The DAO: Complicated But Interesting

The DAO hit Twitter this weekend, and Hacker News this morning with the announcement that over $120mm of ether (The Ethereum base currency) has been invested in it.

What is The DAO exactly? It's a cross between a crowdfunding site and a venture capital / private equity partnership. It's controlled by a set of voting rules encapsulated and enforced on the Ethereum blockchain as a smart contract. People that trust the code, rules and plan are sending ether directly to fund the contract.

Unlike most firms and partnerships, this one has something like a majority-rule structure when it comes to funding decisions, self-consciously aiming to tap the wisdom of crowds. If a certain percentage decide to fund a proposal, then it's funded.

Voting and Value

Voting is done by those who hold 'tokens', and these tokens are what are being sold right now, on a limited time basis, with prices rising over time (natch).

Presumably there will be an actively traded market for DAO tokens after launch. Also presumably those tokens will approximate the underlying value of the assets + opportunities - liabilities of The DAO. It will be interesting to see what sort of premium or discount the market gives these tokens in the early days.

Bad Actors

Along with traditional blockchain bad actors, funders/investors/stakeholders in The DAO have to worry about hostile takeovers. What if someone gets a majority of DAO voting tokens together? They could vote to give themselves the rest.

One of the innovative decisions The DAO has made is to allow any subset of token holders to create their own 'fork' of the organization, taking funds with it.

The proposal is that this will remove most attacks; anybody who doesn't like the direction the organization is going can just take their ball and move on with likeminded folks.

Tower of Babel

There's a good story about this in the Bible, one that Neal Stephenson riffs on at length in Snow Crash. In short, humans do not seem naturally cooperative in large groups.

Right now, The Dao is peopled mostly with optimists as far as I can tell from reading their forums and tweets. @eiaine claims the investment is 'risk free' since you'll be able to fork to a DAO which will allow you to release your money. I imagine her perspective is shared by many boosters.

Pessimists are sitting on the sidelines, and are waiting to gleefully say "I told you so!" when it immediately fragments into 6000 or so sub-Daos.

Impact

The DAO seems likely to have a pretty big impact. If the 'forking' protocol doesn't have major security troubles, it could have the network effects and capital gravity to stay influential.

Investors, especially new ones, often worry about deal-flow; I would expect that The DAO will have excellent deal-flow. And, crowd-funding continues to be very popular. Perhaps some enterprising soul will figure out how to hook up The DAO to Angel List, creating a sort of black hole / supernova of tech news and investing insanity.

For now, I'm on the sidelines, but it should be fun to see the first few successes and failures. One thing is for sure, there will be drama.

Peter Vessenes

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