Demystifying decentralised autonomous organisations | PKF Malta

In the beginning there was man. Much later he created blockchain technology and with this creation he hopes to liberalise the commercial community from some of its bureaucracy and in the near future decentralise trade in a seamless fashion.

When blockchain technologies were developed, the masterminds behind the concept of a decentralised autonomous organization (DAO) company created the tools necessary to turn their ideas to a practical use. Simply put, blockchain technologies introduced the concept of a secure digital ledger, which could track all interactions of its members across the Internet and thus provide a safe and secure environment.

As is the case in farming where one cannot avoid the damage made by pests and disease so equally because of hackers and corruption it was thought important to invent a secure distributed database held by all users of the blockchain. The uses for DAO’s with their unique infrastructure are remarkable in scope.

Allowing for regulatory oversight one may conceptualise how in the next decade blockchain data could replace many public records like birth certificates, marriage certificates, deeds, mortgages, titles, police records and missing persons. Healthcare clinics can function autonomously, and as Malta harkens in its quest to become a Blockchain hub it can attract many software development companies which can employ thousands of independent programmers.

Back to DAO’s theme - one may ask what is so autonomous about this organisation. The answer is that by implementing unique tools it empowers the organization to run without managerial supervision. Thus, a DAO is a business or organization whose decisions are made electronically by a written computer code (smart contracts) or through the vote of its members. The novelty lies in an intricate system of hard coded rules that define which actions an organization will take.

Most commonly, one finds that DAOs are funded by members and this will usually provide members with tokens, proportional to their investment, representing voting and ownership rights. These tokens are freely transferable and their price fluctuate over time, in a similar fashion as happens in stock markets.

The utility of these smart contracts is the ease how they can be programmed to carry out a variety of functions - such as releasing funds after a certain date or when a certain percentage of voters agree to fund a project. So far, DAOs are mainly found in the FinTech sector.

The main focus here is on the digital currencies, which can benefit from a sophisticated and fast organizational structure traditionally facing a volatile and fast-moving market. One notes how DAOs were facilitated by the development of Ethereum, a public blockchain which provides a decentralized virtual machine to execute peer-to-peer contracts using its own cryptocurrency - namely Ether.

The Ethereum network uses Ether as the currency for transaction fees on its blockchain for the purpose of compensating providers of the network to secure computing power used mainly to validate actions taken on the Ethereum blockchain. Ether can be compared as the essential energy source to power all Ethereum transactions.

At this stage, readers may ask what is Ethereum. By definition, it is a distributed network formed by thousands of nodes (computers running the Ethereum software) around the world. To put it into perspective, whereas Bitcoin records the creation and transfer of bitcoins in its global ledger, Ethereum, in addition to recording the creation and transfer of Ether, stores “smart contracts”. The creator of Ethereum, Vitalik Buterin said “There is a lot of intermediaries that end up charging 20–30%, if the concept of decentralization takes off and does well, those fees are going to decline to almost zero”.

This Ethereum platform is a new and expanded version of the Bitcoin system in that it adds a layer of software on top of a blockchain. Like Bitcoin, Ethereum also comprises decentralized “mining” computers, but whereas the Bitcoin miners primarily authenticate transactions, the Ethereum miners authenticate and run executable code. The DAO was intended to allow cryptocurrency “investors” to directly fund and manage new enterprises – all to be run on the Ethereum blockchain.

Because the DAO was backed by Ethereum, complex business logic could be programmed, and once set in action, the organisation would be virtually unstoppable. The blockchain would ensure that all business transactions and organizational changes would be immutably recorded on a public ledger authenticated and controlled by a large, decentralized network of computers.

Moreover, because the organisations spawned by The DAO were directly funded through digital token-holding “investors” each organization would be, in effect, directly managed by its investors, as per the investment stake of the individual. Not all regulators and banks are in agreement with this new founded transparency but it is undeniable that a DAO is a business model of the future.

The advantage of such technology is that it’s difficult to change the smart contracts once it’s deployed to the Ethereum blockchain. This is what renders it tamper proof. Let us mention some examples of DAO projects starting with Digix global, The DAO company and the virtual currency Dash.

Dash is a cryptocurrency unlike most others because it is neither a development platform nor it is like first cryptocurrencies with their huge transaction fees, waiting times, and volatility.

Dash is decentralised peer-to-peer electronic cash built on core of Litecoin which is decentralised in governance and founded via its own network by mining. This makes it autonomous and independent from any authority but its own users. Having discussed DAOs and Dash can we comment on resistance to change faced by these technologies in the world of business.

Starting from the East we find that both India and China have experimented and learned some lessons on how to deal with blockchain and the vagaries of virtual currencies. Back to Malta, it has been seeing a respectable number of investors wishing to set up a virtual currency base.

Top of the heap is Binance, one of the largest cryptocurrency exchanges in the world, which plans to engage up to 200 people according to its CEO Zhao Changpeng. Another applicant is a high profile blockchain business based in Berlin. The CEO of Neufund Zoe Adamovicz, said “we want to kick-start the creation of crypto-friendly laws with Malta’s DLT framework initiative already serving as a great foundation. We hope to influence a positive change in the banking industry with other upcoming projects”.

In Malta, this sector has started being regulated and last year we saw the promulgation of three acts. It goes without saying that DLT scene has become a phenomenon that has reached a mainstream audience. Will the laudable DAO’s concept follow soon?