A new form of crowdfunding, called a DAO, seems to be gaining popularity thanks to the benefits of transparency and autonomy that this system offers. The growing popularity of this new model could even redefine the way that people invest.
As cryptocurrencies gain popularity around the world, Decentralized Autonomous Organizations (DAOs) are now playing an important role in this ecosystem. This method of investing is essentially about being part of a group formed to fund a specific objective. So, what's the difference between classic crowdfunding and a DAO?
First, in this new type of organization, maintained on a blockchain, decisions and choices are submitted to the participants who wish to be involved thanks to what are known as smart contracts. In reality, this contract is a computer protocol that will simply execute an action when the prerequisite conditions are met. So no decisions can be made that do not comply with the previously established rules. This ensures the autonomy of the project, since its functioning is almost automatic. Another advantage is that the system is decentralized, meaning that there is no hierarchical governance. All investors are essentially governors, with control spread out among them, and decisions are made by online voting.
Towards a new way of investing?
Generally speaking, to participate in a DAO, you need to have a "native" token for the project. In the example of the fundraising campaign to help Julian Assange's legal defense (AssangeDAO), payment was made in Ethereum (like most DAOs), but the token is called "Justice." It is with this token that it is possible to take part in decisions and to propose ideas. Obviously, the power of each person in the decision-making process depends heavily on the number of tokens they own. If the funding campaign proves financially successful, the price of the token increases, so it's even possible to make money from these crowdfunding campaigns.
Another not immediately obvious advantage is that since the vast majority of users are anonymous, when a proposal is submitted, it escapes judgments about the status of the issuer. But while they have undeniable advantages, DAOs also have drawbacks. First, like any software-based tool, potential flaws exist and cyberattacks could impact the system or even the data. In 2016, the DAO in charge of financing the Ethereum protocol was hacked because of a flaw in the smart contract. As a result, the hacker was able to pocket 3.6 million Ethereum, worth $50 million at the time.
Since the system ensures transparency for all, the source code of the project is, for the most part, publicly available. It is therefore possible for a developer to detect changes and even copy this code for other applications. Unfortunately (or fortunately, depending on your point of view), as in the cryptocurrency ecosystem, these new investments lack regulation. In the United States, Wyoming became the first state to pass a law to recognize DAOs as legal entities. Despite these legal or operational hurdles, DAOs may become an increasingly popular means of supporting transparent projects.
