Disclaimer: The enclosed article examines some complex ideas and reflects the author’s own observations on the recent fundraising of “the DAO”. Nothing contained in the enclosed article should be considered as investment advice. Anything to do with cryptocurrencies is highly risky and, in most cases, unregulated. Professional advice should always be sought when considering any dealings with any ICO’s (Initial Coin Offerings).
Disclosure: The author of this article has purchased tokens from “the DAO”, as described below.
Over the weekend a new start, vaporware, entity in the Blockchain space passed through an historic $100m funding barrier. Now, your eyes might well start to roll up with that patronizing “here we go again” gaze up at the faux, art-deco, latticed ceiling as you instinctively reach for your double shot skimmed latte, with laissez-faire indifference. “Here’s another piece about Silicon Valley’s excess for its newborn unicorn or Wall Street’s blind passion for seemingly over-hyped, disruptive technology. ”
For fear of excessive dry cleaning bills, you might want to just ease your latte down for a second. This fundraising is different; very different; so different, that it could mark the beginnings of a new & seriously disruptive model for the Venture Capital Industry itself.
The $100m raise was for an entity that leverages the latest in Blockchain based technologies, philosophies and ideas – “the DAO“. As its website address suggests (www.daohub.org), “the DAO” has been designed from the ground up as a hub for DAO’s, Decentralized Autonomous Organizations.
A Decentralized utonomous Organization is a concept that turns the traditional top-down hierarchical structure of an organization on its head. Instead of “Excos” driving and controlling a business by telling their teams what to do, a DAO lets individuals interact with each other according to protocols detailed in computer code, which is then enforced on the blockchain. In its essence, the simplest way to view a DAO it as a very powerful vending machine (check out my post on an Introduction to smart contracts for further clarification of how this parallel concept works), and “the DAO” represents the first implementation of Decentralized Autonomous Organization code to automate organizational governance and decision-making. At its core, “the DAO” is an organization that can be viewed in many ways as a Decentralised Venture Fund.
“The DAO” is raising funds through the sale of its DAO tokens. The funds raised from the sale of the tokens are pooled together, with “the DAO’s” ultimate aim being to fund appropriate Decentralised Projects that apply to it for funding.
Image The DAO
The unifying feature of each project that applies for funding is that they need to be a DAO themselves, and be running on the Ethereum network.
Now, instead of an investment committee of senior managers meeting to decide which projects to back, “the DAO” itself decides which projects to back based on the decisions of the crowd that supported “the DAO” with their ICO. Voting rights on the projects are directly allocated according to the volume of DAO tokens held by an individual – democratic capital if you like. “The DAO” business model allows for revenues to be generated with a structure similar to royalties. For sales made by any DAO funded by “the DAO”, a % will go back to “the DAO” itself, which will then be allocated to token holders – automatically – and by smart contract built into “the DAO’s” computer code. These could be considered similar to dividends, although this regulated description is never mentioned within the whitepaper itself.
To give some pragmatism to this complex subject, one of the key organizations driving the project is a German based organization called Slock.it.
Image : Slock.it
They have developed a prototype door lock that is a DAO, where the lock itself receives and refunds funds. (AirBNB are said to be considering trialing their locks for their clients’ rentals). Slock.it’s ideas are being extended further into additional proofs of concepts – for example they are working with a German energy company to look at charging electric cars as they wait at traffic lights via inducers built into the road. The inducers will charge vehicles as they draw the electricity, with the inducers acting as their own DAO’s receiving monies directly from the cars themselves. We will undoubtedly see more and more DAO’s being established as the ecosystem continues to evolve – especially as there is now a sizable pool of funds dedicated to an ecosystem that further helps the convergence between the Internet Of Things and the Blockchain (see my article on IOT and Blockchain convergence) . Whilst the DAO is in its own right unique and innovative, the way in which it has funded itself also has some innovative features :
1) The funds did not came from deep pocketed Venture Capital funds looking for a direct equity stake and 10X returns, but from backers like you, me and others like us. Think of Kickstarter, i.e. crowdfunding, but, as we shall see below, with an unregulated investment twist.
2) The capital raise was not based around traditional equity or interest bearing debt, but instead, the future abilityto use cryptocurrency based tokens – the DAO Tokens – to vote on DAO proposals submitted to “the DAO”.
3) Buying tokens is only possible by using Ether, the crytptocurrency that is used on the Ethereum Blockchain and not directly by FIAT currencies (i.e. traditional currencies such as USD, AUD, EUR etc). To buy DAO tokens requires you to buy Ether. If it is your first time buying the cryptocurrency, be aware is a complex process full of risks if you do not know what you are doing – so do seek professional guidance before you consider entering into any DAO Token purchase.
4) The capital raise was not based on a beautiful series of videos and shots of great prototype products that everyone could own in the future, but on a 31 page whitepaper that describes the vision of the crowd knowing better how to execute decisions rather than individuals. In fairness, it is also supported by some major known names from the brave new world of crytpocurrency and blockchain – especially those behind the cryptocurrency, Ethereum.
5) $100m was raised in only 14 days – reflecting the deep interest in the concept and idea. That is not to say the crowd is right, but the confidence is there to support the concept as seen by the campaign’s success. The campaign is still continuing and due to finish at the end of May 2016.
6) Subject to the ongoing exchange rate between USD and Ethereum this is proving to be the largest crowdfunding EVER. Check out this Wikipedia link for previous records
7) The last and perhaps most interesting part in the whole funding structure is that it implicitly leverages the speculative investment interest in the cryptocurrency itself . As with so many Initial Coin Offerings , the cryptocurrency trading community are the first to buy the ICO’s tokens, in many cases without any deep understanding of the uniqueness of the underlying technology of the crytpocurrency itself . They buy the tokens in the expectation that the coins will have a subsequent tradeable market on the crytptocurrency exchanges – for which they hope to make a profit. Some high returns have been seen historically (as well as some high losses).
As a result, not only do token holders get access to the potential royalty structures detailed above, but the tokens MAY have a secondary market on cryptocurrency exchanges. These coins and tokens therefore act like equities but are NOT equities – and most importantly ARE NOT REGULATED like equities. In many ways, “the DAO” represents a “Shadow Venture Fund”, that acts like a fund, but is not a fund and is not regulated – yet. As with all things Fintech related, the regulation will undoubtedly lag behind technological innovation – and this is no exception.
Overall, it will be very interesting to see how this new financing model pans out over time, and how subsequent iterations evolve, but either way we are seeing the beginning of deep change and there are over 100m reasons why this will be taken seriously.
Welcome to the new frontier… Blockchain style.
Please be aware there are deep risks associated with all aspects of capital raising in the cryptocurrency space – and it is essential that you seek professional guidance and advice before getting involved.
In the next post I will give an easy introduction to Initial Coin Offerings.
If you are interested in understanding more about the Blockchain, its power and its challenges, on December 8, 2016 I am releasing my new book Down The Rabbit Hole,a book for business & non-technical people, like you, to truly understand the Blockchain & to capitalize on its power.