
Caution: The DAO Can Turn into a Naturally-Arising Ponzi - timmytokyo
http://hackingdistributed.com/2016/06/13/the-dao-can-turn-into-a-naturally-arising-ponzi/
======
Animats
_" This points out a fundamental problem with programmable financial assets:
there are so many degrees of freedom that it's difficult to compare asset
prices and perform arbitrage. In fact, I would not be surprised if the
developers purposefully made their contracts complex to discourage such
comparisons. Additional complexity also makes it difficult for the investors
to figure out what exactly they are buying. Why should someone who wants to
exit a crowd-funding vehicle follow a weird software engineering pattern that
is tantamount to buying a timelocked asset? What exactly happens to the reward
tokens of The DAO through splits? Why is this stuff so needlessly
complicated?"_

This sounds all too much like Paycoin. Paycoin was a competitor to Bitcoin,
but it was much more complicated. There was a claimed guarantee that the price
of Paycoin would not fall below $20. (The current price of Paycoin is
$0.01212923.) There was a connection to a Bitcoin mining operation, GAW
miners. There was BanxShares, which was some kind of derivative based on
Paycoin and backed by a porno site.[1] There were ZenCloud and PayBase. There
was a Paycoin Foundation. There was supposedly a reserve in US dollars backing
Paycoin.[2] There was a "Hybrid Flex Blockchain" to provide faster
confirmations.

The result was a disaster.[3]

There's a long history of complicated Ponzi-like things. Sergei Mavrodi did it
twice, once in the 1990s with "MMM" in Russia, [4], and again, after doing
jail time, as Bitcoin-based "MMM Global" in the 2010s.[5] MMM was a
combination lending network, pyramid scheme with a downline, and Ponzi. It
collapsed both times, of course.

Warren Buffett on overly complex finance: [6]

[1]
[https://bitcointalk.org/index.php?topic=813191.0](https://bitcointalk.org/index.php?topic=813191.0)
[2]
[http://web.archive.org/web/20150214110136/https://paycoin.co...](http://web.archive.org/web/20150214110136/https://paycoin.com/)
[3] [https://bitcoinmagazine.com/articles/death-paycoin-
employee-...](https://bitcoinmagazine.com/articles/death-paycoin-employee-
video-reveals-internal-chaos-1429396603) [4]
[https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29](https://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29)
[5] [http://www.fin24.com/Money/Investments/alleged-sa-ponzi-
sche...](http://www.fin24.com/Money/Investments/alleged-sa-ponzi-scheme-mmms-
global-pyramid-collapses-20160412) [6]
[http://www.buffettsecrets.com/understanding-the-
company.htm](http://www.buffettsecrets.com/understanding-the-company.htm)

~~~
kolinko
The differnce is that in TheDao the money is protected by a smart contract.
It's auditable by anyone and securely locked - literally no single person or
entity owns keys to the lock.

In case of Paycoin, and many other similar scenarios, you had to trust the
company.

~~~
aminorex
Auditability in principle is good in principle. Actual audits in actual
practice, on the other hand, would be actually good.

~~~
Bartweiss
"In theory, theory and practice are the same..."

------
slg
The fact that an article like this has to be written should say enough about
these type of cryptocurrencies and the people who "invest" in them. If you
don't understand the time value of money, the value of liquidity, or how
bubbles work, you probably shouldn't be in charge of your own investments.

~~~
josu
Yet, if you had invested in bitcoin 5 years ago you would have outperformed
Berkshire Hathaway's lifetime performance. In my opinion if you are young, it
makes sense to make these kind of bets, and it doesn't necessarily mean that
you are misinformed. Cryptocurrencies are certainly onto something, and it's
still not clear which one(s) is(are) going to win, so by buying them you are
not only making an investment but also voting with your money. I do believe
that the DAO will crash and burn, but the truth is that among the people that
bought DAO tokens, I don't know anybody that invested a significant amount of
their savings. Furthermore most of the people used the Ether they bought at
100th the current price when it first launched. Last but not least, as an
economist, the DAO is a fascinating experiment, but I do hope that nobody
loses their life savings because of it, which brings me back to your initial
comment that raises a good point.

~~~
powera
Is Bitcoin supposed to be an investment or a currency?

~~~
jonny_eh
Yes

~~~
conception
Exactly. Is the dollar a currency or an investment. It's both.

~~~
colanderman
The dollar undergoes inflation. That makes it a pretty terrible investment.
(It is, by definition, outperformed by near-zero-risk I-bonds.)

~~~
ptaipale
The dollar doesn't necessarily have inflation in comparison to my national
currency... and it may be the most readily available investment opportunity
that helps you avoid poor national economic policies.

~~~
aminorex
Yes, this. Hence its worldwide popularity. The dollar is the #1 u.s. export by
an order of magnitude; because it is a terrible investment for u.s. persons
and a marvelous investment for non-u.s. persons.

------
DennisP
The guaranteed 1 ETH payout only lasts until TheDAO funds its first project,
after which the payout is only the investor's percentage of TheDAO tokens
times TheDAO's remaining ETH. So the potential for a "natural ponzi" won't be
around for long.

There are a fair number of people who've decided to hold ETH long-term
regardless of short-term price action, and for those people, a risk-free way
to increase ETH holdings is more attractive. But in this case it's not
entirely risk-free, since people have described various attacks on TheDAO,
including at least one that could prevent people from extracting the ETH. The
attacks can be prevented with code updates, but not until people vote to adopt
the updates.

------
reddytowns
The author is confusing a ponzi scheme with a bubble. A ponzi scheme implies
deception (get a fantastic interest rate which is clandestinely being supplied
by your own invested funds). Since The DAO is completely open in the way it
works, that would be impossible by itself.

The author actually talking about the creation of a bubble. However, usually,
bubbles are created in things where the potential profit is unclear. Otherwise
it's hard to justify. Who would buy The DAO at a greater price then its book
value in ether, if they simply expect to extract the same amount of ether out
of it after 48 days?

So, such a move by The DAO will probably not create a bubble or "a ponzi" or
whatever. It simply is an investment choice with likely no far reaching
implications, as far as I can tell.

~~~
TylerE
The early investors got in very far UNDER the current "market" value.

~~~
rtkwe
That's not a ponzi scheme, that's how investments in general work especially
with startups and VC, the defining part of a ponzi scheme is that later
investors funds are used to pay the returns of earlier investors.

------
csomar
> The reason why The DAO tokens are cheaper than 1.0 ether is because of this
> uncertainty.

That's a wrong way to look at it. The price of a DAO will equal to 1 ether
minus the costs of shorting 1 ether.

~~~
JumpCrisscross
You're forgetting the 48-day asymmetry.

------
dreamdu5t
For anyone who wasn't already aware, there are many intentional and open Ponzi
dapps running out there.

Source: [http://dapps.ethercasts.com/](http://dapps.ethercasts.com/) (search
for "Ponzi")

------
wildchild
At current rate DAO is a homeless $200M which will be quickly acquired by all
kind of scammers in crypto space.

------
imtringued
It's somewhat amusing that a lot of etherum "dApps" boil down to ponzi schemes
or gambling.

------
powera
Isn't this exactly what Enron did? Use some sleight of hand to hide the fact
that you're using company assets to speculate on the performance of company
assets?

Obviously doing that turned out very poorly for Enron.

~~~
DennisP
Actually any company buying back its own stocks is doing the same, and it
tends to work out well for investors.

~~~
TheCoelacanth
Isn't a stock buyback more or less equivalent to paying a dividend? I.e. a way
of returning a portion of company assets to the company's investors.

~~~
DennisP
Yes. Seems to me it's the same if TheDAO does it.

------
aminorex
"Turn into" requires starting in some other state. I haven't seen a strong
argument for that, and the inductive priors on this issue are profoundly
prejudicial.

------
nivertech

      Short ETH/USD
      Long DAO
      Split DAO
      Wait 48 days
      Convert ETH to USD
      Cover ETH/USD

------
zkhalique
How does a startup even apply to be funded by the DAO?

~~~
jarsin
You would need to submit a proposal. Here is a good overview on that.

[https://blog.slock.it/how-to-create-gorgeous-
proposals-81eb3...](https://blog.slock.it/how-to-create-gorgeous-
proposals-81eb3f606226#.qb32ehgy5)

------
homero
I can't see how people are so gullible that they exchange their bitcoin. My
bitcoin are held safely offline and they'll never be exchanged to alts nor
fiat.

~~~
monatron
good for you. you obviously have a different use case for your assets than
others. as is your right and theirs.

------
exstudent2
Why would you care what anyone does with their money? It screams vested (but
hidden) interest.

~~~
dang
We detached this subthread from
[https://news.ycombinator.com/item?id=11898693](https://news.ycombinator.com/item?id=11898693)
and marked it off-topic.

------
bunnymancer
I spent way too much time trying to figure out how a data access object would
turn into a ponzi...

------
chx
LOL all of these crypto"currencies" _are_ a Ponzi scheme already, did someone
wake up?

------
kordless
The DAO can also turn into a AI intelligence that decides we're boring and
unsophisticated. The logical conclusion is to raise prices on us and then
seize our funds when they stop us for traffic violations through hyperspace.

~~~
aminorex
Strangely true. Simultaneously, a reductio argument. Quod libet, I infer:
Fish, bananas, old pajamas, mutton, beef and trout.

~~~
kordless
Heaven knows, anything goes.

------
exstudent2
There really is a ocean of ink being spilled by old school "experts" attacking
The DAO and crypto currencies in general. It's difficult to understand their
intense motivation to stop people from experimenting until you realize that
crypto currencies disrupt their ability to gatekeep monetary decisions and
make their current roles unnecessary.

As someone tangentially interested in the space, I've bought on every wave of
negative press and have done quite well. Sure it's high risk but if you don't
invest your life savings, it can be great fun, financially rewarding and
technical interesting.

Hardcore naysayers have a vested interest in depressing these experiments and
their commentary should be viewed as such.

~~~
matt4077
Or, possibly, they:

\- Have enough faith in humanity to regard the possibility of collective
democratic power having influence on currencies as a feature

\- Are kinda noticing that life isn't actually quite a tragedy currently in
most western democracies and therefore see no need for revolutionary change.

\- Consider risk an essential factor in every investment, and fear it may be
too high for the class of investors attracted to cryptocurrencies

\- Have been convinced by actually quite serious flaws in this DAO thing, not
from ideology, but game theory

\- Are irritated by crypto currency advocates who go for conspiracy theories
instead of arguing on the merits.

\- Are wary of crypto advocates who argue with political arguments but clearly
have a financial interest in the currency's rise.

~~~
EdHominem
For those with Faith, you've got your wise democratic currencies. But some
people buy gold, presumably with those same democracies in mind ... are you
against them doing that too?

As for _the_ DAO, yeah I imagine it's got bugs. Hopefully less, and more
transparently, than our existing contracts. But even if it fails horribly,
other smart-contracts will stand on their own.

Do the market a favor and short the DAO (and fund an attack on it, if you
can). That'll establish a demand for security and make you a pretty penny if
you're right.

Even if you are right though, what would it mean? If Kickstarter got hacked or
phished would that disprove all p2p funding sites forever?

~~~
EdHominem
> Do the market a favor and short the DAO (and fund an attack on it, if you
> can).

Enjoy your well-deserved prize.

