One of the most significant developments in blockchain technology and smart contracts has been the origination of a game-changing concept in corporate structure; the DAO. In this context, I am not referring to The Genesis DAO, also known as The DAO, although I will turn to this subject later. The lessons the market learned from the collapse of The DAO were significant.
The DAO is no longer an organization but a type of organization that offers redress to challenges common in executive-led corporations, where the well-being of stakeholders (including stockholders) is in the hands of a small group of people, even one person. The corporation hospices and mortuaries are replete with dead, dying, or severely diminished companies, led to their demise by a combination of incompetent, intransigent, and opaque leadership. If this is a disease, then the DAO may be the mythical red pill that can cure this. Before I get to Lepricon’s implementation of a DAO structure, here is a primer on the origins of DAOs because it is not a widely understood concept.
What is a DAO?
Suppose a traditional corporation is executive-led, with decisions taken at the top in boardrooms with frosted glass windows. In that case, a DAO is the exact opposite of everything that statement implies. DAO is an acronym for Decentralised Autonomous Organisation:
- Decentralized because it is not executive-led but governed by its actual stakeholders or community, including its investors, customers, and employees.
- Autonomous because the rules are set in computer code in the form of smart contracts, immutable without consent, and transparent for all to see.
- Organization because, well, it’s an organization.
And yes, the irony of using the red pill analogy where the machines are the arbiters of the truth is not lost on me!
There are some significant advantages to this type of structure, namely:
- It promises genuine transparent and democratic governance to the organization’s real stakeholders, identified by their holding of the entity’s governance token.
- It is highly efficient as smart contracts take on the heavy lifting, handling new data with complete neutrality.
- It is economically advantageous as the smart contract reduces the need for human administration and facilities.
However, there are challenges in the real world, and I offer three in particular that we have focused on at Lepricon as we chart our progress to becoming a DAO.
- Governments do not recognize DAOs as legal entities that can employ people or submit information about their salaries for tax purposes.
- Sometimes decisions require specific executive skills and experience, and the stakeholder pool might not collectively appreciate the full context and ramifications of the choices presented to them.
- Security is paramount. If a malicious actor can find a profitable vulnerability in the smart contracts, the outcome could be catastrophic. It is here that I will return to the story of The Dao.
A Cautionary Tale
As it was formally known, the Genesis DAO, or The DAO, was a venture capital enterprise that raised its money by offering a token sale in return for Ether. This “Creation Event” turned out to be the largest ever crowdfunding event in history at that time. Created as a smart contract on Ethereum, the basic premise was that token holders could nominate and vote on projects that would receive funding. Those holders that backed the right horse received awards for their foresight.
It was symbolic of the revolution promised by the advent of blockchain technology.
Then it went very wrong.
In the summer of 2016, a hacker found a simple error in the smart contract. When requesting a payment, the system would first send the ETH and then update the blockchain’s ledger. This order of events offered a time window allowing recursive calls for the same payment before software updated the record. The hacker siphoned Ether to the value of about US$70 million before stopping the attack. Unbelievably, the hacker never made off with the money because he transferred the proceeds into an account with a month-long holding period.
The fallout was monumental. It caused a hard fork in Ethereum because the community split between those who wanted to roll back the ledger to effectively recover the loss from the holding account and those that believed that any interference in the blockchain broke the fundamental promise of a blockchain ledger. The latter group went on to create Ethereum Classic.
The DAO’s token was delisted across all the major exchanges, effectively destroying the organization.
Out of the Ashes
That was 2016. Now it is almost 2021. Things have changed.
There are already a host of companies that have implemented DAO structures within their operations. For example:
- DashDAO, originally a fork of Bitcoin, implemented a DAO on top of its blockchain layer where 10% of block rewards go into a development pool. Holders of Dash can create a funding proposal for an up or down community vote.
- Polkadot, which connects data and transactions across chains, has moved all its decisions about future development on-chain. The stakeholders vote on protocol developments. Even a decision to hard-fork would be a democratic one.
- Mantra DAO, a community-governed decentralized finance platform for staking and lending, has an open proposal system for its members, a scan of which reveals requests for everything from protocol changes to where a button should sit on the page. It’s completely transparent and public. Click to see.
I will conclude this section with an analogy straight from my geek id. When NASA started making rockets, they blew up on the pad. Then they blew up in the air, progressively achieving greater altitudes, until finally, much to everyone’s surprise, they blew up so infrequently it seemed a good idea to put a man on the top of them.
The point is, the DAO is a good idea and represents the sort of step-change promised by the modern digital world. That it takes several iterations to learn how to do it well is to be expected.
Lepricon will be a DAO. Today, it is not. It is a start-up, raising funds through a token sale, led by an executive team of founders, senior staff, and advisors. Concurrently, we are finishing off the platform’s build-out, wallet, and the initial tranche of games that will accompany the launch.
We plan to transition to a DAO in thirty months from launch. The executive team will become a foundation run by an executive council, starting with three members and growing to a maximum of seven. When the transition is complete, platform participants, identified by their holding of our operating token, L3P, will be able to propose future changes to the platform and examine proposals for software development grants from third-party developers. All of these decisions will be in the hands of the Lepricon community.
Earlier in the article, I bought up some challenges that we must face as a DAO:
It is no surprise that this is the question we are asked most frequently on our AMAs! All our smart contracts are pre-audited by the developers and will always be. A licensed custodian holds all funds on trust, and we will implement protocols to weed out fake projects should they be proposed to the community. We will have an open two-way communications channel with the community on all of these issues and a mechanism by which community participants can raise the alarm should they need to.
Upon completion of the soft cap round of financing, we will establish a limited company as the operating vehicle. This company will enable us to pay staff, rent an office, enter contracts, and pay for necessary services such as agencies and developers. Until the world catches up with us, we need an interface to connect with it.
As mentioned above, Lepricon will establish a foundation to act as proxies for the community to carry out their wishes once the community decides on a given issue. The Council will be responsible for providing context and clarity for proposed decisions put to the community. L3P participants will make decisions. The Council’s purpose is to ensure those decisions are made based upon a clear statement of facts and are in Lepricon’s best interests.
I believe passionately in participation power and how it will propel Lepricon forward. When I wrote about my experience in the gaming industry, I noted that I was inspired twenty years ago by the community’s impact on my first massively multiplayer game, Shadowbane, where the players were the ones dictating the progress of an entire virtual world. Twenty years later, Lepricon will do the same for all the players in our world.
A community-driven and player-owned economy is a DAO.
Founder & CEO, Lepricon