "at will," in a process that's like a Proposal but more involved – and is one that's likely to be seminal. Two votes are taken on whether to change a Curator; the first vote is non-binding.
The second one, the binding vote, offers a unique "right of exit" that's a first in corporate governance. Whichever way the vote goes, the minority – the losing side – has the opportunity to "fork" The DAO into a new DAO. This new DAO retains the right to any and all income streams from any and all crowdfunds approved up to the point of the split. It's this right of exit that provides the protection against a 50%-plus-1 attack. More serious than collusion, this attack could take place if a malicious holder of the tokens acts like a Gordon Gekko by slyly buying up enough tokens to control 50%-plus-one of the vote. Had the right of exit not been in place, this malicious majority stakeholder could asset-strip The DAO by using his majority stake to send all its ether to his own personal Ethereum account and leave the thing gutted.
Take a mosey sometime through the parts of the securities and corporate laws that deal with takeovers. You will find a lot of words devoted to forbidding 50%-plus-one attacks of this sort in the securities arena. In this older part of the world, the protection for minority shareholders is a lot of legal verbiage, lots of regulations and lots of lawyering. But in the new world of The DAO, all the protection a minority shareholder needs inheres in some lines of shrewdly-written automatically-executing smart-contract code.
But this right of exit heralds a world that's even more liberating than automated protection from a Gordon Gekko. It's as if corporate law allowed the disgruntled minority shareholders of a company the right to split off into a new company and take their share of the cash-and-marketable –securities held by the old company after they lose a proxy fight – and take with them the right to an aliquot share of the income from the continuing business(es) that the parent company has established up to the point of split. Imagine a world where Apple shareholders who've had it with Tim Cook and lose a proxy fight to unseat him set up a new company called Dapple with new top management. By right, Dapple starts off with those shareholders' aliquot share of Apple's legendary cash hoard – plus the right to their aliquot share in the profits from every Apple product on sale at the time of the split. Imagine the possibilities, and the perils.
This last feature provides a striking example of an unregulated sector giving birth to an organization that's more tightly controlled by its stakeholders than its regulated likesake. Although counterintuitive, this phenomenon makes a certain sense. A person in a regulated industry who pushes for tighter controls comes across as a stool for the guards. But someone in an unregulated industry doing the same thing, he's just a fellow trying to clean up the town.
As some of the articles about The DAO have pointed out, there's the legal ambiguity of its structuring. If something goes wrong, who's legally responsible? Its creators? Its token holders? It itself? No-one? Is this a creature of the still-unregulated cryptocurrency-only sector, or does it encroach on legal turf already claimed by securities regulators? Are token of The DAO merely rights to use its smart-contract software (terms) or are they securities (Howey test)? We'll find out.
And we'll find out something else. As the above capsule description indicates, The DAO is designed to be a hands-on crowdfunding platform. Even the procedure for setting up your Ethereum wallet to administer your token and vote is complex. One of the terms of sale is the buyer warranting that (s)he is technically capable enough to understand what The DAO is and how to use it. This self-responsibility is reinforced by the ethos of the community. It's like the old days of the horseless carriage: "if you don't know how to use it, then don't buy it."
In its own subtle way, it's also a challenge to the ethos of the Regulatory State. That's why The DAO is important enough to keep an eye on.
The Regulatory State is rooted in the proposition that this age of specialization has created information asymmetries that leave the ordinary bloke vulnerable to being bilked. Conned, hurt or even injured or killed by someone else's chicanery. Herein is the explanation of why the Regulatory State has not proven to be the economy-killer that libertarian analysis says it is. It does make life harder for specialists within their specialties, but much easier for specialists when outside their specialties. A manufacturer who has to endure the frustrations of OSHA compliance can invest his or her money with a lamblike blitheness that a 19th century man of means would find shockingly foolhardy. A workaholic associate lawyer sweating over how to advise a business client on how comply with the new overtime regulations can buy a crib for his newborn without any need to acquire enough mechanical aptitude to spot out any vulnerabilities in the design and account for them when using it. In order to buy a trike for your tyke, you do not have to warrant that you have enough mechanical smarts to understand its use.
Consequently, the Regulatory State has made it easier to specialize by removing some of the natural brakes to burying your head in a small part of the economy. To go through life you no longer need to cultivate an old-style head on your shoulders. The Regulatory State and a more litigious society have placed a lot of that burden on manufacturers and service providers. Long gone are the days when a complaint about being cheated was met with" "Experience keeps a dear school, but fools will learn in no other." (Ben Franklin.) The statecraft-effect has been to ratchet up the United States and its likesakes from medium-trust societies to high-trust societies, in which the cost of being a fool has been greatly lessened. In one sense, this has been great for the world economy: commerce thrives best in a high-trust society. But in another sense, it introduces a subtle cost over and above the well-documented compliance costs. The Regulatory State has bequeathed an age where folly is sheltered. It has nurtured an Age of Fools.
From this angle, The DAO is an experimental return to the older ways: "if you don't know what you're doing, don't go into it." Those of us that buy those tokens have to cultivate the old-fashioned virtue of good judgment – the judiciousness and prudence that made our forebears in far less need of government than we.
In one sense, The DAO hearkens to a future of automated rule- enforcement that will take those inevitable human weaknesses out of a human-administered regime. But in another sense, this bleeding-edge high-fintech experiment points to an older age when we had less government because we needed government less. The old fusionist principle – government always fills a vacuum of virtue – dovetails well with peer-to-peer ethos of the new cryptocurrency sector.
With this new experiment in self-responsibility, we'll see if The DAO is ready for us - and if we are ready for The DAO. Can we use cutting edge fintech to aid us in shouldering loads that our forebears shouldered without a second thought? Are we ready for a domestic velvet revolution in which we say to the Regulatory State, "Thanks for all you've done, but we no longer need your help"? The answers spawned from a gaggle of ubergeeky fellows enthused by the possibilities that inhere in a new cryptocurrency, will shape the world of our descendants.
Daniel M. Ryan, as Nxtblg, is shepherding the independently-run Open Audi Initiative Prediction Market Shadowing Project. He has stubbornly assumed all the responsibility and blame for the workings and outcome of the project.