What is a Decentralised Autonomous Organisation?

I was asked to explain what I meant by haven’t central bankers realised that democratised trust is in the technologies and code? when I blogged about the regulator’s views on bitcoin the other day. I wasn’t going to answer, but then have been prompted to do so after attending the Blockchain Live conference in London.

The opening keynote came from Brendan Blumer, CEO of block.one; Brock Pierce, Partner of block.one; and Daniel Larimer, CTO of block.one. block.one recently set a new record by raising approximately $185 million in ether, Ethereum’s native token, through their Initial Coin Offering (ICO). The crowdsale beat the previous record ICO of Bancor, which raised $153 million in June 2017.

block.one is also the developer of the EOS.IO software , which aims to put businesses on a blockchain by supporting “distributed applications that have the same look and feel as existing web-based applications” citing the many advantages of the decentralized technology in its “transparency, security, process integrity, speed and lower transactions costs”.

The guys talked for a while about DACs, Decentralised Autonomous Corporations. Like DAO, Decentralised Autonomous Organisations, DACs will allow any business to share the benefits equally between providers and users, rather than being purely driven for profitable returns to shareholders.

Daniel Larimer was one of the first people to capture the concept of DACs back in 2014 and, at its simplest level of description, a DAC is a company that is run by rules encoded as computer programs called smart contracts whilst the DAC's financial transaction record and program rules are maintained on a blockchain.

Smith + Crown’s Brian Lio explains what a DAC is rather well if you want to know more, but it is a hard topic to get your head around. In the same way as ICOs, distributed ledgers, blockchain and cryptocurrencies are tough to internalise, DACs are a challenge for anyone not a geek.

However, in my own simple view of the world, what is happening is a hard fork in business and commerce. The old world works with governments, businesses and banks exchanging regulated contracts and currencies through centralised structures. Regulations are issued by government edicts and the community behaves through a physical policing operation.

The new world works through open sourced software where software controls what can and cannot be traded, enabling self-regulating markets to operate with trust through code.  Regulations are written into the systems and the algorithms provide the digital policing operation.

All well and good. Or maybe not, as the physical world has borders and controls that the digital world is bubbling to destroy. The physical world is then trying to work out how to build their controls and policing into the digital world by, for example, banning ICOs and bitcoin trading in China. But the struggle here is that a government finds it hard to ban such trading, in the same way as they would find it hard to ban the internet.

Equally, as the technologists put it, the internet and cryptocurrencies are not inherently bad or evil in themselves. It’s what you do with them that determines whether it is for legitimate or illegal purposes. That is why I would come back to the fact that although DACs are re-imagining business models by using tokens (a shareholding) which can be purchased using cryptocurrencies (a payment) through an ICO (exchange listing) via a trading system (an exchange), they will find that the regulators come after them through securities and financial regulatory models that apply equally to current financial products as they will to digital financial products.

The only flaw in this argument is that if regulators can only regulate what is physical and local (national and domestic), they are going to fail to regulate something that is digital and global. That means a new regulatory structure is needed and, according to my DAC friends, the DAC regulatory structure are the software rules that apply to their operations.

That is also a flawed argument as if a DAC is hacked (as the Ethereum DAO was) or an exchange is flaky (as Mt.Gox was), then there is nothing the investors can do to get their investment back.

There has to be a middle ground here, and it is an evolutionary model of global platforms with software rules that allow for self-regulating structures which, should those structures break, will look for traditional laws to bail them out.