An Angel Investor’s View of TheDAO

I got taught about Ethereum and TheDao from an old friend who is a great visionary and has a knack of finding unique opportunities very early on. It’s an exciting idea with a lot of upside but has also recently been going through a few teething problems, with a concept called TheDao based on top of the Ethereum protocol.

A Quick Recap of TheDAO and The Hack

Basically, a lot of people put a large amount of money into a a new type of distributed VC fund and a hacker has exploited the system to withdraw 1/3 of it into their own account (which is frozen for about 3 weeks as per the rules) and everyone is running around trying to work out how to get the money back without undermining the principles of a “the code has the final say” world.

A great summary of the situation has been written on the ErrataSec blog and a more deep-dive on the business/legal side by Matt Levine for Bloomberg. There are very clever people looking at this and debating the solution so I’m not going to go into this aspect. All I will say is that anyone who abuses a system at the expense of others, has no place in the future of that system.

What I want to outline in this article is a perspective from a business and investment angle and how that can be applied to the technical considerations of what is going on at present.

A Different Perspective

Now I did invest in TheDAO and I very much treated this as just another angel investment as a part of a bigger portfolio. I put a very small amount into it (about 1/4 of what I’d normally invest) as I viewed this very much as an unusually higher risk than normal. I had a few concerns, and still do:

• It’s so new. No one has attempted to create a decentralised venture capital fund using a crytpocurrency as the mechanism for voting and investing (as far as I know) – and with first versions of everything they usually suck. What you’re expecting is that the team behind it will continually learn and make it better.
• Most of the investors in TheDao don’t appear to be professional (or even amateur) investors which meant that many of the core concepts and protection principles have not been applied yet – formal due diligence, vesting, board rights etc. Sure, a lot of this is because they want to get away from this and explore a new system and that’s fine but human behaviour is what it is and will come to the forefront of whatever system you choose. There will also be someone who wants to exploit things to cater to their own personal circumstances at any given point in time.
• The movement of the money isn’t done in the same way as a normal VC fund. What usually happens is that a fund will pitch investors (called Limited Partners; which in TheDao is anyone who owns Ethereum) on what the fund wants to invest in, the edge it is to do it better than others, and how it will go about it (which is equivalent to TheDAO proposal). The big difference here is that the investment money is drawn down in stages as and when the fund needs it (say at 3 agreed milestones) and that the LP’s can’t request their money back. The fund has to finish investing and then any future returns are divided between them (minus commission from the people running the fund). What’s happened here is that a function splitDAO has been available from the beginning to allow people to sell and exit at any time (whether it’s recursive or not) which will create more problems later, not just open up to hacks like today.

Continuing the real world analogy if I may.. If an investment went bad, we wouldn’t expect the entire monetary system to be rolled back so we could get retrieve our fund investments; but this is not what’s happening here. It’s like an attack on a VC fund itself where LP money is being drained through some quirk in the system. This would be a criminal act in a court of law, no matter what the “code” said and would be dealt with accordingly.

As TheDAO isn’t protected by real-world legal protection, it is down to the community to set the “legal precedent here”.

Beyond the Technical Debate

So going forward, I’d like to propose some thoughts for discussion from my viewpoint of a slightly-technical, entrepreneur and angel investor:

• Fund Lock-Down: Don’t allow any investor to take money out of the fund until it has been invested according to it’s original proposal, and the returns (if any) come in.
• An Ethereum Legal Board: As contracts are based on code, there will always be hacks possible. It may be an idea to have a few people voted in, and rotated around to arbitrate situations like this where the Code is different to the Spirit of the Intention. A “senate” for Ethereum based investments if you will.
• More Investor Diversity: We should encourage more people to take part who have a variety of backgrounds and experience because this will create more well-rounded opinion and advice on new concepts like this, especially if a version of TheDao continues to exist and you have to assess proposals from anyone who wants the funding. While I don’t know the current investor makeup in the DAO or Ethereum generally – we should discuss how this could come about to give better investment decisions.

Like anything, TheDao is a startup and experiment and mistakes will be made. We’ll learn, adapt, and move on.

Whether a roll-back occurs and this DAO is shut down, is not really the point. What is, is that this has happened now early on which is probably what it needed – a shot in the arm to take things more seriously and to really think things through before riding any more hype waves to fame and glory. Better now, than when TheDAO had maybe made a 3x return in 5 years and then it got hacked.

It’s great to try new things and push the boundaries of technology and what is possible. Just when it comes to money in particular, let’s not throw away the thousands of years of learning and experiments we’ve done on human behaviour and the monetary systems as a whole. For sure, challenge them, discuss them, experiment with them – but let’s not assume they have no value. Build upon them.

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SideNote

It’s very plausible that the hacker has a deep, vested interest in Bitcoin and is seeking to undermine Ethereum overall as a competitor. It may even be an Ethereum supporter who wants to make a point and will reveal themselves after a solution has been proposed.