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The Guardian - UK
The Guardian - UK
Technology
Alex Hern

TechScape: everything you need to know about DAOs

People walk through the North American Bitcoin Conference held at the James L Knight Center on January 18, 2022 in Miami, Florida.
New kid on the blockchain … People walk through the North American Bitcoin Conference held at the James L Knight Center on January 18, 2022 in Miami, Florida. Photograph: Joe Raedle/Getty Images

It’s a new year, so it’s time for a new cryptocurrency buzzword to escape the sector and become the latest fad that baffled news anchors try desperately to explain to their increasingly confused audiences before giving up and passing over to the sports desk.

In other words: move over “NFT”, now “DAO” is the hot acronym on the block.

Just as NFTs weren’t new this time last year, when the gestalt eye of the internet turned towards them as an investment opportunity after the buzz of pumping and dumping GameStop stock had worn off, so too are DAOs an old idea given a new lease of life by untold millions of consumer cash flooding into the sector.

But, I’ve got ahead of myself: what are they, what are their history, and why are we talking about them now?

WTF even is a DAO?

Standing for “decentralised autonomous organisation”, a DAO isn’t really in the same class as an NFT. Rather than being a singular digital asset, like a picture of a monkey or a dog-themed copy of a dog-themed copy of bitcoin, a DAO is more like a company – but one which is directly controlled by its shareholders, without the need for employees or directors.

(Although, we should note, a DAO is Not A Company and owners of DAOs are Not Shareholders, because if it were and they were, the whole thing would be wildly illegal. Glad we’ve cleared that up.)

At its platonic ideal, a DAO exists in the realm of code-as-law that much of the cryptocurrency community fetishises. An organisation is set up by some clever bod, who sells membership to anyone who’ll buy its tokens. The cash used to buy the tokens becomes the organisation’s treasury, and it can be used by simply writing a smart contract (to, say, loan some money out at an 8% interest rate) and securing the votes of enough of the organisation’s token-holders, at which point the smart contract is executed.

In that idealised vision of the organisation, there barely needs to be any human-level structure at all – hence the “autonomous” part of the name. The DAO itself exists as a smart contract, and while the founder may reserve some special perks for themselves (typically in the form of giving themselves some tokens for free before they go on sale), they have no formalised power beyond the same votes that everyone else has.

But in the real world, DAOs have hit two major problems. The first is that coding is hard, and the second is that most things you would actually want to do in the world today still don’t exist on the blockchain.

Coding is hard

The problem with outsourcing all of your governance to smart contracts is that writing code for cryptocurrency platforms is hard, and reading it is even harder. It’s all very well to be shown a smart contract and told that it will authorise a loan of 8% to a safe counterparty, but it’s trivial to hide nasty surprises in plain sight.

Take the story of the “YEAR” token, which was launched on New Year’s Eve. The token had a very simple use, which was to plug into a smart contract that showed owners their activity on the Ethereum blockchain, but it also arrived with a curious bug: what looked like a typo in the aspect of the contract governing buying and selling it, that meant that if you tried to sell the token to the contract owner, it would fail.

What happened then was simple. Once the token launched, and gained a bit of word of mouth, the founder transferred its ownership – to the only cryptocurrency exchange where it was listed. That meant, at a stroke, that the token became a honeypot: people could buy it, but couldn’t sell it, and the value went up and up on the exchange as a result. Then, thirty minutes later, the founder drained about £100,000 from the account, and disappeared into the night.

That’s a small loss in the grand scheme of things, and “rugpulls” – where a project is launched with great fanfare before its founder steals the funds – are so common in the sector that the phrase is now a one-word term. But a bigger example of the same problem is the failure of a much bigger DAO: in fact, the very first one, called simply TheDAO.

Launched in April 2016, TheDAO made all the same promises as those around today, and rapidly gained thousands of investor/members and more than 11m Ether under its control (worth well over $100m then, and $25bn now). But a bug in the foundational code of the project, unfixed since May that year, was exploited on 17 June, to drain 3.6m Ether into another account.

The hack was so enormous by the scale of the then nascent Ethereum blockchain that it had ramifications far outside TheDAO and its direct investors. In the end, the entire Ethereum cryptocurrency was rewritten from the ground up to reverse the transactions: the Ethereum in use today is technically a “hard fork” of the original, and some users still cling to “Ethereum Classic”, the blockchain where TheDAO’s hack was allowed to continue existing.

Against that background, it is … somewhat odd to me that people continue to describe their projects as DAOs. It seems a bit like deciding that hydrogen airships are the future, despite their historical safety record, and then calling your new business “Hindenburg Aviation”.

The blockchain isn’t the world

But the cryptocurrency sector of 2022 is a different beast from the one of 2016. Perversely, it feels like the vague chance of losing everything to rugpulls and hacks has become more accepted as the sector has moved toward the mainstream, with consumers embracing cryptocurrency as a high-risk, high-reward way of gambling their savings.

These days, the more pertinent flaws of DAOs are becoming apparent as the ambitions of the sector outstrip its ability, with projects such as ConstitutionDAO and theSpiceDAO.

We’ve covered the former, a crowdfunded plan to buy a copy of the US constitution, here before (the project ended in chaos after the group was outbid by a Wall Street executive and failed to buy the constitution at all).

TheSpiceDAO is the “second as farce” version of the same idea. A DAO built around an auction of a rare book detailing the abortive production of an adaptation of Dune by Chilean director Alejandro Jodorowsky, the community managed to actually buy the book. Unfortunately, it was confused about what it had actually acquired. After spending €2.66m on the book, the group planned to:

  • Make the book public (to the extent permitted by law)

  • Produce an original animated limited series inspired by the book and sell it to a streaming service

  • Support derivative projects from the community

In other words, rather than buying a copy of the book, they seemed to believe they had licensed the actual rights to the property. Needless to say, they are not legally entitled to produce an animated series based on Dune.

Despite this, the project is steaming ahead. One popular idea has been to mint NFTs, one for each page of the book, and then to burn the book, ensuring that only the NFT owners “really” own the content. It’s a bold move, let’s see if it pays off for them.

Where next?

I don’t like making predictions (I am, after all, the guy who called bitcoin a bubble when it was worth £30), but I think it’s almost guaranteed that the next few big cryptocurrency stories will be focused on DAOs.

The steam has started to run out on NFTs, narrowly construed: the art bubble has stopped growing, the profile pic projects are too easily parodiable, and the gaming-related NFTs are still stumbling on the fact that none of the games that exist are good, fun or exciting in any way. Money will flow in, but mainstream attention is moving on.

DAOs, by contrast, can be anything: a project to buy a valuable thing, to build a real asset, to move billions, or just to make a lot of money. And they’re also the perfect vehicle for the newly minted millionaires of the sector to throw their influence into the real world: want to buy and run a football team, get celebrities to act in a movie you’ve written, or just spend a lot of money so people think you’re serious? A DAO is the way you do that. It’s going to be chaos.

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