The recent rise of Ethereum has brought a wave of new users and enthusiasm into its possible applications. While smart contracts and their benefits are nothing new to the community one of the more disruptive use cases, DAOs have not been explored to the extent they deserve.
Zero corruption, transparent government
For those who never heard of DAOs before “A DAO, or Decentralized Autonomous Organization, is a digital company with its by-laws set immutably within the Blockchain: its governance is transparent, its finances can be audited by anyone, it suffers zero downtime and corruption is impossible,” according to Slock.it, a company which is planning to launch their own DAO in the near future.
DAOs enable a wide range of possible business models that were previously impossible or too costly run. Think for example of a Kickstarter-style project where the backers do not just give their money and wait for the kickstarted company to deliver the final product, but on one where an abstract or desired product description is proposed by an individual or group and then investors provide funds which are automatically converted into a special token.
In this model, the investors can choose, by voting with their tokens, which company they will hire to get their vision done. They will be able to influence every aspect of the product if the code of the DAO allows it. If they are not happy with one or all of their service providers they can fire them and hire new ones.
All the previous is made possible because of smart contracts which can be run, for example, on the Ethereum Network. It’s just natural to assume that there will even be free open source “templates” for DAOs created for the non programming savvy entrepreneurs.
The number and different combinations of innovative and disruptive companies that can be created this way is mind blowing; and while this technology certainly seems viable there are a lot of interesting questions that still remain unanswered; especially when you take into consideration the vast number of dubious ways that this technology could be used. Consider for a second what are the ramifications of a DAO that’s explicitly constituted to bypass, or even explicitly infringe, laws and regulations.
Decentralized hedge funds
An interesting example of the aforementioned is a DAO which purpose in life is to be a decentralized version of a hedge fund. Now, just for the sake of the argument let’s imagine that a particular stock market broker allows its clients to be DAOs, or more probably doesn’t even care.
At this point you have a DAO, which is nothing more than very well organized lines of code with a determined amount of money, maybe even cryptocurrencies, to invest and whose shareholders may be impossible to track if it's cryptographically powered privacy is strong enough. This situation may result in the absolute abolishment of insider trading. How? Well, imagine a DAO as the previously described and a shareholder who has obtained non-public information that will skyrocket or plunge a security price.
Taking advantage of this situation under a strong privacy-focused DAO would be easy. If authorities try to track down the person responsible the first entity in line is the DAO, which as we explained is nothing more than lines of code, so they have to determine the identity of the shareholders which may prove to be impossible.
Now, let’s not start a discussion about to which extent this already happens in the current system and how people get away with it, because even if this may be true it also must be noted that people do get caught with their hands dirty a lot more often that you may think.
Regulations impossible to enforce
If markets adopt the developments of the crypto world, and they certainly will as soon as they realize they can get away with it, this may mean the death of a lot of regulations. Not because authorities have changed their minds about them, but because such regulations will prove impossible to enforce, and regulations that can’t be enforced don’t get obeyed.
Let’s take things a step further now and assume that because the authorities can’t pinpoint the physical person behind the illegal trade they decide to freeze or seize the DAO assets. How will they be able to do it if such assets are comprised of cryptocurrencies or crypto assets? As long as the DAO’s stores it’s wealth on a decentralized token it becomes untouchable unless they find the private key owner and threaten to imprison him if he doesn’t collaborate.
As of today the probable route that law enforcement officials will follow is to forbid centralized institutions from transacting with DAOs, and while this strategy will certainly have an impact in the short term as soon as the technology matures and markets learn that these corporate structures may prove to be a force of nature they will surely adapt the same model, not to take part in illegal activities but for cost saving and, before not too long, survival. Not convinced? The Googles, Amazons and Itunes of tomorrow may already have been conceived.
So far some may think that DAOs and the widespread adoption of cryptographic technologies may lead to wild anarchy and chaos; but this is far from truth actually. While conventional law enforcement officers will certainly have a hard time trying to apply old laws to the new crypto reality, these new type of business models will have a need for dispute resolution mechanisms.
Even if the code of the DAO is running as expected, the flexibility that business require on an everyday basis will inevitably lead to situations where compensations for the breach or early termination of contracts will be required. Possible answers to this quagmire will be the focus of the next article in this series.