The DAO: a radical experiment that could be the future of decentralised governance

For many people, the birth of the internet happened on August 9, 1995, when Netscape went stratospherically public. Something similar is happening right now, and it could do for organisations and their governance what the internet did for information and its distribution.

The DAO is a wildly ambitious, risky and radical new entity that has already raised more than US$29 million in a little over a week. When it reaches the end of the funding phase on May 28, it will begin contracting blockchain-based start-ups to create innovative technologies.

The extraordinary thing about The DAO is that no single entity owns it, and it has no conventional management structure or board of directors.

Embracing the ether

How can an investment fund work without management oversight? In 2013, a Russian-Canadian genius called Vitalik Buterin, proposed to do for managers and directors what the industrial and robotics revolutions did for factory workers: replace them with technology.

Buterin is the co-creator of Ethereum, a platform that, among other things, aims to automate management through code: creating rules that determine what can be done within an organisation through smart contracts. Buterin wonders:

[…] what if, with the power of modern information technology, we can encode the mission statement into code; that is, create an inviolable contract that generates revenue, pays people to perform some function, and finds hardware for itself to run on, all without any need for top-down human direction?

These code-made organisations are called “distributed autonomous organisations” (DAO). A DAO is a cryptographic technology that relies on multiparty secure computation – the same technology used by Bitcoin – to ensure no attacker can subvert it. In a surge of spectacular self-conceit, “The DAO” is the name given to the first major DAO to launch on the Ethereum platform.

For another two weeks, anyone can trade Ethereum’s altcoins, Ether (ETH or Ξ, the crypto tokens of Ethereum), for tokens on The DAO (Ð).

Once the creation phase is complete, anyone with a project can pitch to and receive investment from The DAO. Only those who own DAO tokens will be able to vote on which projects are funded by The DAO, and receive rewards if those projects make a return.

It all sounds like science fiction, a spontaneous entity evolving out of something named after a nebulous gaseous material) (thin air?), which claims to be immutable and incorruptible.

The significance of this DAO – The DAO – is that its creators have done the hard work in coming up with a rulebook and its underlying code that others can copy, and thereby use to set up other DAOs.

This standard DAO framework was created by Slock.it, an Internet of Things company that plans to propose more than one project to The DAO when it is formed.

The rules are designed to ensure no one interest can take over a DAO. For example, token holders can withdraw their stake if they disagree with a decision, while keeping their stake in any project that The DAO took when they were invested, and continuing to earn a return from those that make profits.

The DAO’s white paper, as well as Slock.it’s proposal are attracting significant attention in crypto currency forums.

Who’s in charge?

For social scientists like us, The DAO is perhaps one of the purest experiments in microeconomic theory, particularly of contracts, digital organisations and mechanism design. And it is likely to produce significant insights into how innovation occurs.

The thinkers behind Ethereum and The DAO are also investigating radical new governance models that might be implemented using blockchain, including Futarchy, which uses prediction markets to choose between competing policies.

One immediate area to watch will be how the token-holders on The DAO behave. Will all token-holders pay sufficient attention to responsibly vote? Or will it fall victim to crowd mentality? Does having a financial stake mean that voters are more likely to do due diligence, as Stephan Taul, COO of Slock.it suggests?

Needless to say, like all activities at the frontiers, The DAO will be highly risky as an investment, and not just because nine in ten start-ups fail. The DAO is only as good as the code it is made from.

As recent disputes in the bitcoin community have demonstrated, code is susceptible to the human error and frailty of those who made it.

Another dimension that no one is talking about is the lack of diversity of the curator team (a group intended to do due diligence on contracts), when research shows that gender and cultural diversity on boards is a good thing. If The DAO fails, it may be because it did not work hard enough to involve a broader group of thinkers in its design.

The DAO reflects a Silicon Valley culture where attracting venture capital for technology start-ups is equated with democracy and seen as the height of innovation. A system in which only those who buy tokens can vote is not an experiment in democracy, but in plutocracy.

Yet the appeal of Ethereum is that it provides a platform for those who don’t want to build a private blockchain to create, organise and govern. This opens blockchain technology up to a world far beyond helping big financial corporations and markets achieve efficiency gains.

It is possible that the innovations that prove the most transformative will actually be those parts of our social fabric that are currently not reaching their full potential because no effective distributed coordination mechanism exists. An interesting example is scholarly publishing.

In a recent paper with some other co-authors, we have suggested a new way to move scholarly publishing on to the blockchain by reinventing a journal as a DAO.

To paraphrase US congressman Barney Frank, governance is the name for the things we do together. If DAOs can remove some of the messier aspects of governance, we might be able to do a whole lot more.