The ‘DAO’ Nobody Knows: Now Distributing $1.2 Million Per Month
This year has witnessed a meteoric rise in the value of cryptocurrencies. From a total market capitalization of $17 billion at the beginning of 2017 to a current capitalization of over $113 billion today, money has been flowing into the cryptocurrency space like the Nile during rainy season. And that doesn’t even include the traditional venture capital money that’s being invested in companies involved in Bitcoin and other digital assets.
Evolution of Funding
Although the numbers have grown astronomically recently, money has been pouring into this space for several years. Sparked by the first large rise of Bitcoin’s valuation in late 2013, venture capital in blockchain-related companies tripled in 2014. During this phase, the cryptocurrency world followed the traditional route of any nascent industry in acquiring capital: raising funds from established venture capital firms. In the past year or so, however, non-traditional means of raising money and funding projects have arisen. Two instruments in particular have been born: the ICO and the DAO.
ICOs, or Initial Coin Offerings, are essentially IPOs (Initial Public Offerings), but instead of offering stock in a publicly-traded company, a cryptocurrency project offers its new coin in exchange for an existing cryptocurrency (usually Bitcoin or Ethereum). As demand for the coin rises, its valuation spikes and investors flock to kickstart the project.
Another instrument for funding is the DAO, or decentralized autonomous organization. Often using smart contracts built in Ethereum, DAOs allow for a project to be run (and funded) completely on the blockchain. DAOs look toward a world in which legal structures are supported by programming code rather than the whims of men and women.
The most well-known ICO is also the most well-known DAO. Unoriginally called “The DAO,” it famously raised over $150 million dollars through an ICO, and then was infamously hacked shortly thereafter. This incident, however, hasn’t cooled enthusiasm for ICOs and DAOs; in fact, in recent months ICOs have mirrored the heady days of Dot-Com IPOs of the late 1990’s: anyone with an idea — no matter how crazy — quickly raises millions.
Without Money, Projects (and People) Starve
ICOs and DAOs, as new and exciting as they sound, are really just new ways to solve an age-old problem: projects need money to survive. No matter how earth-shattering an idea or a new technology is, without money to sustain the project, it’s doomed for failure. Funding is needed for software development, business development, marketing, legal expenses, and a whole host of other expenses that every project faces.
Early cryptocurrencies like Bitcoin and Litecoin, which don’t have built-in funding mechanisms, have encountered this issue acutely. In its early days Bitcoin was run by volunteers, and as it grew, the need to feed those volunteers became clear. So a non-profit organization was created: the Bitcoin Foundation, which was intended to support core developers of the project. Unfortunately, this wasn’t a viable long-term solution, as it depended upon donations and goodwill to keep the project going.
Eventually, another way to fund the development of Bitcoin evolved: a private company called Blockstream. Blockstream would pay core developers to code full-time. Initially this seemed a viable solution; however, over time many in the industry began to worry that there was a conflict of interest. Would Blockstream employees work first and foremost for the good of Bitcoin, or would they work primarily for the success of Blockstream? After all, in just about any other company, employees are incentivized to help the company profit. Blockstream has faced intense criticism since its founding, including accusations that the decisions it makes in maintaining Bitcoin Core promote Blockstream technologies like the Lightning Network.
Litecoin, one of the oldest cryptocurrencies, has also faced struggles in funding its development. It followed the original plan of Bitcoin and has a non-profit organization — the Litecoin Foundation — to help fund its core developers. However, development over the years has been light in Litecoin, and in May 2017, the Litecoin Foundation had an income of only $11,000 — hardly enough to fund serious development.
Solving the Funding Puzzle
Another established cryptocurrency, however, has quietly found a way to successfully fund its development. Dash, a fork of Bitcoin that aims to be “digital cash,” was launched in January 2014. However, for our purposes here, it really got interesting in August 2015. That’s when it launched its decentralized Dash Budget System, which allows it to self-fund its development from its block rewards.
First, a quick primer on block rewards. Every cryptocurrency is secured by “miners,” who are rewarded for their work by receiving new coins that are created on a regular schedule (for example, approximately every 10 minutes in Bitcoin and every 2.5 minutes in Dash). These “block rewards” gives incentives to miners to do the (often expensive) work of securing the network; in other words, blockchains don’t depend upon altruism to stay secure.
Dash has added a twist to its block reward. First, like most cryptocurrencies, it rewards its miners for their work. However, unlike coins such as Bitcoin or Litecoin, it doesn’t reward miners with 100% of the block reward. Instead, it distributes to them 45% of the block reward. Another 45% goes to Masternodes, which are a 2nd-tier network that provides specific services to the cryptocurrency, such as privacy features and instant transactions.
It’s the final 10% that’s important to this discussion. That 10% is set aside for Dash’s own advancement, including those items mentioned earlier: software and business development, marketing, legal expenses, etc. How are these funds distributed? That’s where the “decentralized” comes in. In keeping with the ethos of cryptocurrencies in general, Dash gives decision-making power to Masternode owners, a highly diverse group of individuals who each have to put up 1,000 Dash as collateral for hosting a Masternode. These owners are highly invested in Dash, and thus are incentivized to vote for proposals that will increase the value of Dash.
Who can make proposals? Literally anyone. All a person needs is 5 Dash to submit a proposal to the Dash Budget System. If the proposal is successfully voted in (all voting is done via the Dash network), then the Dash blockchain automatically sends the proposal owner the funds for his or her project.
Sustaining the Flood
The Dash Budget System has been a wild success since its inception, for it creates a successful feedback loop: funds are invested in proposals, these proposals increase the value of Dash, which then increases the funding available for future proposals. Lather, rinse, repeat.
Initially, the first monthly budget payout totaled about $14,000 worth of Dash for a few projects, including funding for the core development team. Since then the Dash monthly budget has risen dramatically due to the rise in the price of Dash. This month (June 2017) over $1.2 million worth of Dash is available for funding. That essentially gives Dash over $1.2 million in its monthly budget — compare that to Litecoin’s paltry $11,000 income. With its revolutionary Budget System, Dash has seen proposals ranging from mobile application development to Dash-based debit cards to sponsorship of MMA fighters. The possibilities for growing Dash are limited only by the imagination, not funding.
Dash is a working and established decentralized autonomous organization. It has “stockholders” (Masternode owners) who vote on the direction of the project; a leadership team (the Core team) who sets the direction but whom the Masternode owners can fire at any time by withholding its funding; as well as various “divisions” (the many third-party proposals) which work for the advancement of the project. Although it hasn’t gotten the press of The DAO or the latest ICO, Dash has used blockchain technology to create a truly functioning decentralized — and funded — project. Every month is the “rainy season” for the Dash funding river.