As June 2016 got underway, there was a new attraction in the crypto space.
And that was DAO (Decentralized Anonymous Organization). This entity had raised about $150 million from excited investors online.
Everyone couldn’t wait to see it go live. And then the unexpected happened. On the 16th June 2016, a hacker exploited weakness on a single line of its code and siphoned out about $50 million of the funds.
Panic set in. The price of the ether, the currency used on the platform, nosedived from $20 (a high it had just reached for the first time) to below $15. Despair replaced excitement.
This post will answer some of the questions you might have on the DAO project.
What is DAO?
DAO is a virtual organization (a company, if you want). It doesn’t have an office, a CEO, a board of directors or anything like that. Even so, it can generate business ideas, contract service providers, fund projects and sell products.
All this is possible because of the concept of smart contracts. Every business process that DAO undertakes is a smart contract executed on the Ethereum blockchain (a distributed ledger inspired by the Bitcoin blockchain).
Indeed, the DAO and Ethereum are joined at the hip. Some of the developers behind DAO had before worked on the Ethereum project.
Who are the owners of DAO?
Anyone or anything (bots may participate, at least, in the long term) that owns tokens known as the DAO tokens is a shareholder. The DAO tokens are what the shareholders use to vote in decision-making processes.
The process of taking on board the initial shareholders is already done. The deadline to purchase the DAO tokens was on 28th May 2016. By that date, 1172.78 million tokens (worth $150 million) had been created.
However, it is expected that, just like any assets, the DAO tokens will be bought and sold for profit going forward.
The purchase of the DAO tokens was made using ether (and the Ethereum native cryptocurrency is the only currency used on the DAO)
How is DAO supposed to operate?
Every investor can vote for a project proposal to be funded. Also, every investor can propose projects they believe are viable enough. And indeed, to make any proposal, one must own some DAO tokens.
In a DAO question and answer video uploaded online, the team behind the project has explained that for a suggestion to be adopted (and funded), a minimum 20% of all DAO token holders must participate in the voting process and over 50% of those must approve it.
What’s more, the outcome of the ballot is binding to all token holders. As a DAO token holder, you can’t bolt out after the decision has been made simply because your vote was defeated. However, you can split (which means leaving) from DAO if you are heartbroken with a project that has been adopted for funding.
After splitting you get your ethers back (equivalent to the value of your DAO tokens at the prevailing exchange rate). Even so, you will maintain your share in future profits from investments that were done before you split.
The brains behind DAO
DAO is the brainchild of Stephan Tual, Simon Jentzsch, and Christoph Jentzsch. It is the same team behind Slock.it (two of them have also worked on the Ethereum project.)
Slock.it is a startup that designs and sells different Ethereum blockchain smart contract solutions.
The startup’s goal is to use the blockchain (the Ethereum blockchain) to make human interactions less reliant on trust. It has interest especially in letting and subletting of facilities.
For instance, if someone wanted to hire out their house while they are away for the weekend, they do not have to put the key under the doormat anymore.
The successful weekend tenant will just need to pay a fee, and they will get access to the house for the specified period. That is possible with smart locks whose operations are executed as smart contracts on the blockchain.
Why did Slock.it design DAO?
DAO owes its birth to Slock.it’s need to raise funds for its smart contract projects.
Stephan Tual, Simon Jentzsch, and Christoph Jentzsch reasoned that instead of them going the traditional ways of raising funds, pitching to investment firms or doing a crowd funding, they could use the blockchain instead.
Thus, they developed this decentralized, anonymous organization to be its primary client. DAO will contract Slock.it to built solutions which the former will sell to the public and corporate world.
The profit made will be shared among the shareholder (those who hold the DAO tokens).
Apparently, Slock.it isn’t going to be the only service provider for DAO. The token holders are free to add more service providers.
What is the legal formation of DAO?
And because of how unconventional DAO is, there has been a lot of confusion as to what exactly it is. Some have been quick to describe it as an investment firm. Others have seen it as nothing more than a crowdfunding platform.
However, Stephan Tual, Simon Jentzsch, and Christoph Jentzsch have explained that DAO is neither an investment firm nor a crowd funding platform. It is a company that will contract as well as sell goods and services.
Indeed, this is nothing like seen before in the business world. An enterprise built and running entirely on a code is pushing the boundaries of what the blockchain technology can do.
As you would expect, the legality of this kind of organization is still unclear. Bitcoin itself isn’t out of the woods yet in this regard.
How did DAO lose $50 million?
Just like the legal formation DAO, what to call the siphoning of $50 million from its control on the 16th of June is a subject of discussion. It is clear that it is a hack since the person who drained the money didn’t break the code.
It is the splitting part of the cord (the part that enables one to withdraw their share) that was tricked into releasing funds without updating the balance of whomever who was making the withdrawals.
Thus the person (or persons) was able to repeat the process without depleting their share of the money. Think of it as withdrawing from an ATM and being able to trick the machine not to update your new balance. You can withdraw the entire bank balance with that trick.
How is DAO likely to fix the problem?
The Ethereum community is considering a soft fork, which essentially means rolling back all the transactions that happened during the time of the theft. However, this has been questioned by some as making smart contracts not to be reliable.
If there are people who can overturn smart contracts then that makes the technology less revolutionary.
Regardless of the glitch, DAO might be the real deal. It could revolutionize how business is done. But it first owes itself to overcome this theft.