DAO – Decentralised Accounting Organisations

Decentralised Autonomous Organization (DAO)

What is the Decentralized Autonomous Organization (DAO)?

One of the major features of digital currencies is that they are decentralised. This means they are not controlled by a single institution like a government or central bank but instead are divided among a variety of computers, networks, and nodes.

In many cases, virtual currencies make use of this decentralised status to attain levels of privacy and security that are typically unavailable to standard currencies and their transactions. Inspired by the decentralisation of cryptocurrencies, a group of developers came up with the idea for a decentralised autonomous organisation, or DAO, in 2016.

Understanding the Decentralized Autonomous Organization (DAO)

The DAO was an organisation that was designed to be automated and decentralised. It acted as a venture capital fund, based on open-source code and without a typical management structure or board of directors. To be fully decentralised, the DAO was unaffiliated with any particular nation-state, though it used the Ethereum network.

Why make an organisation like the DAO? The developers of the DAO believed they could eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process. Fueled by ether, the DAO was designed to allow investors to anonymously send money from anywhere in the world. The DAO would then provide those owners tokens, allowing voting rights on possible projects. The DAO launched in late April 2016 thanks to a month-long crowdsale of tokens that raised more than $150 million in funds.2 At the time, the launch was the most prominent crowdfunding fundraising campaign.

Criticisms of the DAO

By May 2016, the DAO held a massive percentage of all ether tokens issued up to that point (up to 14%, according to The Economist).3 At roughly the same time, however, a paper was published that addressed several potential security vulnerabilities, cautioning investors from voting on future investment projects until those issues had been resolved.

Later, in June 2016, hackers attacked the DAO based on these vulnerabilities. The hackers gained access to 3.6 million ETH, worth about $50 million at the time. This prompted a massive and contentious argument among DAO investors, with some individuals suggesting various ways of addressing the hack and others calling for the DAO to be permanently disbanded. This incident also figured prominently in the hard forking of Ethereum that took place shortly after that.

According to IEEE Spectrum, the DAO was vulnerable to programming errors and attack vectors. The fact that the organisation was charting new territory in regulation and corporate law likely did not make the process any easier. The ramifications of the organisation’s structure were potentially numerous: investors were concerned that they would be held liable for actions taken by the DAO as a broader organisation.

The DAO operated in the murky territory about whether or not it was selling securities. Further, there were long-standing issues regarding how the DAO would function in the real world. Investors and contractors alike needed to convert ETH into fiat currencies, which could have impacted ether’s value. Following the contentious argument over the DAO’s future and the massive hacking incident earlier in the summer, in September 2016, several prominent digital currency exchanges de-listed the DAO token, marking the effective end for the DAO as it was initially envisioned.

Future of the DAO

What does the future hold for the DAO? The DAO, as initially envisioned, had not returned as of mid-2020. Nonetheless, interest in decentralised autonomous organisations as a broader group continues to grow. In 2021, The Maker Foundation, an icon in the crypto industry as the original champion of DAO, announced that it was officially turning operations over to MakerDAO (creator of the DAI stablecoin) and would dissolve by the end of the year.9

While there are many lingering concerns and potential issues regarding legality, security, and structure, some analysts and investors believe that this type of organisation will eventually come to prominence, perhaps even replacing traditionally structured businesses.

Dash

The popular digital currency Dash is an example of a decentralised autonomous organisation because of how it is governed and how its budgeting system is structured. It may only be a matter of time before additional DAOs enter the field.