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. A DAO's financial transaction record and program rules are maintained on a blockchain. There are several examples of this business model. The precise legal status of this type of business organization is unclear.
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The best-known example was The DAO, a DAO for venture capital funding, which was launched with $150 million in crowdfunding in June 2016 and was immediately hacked and drained of US$50 million in cryptocurrency.
Background
Decentralized autonomous organizations have been seen by some as difficult to describe. Nevertheless, the conceptual essence of a decentralized autonomous organization has been typified as the ability of blockchain technology to provide a secure digital ledger that tracks financial interactions across the internet, hardened against forgery by trusted timestamping and by dissemination of a distributed database. This approach eliminates the need to involve a bilaterally accepted trusted third party in a financial transaction, thus simplifying the sequence. The costs of a blockchain enabled transaction and of making available the associated data may be substantially lessened by the elimination of both the trusted third party and of the need for repetitious recording of contract exchanges in different records: for example, the blockchain data could in principle, if regulatory structures permitted, replace public documents such as deeds and titles. In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.
Buterin proposed that after a DAO was launched, it might be organized to run without human managerial interactivity, provided the smart contracts were supported by a Turing complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling DAOs. Decentralized autonomous organizations aim to be open platforms where individuals control their identities and their personal data.
Examples
Examples of DAOs are Dash, The DAO and Digix.io. A value token called DigixDAO finished its crowdfunding campaign and the token began trading on exchanges on 28 April 2016.
Social
Shareholder participation in DAOs can be problematic. For example, BitShares has seen a lack of voting participation, because it takes time and energy to consider proposals.
Legal liability
The precise legal status of this type of business organization is unclear; some similar approaches have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. Although unclear, a DAO may functionally be a corporation without legal status as a corporation: a general partnership. This means potentially unlimited legal liability for participants, even if the smart contract code or the DAO's promoters say otherwise. Known participants, or those at the interface between a DAO and regulated financial systems, may be targets for regulatory enforcement or civil actions.
Security
The code of a given DAO will be difficult to alter once the system is up and running, including bug fixes that would be trivial in centralised code. Corrections for a DAO would require writing new code and agreement to migrate all the funds. Although the code is visible to all, it is hard to repair, thus leaving known security holes open to exploitation unless a moratorium is called to enable bug fixing.
In 2016, a specific DAO, The DAO, set a record for the largest crowdfunding campaign to date. However, researchers pointed out multiple issues in the code of The DAO. The operational procedure for The DAO allows investors to withdraw at will any money that has not yet been committed to a project; the funds could thus deplete quickly. Although safeguards aim to prevent gaming the voting of shareholders to win investments, there were a "number of security vulnerabilities". These enabled an attempted large withdrawal of funds from The DAO that was initiated in mid-June 2016. However, after much debate, on the 20th July 2016, the Ethereum community arrived at a consensus decision to hard fork the Ethereum blockchain to bailout the original contract.