On April 30, 2016, a brand new organizational structure was created: the decentralized autonomous organization, or DAO. This organization, built entirely of smart contracts encoded into the ethereumblockchain​ has already raised over $41 million, making it the second most successful crowd-funded project to date. What is the DAO and why is it revolutionary?

What Is the DAO?

The blockchain is a shared, decentralized, digital ledger that cryptologically seals and stores a permanent record of all transactions that occur on it. Bitcoin, the digital currency, is perhaps the most well-known and widely used application of blockchain technology. Ethereum is a different blockchain from Bitcoin and was created with the intention to allow self-executing smart contracts to be coded directly into it, permitting trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. (See also: Is Ethereum More Important Than Bitcoin?)

The organizational theorist Arthur Stinchcombe once wrote that contracts are merely organizations in miniature, and by extension all organizations are just complexes of contracts. Firms are created using a series of contractual agreements, ranging from employment contracts and employee benefits, to deals with vendors and suppliers and obligations to its customers, to building leases and sales & purchases of equipment. Traditionally, these contractual obligations are quite costly because they need to be enforced externally by society in the form of a trusted legal system and through legal enforcement. Courts, lawyers, judges and investigators all form this system of contract enforcement. With a blockchain-based smart contract, however, much of these costs are greatly reduced or eliminated. This promises to make blockchain-based organizations more efficient, cost-effective, and competitive compared to traditional firms in the marketplace. (For more, see: Decentralized Autonomous Organizations: IoT Today.)

The Ethereum DAO

"The DAO" is not the very first DAO to be constructed on ethereum; that honor goes to Digix, a blockchain-based organization designed for P2P gold bullion receipts trading. The DAO, however, is the first attempt to create a truly decentralized autonomous organization that does something more than function as a digital currency or asset system. The DAO is meant to democratize ownership of the organization, with 100% of the ownership distributed among its tokenholders (akin to shareholders). The DAO itself is self-governing; it cannot be influenced by outside forces such as politics, government, or corporate lobby. Its software operates in the cloud, so it exists both nowhere and everywhere at the same time, and thus circumvents jurisdiction. Its smart contracts are indelibly etched into the Ethereum blockchain. Its identity is formed through consensus. Its authority is defined through voluntary endorsement and, ultimately, network effects. (See also: How Will Bitcoin 2.0 Change The World?)

The current DAO has a creation phase from April 30, 2016 that runs for 30 days. During the creation phase, anybody is eligible to purchase DAO tokens, or ownership stakes in the new organization. For the first fourteen days, 100 DAO tokens can be purchased for 1 ETH (ETH is the symbol for ether, the internal digital currency of the ethereum blockchain), with 1 ETH worth approximately $9.50 currently. After that period, DAO tokens will cost increasingly more until ultimately 100 DAO tokens will cost 1.5 ETH before the creation round closes. Once it closes, no new DAO tokens will be created, but they can still be bought and sold on secondary exchanges. In other words, the DAO creation phase is quite similar to an initial public offering (IPO), but without a syndicate of investment banks, lawyers, or a stock exchange. So far, the DAO has raised over 4.2 million ETH, or $41 million.

DAO token holders have voter rights (1 token = 1 vote) and are entitled to their pro-rata share of dividend income from the organization's profits. The organization itself, however, is just software. The DAO must hire contractors to engage in economic activity, and these contractors are hired by democratic vote from tokenholders. Their work enforced by smart contract. Contractors are paid out in ETH raised from the creation phase. Tokenholders can also issue proposals to be voted on for projects to be undertaken.


Source: daohub.org

From the DAO's website, here is an excerpt of its governing principles:

Inclusion: The DAO leverages smart contracts on the Ethereum blockchain so that anyone, anywhere in the world can be empowered to participate. In exchange for their early help, participants receive DAO tokens which hold many benefits.

Flexibility: The DAO backs Proposals which it selects for their innovative nature, to be delivered by Contractors. Some of these Proposals could hold no promise of return whatsoever (in the case of a charity for example), others could involve the building of products or services which The DAO could then use for its own purposes.

Profitability and Growth: The DAO charges for the use of its the products or services. This revenue is then sent directly to The DAO in the form of ETH. The DAO then has the option to accumulate this ETH to support its growth, or redistribute it to the DAO Token Holders as a reward.

Autonomous Governance: The ETH held by The DAO will never be centrally managed. DAO Token Holders are able to vote on important decisions relating to the management of The DAO, including the power to redistribute its ETH amongst themselves.

The DAO, represented by smart contracts on the Ethereum blockchain at address 0xbb9bc244d798123fde783fcc1c72d3bb8c189413, intends to back a series of Proposals to create products or services. The DAO Token Holders will then leverage these product or services, or charge others for using them.

One of the current proposals for the DAO to fund is a marriage of the internet of things (IoT) with blockchain: slock.it. This German start-up aims to allow people that want to borrow something (anything from renting an apartment or storage locker to a bicycle or lawnmower) directly from a lender in a truly decentralized, secure, P2P fashion. Another is to fund Mobotiq, which plans to create smart driverless electric cars that can be rented P2P and could enable the development of fully autonomous, self-renting vehicles. With millions of dollars at its disposal, the DAO will surely see many new and exciting proposals that tokenholders will advocate for and fund.

The Bottom Line

The DAO is now a reality. Blockchain based organizations founded on smart contracts and digital currency transactions have been manifested on ethereum. The DAO, now midway through its creation phase, has already raised over $41 million, making it the second most successful crowdfunding project ever to date. This brand new type of organization can prove to be disruptive if it proves viable, as it democratizes the process of equity ownership and at the same time obviates the need for C-suite managers and corporate bureaucracy. It may also prove to be the killer-app for blockchain, ushering in a new age of technocratic enforcement of contracts and transactions of all sorts.

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