
Ethereum’s $150M DAO Opens as Researchers Call for a Halt - sangfroid
http://spectrum.ieee.org/tech-talk/computing/networks/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium
======
eterpstra
Discussion around the issues outlined in the report have already begun (before
the report was published) in the DAO forums. It's not unexpected that there
will be problems. This has never been done before. But the fact that this
report exists, the problems are being discussed, and there are already talks
of proposals for resolving some of the issues is a good sign that the DAO is
working as intended... The community discovers problems, the community fixes
problems.

Compare this to a traditional investment fund where you hand over your money
to a private organization with opaque investment strategies, business
operations, and technology. If I invest in a Vanguard or Fidelity fund, they
only report back what is required of them by regulators. They take little to
no input from investors, and may be running their business on decades old
technology filled with flaws and bugs.

I view the DAO as an open source investment fund in the same spirit as "The
Cathedral and The Bazaar". It's not perfect, it's messy, some people are more
influential than others, there's a lot of noise, and it could collapse on
itself at any time. But everyone gets to participate (for better or worse).
Lots of eyeballs are constantly watching, and plenty of concerns will be
voiced.

I know the HN crowd is a skeptical one, but try to keep an open mind. This
could grow into something great. And if it doesn't... hey, it's not your
money, so don't sweat it.

~~~
zekevermillion
The "investors" risk losing all their money, and the curators and contractors
risk going to prison because they are conducting an illegal securities
offering with no valid exemption.

~~~
eloff
In a way, this is like Uber or Airbnb, you can't ask permission or you'd be
out of business before you managed to change the laws. Asking forgiveness is
not only easier than asking permission, sometimes it's the only viable route.

They may lose money, they may make some. But it's a grand experiment of a kind
that's never been tried before and I'm curious to see the results.

~~~
zekevermillion
Uber runs up against municipal taxi regulators. The DAO runs up against the
SEC, DOJ, and state securities regulators, just to focus on the US cops. These
people are a bit more serious than the City of Austin transit authority. As
we've already seen in multiple cases, e.g., SatoshiDice, US regulators are
aware of efforts to use profit-sharing contracts to raise funds, and view this
(correctly) as a securities offering that should be registered unless there's
a valid exemption. I was on a train some months ago and saw Preet Bharara
reading the WSJ. At least I'm pretty sure it was him. How long do you think
before a failed DAO crowdfunding ends up on the WSJ front page? If investors
lose $100mm you can bet it will get that kind of publicity. Then it's just a
matter of identifying the ideal defendant for symbolic punishment. If I were
involved in slock.it, I would be careful not to travel through the US.

~~~
darawk
The DAO exists outside of the laws of the United States. If the US curators
are arrested, they will be replaced with non-US residents.

This is the fundamental premise of decentralized systems. They are resilient
to the interventions of governments. Bitcoin is definitely illegal in many
places in the world, and occupies something of a gray area in the US. Yet, it
operates just fine.

~~~
bunkydoo
You've obviously never heard of extradition have you?

~~~
darawk
No country is going to extradite one of its own citizens for selling a
financial product that doesn't happen to be approved by the US SEC and isn't a
ponzi scheme / scam (the DAO may be a lot of things, but it is likely not an
explicit confidence scheme). Not to mention the fact that there are plenty of
countries who won't extradite to the US for _any_ reason.

~~~
zekevermillion
But I am speaking exactly of the scenario where a dao project
curator/contractor is perpetrating a financial crime. In that case, most
countries would in fact extradite. If that's even necessary. I mention US laws
not b/c I'm in favor of US imperialism but b/c I am familiar with these laws.
I'm sure that there are other relevant jurisdictions that would frown upon
financial crimes regardless of new age window dressing.

~~~
darawk
I don't think it's clear that the DAO represents a 'financial crime'.
Especially not on the part of the curators. It is an unregulated, unlicensed
investment vehicle, but it's certainly not predatory, and especially not on
the part of the curators (who are the only arrestable individuals).

~~~
zekevermillion
The problem as I see it is that a curator could be affiliated with a
contractor, and the same person could also hold a large stake of tokens. At
some point the dao is not truly decentralized, and the parties with the power
to influence voting decisions for their own benefit do not disclose this
conflict.

~~~
darawk
Ya that's certainly a possibility. Of course, in such a situation, the curator
could be fired. However, you face the same issue in any publicly traded
corporation, but with even less recourse for the shareholders.

Don't get me wrong, even though i'm invested in the DAO a bit, I fully expect
there will be serious disasters like this along the way. I'm not blind to how
overwhelmingly likely it is that at least some people will run off with at
least some of the money they get. But I do think these issues will get shaken
out over time. And then we'll simply be left with: is it a good idea to let
the wisdom of crowds make investment decisions? (also, likely the answer here
is an emphatic: no, but it'll be interesting to find out).

------
CyberDildonics
I have to say that as far as flawed systems of incentives go, the one outlined
in the article seems pretty tame. I feel like it is something people don't
understand in general and something that is often manipulated, but simply not
paying attention roughly amounting to an implicit 'yes' doesn't strike me as a
fatal flaw.

That being said I think ethereum is very interesting but enormously risky
(even more so than some other crypto-currencies). I think experiments like
this are fantastic, but starting with 150 million is not. It would be much
better in my opinion if it started with 1000 dollars and tried to grow from
there gradually.

As far as incentives go, 150 million is a huge incentive to play fast, loose,
and dirty by any means necessary to get balance into keys you control and cash
out. From what I've seen of kickstarter, the internet is WAY less skeptical
than they should be and it seems everyone needs to learn the lessons of their
grandparents on how not to lose money to false promises.

------
hNewsLover99
DAO's claim of being "jurisdictionless" \-- and thus not subject to any state
or federal laws governing the rights and duties of business organizations,
fiduciaries and beneficiaries or creditors and debtors -- then its equity
owners (i.e., those who spent Ether in exchange for proportional ownership
tokens) wouldn't enjoy the investor liability limitations and other
protections provided by those laws.

As a result those equity owners could be on the hook for claims and judgments
against the DAO for sums in excess of the value of the Ether they've paid in
or the tokens they've received.

------
applecore
Does the governance structure of the DAO support permanently shutting itself
down? What system of checks and balances exists to govern its behavior if
things get really bad?

~~~
sidko
It allows a way to 'split' the DAO, and also take your 'share' of what's left
and just leave.

For instance, you are already scared and don't want to deal with this anymore,
you can just take all the ETH that you put into this and forget the whole
thing happened.

However, there are some issues with timing, and other attack vectors/flaws in
this mechanism outlined in the research being referred to in the article.

Here's the original research paper. It's a very good read:
[https://docs.google.com/document/d/10kTyCmGPhvZy94F7VWyS-
dQ4...](https://docs.google.com/document/d/10kTyCmGPhvZy94F7VWyS-
dQ4lsBacR2dUgGTtV98C40/mobilebasic)

~~~
curiousgal
I believe you'd have to wait like 21 days for your ether to clear so that
you're _completely_ out. But I am not sure.

~~~
reddytowns
It's 48 days. [https://daowiki.atlassian.net/wiki/display/DAO/Step-by-
Step%...](https://daowiki.atlassian.net/wiki/display/DAO/Step-by-
Step%3A+Splitting+the+DAO)

------
bunkydoo
This ultimately ends with Vitalik receiving a subpoena from the feds on behalf
of a U.S. based investor who loses and gets pissed. Then he either complies
and builds a backdoor for Ethereum, or he gets banned from the U.S. has
trouble going back to Russia because they want the same thing. So he will
ultimately become like the Bobby Fischer of crypto in effort to not give
government backdoor access to Ethereum. Will it work? Tune in next week!

~~~
DennisP
Ethereum is defined by a 32-page spec and has seven independent
implementations so far, each in a different language, with only one produced
by the organization that Vitalik leads. It might be a bit challenging
introducing a back door.

------
force_reboot
The no vote bias looks like a serious flaw in the DAO. As the authors say, it
is safe for an informed investor to split than to vote "no" on a proposal (for
reference, users who split are still entitled to the proceeds of any proposal
they funded so far). So passive investors would either be in danger of an
attack from a bad proposal, or would find a way to automatically split if the
investor wasn't available, defeating the purpose of the DAO.

Put another way, the stock market rewards passive investors with exactly the
same rewards as active investors (which has its own problems - shareholder
control over management is notoriously lax), but the DAO goes to the opposite
extreme.

I personally think that calling for a moratorium is presumptuous - I'm
certainly glad there was no moratorium of the stock market when it was
introduced because some economists identified some real flaws. But it is a
well researched critique.

~~~
CyberDildonics
But wouldn't that end up being all or nothing? If there were many investments
going on and someone splits, do they retain all the previous investments? I
suppose the answer is yes, but then are the same curators working for them?

------
awt
I would be interested to know how much the creators of the DAO have studied
the history of democracy.

~~~
eterpstra
I can't speak for the individual creators, but the 'tyranny of the majority'
has been discussed at length and is the basis for the 51% attack mitigation.
DAO and Ethereum enthusiasts also seem to enjoy discussing 'delegative
democracy' (or 'liquid democracy') at length.

------
lukebp
Could ethereum be used to create verifiable transparency in investment funds?
Something that would prevent fraud, such as the Bernie Madoff ponzie scheme,
from occurring.

~~~
josu
Yes, and kind of. You'd probably avoid a Madoff-like kind of scheme, but
scammer will always exist and they'll find new ways.

------
Animats
So the same people behind the DAO are behind Slock? That is, the people behind
the exchange are also pushing the first offering?

Uh oh.

------
sillysaurus3
[https://boards.4chan.org/biz/thread/1271161/wtf](https://boards.4chan.org/biz/thread/1271161/wtf)

Transcript:
[http://pastebin.com/raw/ATJSADgr](http://pastebin.com/raw/ATJSADgr)

One could argue that the thread consists of nothing but trolling, and that no
one could possibly be so stupid as to invest their entire life savings, take
out loans, and attempt to use credit cards to buy coins. Unfortunately, I've
seen it happen.

The conversations on that thread are almost exactly the same as they were
several years ago. "Hold. Things will get better, you simply must hold." "But
I lost half my life savings..."

~~~
CyberDildonics
Everyone learns their lesson at some price, but for some it is higher than
others.

------
dreamdu5t
Wake me up when the DAO does something interesting

~~~
wyck
Haven't you heard they are going to destroy airbndb because they invented a
self install lock app, people will be rushing to the stores to install these
locks because it solves so many lock related issues, it's more expesive then
what's already on the market, it's a great signal to local regulations that
your illegally renting your house, and as a bonus they do zero marketing, it's
all win.

~~~
TeMPOraL
> _and as a bonus they do zero marketing_

The _locks_ or the _company_ does zero marketing?

Also, I went to their page:

[https://slock.it/](https://slock.it/)

First thought: "OMG this looks like just another bullshit startup". Pages
looking like that are a pretty reliable signal of very low value to
presentation ratio...

------
intrasight
I read the article as saying "passive investors might get screwed". So this
discussion should be healthy for the DAO if it gets these passive folks to
become more active. Creating the future will require some work.

~~~
joosters
No, it's worse than that. Everyone (with money in the DAO) may be screwed.

------
brador
What advantages does the DAO offer over a regular fund for investors?

It looks like you get less regulartion and legal weight if things go
wrong...am I missing something?

~~~
ilaksh
Its transparent and everyone can vote. So its like being able to read over all
contracts and investment strategies that a fund manager is considering ahead
of time and voting whether you want to be part of it. Then you can see every
single transaction the 'fund manager' makes.

If you understand how Wall St. works then the question becomes 'why does
anyone use regular funds'.

~~~
dpc59
People use regular funds because they want their capital to grow without
having to think or work.

------
reddytowns
Slock has responded to this by creating a proposal to fix these security
issues: [https://blog.slock.it/slock-it-security-proposal-1-is-now-
ve...](https://blog.slock.it/slock-it-security-proposal-1-is-now-verified-we-
look-forward-to-you-guys-being-able-to-vote-on-it-d20b3a2e7d9c#.4ng99aiix)

------
_Marak_
I spent a few days in the DAO chat room discussing a potential proposal.

The general consensus among the developers was that the DAO isn't ready for a
real business, and any business owner intending to use the DAO would face real
potential risks for loss of funds or worse.

Still, it's a really interesting idea. Wish it was ready for prime-time.

~~~
ilaksh
That's just the difference between honest problem solving people and the
average Wall St. sales guy. One tells you about the risks, the other doesn't
really understand the risks or care, he is just trying to get more of your
money to play with.

------
kordless
I bet you an Ether it's also highly vulnerable to polarized voting.

------
jsprogrammer
>“In general what you really want in any kind of a voting-governed structure
like the DAO is you want the voters to vote their true preferences. You want
them voting in line with what they want to see happen,” says Sirer. In other
words, if a token-holder thinks that the proposal will yeild[sic] profits and
increase the net worth of the DAO, he should vote yes. If not, he should vote
no. But that’s not what we’re likely to see, according to the analysis.

Sorry, but I had to stop reading there. The sentences do not logically follow
each other. The other words used by the author are not equivalent to what Sure
was quoted as saying. In fact, the author's assertion removes all autonomy
from a token holder and reduces them to a revenue maximizing rubber stamp.

Edit: if you can't deal (or even read), pls downmod

~~~
ianai
I suppose the statements agree if all the voter is interested in is profit.

~~~
jsprogrammer
It removes all autonomy from the voter being able to express their true
preferences as the author has subjugated them to profit.

~~~
schwabacher
You are missing the point - whether their motivation is purely profit, or
altruistic, or whatever - if they do not want to fund a project, they have an
incentive not to vote 'No' against it because as soon as they do they can no
longer remove their money from the DAO, and have committed to funding the
project if it passes.

~~~
jsprogrammer
Maybe you are missing the point?

The author conflates an (presumably autonomous) individual's true preference
with necessarily increasing the net worth of the DAO. There is no a priori
reason to believe that.

Edit: you could, like, you know, post a reason to believe the equivalency.

~~~
tripzilch
I _think_ .. I believe the point of the featured article was the example:

(given the voter is mainly interested in profit, then) IF a voter thinks that
the proposal will yield profits and increase the net worth of DAO: vote yes

but only if their interests align that way. if they don't, obviously their
decision will be based on other factors.

the point being, it should be straightforward and obvious to vote yes or no,
depending on whether the result of a majority-vote yes or no, would align with
your particular interests yes or no.

while that statement seems almost tautological, it's a very desirable
requirement for voting systems. I'm not 100% sure on the terminology (it's
been a while since I studied it) but it might be called "monotonicity" or
something.

the point of the article was that in some cases it would be advantageous to do
something different instead of voting yes or no along with your particular
interests. in this case that it would be better to split than to vote no, in
many cases. that demonstrates the (mathematical/logical) assumption of
monotonicity (if it was called that) is violated.

but you only need one example to demonstrate that. so it doesn't quite matter
that this is not everybody's incentive, as long as it's a reasonable incentive
that people may choose.

I admit the added bit about "increasing the net worth of DAO" raised my
eyebrows as well. I just assumed many profit-interests would align with the
net worth of DAO, and that it'd be healthy for the system or something (I
don't know).

------
ianai
I love the idea of a corporation ran completely by rules and regulations. But
the blockchain sours it for me. I just do not believe that operates in any way
like a currency must.

~~~
llamataboot
In this case, the blockchain isn't acting like a currency, it's acting like a
impartial applyer of decisions made by people..

~~~
ianai
Interesting, got a link?

~~~
DennisP
Here's the main site, link to the whitepaper at the bottom of this page:
[https://daohub.org/about.html](https://daohub.org/about.html)

