The DAO

The Decentralized Autonomous Organization (DAO) was an attempt at an unbanked entity, though not unincorporated. It was organized as a Swiss SARL, and raised approximately 11.5 million Ethereum (ETH). The DAO was to be a fund that ran on smart contracts, and would make loans to entities that would use the funds in productive ways.

The reasoning behind the DAO was that investors would vote on all decisions, and with governance done entirely with smart contracts for the benefit of investors, it would defeat any perverse incentive that a director or manager might have. All decisions would be in the interest of investors.

A series of vulnerabilities in one of the DAO's smart contracts allowed malicious hackers to steal $50 million in ETH, or a third of the DAO's funds.

The DAO was delisted from major exchanges by the end of 2016, and that was the end of it. In order to recover the funds, the Ethereum blockchain went through a controversial hard fork.

A faction of the Ethereum community was opposed to refunding the funds from the DAO, claiming that a hard fork violated the principle of immutability and the notion that code is law—that users should be made to abide by. This led to the creation of Ethereum Classic.

About a year after delisting, the SEC stated that the raise was probably in violation of US securities law, although it was declining to take action against the DAO. No one suffered criminal penalties.

This was likely the first instance in which professional managers were removed from the process of running an organization. Disintermediating corporate boards and directors and allowing stakeholders to have a say directly seems to be a good idea, at least on the face of it. Blockchain provides a variety of consensus mechanisms, such as proof of stake and delegated proof of stake (discussed in greater detail in the previous chapter), that are natural fits for this sort of problem, as well as the limitless possibilities allowed by smart contracts.