By most measures, the 2016 initial coin offering (ICO) for venture fund Decentralized Autonomous Organization (DAO) was a success. Billed as the “largest crowdfundingproject in history,” it raised a record $100 million worth of ethers in less than two days. (See also: DAO Raises $130 Million Plus, Largest Ever Crowdfunded Project.)
DAO was stateless and decentralized, meaning that its operations were not tied to a specific geographic area and it had a flat organizational structure. DAO token holders could vote on projects for investment and the relationship between them and the overall organization was governed by smart contracts on ethereum’sblockchain.
But a hack, which exploited security vulnerabilities in its code and resulted in the theft of $55 million worth of ether, put paid to its ambitions. The question of what to do with the remaining funds cleaved the ethereum developer community. Large investors in the project demanded a hard fork, which would have refunded investors by creating a “withdraw” function in the code. But developers argued for a soft fork, which would have frozen funds and prevented the hacker from cashing in on the stolen ether. Underlying their argument was the “code is law” rule, wherein code pertaining to the original blockchain should remain immutable regardless of hacks. The money guys won, and a hard fork created ethereum while the original blockchain continued as ethereum classic. As of this writing, ethereum is the second-most-valuable cryptocurrency while ethereum classic is ranked 17th. Trading in DAO tokens was discontinued last year. (See also: DAO, Blockchain, and the Potential of an Ownerless Business.)
Regardless of its consequences, the DAO fiasco brought governance issues within cryptocurrencies into sharp focus.
Why Does Governance Matter for Cryptocurrencies?
Equity markets have clearly defined stakeholder structures for investor recourse. These structures have resulted in governance systems that protect investor interests and prevent rogue executives from running amok with the company. But cryptocurrencies have largely been shielded from similar oversight. The DAO hack is just one example of governance gone wrong within cryptocurrencies. Similar …….
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Author: Rakesh Sharma
Original link: https://www.investopedia.com/tech/governance-why-crypto-investors-should-care/