The Decentralized Autonomous Organization (DAO) operates similarly to a venture capital firm, selecting innovative ideas and businesses for investment. However, unlike traditional companies typically led by affluent individuals in Silicon Valley, the DAO functions through a network of machines governed by principles similar to those of the bitcoin digital currency. When individuals contribute funds to the DAO, these machines enable them to vote on which projects the organization should support. Greater financial contributions result in a higher voting power.
By the investment deadline last month, approximately 10,000 anonymous individuals had collectively invested over $168 million into this pioneering online initiative, marking it as the largest crowdfunded project to date. The next step for the DAO involves accepting project proposals for evaluation and voting, introducing a fresh form of democratic engagement to the established framework of capitalism that has facilitated much of today’s technology.
However, there is a challenge: all current proposals revolve around modifying the DAO itself. Just hours before the investment cut-off, a group of computer scientists identified fundamental issues within the DAO, both concerning security and participant honesty in voting. They have proposed a pause on new project pitches while the community reviews these concerns and determines possible solutions.
Even critics acknowledge that the DAO presents an exciting concept—offering an alternative to entrenched networks that often shape not just venture capital but many corporate structures. Nevertheless, as with several innovations stemming from the decentralized nature of bitcoin, the DAO is still evolving and remains a project managed by a closed community that is distant from realizing transformative potential. “The DAO symbolizes a vision and ambition,” notes Emin Gün Sirer, a researcher focused on self-organizing systems, including cryptocurrencies and the ‘smart contracts’ that form the backbone of the DAO. He is also a co-author of a paper addressing its vulnerabilities. “The crucial question is whether it can live up to that vision.”
Adopting a novel approach to building companies carries inherent risks, but few anticipated the DAO’s capacity to garner $168 million. “The process was poorly executed and rushed,” remarks Patrick Murck, a lawyer associated with the Berkman Center for Internet & Society at Harvard University. “That’s regrettable, as the underlying concept has considerable merit.”
### Structure of the DAO
The DAO is built on Ethereum, a platform presented as an enhanced iteration of bitcoin. Many leading figures within the Ethereum community are actively engaged in the DAO, including some curators who determine which proposals advance to community voting. It is also developed by Slock.it, a European company aiming to fund a separate initiative linked to Ethereum and the ‘Internet of Things’. The first genuine proposal to be presented to the DAO will originate from Slock.it.
However, the community must first address existing issues. Sirer emphasizes that the DAO’s primary shortcoming is its lack of encouragement for fair voting on new proposals. When a project is considered—requesting a certain amount of funding with an expected return for contributors—community members can vote yes, no, or choose to abstain. The weight of their votes correlates with the amounts they’ve invested. The complication arises because voting on a proposal locks up the funds a participant has invested in the DAO—even if they vote against it. This restricts withdrawal during the voting period, meaning individuals who doubt a project may prefer to abstain rather than cast a negative vote.
Consequently, this structure tilts the balance in favor of project approval, creating a potential bias towards funding. Sirer points out, “This biases the system towards financing, rendering the DAO a risky entity.”
Currently, Vlad Zamfir, a co-author of Sirer’s paper and a notable member of the Ethereum community, is advocating for a temporary halt in the project’s proposal evaluation. Zamfir, one of the curators, has called for a pause on whitelisting new proposals until the DAO’s creators resolve its critical flaws. Yet, rectifying the DAO’s issues must be equally democratic, and consensus-building can be chaotic.
### Challenges of Democratic Governance
Similar to bitcoin, the DAO uses open-source code operating across a network of independent machines, allowing any community member to suggest modifications as long as the majority agrees. Voting strength is proportional to each participant’s investment. “It’s encouraging to see so many people engaged—given the significant amount of money raised,” states Christoph Jentzsch, CEO of Slock.it and an original coder for the DAO.
Yet, this collective decision-making can also complicate progress. Bitcoin has experienced significant turmoil due to divergent opinions within its development community. Jentzsch expresses optimism, believing that changes could be implemented rapidly with community consensus. However, Sirer cautions that resolving these issues may take months or even years, as it remains uncertain who the actual contributors are and their underlying motivations. Around 22,500 different Internet addresses contributed to the DAO; however, individuals may own multiple addresses, leading Jentzsch to estimate around 10,000 distinct investors overall. A significant portion of the funding—nearly half of the $168 million—came from approximately 70 addresses.
### Legal Concerns
Despite potential solutions to structural problems, the DAO faces additional hurdles, including legal implications. Murck highlights that the DAO may be trading in securities without proper regulatory approval, raising concerns about compliance with securities law. “There are clear concerns regarding the regulations surrounding securities,” he asserts. “The SEC may not hesitate to impose liabilities on those involved,” potentially extending to curators and investors alike.
Jentzsch, while acknowledging his non-legal background, argues that the DAO’s shares should not be classified as securities. This viewpoint is echoed by investor Paolo Anziano, who believes: “This technology will reshape the financial landscape.”
Nevertheless, like other inherent issues facing the DAO, the question of legality could hinder the propagation of this ambitious idea. As with many self-organizing systems, the DAO still requires extensive organization and development to realize its full potential.