A decentralized autonomous organization, sometimes labeled a decentralized autonomous corporation, 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 immediately hacked and drained of in cryptocurrency. This hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. This bailout was made possible by the Ethereum miners and clients switching to the new fork.
Background
Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digitalledger 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, thus 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 coupledpeer-to-peersmart contract collaboration. Daniel Larimer first proposed the concept of a "Decentralized Organized Company" in an article published on September 7, 2013 and implemented in Bitshares in 2014, EOSIO in 2018. Vitalik Buterin proposed that after a DAO was launched, it might be organized to run without human managerial interactivity, provided the smart contracts were supported by a Turing complete platform in 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.
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.
Legal liability
The precise legal status of this type of business organization is unclear; some similar approaches have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. Although unclear, 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 for regulatory enforcement or civil actions.
Security
The code of a given DAO will be difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralised code. Corrections for a DAO would 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 issues in the code of The DAO. The operational procedure for The DAO 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 the voting of shareholders 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 the 20th of July 2016, the Ethereum blockchain was forked to bail out the original contract.
