Decentralized autonomous organization

A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO's financial transaction record and program rules are maintained on a blockchain. The precise legal status of this type of business organization is unclear.
A well-known example, intended for venture capital funding, was The DAO, which launched with $150 million in crowdfunding in June 2016, and was nearly immediately hacked and drained of in cryptocurrency. The hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain: the Ethereum miners and clients switched to the new fork.
Background.
Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track financial interactions across the internet, hardened against forgery by trusted timestamping and dissemination of a distributed database. This approach eliminates the need to involve a mutually acceptable trusted third party in a financial transaction, simplifying the transaction. The costs of a blockchain-enabled transaction and of the associated data reporting may be substantially offset by the elimination of both the trusted third party and of the need for repetitive recording of contract exchanges in different records. For example, the blockchain data could, in principle and if regulatory structures permit it, replace public documents such as deeds and titles. In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.
Vitalik Buterin proposed that after a DAO is launched, it might be organized to run without human managerial interactivity, provided the smart contracts are supported by a Turing-complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling such DAOs. Decentralized autonomous organizations aim to be open platforms where individuals control their identities and their personal data.
Issues.
Social.
Shareholder participation in DAOs can be problematic. For example, "BitShares" has seen a lack of voting participation, because it takes time and energy to consider proposals. However, misalignment of interests between shareholders, operators, users and customers – a legacy of the industrial revolution codified in for-profit corporations – has created an environment of broken promises that could be addressed by smart contract systems like DAOs, realigning the interest of users, reducing friction and removing middlemen.
Legal status, liability, and regulation.
The precise legal status of this type of business organization is generally unclear, and may vary by jurisdiction. Some similar approaches have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership. This means potentially unlimited legal liability for participants, even if the smart-contract code or the DAO's promoters say otherwise. Known participants, or those at the interface between a DAO and regulated financial systems, may be targets of regulatory enforcement or civil actions.
Security.
A DAO's code is difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralised code. Corrections to a DAO require writing new code and agreement to migrate all the funds. Although the code is visible to all, it is hard to repair, thus leaving known security holes open to exploitation unless a moratorium is called to enable bug fixing.
In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date. Researchers pointed out multiple problems with The DAO's code. The DAO's operational procedure allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly. Although safeguards aimed to prevent gaming shareholders' votes to win investments, there were a "number of security vulnerabilities". These enabled an attempted large withdrawal of funds from The DAO to be initiated in mid-June 2016. On July 20, 2016, the Ethereum blockchain was forked to bail out the original contract.