Dad and DAO
So the other day I was reading about the decentralized autonomous organizations (DAO) on the blockchain. DAOs are leaderless organizations that function according to a pre-decided digital constitution. These orgs are borderless, permissionless and function without any possibility of downtime or censorship. They do not have a physical address, nor people in formal management roles. In a nutshell, these are unstoppable organizations — that can operate without the fear of a government or a malicious third-party interfering. I also came across the Aragon project. Aragon provides a framework for creating DAOs, with opt-in decentralized applications (DApps) to govern and manage your DAO — for instance, minting tokens, fundraising, voting, payments etc. They also have a focus on the upgradability of these orgs and aim to provide a built-in governance system based on a digital jurisdiction.
With a couple hours worth of knowledge about DAOs, I thought it might be interesting to have a conversation with my dad about the same. To provide some background, my dad is a chartered accountant and hence intimately aware of regulations, laws and best practices of the taxation system of our country, but blissfully unaware of the potentials of the blockchain. I told him about “The DAO” — an investor directed venture capital fund. Built on the Ethereum blockchain; to participate, an investor could buy DAO tokens with Ether and vote for projects / startups to be funded.
The DAO was intended to operate as “a hub that disperses funds (currently in Ether, the Ethereum value token) to projects”. Investors received voting rights by means of a digital share token; they vote on proposals that are submitted by “contractors” and a group of volunteers called “curators” check the identity of people submitting proposals and make sure the projects are legal before “whitelisting” them. The profits from the investments will then flow back to its stakeholders.
Though not specifically relevant to DAOs themselves, I did tell him about the DAO hack as well — a vulnerability in the code that led to $50 Million worth of Ether to be siphoned off from the The DAO smart contract. That really set my dad off. He brought up, that the cryptocurrency transactions in general and the DAO fundraise in particular are classified as “speculative transactions” and that since these organisations and transactions are not regulated by the government, there is always a risk of a fraud (referring to the hack), in which case there is no one to protect the interests of the investors. He mentioned that until all actions on the blockchain are somehow regulated by the lawmaking bodies, it can never catch-up.
I agreed that the regulations and laws in place to protect the interests of the parties involved and consequently the sense of security that follows from it are indispensable for mass adoption. However, there is a cost associated with this privilege — freedom, censorship and the time spent on processes.
To build a case for DAOs, I picked up an instance for permissionless payments. Let’s say my dad provided accounting and compliance services to a firm. After he was done dispensing his services but before he could receive his payment, imagine that the firm was sued for alleged wrongdoings. For the duration of the case proceedings, the authorities freeze their bank accounts. Clearly, payment for my dad’s firm is in an abyss. Imagine a scenario where my dad was counting on that payment to pay any vendors whose services he might have sought during the project.
If these firms were running on the blockchain, no one could have stopped my dad from receiving his payments. Blockchain, in its current state, reinstates that confidence at the cost of the regulations and (lawful) protection — all of which seem like a double-edged sword now. I see the inertia for regulations and the confidence in regulated entities as a barrier for on-chain governance. Anyway, there is no better way to end a discussion than quote Naval.