Campbell R. Harvey Duke University and NBER Innovation and Cryptoventures The DAO Campbell R. Harvey Duke University and NBER January 25, 2018

Campbell R. Harvey 2018

Background Decentralized Autonomous Organization Purpose: Venture Capital Fund for blockchain based investment 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 had value,. However, this value was not close to the value of Ether but rather similar 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