Research on Decentralized Autonomous Organizations (DAO)
What is it and why is it an Innovation?
A vending machine that not only takes money from you and gives you a snack in return but also uses that money to automatically re-order the goods. This machine also orders cleaning services and pays its rent all by itself. Moreover, as you put money into that machine, you and its other users have a say in what snacks it will order and how often should it be cleaned. It has no managers, all of those processes were pre-written into code.
This is, roughly, how a DAO or a Decentralized Autonomous Organization, works. The idea of such a management model has been circulating in the cryptocurrency community ever since Bitcoin managed to get rid of middlemen in financial transactions. Similarly, the main idea behind DAO is establishing a company or an organization that can fully function without hierarchical management.
It is essential to draw a distinction between DAO as a type of organization and The DAO, which is merely the name of one of such organizations. The project was one of the first attempts at creating a DAO and it failed spectacularly due to a mistake in its initial code.
Well-known DAOs
Essentially, any autonomous organization with a decentralized governance and budgeting system can be called a DAO. This makes practically every decentralized cryptocurrency network a DAO, especially considering the initial crowdfunding period the precedes the official launch. Below is a shortlist of some of the most well-known DAOs.
● MakerDAO — Debatably the largest and most established DAO in the space, MakerDAO encompasses both the core team behind Maker (the project that created the Dai stablecoin) along with the community of individuals that participate in governance polls with the governance dashboard.
● UniDAO — UNIDAO is set of community driven decentralized organizations aiming to create a vehicle of collective investment, leveraging DeFi ecosystem. Each DAO from UNIDAO set has its unique properties to suit contributors with different risk profiles.
● MolochDAO — MolochDAO is a decentralized autonomous organization (DAO) created to fund Ethereum 2.0 grants. It was designed as a minimum viable DAO and uses simple smart contract functions to reduce the potential attack surface. These smart contracts have been forked to develop numerous other DAOs such as MetaCartel Ventures and Marketing DAO.
● Gitcoin — Gitcoin is a platform used to source blockchain developers, similar to UpWork but specifically focused on blockchain.
● MetaCartel — MetaCartel was created as a fork of MolochDAO, focusing on dApp funding to leverage shared product data and user insight. In this sense, members of MetaCartel theoretically receive upside in the form of valuable information gained from any products or companies the DAO has funded.
● Dash — An open-source, peer-to-peer cryptocurrency, which offers instant payments and private transactions.
● Digix Global — The gold standard in peer-to-peer digital assets. Each Digix Gold token represents 1 gram of LMBA standard gold and is secured in Safehouse vaults.
● BitShares — A decentralized cryptocurrency exchange, which markets itself as a fast and fluid trading platform, providing the freedom of cryptocurrency combined with the stability of the dollar.
● Aragon — Aragon allows you to create global, bureaucracy-free companies and freely organize and collaborate without borders or intermediaries.
● Colony — Colony is a suite of smart contracts, providing a general-purpose framework for the essential functions organizations require, such as ownership, structure, authority, and financial management.
● DAOStack — DAOStack is an open-source project advancing the technology and adoption of decentralized governance.
● DXdao — The DXdao is a decentralized organization that develops, governs and grows DeFi protocols and products, owned and operated by the community.
● Daohaus — Daohaus is a DAO Explorer with an interface enabling joining existing DAOs, as well as creating a new Moloch-like DAOs.
● PieDAO — The PieDAO is a decentralized organization dedicated to bringing market accessibility and economic empowerment through Pie Protocol.
● Snapshot — Snapshot is an off-chain, gasless, multi-governance community polling dashboard.
Jurisdictions used
● Aragon. Aragon Association — the legal steward of the Aragon project. The Aragon Association is a non-profit entity based in Switzerland. It is the legal steward of the Aragon project and is responsible for managing the funds raised in the Aragon Network Token sale.
● Gitcoin. ConsenSys AG Gitcoin is presumably a Switzerland entity. The applicable law when interacting with a resource is the law of the United States.
● Dash. The Dash Trust was established in New Zealand, which was selected for its strong reputation and well-defined trust laws.
● Digix Global. DigixGlobal Pte. Ltd. Singapore Private Limited Company.
● BitShares. Echo Industries GmbH, Munich, Germany.
Governance and Role of Tokens
Initially, Bitcoin was considered to be the first-ever fully-functional DAO, as it has a pre-programmed set of rules, functions autonomously and is coordinated through a distributed consensus protocol. Since then, the use of smart contracts was enabled on the Ethereum platform, which brought the creation of DAOs closer to the general public and shaped their current look.
But what does a DAO need to be fully operational? First of all, a set of rules according to which it will operate. Those rules are encoded as a smart contract, which is essentially a computer program, that autonomously exists on the Internet, but at the same time, it needs people to perform tasks that it can’t do by itself.
Once the rules are established, a DAO enters a funding phase. This is a very important part for two reasons. Firstly, a DAO has to have some kind of internal property, tokens that can be spent by the organization or used to reward certain activities within it. Secondly, by investing in a DAO, users get voting rights and subsequently the ability to influence the way it operates.
After the funding period is over and a DAO is deployed, it becomes fully autonomous and completely independent from its creators as well as anyone else for that matter. They’re open-source, which means their code can be viewed by anyone. Moreover, all of the rules and financial transactions are recorded in the Blockchain. This makes DAOs fully transparent, immutable and incorruptible.
Once a DAO is operational, all the decisions on where and how to spend its funds are made by reaching a consensus. Everyone who bought a stake in a DAO can make proposals regarding its future. In order to prevent the network from being spammed with proposals, a monetary deposit could be required to make one.
Subsequently, the stakeholders vote on the proposal. In order to perform any action, the majority needs to agree on doing so. The percentage required to reach that majority can vary depending on a DAO, as it can be specified in its code.
Essentially, DAOs enable people to exchange their funds with anyone in the world. This can be done in the form of an investment, a charitable donation, money raising, borrowing and so on, all without an intermediary. One potentially major problem with the voting system is that even if a security hole was spotted in an initial code, it can’t be corrected until the majority votes on it. While the voting takes place, said hackers can exploit a bug in the code.
Finally, it is important to note that a DAO isn’t capable of building a product, writing a code or developing a piece of hardware. Instead, a contractor can be hired to perform a required task. This appointment is done through the same voting process, while a smart contract will ensure a swift payment upon the correct completion of the task.
What is Dapp?
Dapps, or Decentralized Applications, are essentially unstoppable apps, which work on the Ethereum Blockchain and are powered by smart contracts. The main difference from ordinary apps is that Dapps are fully autonomous, they don’t require a middleman to operate and basically immune to censorship. In other words, they establish a direct connection between a user and a service. Through that, users can fully control the information and data they share.
DAOs are basically a very ambitious breed of decentralized apps. As described in the Ethereum white paper, they fall into the ‘other’ category, which includes voting and governance systems. The two other types of Dapps are money managing applications and apps where the money is involved, but they also require another piece (insurance, charity, property, etc.).
Legal framework
Lawmakers in very few jurisdictions had the foresight to introduce legislation that integrates new forms of companies running on blockchain technology.
Monaco has attempted to deal with many aspects of blockchain technology by introducing a pioneering bill in December 2017. One innovative aspect is that Art. 2 of the draft bill defines a smart contract and recognizes its legally binding effect. The draft bill goes even further by introducing in its Art. 3 the concept of an “enterprise algorithmique” (i.e., algorithmic company). This new form of company is defined as the operation by which one or more smart contracts, acting for a specific purpose for the benefit of one or more beneficiaries, emit, receive or transfer assets, property, rights or securities, or a set thereof, present or future, to the third parties206. Art. 5 of the draft bill also deals with matters of private international law by defining connecting criteria for the application of Monegasque law and for granting jurisdiction of Monegasque courts. As a result, the bill pushes for the recognition of DAOs running on the blockchain that are connected in some ways to the Monegasque jurisdiction. However, it does not grant such an organizations legal personality and does not deal with questions of governance, nor the rights and obligations of participants.
Malta has been more effective than Monaco by actually accepting three bills on blockchain and cryptocurrency on 4 July 2018. Those bills set up a regulatory framework applicable to the blockchain environment and are collectively referred to as “The Digital Innovation Framework”. The first Maltese bill, referred to as the Innovative Technology Arrangements and Services Act (ITAS), regulates entities running on DLT (i.e., DAOs). The second bill, referred to as the Virtual Financial Assets Act (VFA), regulates cryptocurrency exchange platforms, provides a legal framework for ICOs and sets guidelines on how they must be conducted and licensed. The third bill referred to as the Malta Digital Innovation Authority Act (MDI), establishes a supervisory authority for the aforementioned activities.
The ITAS bill introduces the legal concepts of Innovative Technology Arrangements (ITAs), which are defined in the first schedule of the bill as “software and architectures which are used in designing and delivering DLT which ordinarily, but not necessarily: (a) uses a distributed, decentralized, shared and, or replicated ledger; (b) may be public or private or hybrids thereof; © is permissioned or permissionless or hybrids thereof; (d) is immutable; (e) is protected with cryptography; and (f) is auditable”. Smart contracts as well as DAOs fall within the definition of an ITA. In addition to the definition, the bill deals with the recognition (part II of the bill) and the certification (part III of the bill) of ITAs and requires the registration of a service provider (part IV of the bill) to run an ITA. Instead of granting ITAs legal personality, the Maltese legislator created a legal link between an ITA and a person.
More recently, the U.S. state of Vermont introduced an act that was signed into law on 28 August 2018, which adds a new form of company to its legal order: the Blockchain-Based Limited Liability Company **(BBLLC). A BBLLC can be described as a DAO incorporated as a Limited Liability Company (LLC) in Vermont’s jurisdiction. This act allows a DAO to validly enter contractual agreements and protect its “owners, managers and blockchain participants from unwarranted liability”. Hence, the BBLLC is part of Title 11, Chapter 25 of the Vermont Statutes Annotated (V.S.A), which deals specifically with LLCs. As such, general provisions related to LLCs apply to BBLLCs (11 V.S.A. § 4176). The key innovation in this act is that the governance of a company can be fully or partially provided through blockchain technology (11 V.S.A. § 4173, par. 1). The act also recognizes the use of blockchain-based smart contracts for carrying out votes regarding the operation and activities of a BBLLC (11 V.S.A. § 4173, par. 2, let. c). The state of Vermont has already seen its first BBLLC incorporated as the dOrg LLC. The BBLLC dOrg is believed to be the “first legal entity that directly references blockchain code as its source of governance”. By incorporating BBLLCs into its legal order, the state of Vermont has offered blockchain actors “an enforceable legal framework to create custom governance and organizational structures that fit their unique technology and circumstances”.
These two first DAO legislations call for the following observations. The Maltese ITA’s administrative burden appears overly complicated and too much responsibility is put on the ITS provider, which is contrary to the spirit of DAOs early adopters. However, the ITAS bill has solved a great legal challenge by recognizing blockchain-based entities. Amendments to the bill could, for example, grant ITAs legal personality and reduce the responsibility of the ITS providers. The Vermont BBLLC, while enabling the dematerialization of many aspects of a company, keeps at its very core the structure of an LLC. This can be reassuring for some and not innovative enough for others. The key takeaway of this legal structure is that a BBLLC is a blockchain-based entity that has legal personality, which benefits both investors and third parties.
The Maltese ITA is vividly criticized by entrepreneurs. As for the Vermont BBLLC, it is well received within the blockchain community. It is important to underscore that it is too soon to assess whether or not the two aforementioned models of DAO legislations can be considered a success. In any case, they have the merit of trying to embrace the technological revolution of blockchain for the benefit of entrepreneurship and are therefore groundbreaking.
Advantages of DAOs
Undeniably, the very concept of DAOs is extremely exciting, as it strives to solve everything that’s wrong with how modern-day organizations are run. A perfectly structured DAO gives every investor an opportunity to shape the organization. There’s no hierarchical structure, which means every innovative idea can be put forward by anyone and considered by the entire organization. A set of pre-written rules that every investor is aware of before joining the organization as well as the voting system leave no room for quarreling whatsoever.
Moreover, as both putting a proposal forward and voting for it requires an investor to spend a certain amount of money, it pushes them to evaluate their decisions and not waste time on ineffective solutions. Finally, as all the rules, as well as every single financial transaction, are recorded in the Blockchain, available for review to anyone, DAOs are completely transparent. Everyone taking part helps decide on how to spend the funds and they can track how those funds are spent.
Disadvantages and critique
DAOs, just like pretty much everything else connected to cryptocurrencies, are an extremely new and, to some extent, a revolutionary technology. Naturally, projects like these will attract a lot of criticism. For instance, MIT Technology Review considers the idea of entrusting the masses with important financial decisions a bad one and the one that isn’t likely to yield any returns. In their article, they say that much in the world will have to change for the DAO-related projects to succeed on any scale.
Apart from quite a conservative sentiment that masses can’t be entrusted with investments, there are other concerns surrounding DAOs. The most urgent problem, especially after The DAO hack, is a security problem and it is connected with the ‘unstoppable code’ principle. During the attack, observers and investors watched helplessly as the funds were siphoned out of The DAO, but couldn’t do anything, as the attacker was technically following the rules. Of course, such attacks can be avoided if the code is well-composed and bug-free.
Finally, in order for startups that operate as DAOs to be able to conduct business outside of a Blockchain network and communicate with a physical world of financial instruments and intellectual property, there needs to be some kind of a legal framework. Legal uncertainty is an issue that has been plaguing the world of cryptocurrencies due to the technology within it is so new and radically different, but the solution seems to be just a matter of time.
Sources:
· https://cointelegraph.com/ethereum-for-beginners/what-is-dao
· https://defirate.com/top-daos/
· https://medium.com/@OpenLawOfficial/the-era-of-legally-compliant-daos-491edf88fed0
· https://blockchainhub.net/dao-decentralized-autonomous-organization/
Disclaimer
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