Product Review: The DAO

The DAO
  • Editor Rating
  • Rated 4 stars
  • 80%

  • The DAO
  • Reviewed by:
  • Published on:
  • Last modified: December 7, 2017
  • Risk/Reward Ratio
    Editor: 100%
  • Transparency
    Editor: 50%
  • Costs
    Editor: 95%
  • Originality
    Editor: 100%

The DAO is a decentralized organization on the Ethereum network that was launched via a crowdsale by the end of April 2016, after which it quickly became one of the most successful crowdsales in history raising more than $150 million (as of May 20, 2016). In return for their investment, investors received DAO tokens that represented ownership over The DAO (like equity shares).  The quality of this investment will be the subject of this product review.

Update: Unfortunately The DAO had weak security causing the project to be stopped. Early investors did end up getting a good return on their investment, as the price of the underlying Ether peaked during its short lifetime.

Description

The easiest, though somewhat inaccurate, description for The DAO would be a “venture capital fund without managers or executives”, in which DAO token holders are the shareholders and making all of the (investment) decisions. Like a traditional venture capital fund, The DAO can invest in startups (although probably not any startup due to legal restrictions) hoping to for a high return on investment. Unfortunately, the similarities already end here. Besides investing in startups, traditional venture capital funds also invest in small and medium sized companies with little to no track record of profitability. It will be more difficult for The DAO to invest in this type of companies (as well as not fully decentralized startups), because companies will typically be required to identity (large) shareholders. Identity verification is, however, not required to become a DAO token holder. It is extremely unlikely any regulator will allow a company to be financed by this kind of anonymous money, especially given the risk that this method will be used to launder money.

Furthermore, The DAO also allows its token holders to vote for projects that don’t offer any promises of return like a charity. By funding projects that allow the project creators to keep full ownership of their work, The DAO would be more like a Kickstarter than a venture capital fund. It does seem unlikely though that token holders expecting a return on their investment will ever vote for this kind of projects.

Risk/Reward Ratio

Based on the previous, there should be no doubt that an investment in The DAO has a high-risk profile regardless of the investment horizon. Apart from the risk that The DAO is successfully attacked somehow, investing in early-stage companies is high-risk by nature. Given possible legal restraints, The DAO could also be very limited in doing so. Even without any projects at all, The DAO starts out by being fully invested in Ethereum’s currency. By itself, this can be considered a high-risk investment as the popular altcoin is still very young (it began trading in August 2015) and will likely see some significant changes to its design in the medium-term future.

On the positive side, with The DAO starting out being fully invested in Ether, this may make investing in The DAO profitable despite a complete lack of projects. In fact, early investors in The DAO may find that the fiat value of their investment has already doubled.  This is ensured by the fact that during any point during the lifetime of The DAO, the tokens holders may retrieve their proportional amount of Ether. In the long run, potential returns will be determined by the projects The DAO will engage in. Should this include something like a successful fully decentralized autonomous AirBnB, then the future of The DAO will ook very bright. Then again, there is always the possibility that DAO token holders will make The DAO a platform like Kickstarter and invest in projects that will not return anything to The DAO. Unlikely, but certainly not impossible. Altogether, the risk/reward ratio seems very well balanced regardless of the investment horizon.

Investment Horizon<1 year1-3 years3-5 years5-10 years10+ years
Potential ReturnsHighHighHighHighHigh
RiskHighHighHighHighHigh

Transparency

The DAO is a smart contract, and as such it is publicly auditable code. Auditing smart contract code can, however, be very complex for the average investor. This is why a website with proper documentation can still greatly enhance transparency of a smart contract. Sadly, the website for The DAO is rather confusing and risk disclosure is even buried somewhere within the terms. The listed risks include:

  • Risk of Security Weaknesses in The DAO’s Software
  • Risk of Weakness in the DAO underlying blockchain, and/or Ethereum Network
  • Risk of unforeseen attack vectors
  • Regulatory risks

This also happens to be a rather limited list, as it includes no statement on how crowd behavior might influence the voting process (and result in sub-optimal decisions) for example. The splitting mechanism is not really covered either (only mentioned briefly), and one will have to dive into the white paper to get to know more about this. In short, transparency is about more than being able to examine the underlying code, and The DAO doesn’t excel at this.

Costs & Originality

Last but not least, costs and originality are an important part of any investment product. Being the first “venture capital fund without managers or executives”, and one of the first decentralized autonomous organizations in general, The DAO certainly manages to secure the first-mover advantage. The nice thing about The DAO is that it doesn’t charge any (recurring) fees for investing either. In order to invest investors will, however, first have to convert their fiat money or other digital currencies to Ether. This will result in some costs of which the impact will depend on the used exchange.

Conclusion

The DAO is an intersting new experiment that is suitable only for the most risk-seeking investors. These investors should assure themselves that they absolutely know what they are getting themselves into, as The DAO is a very complex structure that could have been documented a lot better. For those who are completely comfortable with their investment, it certainly has the potential to be a very rewarding one.

Pros

  • Well-balanced investment for the risk-seeking investor
  • No recurring fees

Cons

  • Limited risk disclosure
  • Very complex and hard to properly understand

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