Ethereum

What is DAO?

Ethereum DAO

Let’s imagine a scenario: you watch a car with no driver, cruising around and looking for passengers.  After it has dropped off its passengers, the profits it’s made take it to a charging station to be re-charged.  The car is now fully autonomous.  It doesn’t need any help from people to carry out its job.  

Sounds like something from a science-fiction movie, doesn’t it? The truth is, the reality of these kinds of cars and this kind of venture, is not too far away in our future.   This is one of Mike Hearn’s “thought experiments”.  The former bitcoin backer describes the ways in which the coin could possibly help to control leaderless organizations in the next few decades or so.

This description from Hearn is a dream that uses DAO.  DAO stands for decentralized autonomous organization.  This is an idea that’s been thought,but in the tech communities after the first releases of bitcoin in 2009.    The idea behind it is that, if financial middlemen are no longer needed (thanks to bitcoin), it is possible that organizations and companies could operate without any management hierarchy one day.

Simply put, DAOs would implement certain rules for a company from the outset such as putting a certain percentage of any earnings to one side for causes or in determining processes to change such rules.  In theory, this is not too different from how a regular company works.  One big dissimilarity is that normal companies’ rules are not digitally enforced as with DAOs.

The DAO

‘The DAO’ was probably the most well-known attempt to create an organization like this.  It was launched back in 2016 but it failed in just a few months.  However, it gives us a good idea of what people are looking for when they think of using this technology.  The original plan was for those participating to receive a DAO token and then they could vote for funding for their preferred projects.  Therefore, selecting investment projects was solely reliant on the crowd’s wisdom.   

The DAO tried to improve the governance in organizations today in a few different ways.   They wanted anyone who had internet access could have DAO tokens or purchase them.  Also, creators of DAO could set the rules to be voted on.

Abstractly, DAOs function in a similar way.  They are reliant on pre-programmed contracts and smart rules that will describe the possibilities within the system.  

The smart contracts could be programmed in such a way that they undertake a range of tasks, such as giving out funds once a certain date has passed or, additionally, when there’s a certain percentage of agreement amongst voters to fund a specific project.    Many people believe that it could work for any organization where there are decisions that need making, not solely those relating to money.  In essence, it is a way of having a crypto-graphical democracy that’s guaranteed, where any stakeholders vote on the addition of new rules, on changing the rules as well as ousting any members, for example.

Security

However, it is not difficult to see how an “unstoppable code” can cause a problem for security.  Changing a DAO is difficult today as it changing the smart contracts that underpin it after it has been deployed in the ethereum blockchain.  This is essentially a good thing, however, as one entity or one person cannot change rules on their own.   However, it can be a disadvantage too.  If a user has spotted a bug when running DAO, the developers can’t change the code easily.

ETH DAO Security

This is what happened with our example, The DAO. It was attacked and slowly drained of funds and all the observers could do was sit back and watch it happen without being able to do anything about it.  The hacker followed the rules.   

The lead coders in Ethereum did reverse the transactions and return the funds to their rightful owners, but this a hugely controversial decision which led to a community rift that could not recover.

How we handle similar situations in the future remains to be seen.