Campbell R. Harvey Duke University and NBER Innovation and Cryptoventures The DAO Campbell R. Harvey Duke University and NBER February 3, 2018

Campbell R. Harvey 2018

Background Decentralized Autonomous Organization Purpose: Venture Capital Fund for blockchain based investments that would be directed by investors Smart contract on Ethereum blockchain No management structure, no Board of Directors, no employees Code was open-source The DAO was stateless – (not tied to any country) – so not obvious how it would (or could) be regulated Campbell R. Harvey 2018

Background Decentralized Autonomous Organization Launched April 30, 2016 on Ethereum block 1428757 with a 28-crowdsale to fund the organization. Ether value about $150 million by May 21 (about 14% of all ether at the time). DAO tokens were traded on various exchanges by May 28 Campbell R. Harvey 2018

Background June 2, 2016 Campbell R. Harvey 2018

Background June 16, 2016 Campbell R. Harvey 2018

Background Decentralized Autonomous Organization June 17, 2016 The DAO attacked and user gained access to about $50 million of ETH Funds put in a 28-day holding period (as per the contract) Community debated what to do https://en.wikipedia.org/wiki/The_DAO_(organization) Campbell R. Harvey 2018

Background June 17, 2016 Campbell R. Harvey 2018

Mechanism How did it work? As an investor, you would call the smart contract, and send it ETH in exchange for DAO tokens. The token is just simply a way to vote, but it had value. However, this value was not close to the value of Ether but similar to any other ERC20 token’s value. The tokens were what you could use to vote on proposals. The more tokens you had, the more ETH you had committed, and the more say you had in voting. Campbell R. Harvey 2018 https://www.sec.gov/news/press-release/2017-131

The Fork How did it close? When The DAO closed, all transactions were reverted from the hack, and all ether was returned to the original contract (and subsequently to initial investors). The contract itself stored ETH which it exchanged for tokens (to investors), thus, when the contract was hacked, the DAO lost most of its committed ETH. The loss of ETH was significant enough that the ETH core developer team decided to fork the chain instead of allow the hack (i.e., Eth-Classic and Ethereum chains). There was also a holding period of 28 days that the attacker had to wait before he could trade the funds, which is why there was time for the core-team to decide a course of action. Campbell R. Harvey 2018 https://www.sec.gov/news/press-release/2017-131

Is it a Security? Decentralized Autonomous Organization July 26, 2016 The SEC rules that DAO tokens were “securities” subject to federal securities laws. …issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection. Campbell R. Harvey 2018 https://www.sec.gov/news/press-release/2017-131

Is it a Security? Decentralized Autonomous Organization Thank you for this information.  Been scrambling a bit this week.  Several of my colleagues are gone for Davos and I am preparing to give a presentation for my company retreat which is the week after next.  Please pardon the delayed response.   about $150 in ether at the time was committed.  I remember the DAO, Ether was locked into the DAO contract and supposedly the DAO tokens were going to be utilized for allowing decentralized governance as if a group of people can manage a DAO VC company - because of this value driven dynamic, SEC is considering the DAO tokens as securities. >>First, as an investor, did I just commit some ETH to it, that is, in the smart contract? I know there was a token associated with The DAO. Did the token have value greater than the ETH? Or was it just a way to vote. You committed Ether into the DAO smart contract, which had a bug in it.  The token also had its own value associated with it.  The token value was denominated in Ether or some other crypto, depending on the exchange I believe - I'm pretty sure Poloniex had DAO tokens (I was too busy working with our team on scrambling together around to hard fork to actively trade this stuff).  The DAO tokens represented the value of being able to govern the huge store of Ether in the DAO contract that can be invested into projects in the Ethereum space.  As a quick note, ConsenSys was in no way supportive of the DAO.  In fact, our CEO did not like the idea and was not supportive of it.  Full disclosure, I bought 3 Ether worth of DAO tokens just for fun. our friend Dino wrote the first moratorium post on identifying the vulnerabilities: http://hackingdistributed.com/2016/05/27/dao-call-for-moratorium/ two of our interns wrote about the vulnerability in the soft fork, which eventually led to the necessity of doing a hard fork: http://hackingdistributed.com/2016/06/28/ethereum-soft-fork-dos-vector/ >>When the DAO closed, where did the investment funds go? Were they returned to the initial investors? Some of the funds were rescued by a group of white hat hackers: https://blog.status.im/devcon3-interview-series-jordi-baylina-dr-christian-reitwiessner-and-greg-colvin-1449b8f18841 Some of the DAO Ether remains stolen. I believe the Ether that was not stolen could be withdrawn, though this article specifies that some people simply chose not to withdraw: https://www.coindesk.com/25-million-of-dao-ether-still-remain-one-month-after-hard-fork/ My Synopsis: I think the DAO was obviously a failure, though a very powerful experiment that can inform future iterations of structures that may be both similar to the DAO or better in that they improve upon certain aspects of the funding mechanism.  I think our current ICO market is not the right way to approach the token market.  Current ICO tokens are not necessarily backed by anything.  The tokens are simply allocated from the ERC 20 contract without necessarily being backed by Ether.  The DAO was brilliant in a way because the Ether backing the DAO was actually worth something. Vitalik is looking at some models like the DAICO:  https://themerkle.com/vitalik-buterin-releases-revolutionary-new-daico-model-for-icos/ Simon one of our first employees is proposing bonding curves: https://medium.com/@simondlr/tokens-2-0-curved-token-bonding-in-curation-markets-1764a2e0bee5 Curation markets and token curated registries are also power technologies to look at: https://www.google.com/search?q=curation+markets&oq=curation+markets&aqs=chrome..69i57j69i60l2j0j69i60.3025j0j4&sourceid=chrome&ie=UTF-8 https://medium.com/@ilovebagels/token-curated-registries-1-0-61a232f8dac7 Campbell R. Harvey 2018