Venture DAOs: So Hot Right Now

What are DAOs?

Decentralized autonomous organizations (DAOs) are blockchain-based organizations that are collectively owned and operated by their members. DAOs are built upon a foundation of smart contracts that define the rules of the organization as well as perform protocol operations and governance functions. Most major decisions in DAOs begin as proposals and are ultimately decided upon by member voting which is recorded on a blockchain. This is also the same method used to control DAOs’ treasuries and to determine how these organizations spend their funds. In total, DAOs offer stakeholders significantly more transparency and control over the organization than traditional corporations.

DAO History

The concept of DAOs dates back to a 2013 blog post in which blockchain developer Dan Larimer coined the term DAC (Decentralized Autonomous Corporation). In it he described a DAC as a profit driven organization where code defines the bylaws and the organization acquires the services it requires to operate by paying for them with shares in the decentralized company. Months later Vitalik then coined the term we know today, DAO, in an essay where he pondered:

“What if, with the power of modern information technology, we can encode the mission statement into code; that is, create an inviolable contract that generates revenue, pays people to perform some function, and finds hardware for itself to run on, all without any need for top-down human direction?” - Vitalik Buterin, 2013

Years later in May 2016 one of the first DAOs was formed - a crowd-funded venture capital fund called The DAO. The DAO raised 11.5 million Ether, which at that time was worth $150 million. Three months after the fund launched it was hacked for $50 million. With the exploit details being first reported by a pre-Flashbots Phil Dalian. At the time, The DAO was one of Ethereum’s largest projects, containing roughly 14% of the circulating ETH supply. On July 20, 2016, the Ethereum community ultimately decided to save investor funds by hard-forking Ethereum and rolling back to the block before the hack. The pre-fork version of Ethereum became Ethereum Classic while the hard-fork version is today’s current version of Ethereum.

On July 25, 2017, the United States Securities and Exchange Commission (SEC) released a ruling that the tokens sold by The DAO were securities and were therefore subject to federal securities law. The DAO’s offering was subject to the same federal regulations as an initial public offering and The DAO and its investors were in violation of these securities laws. As a result of this SEC ruling, blockchain DAOs that issue tokens need to prove that the tokens do not satisfy the Howey test and therefore are unlikely to be construed as securities by the SEC.