The DAO was a digital

decentralized autonomous organization A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization managed in whole or in part by decentralized computer programs, with voting and finances handled through a decent ...

and a form of investor-directed

venture capital fund Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number ...

. After launching in April 2016 via a token sale, it became one of the largest

crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance, to fund projects "withou ...

campaigns in history, but it ceased activity after much of its funds - in the form of US$ exchanged for "

Ether In organic chemistry, ethers are a class of compounds that contain an ether group, a single oxygen atom bonded to two separate carbon atoms, each part of an organyl group (e.g., alkyl or aryl). They have the general formula , where R and R� ...

-crypto coins" - were taken in a hack in June 2016. The DAO had an objective to provide a new

decentralized Decentralization or decentralisation is the process by which the activities of an organization, particularly those related to planning and decision-making, are distributed or delegated away from a central, authoritative location or group and gi ...

business model for organizing both

commercial Commercial may refer to: * (adjective for) commerce, a system of voluntary exchange of products and services ** (adjective for) trade, the trading of something of economic value such as goods, services, information or money * a dose of advertising ...

and

non-profit A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, not-for-profit organization, or simply a nonprofit, is a non-governmental (private) legal entity organized and operated for a collective, public, or so ...

enterprises. It was instantiated on the

Ethereum Ethereum is a decentralized blockchain with smart contract functionality. Ether (abbreviation: ETH) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-s ...

blockchain The blockchain is a distributed ledger with growing lists of Record (computer science), records (''blocks'') that are securely linked together via Cryptographic hash function, cryptographic hashes. Each block contains a cryptographic hash of th ...

and had no conventional management structure or board of directors. The

code In communications and information processing, code is a system of rules to convert information—such as a letter, word, sound, image, or gesture—into another form, sometimes shortened or secret, for communication through a communicati ...

of the DAO is

open-source Open source is source code that is made freely available for possible modification and redistribution. Products include permission to use and view the source code, design documents, or content of the product. The open source model is a decentrali ...

In June 2016, users exploited a vulnerability in The DAO code to enable them to siphon off one-third of The DAO's funds to a subsidiary account. The Ethereum community controversially decided to hard-fork the Ethereum blockchain to restore approximately all funds to the original contract. This split the Ethereum blockchain into two branches, each with its own cryptocurrency, where the original unforked blockchain continued as

Ethereum Classic Ethereum Classic is a blockchain-based distributed computing platform that offers smart contract (scripting) functionality. It is open source and supports a modified version of Nakamoto consensus via transaction-based state transitions executed ...

. By September 2016, the value token of The DAO, known by the

moniker A nickname, in some circumstances also known as a sobriquet, or informally a "moniker", is an informal substitute for the proper name of a person, place, or thing, used to express affection, playfulness, contempt, or a particular character trait ...

DAO, was

delisted In corporate finance, a listing refers to the company's shares being on the list (or board) of stock that are publicly listed. Some stock exchanges allow shares of a foreign company to be listed and may allow dual listing, subject to conditions. ...

from major cryptocurrency exchanges (such as

Poloniex Circle Internet Group, Inc., doing business as Circle, is a peer-to-peer payments technology company that now manages the stablecoin USDC, a cryptocurrency the value of which is pegged to the U.S. dollar. It was founded by Jeremy Allaire an ...

and

Kraken The kraken (, from , "the crookie") is a legendary sea monster of enormous size, per its etymology something akin to a cephalopod, said to appear in the Norwegian Sea off the coast of Norway. It is believed that the legend of the Kraken may h ...

). The DAO had in effect become defunct.

History

The

open source Open source is source code that is made freely available for possible modification and redistribution. Products include permission to use and view the source code, design documents, or content of the product. The open source model is a decentrali ...

computer code behind the organization was written principally by Christoph Jentzsch, and released publicly on

GitHub GitHub () is a Proprietary software, proprietary developer platform that allows developers to create, store, manage, and share their code. It uses Git to provide distributed version control and GitHub itself provides access control, bug trackin ...

, 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 by 10 May 2016, and more than -worth of ''

'' (ETH)—the digital value token of the

network—by 12 May, and over by 15 May 2016. 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. The fund's Ether value was more than , from more than 11,000 investors. As of May 2016, The DAO had attracted nearly 14% of all Ether tokens issued to date.Staff, The Economist. May 21st, 201
The DAO of accrue. A new, automated investment fund has attracted stacks of digital money
On 28 May 2016 the DAO tokens became tradable on various cryptocurrency exchanges. A paper published in May 2016 noted a number of

security vulnerabilities Vulnerabilities are flaws or weaknesses in a system's design, implementation, or management that can be exploited by a malicious actor to compromise its security. Despite a system administrator's best efforts to achieve complete correctness, vir ...

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. 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). 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. 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, 201
A $50 Million Hack Just Showed That The Dao Was All Too Human
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. 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. However, some continued to use the original unforked Ethereum blockchain, now called

. In September 2016,

de-listed DAO trading pairs, followed by

in December 2016.

Operation

The DAO was a

that exists as a set of

contracts A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

on the

, 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 The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the " agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gr ...

. 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. 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 A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. Originally, the word meant an arrowslit, a narrow vertic ...

. 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 A smart contract is a computer program or a Transaction Protocol Data Unit, transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objective ...

. 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 Swiss most commonly refers to: * the adjectival form of Switzerland * Swiss people Swiss may also refer to: Places * Swiss, Missouri * Swiss, North Carolina * Swiss, West Virginia * Swiss, Wisconsin Other uses * Swiss Café, an old café located ...

-based company, "DAO.Link", registered in Switzerland as a

limited liability corporation A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that can combine the Flow-through entity, pass-through taxation of a partnership or sole proprietorship with the l ...

(

Société à responsabilité limitée A (, abbreviated as SARL, S.à r.l. and similar; ) is a form of private company that exists mainly in French-speaking countries, such as France, Luxembourg, Monaco, Algeria, Morocco, Tunisia, Madagascar, Lebanon, Switzerland (where it is a ...

, SARL), apparently co-founded by Slock.it and

Neuchâtel Neuchâtel (, ; ; ) is a list of towns in Switzerland, town, a Municipalities of Switzerland, municipality, and the capital (political), capital of the cantons of Switzerland, Swiss canton of Neuchâtel (canton), Neuchâtel on Lake 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."

Marketing

In May 2016, ''

TechCrunch TechCrunch is an American global online newspaper focusing on topics regarding high tech, high-tech and Startup company, startup companies. It was founded in June 2005 by Archimedes Ventures, led by partners Michael Arrington and Keith Teare. I ...

'' 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." The group's logo featured a capital letter Đ.

Risks

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. 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 vector In computer security, an attack vector is a specific path, method, or scenario that can be exploited to break into an IT system, thus compromising its security. The term was derived from the corresponding notion of vector in biology. An attack ve ...

s and

programming error A software bug is a design defect ( bug) in computer software. A computer program with many or serious bugs may be described as ''buggy''. The effects of a software bug range from minor (such as a misspelled word in the user interface) to sev ...

s. 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 Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is ...

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. 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. 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.
Paper Points Up Flaws in Venture Fund Based on Virtual Money
." ''New York Times'' May 27, 2016

Proposals

Slock.it (a German

Blockchain The blockchain is a distributed ledger with growing lists of Record (computer science), records (''blocks'') that are securely linked together via Cryptographic hash function, cryptographic hashes. Each block contains a cryptographic hash of th ...

venture), and Mobotiq (a French

electric vehicle An electric vehicle (EV) is a motor vehicle whose propulsion is powered fully or mostly by electricity. EVs encompass a wide range of transportation modes, including road vehicle, road and rail vehicles, electric boats and Submersible, submer ...

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.

Regulation

On 25 July 2017, the

U.S. Securities and Exchange Commission The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...

published a report on

initial coin offering An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of c ...

s (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 A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

and therefore possible violations of U.S. securities laws.