Thursday 19 May 2016

It raised over $145 million, it’s run by its owners, and almost none of them seem to know what it is. It’s The DAO.

Ethereum is shaping up to be a pretty cool platform. Smart contracts are a Big Deal, and we’re now starting to get some of the first use cases coming in. No surprise they’re accompanied by massive hype. DigixDAO pulled in $5.5 million of investment, all in ETH. But that’s dwarfed by The DAO, which has attracted an unbelievable nine figure dollar equivalent. At present, something like one in every seven ETH have been invested in it. It’s a truly interesting, innovating and promising concept, certainly. But it may also have problems that its investors haven’t begun to grapple with yet.


Could be awesome. Could be a big DAO!

What is The DAO?

The Decentralised Autonomous Organisation is a new kind of enterprise: a leaderless entity that exists in cyberspace, residing on the blockchain. The rules governing its existence are written in smart contracts. It belongs to everyone who owns a share in it, and decisions are taken collectively.

It’s something like a decentralised venture capital fund. Investors receive DAO tokens in return for their ETH, which give them voting rights on different project proposals. Funds are released upon approval to create new products and services, which will in theory pay dividends back to DAO holders.

It’s a beautiful concept: the democratisation of investment in the hands of ordinary people, embodying the sharing economy and being rewarded for their involvement. However.

Yeah, however.

There are some issues attached to the idea. Maybe they won’t be dealbreakers. Maybe it will end in tears. Who knows? This is what makes crypto so interesting. A few, in no particular order:

The ‘wisdom’ of crowds is not that wise. Making group decisions can be the right thing, in some cases. In others, there’s a reason we have experts. It remains to be seen whether The DAO’s investors can make good decisions, or whether they will collectively gravitate towards mediocrity, or worse.

Cash or fuel? Releasing funds for a project will necessarily mean putting sell pressure on ETH, in the short-to-medium term. That’s what happens when you use the same token for money as you do for network fuel. Will it matter? Unclear. It certainly has been an issue for other 2.0 platforms like Nxt.

What goes up… It also seems likely that the recent spike in ETH’s value is due to new people buying ETH to invest in The DAO. So what happens when the ICO is over and there are no newcomers to support the price? Gravity will take over, and it may not be pretty. That alone could cut the USD-equivalent cash held by The DAO by, what? A third, a half?

Limited refunds. As one former Curator of the project suggested, holders may not realise the economic dynamics of their investment model. Funds can be pulled from the project at will - but investors may be in for a surprise shortly down the line. ‘I would note that thus far all Ether submitted to the DAO can be refunded from the DAO at no cost. However, once the price starts increasing, Ether entering the DAO cannot be refunded in full. You have been warned ;-) ’ 

TL;DR: It’s a cool concept, but caveat emptor - in spades.

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