TheDAO has, thus far, raised over 2.4m Ether valued at ~$37.75m (on 11 May 2016), making it one of the largest crowdfunds in history. I’ve shared this project on social media and have seen plenty of bewilderment & uncertainty, leading most to think it’s a giant scam. Admittedly, looking at the website, you are first met with over the top rhetoric that can set off the “bullshit” filters: “The DAO is revolutionary”. “One time only event”. Which leads to thoughts such as:
“I’m using Ether (wtf is that?) to get DAO tokens (wat)?”
“Cryptocurrencies are full of scams. I’m out.”
TheDAO, as a concept, is simple: people from all over the world, pool funds together, in exchange for ownership in this fund. Proposals are tabled to this fund, upon which the TheDAO members decide to fund it or not. Proposals, hopefully, generate returns and the pool of funds that the TheDAO manages get larger. One can either sell one’s share in TheDAO for a personal return, or there’s a unique scenario (explained later), where one can trade tokens directly for a portion of the available fund to get out of it.
Looking at this, it’s easy to imagine why, based on our current understanding of the systems available to us, why it sounds potentially sketchy.
One might imagine in the legacy system, it might work as follows:
There’s one, identifiable person that has a PayPal account. Everyone sends money to them, and they keep track of who is owed what. If they want to sell their ownership in TheDAO, they all need to talk to this one entity to make sure everything is settled accordingly. As you can see, there are plenty of holes to this:
- Not everyone in the world can get access to a PayPal account.
- Massive levels of trust required: both in PayPal & the individual maintaining said account. Lots of places for this fund to break down due to negligence or malevolence.
By using Ethereum, this fund can work by reducing the trust required for it to function. Ethereum is a decentralized application platform, a so-called distributed “world computer”, using p2p blockchain technology to run programs that run exactly as programmed without any downtime or 3rd-party interference.
Developers can create transparent code, submit it to Ethereum, upon which the code doesn’t heed its creators anymore. One can build everything from decentralized markets, to decentralized virtual worlds. One of the simpler use cases is worldwide money management without needing to trust any particular institution: only the code.
Thus, one gets several benefits to such a global fund that wasn’t possible before:
- It can’t be shut down.
- There’s no person or entity that can interfere (cooking the books or running away with any money).
- Creation of transparent & audit-able ownership in a supranational context.
This is why it is unprecedented.
- A global fund running only on code without any reliance on jurisdictional support.
- A global fund where no one can cook the books or defraud someone.
- A global fund where anyone can become a part of it.
Is a global fund a good idea?
Even though it is unprecedented, by this point you might wonder whether it is a good idea in itself? When you look currently at fund management, you rely on the decision-makers of the fund to make a return. I don’t know who my fellow decision-makers are in TheDAO, only that it is the proverbial “crowd”. A diverse set of stakeholders might make it resilient and result in a good return, but perhaps the future consists perhaps more of thinner funds, focused on accepting and funding proposals that are more in line with a common goal. Currently TheDAOs common goal is: “Make money”. Perhaps it makes more sense to have global funds where a common goal in investing is: “Make money by investing in green tech”, for example.
The beauty of the current setup of TheDAO is that it can split off… Through this mechanism one can get one’s Ether out, or split it into more thinner funds with more specific goals. The technical functioning of how the proposals, voting, splitting, etc works, I suggest reading the wiki.
At the end of the day, we’re busy seeing a grand unprecedented experiment. Ethereum isn’t even 1 year old yet, powering a global fund with funds over $20m. It all might collapse. Ethereum might break, the code itself is faulty or someone tries to sue TheDAO for some reason. But, hot damn, so far it is all working. We’re in for a crazy ride.