For your startup business, crowdfunding campaigns can
be a great way to both raise funds and validate your product market. Bridging
the gap between crowdfunding and venture financing, the Decentralized
Autonomous Organization, or the DAO, has emerged as a potential new source of
funding for projects and startups. The human-less organization has raised over
$165 million worth of Ether, a cryptocurrency, and plans to make venture
capital-style investments.
So what exactly is the DAO and how does it work? The DAO
is an organization managed on the Ethereum blockchain via smart contracts. Its
bylaws are written entirely in code, and it is managed by its investorsno
separate management team is involved. Individuals who invest in the DAO receive
tokens in exchange for their investments, and these tokens are then used to
vote on governance issues. As a result, token-holders dictate the DAO's actions
through an online polling mechanism.
Unlike shareholders in normal corporations, DAO
token-holders have complete visibility. This visibility is a core advantage and
opportunity of ledger technologies such as Ethereumtransactions on a blockchain
are fully transparent; that is, every token-holder stores a copy of the
blockchain ledger, and before any transaction is effected, each token-holder
validates the transaction against his or her copy of the ledger. As such, each
tokenholder knows who owns every token at any time. This means that accounting
and compliance systems can be decentralized as each participant has a full view
of the transactions occurring on the blockchain and can flag any transactions
that seem inconsistent or suspicious. By decentralizing the accounting and
compliance systems of an organization, ledger technology allows for significant
cost savings, the potential for more secure transactions and, in the case of
the DAO, the ability to democratize corporate actions.
This structure may bode well for your startup as it
seeks financing. Because of the extremely low overhead, the vast majority of
the money raised by the DAO will go directly to funding startups. The DAO was
built with the intention of engaging in venture-style investments, purporting
to give the everyday consumer an opportunity to invest in exciting startups and
projects. The notion that anyone can buy "shares" in a venture fund
that is fully transparent and under complete shareholder control has an appeal
that is distinct from that of crowdfunding. Investors aren't just early
adopters buying a product and funding its releasethey have a voice in which
products receive large sums of capital and they receive an equity stake in the
startup's outcome. Because of this duality, the DAO has the potential to
harness the wisdom of the crowd to make significant targeted investments in new
ideas. This model could allow startups to tap directly into the consumer base,
as with crowdfunding, and receive significant long-term financing.
While the DAO, and ledger technology in general,
present exciting funding sources for your startup, they're still in their early
stages. Policymakers, investors, innovators and others in the ecosystem are
evaluating the inherent opportunities and risks of distributed ledger
technology. Moreover, the legal status of the smart contracts on which the DAO
is based is still unclear, as are the securities law implications of the DAO's
investment model. Even aside from these potential legal challenges, the DAO
recently experienced a security breach that caused it to lose $55 million from
its treasure chest. This breach, like the breaches experienced by key market
participants in the Bitcoin context, raises questions as to the DAO's
viability. Although the DAO's developers are reportedly capable of intervening
to undo this breach, such an action would run counter to the DAO's mission of
being a decentralized, fully democratized, organization.
As with any early technology, the DAO has some kinks
to smooth out. Nonetheless, the DAO represents an interesting proposition for
the future of startup investing. At a time when high-frequency trading relies
on algorithms for day-to-day trades, increased automation and better artificial
intelligence suggest that the DAO and other autonomous entities could find
success and become the norm. Algorithms could be used in the DAO to make
management, investing and governance decisions based on code approved by
token-holders. This potential for automation, coupled with a decision-making
process that surveys the masses, could make for an exciting alternative for
startups seeking investments and individuals hoping to participate in the
startup game.
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