DAO (organization)

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DAO
The-DAO-logo.png
Founded 2016
Headquarters Berlin, Germany
Key People Christoph Jentzsch, Simon Jentzsch, and Stephan Tual
Products Virtual Venture Capital Fund
Website defunct


The DAO was a revolutionary decentralized venture capital fund from which $50 million worth of cryptocurrency was stolen during its start-up phase. It was dissolved not long after the theft.

Background

DAO stands for "decentralized autonomous organization" as set forth in a March 2016 white paper written by Christoph Jentsch, the driving force behind the DAO. The point of a DAO is to automate decision making in an investment fund. The fund is created by individuals paying in ether and receiving a proportionate number of DAO tokens. The DAO holders can propose to use some of the ether to fund projects that employ smart contracts on Ethereum, the ether platform. DAO holders vote to approve or disapprove an individual project and share in the revenues generated by successful projects. The white paper is general, meant to apply to any venture capital decentralized autonomous organization[1] The DAO was launched with a creation stage which entailed collecting investments in DAO tokens purchased with ether starting on April 30, 2016 and ending on May 28, 2016, a self imposed deadline. The DAO raised $160 million worth of ether.[2]

Structure

Christoph Jentsch, along with the other key founders of the DAO, was associated with a German blockchain consultancy and ethereum developer named Slock.it. The DAO was legally and operationally separate from Slock.it, although Slock.it staff continued to provide the core support for development of the DAO.

The DAO required investors to deposit ether with it, for which they received DAO tokens in proportion to their ether contribution. All decision making was based on the number of DAO tokens voted in favor of and against a proposition. Ether was necessary because of its usefulness in smart contracts; all projects to be funded by the DAO were to be based on smart contracts. Although the term "autonomous" appears in the name of DAO, acceptance and rejection of investment proposals was to be determined by the voting of the individuals and entities that held DAO tokens rather than according to rules. The use of the term autonomy refers to the fact that actual voting would be run through smart contracts on the platform and not administered by managers. In fact, the only guidance to the DAO's operations was to be provided by a group of curators who would advise on proposals and monitor ongoing projects for adherence to the contracts. Proposals for both contracts and distributions of earnings would be voted up or down based on the majority view of individual voters in proportion to their DAO holdings. With no administration, the DAO consequently was truly decentralized. Furthermore, the DAO's funds - in the form of ether - were held in a public Ethereum wallet where their use, inflows and outflows could be monitored.[3]

Toward the end of the offering period for the DAO, concerns were raised about the security of the ether funds, including a May 27, 2016 joint report by several computer scientists.[4] According to the U.S. Securities and Exchange Commission's report on the DAO operations and failure, Slock.it proposed a moratorium on software development while vulnerabilities in the DAO code were addressed and recommended the appointment of a security expert.[5]

Theft and Recovery

The alarms about security were raised none too soon because on June 17 DAO 3.6 million ether were drained from the public ether wallet. The stolen ether was about a third of the total invested funds and had a value of about $55 million. The attacker exploited a loophole in the code to divert ether into an identical wallet. The DAO code, however, froze the funds for 27 days.[6]

During the 27 days, the DAO founders approached the decentralized Ethereum community and convinced it to "hard fork" the currency. The hard fork was very controversial among ether holders because it seemed to violate the concept of immutability of transactions. The community voted in favor of the hard fork, which made the stolen ether mostly obsolete.[7] The hard forking helped restore the value of the outstanding ether by deleting the 3.4 million from the total outstanding of the cryptocurrency. After the hard fork, the ether that was not converted became known as ether classic (ETC). While the identity of the attacker is not publicly known, the attacker reportedly has converted some holdings into bitcoin.[8]

U.S. Securities and Exchange Commission Report

On July 17, 2017, the U.S. Securities and Exchange Commission published its investigative report without bringing enforcement action against any involved parties. The report provides a thorough description of the establishment and organization of the DAO and notes that by doing business with U.S. residents the DAO likely violated the federal securities laws. It found that the DAO tokens would be securities under the Howey test and that they should have been registered and offered pursuant to the Commission's regulations unless they were eligible for exemption. In addition, the Commission indicated that platforms where the DAO tokens were traded probably should have been registered as securities exchanges or other regulated facilities unless there were relevant exemptions available.[9]

References