The DAO, the most successful crowdfunding project in history, is in trouble

The Decentred Autonomous Company is a venture capital firm like Andreessen Horowitz (a top Silicon Valley VC firm) and Kleiner Perkins (founded in 1972, which has successfully invested in Google, Ebay, Sun Microsystems, AOL, Compaq Computer, Genentech, Amazon and Netscape, etc.), which finds innovative companies and then invests in them. But there is one thing that makes The DAO different from ordinary companies. It is not run by white entrepreneurs in Silicon Valley with rich funds, but by a complex computer network that manages the entire company according to basic principles, just like managing Bitcoin digital currency. If you invest in The DAO, then in this computer system, you have the right to decide which projects to invest in. The more money you invest, the more voting power you get.

As the DAO’s investment deadline approached last month, about 10,000 people had anonymously invested more than $168 million in the company (click here to read our coverage) , making it the most successful crowdfunding project. Now, DAO has to turn these anonymous investments into innovative new companies, which is one of the most democratic manifestations of capitalist democracy in modern technology society.

But there’s another problem: all of these bids are suggesting changes to the DAO.

A few hours before the investment deadline, a group of computer scientists published a paper saying that there were problems with DAO. Not only was there a security loophole, but the money invested by investors was likely not to be invested well. The scientists called for a halt to the bidding, and the DAO project was actually shelved. After all, only industry insiders knew the real problems and how to fix them.

Of course, even those who were once the most critical of DAO have to admit that the idea of ​​DAO is very novel and no longer follows the old model of white entrepreneurs managing enterprises. There are also many decentralized ideas in the field of Bitcoin that have sprung up like mushrooms after rain. Like these ideas, DAO still has many imperfections. It is just a technology managed by a computer network. It still has a long way to go to change the world's business model. Emin Gün Sirer is a researcher at Cornell University (specializing in self-organizing systems such as "cryptocurrency" and "smart contracts". DAO uses these systems for website security protection). He also participated in the writing of the DAO flaw paper. He said: "DAO represents a dream and a promise to all investors. The question is whether DAO can meet the standards after adjustments and whether it is worthy of this dream."

Starting a business in a completely new way is definitely risky. No one could have imagined that DAO could raise $168 million, and huge amounts of money also mean huge risks. Patrick Murck, a researcher at Harvard University's Berkman Center and also a lawyer, said: "The DAO's decision was made in a hurry and hastily, which is unfortunate for the company because such ideas usually have more or less loopholes."

Analyzing the DAO

The DAO was indeed an independent enterprise, built on Ethereum, and many prominent Ethereum figures worked for the DAO, including the “curators” who decided which bids would get funded.

Furthermore, the DAO was initiated by a European company, Slock.it, which wanted the DAO to fund unique independent projects related to Ethereum and the "Internet of Things". The first donation DAO received came from Slock.it.

The first problem is that DAO has to learn to solve the above problems. Sirer (a researcher at Cornell University) said that the biggest problem of DAO at present is that the voting in the bidding activities is not very real. (Enterprises bid, that is, raise a certain amount of funds for a project, and then promise that everyone who invests in DAO will get a corresponding return) because everyone who invests in DAO can vote for, against or abstain. The more money you invest, the more power your vote has. But Sirer and other authors pointed out that if you vote for a project, even if you vote against it, the funds you invested in DAO will be temporarily frozen. Once the project starts, you will not be able to withdraw the funds. On the contrary, if you vote to support a project, then whether you vote voluntarily or are instigated by others, all your funds will be invested in the project. Therefore, if you don’t trust a project, it is better to give up voting instead of voting against it.

The end result is that all projects are likely to be supported, because even if people are not optimistic about them, they generally will not risk voting against them. "The flow of funds is very biased, so the DAO is not so reliable," Sirer said.

Now Vlad Zamfir (like Sirer, one of the authors of the paper and a well-known expert in the Ethereum field) is working together to rectify the DAO project. Zamfir was appointed by Slock.it to "release" suitable bids and become one of the administrators of the system.

Zamfir called on all administrators not to release any bids unless the developers of the DAO fix all the fundamental loopholes. But fixing all the loopholes in the DAO must be done democratically, just like investing, and democracy usually leads to chaos.

The chaos caused by democracy

The DAO, like Bitcoin, is open source. The code runs on an independent network of machines, and anyone can change the code as long as the DAO agrees to the change.

The voting power is determined by the amount of money invested by the investor. Most investors have to vote on whether to agree to the change, which is also one of the rights given to investors. Christoph Jentzsch, CEO of Slock.it and the author of the source code, said: "I am very grateful to the investors who believed in DAO. Without them, DAO would not have raised so much money."

But collectivism certainly has its drawbacks. Take the serious controversy that Bitcoin once encountered as an example. The code writers who had participated in writing the code disagreed with the direction of the project, causing chaos in the industry. Well-known people in the Bitcoin field called this incident a capital "failure".

Jentzsch also said that as long as DAO allows changes to happen naturally, the platform will be able to develop rapidly. However, Sirer holds the opposite attitude, and he thinks that it will take at least a year and several months for DAO to change.

Since no one knows who invested so much money in DAO and for what purpose, it is difficult to predict the direction of things. All the investments in DAO came from 22,500 different websites, but it is also possible that a group of people used different accounts to invest. Jentzsch guessed that there were about 10,000 people who invested in DAO. Some investors seemed to be very interested in DAO's project. Of the $168 million in investment, about half of the funds came from about 70 different websites.

The insecurity of DAO

Even if DAO solves the loopholes in its corporate structure and code, there are still other problems. For example, the DAO project is likely to be illegal. Murch, who graduated from Harvard and is now a lawyer, said that DAO traded securities but was not recognized by regulators, such as the Securities and Exchange Administration, which did not certify it. He added: "Although it is not approved by securities law, if something unexpected happens, the Securities and Exchange Commission will definitely find someone responsible for the accident. Those who are responsible for accidents are not only Jentzsch and other DAO code writers, but also administrators and even investors.

But the idea of ​​being held responsible for the unexpected didn’t bother Jentzsch. He said he was not a lawyer but was aware that owning a stake in the DAO did not mean owning a security. The same didn’t bother Paolo Anziano, who invested $7,000 in the DAO, who explained it this way: “The technology will change the entire form of the financial process.”

In addition to the obvious loopholes mentioned above, legal uncertainty also hinders the development of DAO. Like other self-organizing systems, DAO is not yet fully developed, but at least for now, there is still a lot of room for development.

JPM compiled from

Wired, The Biggest Crowdfunding Project Ever-The DAO-Is Kind of Mess.