The DAO

The DAO and its foundation

The DAO was founded in 2016, putting into practice an idea that had been already theorized in 2013, with the goal at the time of establishing a ride-sharing platform, that is, one that would connect drivers and users on the basis of a decentralized software architecture (see https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274).

While it is interesting to analyze the characteristics of The DAO, it is important to keep in mind how each decentralized organization is different from the other, as much on the basis of the different cryptocurrencies that can be used, as on the strength of the wide elasticity and variability in the way they are governed. Several initiatives, in fact, followed this initial experimentation between 2016 and 2017, based on proceedings of ICOs, demonstrating the interest of non-professional investor start-up initiatives in legal forms other than traditional corporate finance models.

The establishment of The DAO was, indeed, quite simple, following a process that can be usefully broken down into the following stages:

1. a 28-day "creation" phase, during which investors had the opportunity to trade ETH for tokens issued by the DAO, raising a sum of Ether cryptocurrency of about $150 million, from more than 11,000 private investors. During this period, the price of the tokens grew, in part to incentivize the riskiness of the initial, information-free investment. These tokens contained a disclaimer that they would not qualify as shares or other forms of corporate participation.
2. After this initial period, tokens were no longer issued, although it was still possible to trade existing ones on secondary markets. Suddite tokens allowed for both publishing proposals and voting on them, directly controlling the structure of the organization and managing it democratically. In this sense, The DAO constituted a full experimentation of that decentralization which, while it could be graduated until it came considerably closer to the mechanisms of a traditional corporation, is an essential character of the typical DAO. During this "static" phase a white paper was also published by some experts identifying some of the risks involved in investing in and using the DAO.
3. Token holders were able to vote on several proposals, among which "Slock.it," a project aimed at establishing a platform in accordance with the model of the so-called sharing economy, functional to connect property owners with potential landlords, gained wide acceptance. Transactions and relationships between contractors were handled automatically, minimizing intermediation, on the basis of smart contracts.
4. An update of the system on which DAO was based was developed and proposed, functional to prevent cyber attacks whose danger had been pointed out by several experts, and which had been tested on another DAO project (MakerDAO). Several developers of the platform, in fact, had detected the presence of some programming errors in the smart contract on which The DAO was based.
5. A second warning about the vulnerability of The DAO was issued on June 16.

The attack and the "hard fork"

In June 2016, an anonymous cyber attack was launched on the organization, similar to the one whose risk had been identified and analyzed. Figuring that the hacker's goal was to convert the stolen cryptocurrency into legal tender, an attempt was made to block trading. However, fearing reputational repercussions and thus a loss in the value of crypto, not everyone agreed to freeze the market immediately. Within a short time, about a third of the capital put into the platform was taken away.

It was decided not to initiate a court proceeding for a technical reason: the dispossession by the anonymous attacker had transferred the ether deposit codes into his own material possession, gaining exclusive control of them and making a contrary transfer by enforcement impossible. A court proceeding, therefore, could have led only to an abstract pronouncement that was materially unrealizable. Moreover, the impossibility of recovering the misappropriated ethers would have been without prejudice to any claims by the fund's investors for the platform's negligent conduct, consisting of its failure to control the defective program and thus contrary to the duty of care. The directors of The DAO were then faced with the alternative of whether to suffer the consequences of the breach or to activate a technical solution that could reduce losses.

In the following weeks, thanks to the political clout of the founder and the Ethereum Foundation, a "hard fork" version of the Ethereum software, considered as the best technical solution, was developed and released to miners. This system fork allowed the blockchain to be recalculated to the block prior to the attack, resulting in the loss of validity of the blocks containing the stolen ethers.

This solution created heated debates in the community. Specifically, a portion of miners believed that majority consensus was a necessary and sufficient element to proceed with the reorganization; while an opposing current of thought emphasized that the very immutability of the blockchain generated the market trust necessary for the success of the project. In other words, the historical reconstruction of transactions could not be altered!

A portion of hubs, in fact, rejected this modification, resulting in a parallel blockchain (Ethereum classic), while the majority voted in favor of executing the fork.

Eventually, the majority of miners implemented this new software, so that after a few months the blockchain registry was updated to effectively delete the DAO, and tokens issued from it were delisted from secondary markets.

References

• Q. DuPont, Experiment in algorithmic governance. A history and ethnography of “The Dao”, a failed decentralized autonomous organization, in Bitcoin and beyond. Cryptocurrencies, blockchain, and global governance, edited by M. Campbell-Verduyn, 2018, p. 159 et seq.
• P. Ortolani, Decentralized Autonomous Organizations: inquadramento giuridico de jure condito e prospettive de jure condendo, in Blockchain e Smart Contract. Funzionamento, profili giuridici e internazionali, applicazioni pratiche, edited by R. Battaglini, M. T. Giordano, Giuffrè, Milano, 2019, p. 403 et seq.
• M. L. Perugini, Distributed Ledger Technologies e sistemi di blockchain. Digital currency, smart contract e altre applicazioni, Key,  2018, p. 85.