DAO Episode 2: Risks Ahead or Can the Experiment Fail?

We hear the DAO is decentralized, autonomous, with no directors - but can it actually work?

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DAO Episode 2: Risks Ahead or Can the Experiment Fail?

The DAO is grabbing the world’s imagination with disruptive new concepts. We hear it’s decentralized, autonomous, with no CEOs or directors - but can it actually work?

Hope may turn around

Many seem to think it will as they send 11 million ethers to the DAO smart contract, but there are considerable risks. Voters may not participate, legal uncertainties may give protection to scammers, the crowd may become emotional and irrational, focus may be lost, hope may turn to hate.

For one of the most exciting experiments to flourish a new consciousness may need to arise, replacing the current attitude of ‘speak first, ask questions later’ with  worklike ethics requiring a shift from mere chatting to a collaborative common endeavour to bring forward shared goals with a focus on creating a fourth industrial revolution.

This is a futuristic vision of machine to machine payments, with fridges becoming intelligent machines, inanimate matter coming to life through smart contracts. It’s a steep mountain to climb with considerable risks and failure more likely than success.  

Will Voters Participate?

According to Daniel Larimer, founder of Bitshares, voter participation may be minimal as it requires time and knowledge to analyse proposals. Moreover, approved projects would convert ether into fiat which may affect the price. Holders, therefore, might not approve any project.

A potential solution is an incremental release, minimizing impact on price and addressing another potential risk: projects absconding. According to Mo Balaa, Systems Engineer at Stratford University and DAO Community Member:

“Kickstarter projects often abscond with funds and there's no recourse. With projects funded by the DAO, funds are held by an intermediary (the proposal contract) and only paid out as milestones are reached (minus some initial funding). It’s like a programmatic voter facilitated way of providing money to someone who promised you something in return for it.”

The Wisdom of the Crowd

However, funds released to projects are at risk with further risk added each time funds are released as the project may, at any point, simply give up, burning all the previously invested funds. It is here where the wisdom of the crowd may assist as a diverse array of individuals from different specialisations look at all aspects with a collective decision potentially more informed than a small number of executives.

On the downside, the time period for any such decision is only 14 days which may not be sufficient to carry out any due diligence or analysis. Most initial proposals, therefore, may be rejected, which, psychologically, may not be a good start of any relationship.

Will the Wise Crowd Descend into an Irrational Mob?

Of more concern may be the behaviour of the crowd. They may be unduly demanding, or not sufficiently demanding. They may make emotional decisions or, at times, turn aggressive. Some, especially if anonymity provides cover, may simply try and gain entertainment by disrupting or trolling.

Keeping harmonious relations when thousands of individuals are involved may be difficult, if at all possible, but potentially achievable if a laser focus is retained on cool headed financial analysis, but any such coolness may break down at the second batch of funds or midway through the project.

A professional attitude would need to prevail, with a businesslike laser focus, emphasis on politeness and constructive contribution to keep the risk of the crowd becoming a mob at bay.     

Potential Legal Complications

But what happens if, despite the odds, the token holders do give prevalence to rational thought over emotion, do behave politely, do retain a laser focus, and nonetheless a seemingly great project decides, for no apparent reason, to just give up, midway, burning all the invested funds, simply, perhaps, because they can?

In established financial relations, you sue them. The DAO, however, is a new invention which doesn’t easily fit with established contractual laws. The smart contract itself can’t act. Perhaps each individual can have legal standing, but that wouldn’t recognize the decentralized, yet collective, nature of the DAO.

As this is a consensual and contractual (albeit written in code) civil relationship a legal system which wishes to keep up with innovation may take the view that, since the contract says, at minimum, 20% of token holders control the funds, standing and liability should likewise require that 20%, collectively and in unison, sue or are sued.

For the DAO specifically, that may be easier than it seems as only 20 people/addresses hold 20% or more of the funds. Therefore, they may be the most incentivized to carry out due diligence and enforce proposals not only through the limited aspect of self-enforcing smart contracts, but also through physical courts.

Whether they can actually do so is in no way clear as courts may hold a very different view on the legal classification of DAOs – such as partnerships or unincorporated associations – which allows everyone to sue and likewise be sued, creating considerable risk for individual holders and less incentive to sue due to the bystander effect.

A wholly different analysis is required if DAO token holders decide to fund a criminal or illegal project or, perhaps, even legally grey/controversial projects. However, it is unlikely they would do so, making such analysis unnecessary, until proven otherwise.

So, Can the DAO Actually Work?

The DAO has a steep mountain to climb. It has to form a businesslike culture and a worklike attitude when token holders express opinions. Any emotional, provocative, or disruptive behaviour, as well as any undue criticism, would have to be quickly policed by token holders so as to create an atmosphere of collaboration and form a common bond with a common aim to change the world for the better.

If that can be achieved, the sky’s the limit.

In my personal and very speculative opinion, I think it is possible if, and only if, the DAO token holders unite under a common vision of funding new, innovative projects, focused on bringing smart contracts, machine to machine payments and blockchain related innovation to the masses with the aim of bringing a fourth industrial revolution.

The current atmosphere seems promising as the mood in the air seems to be that something big is happening here, which may create a common bond and unite all under one vision and goal, but, if history has a say, we ought to expect the project to fail, while hoping it flourishes.

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