What's the Deal with The DAO?
It's the largest crowdsourced project ever at $150 million, but what is it?
On May 28, 2016, the funding for The DAO became the largest crowdsourced project ever.
A crowdsourced project is one in which a project, idea or company is funded not through the typical bank and investment related channels through stock offerings, private placements or debt sales. Rather, these projects are typically funded by individuals through an online channel with a variety of funding instruments.
In the case of The DAO, the project was funded with ETHER, which is the token used for Ethereum based projects.
As of this writing, the funding is not complete but the indications are that the amount of ETHER that has funded The DAO will be over $150 million (that’s in the old fashioned dollar currency, which ETHER can be exchanged for). Their initial target was for $500,000. For comparison purposes, Ethereum was crowdfunded and achieved its creation with a total of over $18 million.
What is The DAO?
So what is The DAO, and why is so much ETHER being thrown into it?
First of all, DAO stands for distributed autonomous organization, which has “has been typified as the ability of blockchain technology to provide a secure digital ledger that tracks financial interactions across the internet, hardened against forgery by trusted timestamping and by dissemination of a distributed database.”
Basically, the basis of blockchain technology is built on this concept, which is that there is no centralized entity that controls the organization, but rather the organization is maintained by a distributed network.
This concept forms the basis for the blockchain projects and infrastructure that is so highly desired by organizations and companies who are seeking to integrate this secure and efficient process into their current business models.
An organization of this nature has been seen as an effective way to crowdsource projects, as evidenced by the ability for The DAO to employ it to raise over $150 million.
How is it Funding Itself?
The DAO is not only using the concept to raise money, but it’s using it to run the entire entity. To be part of the crowd source funding process, a participant has to transfer holdings in ETHER (the token for Ethereum, which does have a dollar value as its traded on exchanges) to gain DAO tokens. The funding process was scheduled to run for 28 days and those who transferred ETHER for DAO tokens early in the process gained better value for their transaction. For the first 14 days, you would’ve received 100 DAO tokens for each 1 ETHER.
After that time, there would be a linear increase until the last 10 days when it would cost you 1.5 ETHER to gain the same 100 DAO tokens. After the 28 days were done, there would be no more DAO tokens created and if someone wanted to buy a DAO token, they would have to do so on a third party exchange.
Holders of DAO tokens would then have the ability to vote on potential projects that could be funded by The DAO, which would potentially share in the rewards, as well as risks of these investments. There would be no central entity controlling the organization or these discussions, rather they would be voted on and the impact of a decision would be effected on anyone holding a DAO token.
As with most cryptocurrency or blockchain related projects of this type, there’s a white paper. It will outline the thinking and structure of The DAO.
What About Traditional Capital Market Funding Options?
There are already potential projects that are lined up to propose for The DAO’s commitment. One of these is based on the need for the organization to provide a more effective way to govern itself and incentivize its participants. The company is Backfeed and its headed by a Harvard researcher and it may be a necessary investment in order for The DAO to address much of the concern and criticism it has gotten.
Beyond just the need to create and reward effective participation from the members of The DAO, its entire structure is new and breaking new ground in the need for investment regulators to understand how to regard it.
Because of the ability to utilize an option to the traditional capital market structure for funding, many are skeptical of The DAO’s ability to shield itself and its participants from potential risk if things don’t go well. It’s exactly this reality and its success in gaining over $150 million that points to the evolution of the capital market concept and the impact that cryptocurrencies and blockchain structures overall can have on the marketplace.
The success of The DAO to gain such a large amount of funding is only the first step. Making the organization work and creating opportunities and profits for its participants will be a much tougher job.