DAO - It’s 3 Letters for a Reason


DAO - It’s 3 Letters for a Reason

DAO - It’s 3 Letters for a Reason

“Decentralized Autonomous Organization” is a phrase that can be defined

A decentralized autonomous organization (DAO), sometimes labeled a decentralized autonomous corporation (DAC), is an organization that is run through rules encoded as computer programs called smart contracts.[1][2]:229 A DAO's financial transaction record and program rules are maintained on a blockchain.[2]:229[3][4] The precise legal status of this type of business organization is unclear.[5]
Wikipedia https://en.wikipedia.org/wiki/Decentralized_autonomous_organization

So although the phrase can be defined, to put a little more meaning behind this occasional buzzword. Lets look at the Three words used and why.

Decentralized
This word is first for a reason.  Decentralized simply means no one entity is in control, however there are limitless ways one could go about attempting to make something “decentralized” Even the definition of Decentralized on Wikipedia attempts to encompass the diverse number of ways the word can be used.

“Decentralization is the process of distributing or dispersing functions, powers, people or things away from a central location or authority.[1][2] While centralization, especially in the governmental sphere, is widely studied and practiced, there is no common definition or understanding of decentralization. The meaning of decentralization may vary in part because of the different ways it is applied.[3] Concepts of decentralization have been applied to group dynamics and management science in private businesses and organizations, political science, law and public administration, economics and technology.”
Wikipedia https://en.wikipedia.org/wiki/Decentralization

In the sense of a DAO in regards to the blockchain.  Decentralized can first and foremost be applied to the fact that a blockchain itself is decentralized.  The DAO simply by using Blockchain is going to have a decentralized ledger.  We believe a true DAO has to make an effort to transcend that level of decentralization. And also meet the criteria of not being owned. A minimum standard could be the way Bitcoin and Ethereum are not owned and issued by a company or individual.

Autonomous
Autonomous may be the most impressive feature of a DAO.  It is essentially about having the foresight to predict any possible future situation and prepare for it.  Wikipedia defines Autonomy as

“In moral, political, and bioethical philosophy, autonomy[1] is the capacity to make an informed, un-coerced decision. Autonomous organizations or institutions are independent or self-governing.”
wikipedia

This is also my favorite feature of a DAO.  It is able to make its own decisions.  A DAO is a democracy. In regards to blockchain a DAO is capable of defining its own needs and then distributing smart contracts to fulfill its needs. Many tokens and ICOs being released today are owned by one company, individual, or team.  They are structured so that they are in charge and they set the rules.  A DAO, in contrast, is an idea developed by those who will use it. The people who want the product or service. A DAO is much more appealing. By creating smart contracts for the individual job description related to running and maintaining a DAO, a DAO can remain autonomous but also remain capable of acting in its own best interest through established protocols.

A DAO must establish a means of existence without interruption to maintain “autonomy”. An organization cannot remain truly autonomous if a single person, entity or government has the ability to shut it down.  A myriad of strategies have been attempted to establish this level of indolence from traditional systems and structures.  Decentralization actually helps with this blockchain example as the ledger and the community’s team and elected board are scattered across the globe.  However a DAO must also have a quality platform and established governance mechanisms to protect itself. And it also must maintain the right to change itself if necessary.

Organization
Because of the reliance on code and blockchain smart contracts sometimes this word is lost in the mix.  A DAO is an organization, let’s not look at it as an assignment of smart contracts to computer nodes. But rather a group of people, who are part of a respectable organization, who require competent individuals to perform the day to day operations requirement of their organization.  There DAO manages a blockchain. It must be set up and improved. There must be network security updates. There will be a need for lawyers and accountants.  A board of advisors and funds for their respective teams must be established. Administrative tasks will need to be performed.

A country doesn’t operate under the premise that because a person can vote for a law they are automatically police officers.  A company does not grant people an office just because they are a shareholder.  A DAO must not simply use tallied voting mechanisms to run with no human interaction.  It must be a community, who elects a board, who hire a team.  This team can be governed by smart contracts and compensated fairly via a small percentage of the organization’s revenue. Even as a small percentage if a DAO grows then that percentage will grow with it, increasing the size of the funds for things like security, management, programming, etc.

Examples
There are many different examples of DAOs in the past and each one is a unique attempt at achieving an organization that functions in the manor described above. We want to study some of them as use and example cases.

“Examples of this business model are Dash governance and Digix.io.[6] A well-known example, intended for venture capital funding, was The DAO, which launched with $150 million in crowdfunding in June 2016, and was immediately hacked and drained of US$50 million in cryptocurrency.[7] This hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. This decentralized bailout was made possible by a majority vote of the blockchain's hash rate.”
Wikipedia https://en.wikipedia.org/wiki/Decentralized_autonomous_organization

Dash
Dash is a popular example of a decentralized cryptocurrency i.e. a blockchain token that is intended to be traded as cash. Their team structure method embraces the aspects of a DAO.

“The Dash Core Team, responsible for developing the currency, has since grown to 30 full-time employees, 20 part-time employees, and dozens of unpaid volunteers.[9] All Core Team employees are paid from Dash's budget system and therefore are not reliant on donations or sponsorships that can lead to conflicts of interest.”
wikipedia https://en.wikipedia.org/wiki/Dash_(cryptocurrency)

This is a good example of a team using there budget wisely to hire a competent team to diligently meet the needs of the DASH cryptocurrency holders worldwide.

The DAO
The DAO was a noble but failed attempt that must be studied for successful future DAOs to learn from.

The DAO was a digital decentralized autonomous organization,[5] and a form of investor-directed venture capital fund.[6] The DAO had an objective to provide a new decentralized business model for organizing both commercial and non-profit enterprises.[7][8] It was instantiated on the Ethereum blockchain, and had no conventional management structure or board of directors.[7] The code of the DAO is open-source.[9]
The DAO was stateless, and not tied to any particular nation state. As a result, many questions of how government regulators would deal with a stateless fund were yet to be dealt with.[10]
The DAO was crowdfunded via a token sale in May 2016. It set the record for the largest crowdfunding campaign in history.[6]
In June 2016, users exploited a vulnerability in the DAO code to enable them to siphon off one third of The DAO's funds to a subsidiary account.

Wikipedia https://en.wikipedia.org/wiki/The_DAO_(organization)

The DAO was a good concept, it actually attracted a lot of interest at its launch. It automatically took the contributed Ethereum and contributed it into other altcoins and blockchain projects based on the popular vote of The DAO stakeholders.  It was programmed by highly skilled Ethereum programmers and released.  However a method to overdraw from the fund was exploited by a hacker and the fund was abolished with the investors original tokens returned.

The problem with the DAO was technically a small coding issue that some other blockchain funds have had similar issues with.  The bigger problem was that “The DAO” was lacking the third aspect of a DAO. The organization.  When the code was released they were confident enough in it that means and methods were not set up for people to work on behalf of the fund and care for it.  The fund gained a lot of value and was subject to a hack.  They were able to salvage their investment at the end, which is important but a noble cause was lost and even set back because of this unfortunate situation.  

Conclusion
A DAO should establish as a minimum the basic elements and funding a similar entity in the non-blockchain based world may have to maintain itself.  By setting up the DAO with all the key elements of a similar non-decentralized structure they can protect themselves from vulnerabilities.

The key takeaway to this is no matter how good the decentralized and autonomous aspects of a fund or token may be. Without an organization that is elected and accountable as well as scalable and prepared a DAO is susceptible because an organization run strictly by code also has a fail point for maintaining its autonomy “the code itself”

-JT