Building a better DAO
Call it the revenge of the DAO. Three years ago, one of the boldest experiments in decentralization—a distributed, user-owned incubator known as the DAO—suffered a humiliating and expensive hack. Some $50 million was lost, and a subsequent fork of the Ethereum network, intended to roll back the losses, created a deep, ideological rift in the Ethereum community.
Despite the setback, a number of true believers haven’t abandoned the idea.
Last week, a new DAO, known as dxDAO, was launched with a promise to be more secure, more decentralized and a vast improvement over the original. Created by the developers behind crypto startups Gnosis and DAOstack, dxDAO has already accumulated $12 million from a variety of mostly anonymous investors. It’s attempting to use prediction markets for governance and has set its sights, initially, on running a purely decentralized crypto exchange—a move that’s both likely to attract the attention of regulators and possibly show its ability to outrun them.
“It’s an experiment to start a startup with 1,000 cofounders,” said Martin Koeppelmann, the CEO and founder of Gnosis, a prediction market whose devs helped build the new DAO.
“DxDAO is, to my mind, one of the first large scale DAO experiments—truly a DAO in practice, not in name only— that has existed on blockchain since the very first DAO experiment,” said Kirk Dameron, a ConsenSys grandee who was deeply involved in the “cleanup” of the original DAO and has been following the dxDAO project closely.
“It enables a vastly powerful new means of human coordination,” he said. “It will, at a number of margins, move power from the centers, to the edges. How will humans react to it? We don’t know. Will it hold up or be hacked? We don’t know. Will it become just another failed experiment, or a powerful DAO that will change and evolve in interesting and no doubt fascinating ways for decades? We don’t know.”
The idea of a DAO (or “decentralized autonomous organization”) is fundamental to modern crypto. Rather than being hierarchical and managed from the top down, the DAO does away with CEOs, a board, and old-fashioned equity-investment. Instead, the firm is more of a co-op, owned and controlled by everyone who buys into it. Decisions are supposed to serve the collective good, are consolidated in code, and executed using smart contracts.
The hack of the first DAO notwithstanding, the philosophical issues raised by the prospect of a headless, fully distributed firm are as consequential as they are technical. With the fully automated future approaching, it’s increasingly urgent to figure out how humans will fit into a world dominated by ones, zeroes and benevolent algorithms. Some futurists anticipate a self-sustaining hierarchy of machines, a holistic Internet of Things, with driverless cars paying congestion fees to ownerless parking meters as they ferry mechanical passengers across leaderless nations.
The DAO, in theory, lets humans wrest back a degree of control.
The idea for a distributed autonomous companies appears to stem from a piece written by Block.One founder Dan Larimer in 2013 in which he described a “Decentralized Autonomous Corporation:
“Think of a crypto-currency as shares in a Decentralized Autonomous Corporation (DAC) where the source code defines the bylaws. The goal of the DAC is to earn a profit for the shareholders by performing valuable services for the free market. With this goal in mind set out to maximize shareholder value at every stage as you design the bylaws that govern operation of the DAC.”
But other early thinkers, including Ethereum co-founder Vitalik Buterin, were fascinated with the notion of companies run by code, and built on the concept, which has evolved over time.
While the original DAO was essentially a novel crowdfunding mechanism, dxDAO’s primary focus is giving its members full, executive control. Its 232 investor/owners can be anybody with an Ethereum address, meaning they can be anonymous, and hold voting rights in proportion to money staked on the network. That allows them to make, and vote on, propositions about how the DAO’s considerable financial resources are invested.
Putative members can join the DAO by earning “reputation,” which translates to voting rights. They do that by purchasing dxDAO’s GEN tokens, temporarily “locking down” ether or other tokens (that’s where the $12 million came from—it will eventually be returned), or, most significantly, trading on a decentralized exchange called “DutchX.”