A decentralized autonomous organization known as The DAO is a new platform which operates as an autonomous venture capital fund. The DAO raised over $150 million in less than 3 weeks, making it the largest crowdfunding event ever. Investors receive DAO tokens in return for investing Ether in The DAO. It operates much like a modern day venture fund in that it can raise and invest funds and hire employees or lobbyists.
The DAO is built on the Etherneum blockchain and through its extensive use of smart contracts, The DAO almost automates the entire investment process. The DAO raises and invests funds using the cryptocurrency Ether. Once The DAO is funded, there is a two-step proposal before a project gets funded. The first step requires the project’s owners to submit a business plan to The DAO token holders. Proposals can be submitted by anyone including businesses, coders, developers, and other entrepreneurs. The business plan must then be coded into a smart contract which operates in conjunction with The DAO. The DAO’s curators then review the smart contract’s code to ensure the proposal’s execution aligns with its business plan. Once a proposal is approved by the curators, DAO token holders vote to fund the project on a majority rule basis. Votes are proportional to the number of tokens held by the voter. Once the project is funded, The DAO operates completely autonomously. Through the use of smart contracts, DAO token holders are automatically paid as payout events are triggered.
The DAO represents an innovative step forward for a venture capital funding organization in many ways. Through The DAO, individuals from around the world now have the ability to invest in a venture capital fund. Through the exchange of cryptocurrency, it has become extremely easy for anyone with an internet connection to invest in and participate in The DAO. With its voting structure, The DAO also creates a flexible investing environment in which the projects receiving funding are approved by a majority vote. The most innovative feature of The DAO, however, is the completely autonomous nature of the organization. DAO token holders hold the exclusive voting power over every single important decision. This purely democratic organization replaces the gap that exists in traditional venture capital funds between the fund managers and investors.
While The DAO presents exciting new opportunities, potential pitfalls raise serious concerns about the platform’s future. Proposals could face uncertainty over outcomes of votes as voting is conducted by majority rule as opposed to being made by a board of directors or manager. This lack of certainty could cause project owners to turn to traditional venture capital funds instead of The DAO. A bug in the code could have a disastrous impact and possibly require a complete rebuild of the platform. The resulting shutdown could have a devastating impact on the funded projects as well as DAO token holders. The DAO, like other blockchain technologies, could run into legal and regulatory challenges. Additionally, The DAO’s coding is potentially vulnerable to a variety of attacks and pitfalls including incentive to vote no, stalking attacks, ambush attacks, token-value attacks, extraBalance attacks, split majority takeover attacks, concurrent tie-down attacks, and independence assumption. Ultimately, The DAO faces a multiplicity of challenges, any of which could have a crippling effect on the new platform.
Despite the possible pitfalls of The DAO, the first project expected to receive $75 million in funding is the near future. The high tech startup, Slock.it, has proposed a project that will develop the Universal Sharing Network which would create a technology backbone for Ethereum. Slock.it is aiming for this project to represent the first step towards smart contracts becoming a useful and secure aspect of IoT products.