‘The DAO’ made headlines in the cryptocurrency world last year when it was widely reported as being hacked, resulting in the loss of approximately $80 million US of Ether and a subsequent backlash that saw the price of Ether drop by over 25% within hours and ramifications that had serious consequences for the Ethereum blockchain. Although this initial introduction to DAOs left a lot to be desired, the idea of a DAO is one that has huge potential and, if the benefits are realised, could become commonplace in the future.
Despite being reported as a hack, it should be noted that the Ethereum blockchain was not hacked; nor, technically was The DAO. Instead, a loophole in the code was exploited to withdraw funds that had been deposited in the project. It is also worth mentioning that the creators of The DAO had previously been made aware of the loophole and had failed to fix it, much to the detriment of the organisation and Ethereum as a whole.
At its core, a DAO – or Decentralised Autonomous Organisation – is a company that is essentially owned and run by shareholders. In this model, there are no board of directors, management or bosses to decide on what the company does; instead, the people who invested in a particular DAO are able to vote on projects, with the consensus being used to distribute funding to a contractor. In a manner similar to the whole idea of blockchain, it gives the power to the people, rather than having a centralised controlling body.
Built using code on smart contracts and blockchains, a DAO is written to mitigate potential problems, such as one person controlling a majority of the shares or contractors not delivering on products and services. As it is written in hard code, it avoids wasted time and effort that traditional companies may experience negotiating terms and alterations to contracts. For example, if there was an issue where work on a project had not started, shareholders could simply decide to withdraw their support (funds) until the problem was rectified or the project was ended due to insufficient funding. This model incentivises work to be done on time and to a high quality to ensure the investors remain happy and continue their support. Additionally, by avoiding giving the power to the few, it means that a much wider variety of projects have the opportunity to be reviewed for potential as they can appeal to the masses, rather than the management. Overall, a properly coded DAO is a highly efficient way to run an organisation.
To avoid issues that were brought to light last year, it would be necessary to have the project open source with a large amount of testing to identify and fix any flaws. If The DAO had not gained so much such interest so quickly it may have had time to be corrected and could have succeeded. The Ethereum blockchain is often seen as the most desirable for this kind of project as it is an established blockchain which was built with an emphasis on enabling smart contracts. There are still issues surrounding DAOs regarding legal standing and some have raised the problem of the ease of participating in one. Whether DAOs can overcome these problems, or even if people can look past the initial failure of The DAO remains to be seen, but without further testing a potentially hugely efficient system could go to waste.