The DAO

The open source computer code behind the organization was written principally by Christoph Jentzsch, and released publicly on GitHub, where other contributors added to and modified the code. Simon Jentzsch, Christoph Jentzsch's brother, was also involved in the venture.

The DAO was launched on 30 April 2016 with a website and a 28-day crowdsale to fund the organization.

The token sale had raised more than {{USD|34 million}} by 10 May 2016, and more than {{USD|50 million}}-worth of Ether (ETH)—the digital value token of the Ethereum network—by 12 May, and over {{USD|100 million}} by 15 May 2016.{{cite news |last=Vigna |first=Paul |url=https://www.wsj.com/articles/chiefless-company-rakes-in-more-than-100-million-1463399393 |title=Chiefless Company Rakes In More Than $100 Million |work=Wall Street Journal |date=2016-05-16 |access-date=2016-05-16 |archive-date=2017-06-25 |archive-url=https://web.archive.org/web/20170625083255/https://www.wsj.com/articles/chiefless-company-rakes-in-more-than-100-million-1463399393 |url-status=live }}{{cite magazine |last=Morris |first=David Z. |url=http://fortune.com/2016/05/15/leaderless-blockchain-vc-fund/ |url-access=subscription |title=Leaderless, Blockchain-Based Venture Capital Fund Raises $100 Million, And Counting |magazine=Fortune |date=2016-05-15 |access-date=2016-05-16}} On 17 May 2016, the largest investor in the DAO held less than 4% of all DAO tokens and the top 100 holders held just over 46% of all DAO tokens.{{cite news|url=https://www.reuters.com/article/us-blockchain-crowdfunding-idUSKCN0Y82LI|title=Virtual company may raise $200 million, largest in crowdfunding|date=17 May 2016|access-date=20 May 2017|newspaper=Reuters|archive-date=10 June 2017|archive-url=https://web.archive.org/web/20170610084228/http://www.reuters.com/article/us-blockchain-crowdfunding-idUSKCN0Y82LI|url-status=live}} The fund's Ether value {{asof|2016|05|21|lc=y}} was more than {{USD|150 million}},{{cite news |last=Popper |first=Nathan |url=https://www.nytimes.com/2016/05/22/business/dealbook/crypto-ether-bitcoin-currency.html?_r=1 |title=A Venture Fund With Plenty of Virtual Capital, but No Capitalist |work=New York Times |date=2016-05-21 |access-date=2016-05-22 |archive-date=2016-05-27 |archive-url=https://web.archive.org/web/20160527080542/http://www.nytimes.com/2016/05/22/business/dealbook/crypto-ether-bitcoin-currency.html?_r=1 |url-status=live }} from more than 11,000 investors.{{cite web|first1=Tanaya|last1=Macheel|date=19 May 2016|url=http://www.americanbanker.com/news/bank-technology/the-dao-might-be-groundbreaking-but-is-it-legal-1081084-1.html?zkPrintable=1&nopagination=1|title=The DAO Might Be Groundbreaking, But Is It Legal?|website=American Banker|type=News|access-date=23 May 2016|archive-date=17 June 2016|archive-url=https://web.archive.org/web/20160617164525/http://www.americanbanker.com/news/bank-technology/the-dao-might-be-groundbreaking-but-is-it-legal-1081084-1.html?zkPrintable=1&nopagination=1|url-status=live}}

As of May 2016, The DAO had attracted nearly 14% of all Ether tokens issued to date.Staff, The Economist. May 21st, 2016 [https://www.economist.com/news/finance-and-economics/21699159-new-automated-investment-fund-has-attracted-stacks-digital-money-dao The DAO of accrue. A new, automated investment fund has attracted stacks of digital money] {{Webarchive|url=https://web.archive.org/web/20171118115027/https://www.economist.com/news/finance-and-economics/21699159-new-automated-investment-fund-has-attracted-stacks-digital-money-dao |date=2017-11-18 }}

On 28 May 2016 the DAO tokens became tradable on various cryptocurrency exchanges.{{cite web|url=https://www.econotimes.com/BTC-Markets-To-Enable-Trading-Of-The-DAO-Token-On-May-28-211069|website=econotimes|title=BTC Markets To Enable Trading Of The DAO Token On May 28 - EconoTimes| date=20 May 2016 }}

A paper published in May 2016 noted a number of security vulnerabilities associated with The DAO and recommended that investors in The DAO hold off from directing The DAO to invest in projects until the problems had been resolved. An Ethereum developer on GitHub pointed out a flaw relating to "recursive calls". On June 9 it was blogged about by Peter Vessenes, founder of the Blockchain Foundation.{{Cite web|last=Vessenes|first=Peter|date=2016-06-09|title=More Ethereum Attacks: Race-To-Empty is the Real Deal|url=https://vessenes.com/more-ethereum-attacks-race-to-empty-is-the-real-deal/|url-status=live|archive-url=https://web.archive.org/web/20210119023616/https://vessenes.com/more-ethereum-attacks-race-to-empty-is-the-real-deal/|archive-date=2021-01-19|access-date=2021-06-10}} By June 14, fixes had been proposed and were awaiting approval by members of The DAO.

On June 16, further attention was called to recursive call vulnerabilities by bloggers affiliated with the Initiative for CryptoCurrencies & Contracts (IC3).{{cite web|title=The Initiative for Cryptocurrencies & Contracts|url=http://www.initc3.org/|website=IC3|access-date=2017-02-14|archive-date=2017-02-14|archive-url=https://web.archive.org/web/20170214175731/http://www.initc3.org/|url-status=live}}

On June 17, 2016, the DAO was subjected to an attack exploiting a combination of vulnerabilities, including the one concerning recursive calls, that resulted in the transfer of 3.6 million Ether - around a third of the 11.5 million Ether that had been committed to The DAO - valued at the time at around $50 million.{{cite news|last1=Popper|first1=Nathaniel|newspaper=The New York Times|title=Hacker May Have Taken $50 Million From Cybercurrency Project|url=https://www.nytimes.com/2016/06/18/business/dealbook/hacker-may-have-removed-more-than-50-million-from-experimental-cybercurrency-project.html|date=17 June 2016|access-date=3 March 2017|archive-date=20 June 2017|archive-url=https://web.archive.org/web/20170620012726/https://www.nytimes.com/2016/06/18/business/dealbook/hacker-may-have-removed-more-than-50-million-from-experimental-cybercurrency-project.html|url-status=live}}{{cite web|title=Digital currency Ethereum is cratering amid claims of a $50 million hack|url=https://www.businessinsider.com/dao-hacked-ethereum-crashing-in-value-tens-of-millions-allegedly-stolen-2016-6|first=Rob|last=Price|date=17 June 2016|website=Business Insider|access-date=17 June 2016|archive-date=11 June 2017|archive-url=https://web.archive.org/web/20170611195628/http://uk.businessinsider.com/dao-hacked-ethereum-crashing-in-value-tens-of-millions-allegedly-stolen-2016-6|url-status=live}} The funds were moved into an account subject to a 28-day holding period under the terms of the Ethereum smart contract so were not actually gone.

Members of The DAO and the Ethereum community debated what to do next, with some calling the attack unethical but valid, since it did not violate DAO rules as coded, while others called for the Ether to be re-appropriated and/or The DAO to be shut down.Klint Finley for Wired. June 18, 2016 [https://www.wired.com/2016/06/50-million-hack-just-showed-dao-human/ A $50 Million Hack Just Showed That The Dao Was All Too Human] {{Webarchive|url=https://web.archive.org/web/20160726195036/http://www.wired.com/2016/06/50-million-hack-just-showed-dao-human |date=2016-07-26 }} The DAO community manager, Griff Green, organized a volunteer group of coders known as The White Hat Group to recoup the funds in the other 500 wallets before they could also be hacked.Pearson, Jordan (24 July 2017). How Coders Hacked Back to ‘Rescue’ $208 Million in Ethereum[https://www.vice.com/en/article/qvp5b3/how-ethereum-coders-hacked-back-to-rescue-dollar208-million-in-ethereum]. Wired. From the original on 2017-07-24. Retrieved 3 Oct 2023. Eventually on July 20, 2016, the Ethereum network was hard forked to move the funds in The DAO to a recovery address where they could be exchanged back to Ethereum by their original owners.{{cite web |title=Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO |url=https://www.sec.gov/litigation/investreport/34-81207.pdf |publisher=Securities and Exchange Commission |access-date=13 June 2018 |date=July 25, 2017 |archive-date=9 June 2018 |archive-url=https://web.archive.org/web/20180609110235/https://www.sec.gov/litigation/investreport/34-81207.pdf |url-status=live }} However, some continued to use the original unforked Ethereum blockchain, now called Ethereum Classic.

In September 2016, Poloniex de-listed DAO trading pairs, followed by Kraken in December 2016.

The DAO was a decentralized autonomous organization that exists as a set of contracts on the Ethereum blockchain,{{cite news |last=Castillo |first=Andrea |url=http://reason.com/archives/2016/05/24/can-a-bot-run-a-company |title=Can a Bot Run a Company? |work=Reason |date=2016-05-24 |access-date=2016-05-25 |archive-date=2016-05-26 |archive-url=https://web.archive.org/web/20160526104134/http://reason.com/archives/2016/05/24/can-a-bot-run-a-company |url-status=live }}

with no physical address or officials with formal authority. The theory underlying the DAO was that keeping operational power directly in the hands of owners, not delegated to managers, would ensure that invested funds would be used in the owners' best interests, thus solving the principal–agent problem.{{cite web|url=https://fronteranews.com/news/dao-will-soon-become-greatest-threat-banks-ever-face/|title=The DAO Will Soon Become The Greatest Threat Banks Have Ever Faced|date=25 May 2016|access-date=31 May 2016|archive-date=24 June 2016|archive-url=https://web.archive.org/web/20160624152552/https://fronteranews.com/news/dao-will-soon-become-greatest-threat-banks-ever-face/|url-status=live}}

As an on-chain organization, The DAO claimed to be completely transparent, since everything was done by the code which anyone could see and audit.{{cite web|url=https://spectrum.ieee.org/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium|title=Ethereum's $150-Million Blockchain-Powered Fund Opens Just as Researchers Call For a Halt| date=28 May 2016 |access-date=31 May 2016|archive-date=30 May 2016|archive-url=https://web.archive.org/web/20160530202345/https://spectrum.ieee.org/tech-talk/computing/networks/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium|url-status=live}} However, the complexity of the code base and the rapid deployment of the DAO meant that neither the coders, the auditors, nor the owners could ensure the intended behavior of the organization, with the eventual attacker finding an unexpected loophole.{{cite journal|title=The DAO Controversy: The Case for a New Species of Corporate Governance?| date=27 May 2020 |doi=10.3389/fbloc.2020.00025 |doi-access=free |last1=Morrison |first1=Robbie |last2=Mazey |first2=Natasha C. H. L. |last3=Wingreen |first3=Stephen C. |journal=Frontiers in Blockchain |volume=3 }}

The DAO was intended to operate as "a hub that disperses funds (currently in Ether, the Ethereum value token) to projects". Investors receive voting rights by means of a digital share token; they vote on proposals submitted by contractors, and a group of curator volunteer make sure the projects are legal and the contractors properly identified before whitelisting them. The profits from an investment will flow back to their stakeholders as specified in an on-chain smart contract.

The DAO did not hold the money of investors; instead, the investors owned DAO tokens that gave them rights to vote on potential projects. Anyone could pull out their funds by the time they first voted.

The DAO's reliance on Ether allowed people to send their money to it from anywhere in the world without providing any identifying information.

In order to provide an interface with real-world legal structures, the founders of The DAO established a Swiss-based company, "DAO.Link", registered in Switzerland as a limited liability corporation (Société à responsabilité limitée, SARL), apparently co-founded by Slock.it and Neuchâtel-based digital currency exchange Bity SA. According to Jentzsch, DAO.Link was incorporated in Switzerland because local law allowed it to "take money from an unknown source as long as you know where it's going."

In May 2016, TechCrunch described The DAO as "a paradigm shift in the very idea of economic organization. ... It offers complete transparency, total shareholder control, unprecedented flexibility, and autonomous governance."{{cite news |last=Bannon |first=Seth |url=https://techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-autonomous-corporation-is-already-here/ |title=The Tao of "The DAO" or: How the autonomous corporation is already here |work=TechCrunch |date=2016-05-16 |access-date=2016-05-16 |archive-date=2016-05-17 |archive-url=https://web.archive.org/web/20160517052722/http://techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-autonomous-corporation-is-already-here/ |url-status=live }}

The group's logo featured a capital letter Đ.

In May 2016, the plan called for The DAO to invest Ether into ventures. It would back contractors and receive in return "clear payment terms" from contractors.{{Citation needed|date=July 2022}} The organizers promoted The DAO as providing investors with a return on their investment via those "clear payment terms" and they warned investors that there was a "significant risk" that the ventures funded by them may fail.

The risks included unknown attack vectors and programming errors.{{cite web|url=https://spectrum.ieee.org/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium|title=Ethereum's $150-Million Blockchain-Powered Fund Opens Just as Researchers Call For a Halt|first=M.|last=Peck|date=28 May 2016|work=IEEE Spectrum|publisher=Institute of Electrical and Electronics Engineers|access-date=2 February 2020|archive-date=30 May 2016|archive-url=https://web.archive.org/web/20160530202345/https://spectrum.ieee.org/tech-talk/computing/networks/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium|url-status=live}} Additional risks included the lack of legal precedents: it was unknown how governments and their regulatory agencies would treat The DAO's ventures and contracts. For example, legal systems might not acknowledge a corporate veil protecting investors from individual legal and financial liability for actions taken by The DAO and its contractors. It was unclear if The DAO was selling securities, which are highly regulated, and if so, what type of securities.

The DAO has a democratized organizational structure so that control can be spread among members, with no official leadership or regulation. Normally, there is no way to recover funds if a member mistakenly transfers cryptocurrency to the wrong wallet, including in case of fraud.{{Cite journal |last1=Dhanani |first1=Ali |last2=Hausman |first2=Brian J. |year=2022 |title=Decentralized Autonomous Organizations |journal=Intellectual Property & Technology Law Journal |volume=34 |issue=5 |pages=3–9}}

Additionally, to function in the real world, contractors would likely need to convert the invested Ether into national currencies. In May 2016, attorney Andrew Hinkes said that those sales of Ether would likely depress its market value.{{Citation needed|date=September 2022}}

The code behind The DAO had several safeguards against anyone capturing the voting rights of shareholders to win investments. However, this would not prevent fraudulent or over-optimistic proposals. A paper cited a "number of security vulnerabilities".Popper N. "[https://www.nytimes.com/2016/05/28/business/dealbook/paper-points-up-flaws-in-venture-fund-based-on-virtual-money.html Paper Points Up Flaws in Venture Fund Based on Virtual Money] {{Webarchive|url=https://web.archive.org/web/20201108163117/http://www.nytimes.com/2016/05/28/business/dealbook/paper-points-up-flaws-in-venture-fund-based-on-virtual-money.html |date=2020-11-08 }}." New York Times May 27, 2016

Slock.it (a German Blockchain venture), and Mobotiq (a French electric vehicle start-up) were listed as seeking potential funding on the daohub.org website during the May "creation period". Both Jentzsch brothers were involved in Slock.it as well.

On 25 July 2017, the U.S. Securities and Exchange Commission published a report on initial coin offerings (ICOs) and The DAO, examining "whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for 'Ether,' a virtual currency." The SEC concluded that DAO tokens sold on the Ethereum blockchain were securities and therefore possible violations of U.S. securities laws.{{cite web|title=SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities; U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organisations. Press Release 2017-131|url=https://www.sec.gov/news/press-release/2017-131|website=U.S. Securities and Exchange Commission|access-date=2017-08-03|archive-date=2017-10-10|archive-url=https://web.archive.org/web/20171010022343/https://www.sec.gov/news/press-release/2017-131|url-status=live}}

{{Reflist|30em}}

• {{cite web|url=http://vessenes.com/deconstructing-thedao-attack-a-brief-code-tour/|archive-url=https://web.archive.org/web/20180128074919/http://vessenes.com/deconstructing-thedao-attack-a-brief-code-tour/|url-status=dead|archive-date=2018-01-28|title=Deconstructing The DAO Attack: A Brief Code Tour|first=Peter|last=Vessenes|date=18 June 2016}}
• DuPont, Quinn (2017). “[https://www.taylorfrancis.com/chapters/oa-edit/10.4324/9781315211909-8/experiments-algorithmic-governance-quinn-dupont Experiments in Algorithmic Governance: An ethnography of "The DAO," a failed Decentralized Autonomous Organization]” ([https://web.archive.org/web/20171215144748/http://iqdupont.com/assets/documents/DUPONT-2017-Preprint-Algorithmic-Governance.pdf archive link]). In Bitcoin and Beyond: The Challenges and Opportunities of Blockchains for Global Governance, edited by Malcolm Campbell-Verduyn. Routledge (in press).

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