DAO is a new concept which has grabbed imagination, raising a record-breaking $150 million. What can it do? What can’t it do?

While the world is just learning about the blockchain and barely getting their heads around Bitcoin or Ethereum, a new concept has grabbed imagination, raising almost $150 million, and shattering all records: The DAO.

Unlike corporations or companies, the DAO has no CEO, no directors, no board, no employees and no shareholders. It is literally just a few lines of open source code. That code, however, allows it to hold money, with no human involvement or control, in an Ethereum address visible to anyone.

Machine-to-machine

Unlike normal addresses, which require a private key to spend funds, the DAO smart contract address has no private keys. Although machines cannot authenticate individuals without input, machines require no such input from other machines themselves. As they have already authenticated that the DAO address holds more than 11 million, and that a transaction is valid according to the smart contract’s coded rules, no further authentication is required, thus no private keys.

The funds, therefore, cannot be lost or stolen and there is no hot wallet to hack. The smart contract address, instead, obeys only the rules of the code making the DAO autonomous in limited ways, such as automatically and perhaps incrementally sending funds or distributing returns on investments.

A venture fund, kind of

The DAO, specifically, can be described as a venture fund. Anyone who wishes can send Ether to the DAO smart contract address and receive a DAO token for the next few days. Once the DAO token “creation” period is over, entrepreneurs or inventors can put forward a proposal for a project they would like funded.

The proposal has two components: a business plan or prospectus for the DAO token holders, and the translation of that business plan into smart contract code. The proposal’s smart contract code is analysed by a panel of Curators to determine whether the code does what the business plan says, whether it is safe and not malicious, and whether the proposing entity is genuine.

Token holders matter

Once authenticity is verified, the proposal is then opened to the DAO token holders who can approve the offer, reject it, or, potentially, suggest modifications and re-submission. A minimum quorum of 20% of all tokens is required for a successful vote to pass.  

The most highly anticipated proposal is from slock.it which has already published a whitepaper. According to Griff Green, a spokesman for slock.it, the proposal will not ask for more than “50% of the DAO's ETH holdings” with the actual figure not yet published. At the current ever-increasing rate, that would be no more than $75 million to fund an Ethereum computer, slocks, and a vision of a Universal Sharing Network.

That still leaves at least some $75 million, an incredible amount of funds, to be invested in other endeavours, such as a Ledger Ethereum Wallet which is estimated to cost “only” $140,000.

Undoubtedly, many more proposals will follow as the cryptocurrency space establishes its own decentralized venture capital fund and entrepreneurs are given a new option for raising capital.

Easy and free promotion

One benefit may be the open process and the likely free advertising. With more than 11 million ether raised and more than 5,000 members on the DAO slack channel (the highest number by far of any blockchain related slack channel) it is likely that any proposal will attract free promotion from tens of thousands of token holders.

The process itself is completely open and transparent with proposals currently published on the DAOhub page, but a new design is likely to order proposals by votes and encourage open discussion.

Accountability is ensured by releasing funds incrementally, thus requiring frequent updates on progress, with the start-up benefiting from the feedback of the DAO token holders who may themselves be customers.

Risks ahead

The concept is very new and it is not clear how it will work in practice, but if it is successful, it will disrupt not only finance and VCs, but boardrooms, CEOs and the nature of companies.

However, many emphasise that the concept is untested and experimental, therefore carries many risks, which we will analyse in our part two article where we ask whether the DAO will fail or flourish.