American CryptoFed is a new kind of company spawned by the advent of cryptocurrencies – in a way, it’s not a company at all.
According to its stated plan, CryptoFed has no owners, officers, or employees. Instead, it is a “decentralized autonomous organization (DAO)” that is automatically controlled by computer code and governed by a community of users voting on proposals.
For proponents, DAOs are a new business model that democratizes the business enterprise and breaks the grip of large technology companies and other entrenched middlemen on innovation in the information age. There are already a growing number of DAOs currently online, such as financial services operations, news centers and social clubs.
But DAOs are also under fire from multiple angles, demonstrating the power of disruptive innovation that cryptocurrencies bring, and struggling to prove that they have practical uses outside of financial speculation.
DAO members have been at odds with each other over how to balance the need for good managers with an idealistic vision of shared decision-making. Crypto investors and regulators have said that in some cases these DAOs amount to Ponzi schemes that aim to do little more than boost the value of the digital tokens in question.
In such organizations that do not employ traditional business models and accounting practices, regulators are quickly stepping in out of concern for investor protection.
Crypto Fed DAO, which worked to create a crypto payment system, was shut down by the SEC in November 2021, just four months after its launch, and the SEC argued that the business “materially misled” the public with conflicting documents that failed to disclose key information, such as audited financial statements. The SEC found that the company “materially misled” the public by using conflicting documents that failed to disclose key information, such as audited financial statements.
SEC Commissioner Hester M. Peirce said the growth in DAO activity has been dramatic.
“The last year or so has been a significant period for DAOs, and there is a lot of experimentation going on.” Peirce said, “It’s hard to try to understand what that actually means because everything is moving so fast.”
Indeed, DAOs are grappling with a variety of challenges, including huge financial losses from software bugs and hacks, internal divisions that threaten the continued existence of certain entities, and allegations of misappropriation of community funds. For some DAOs, there has been an unresolved issue of low member turnout when it comes to voting on strategic or business decisions, which effectively leaves control in the hands of the large investors who funded the DAO to help get it off the ground.
This confusion brewing has sparked a debate: are these DAOs tools for insiders to profit and exploit consumers, or are they early experiments in a new way of doing business?
According to DeepDAO , in 2021, the value of cryptocurrencies held in the vaults of more than 4,000 DAOs grew by 3,200 percent, at one point worth more than $13 billion in December. Of course these numbers fluctuate dramatically with the value of cryptocurrencies.
DAOs have run all kinds of programs, including decentralized financial services like Compound and SushiSwap, investment pools like Red DAO (where fashion enthusiasts join to buy digital collectibles), and social clubs like Friends with Benefits (whose token holders meet virtually and face-to-face).
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The concept of DAO has been embraced by individual crypto investors and industry giants, including Silicon Valley venture capital firm Andreessen Horowitz, which has billions of dollars to back blockchain projects. Industry lobbyists and lawyers, including from A16z and the Crypto Federal Reserve, have been working in Washington and state capitals to push for recognition of DAOs and revise what they call “outdated” laws.
Currently, few federal regulators have clear legal authority to regulate these entities unless a DAO is suspected of violating securities laws, said SEC Commissioner Peirce, adding that the result is confusion and ongoing conflict as regulators struggle to regulate new entities.
Perhaps the most promising but worrisome aspect of DAOs is the way they make decisions.
While DAOs may choose to lead a group or hire staff, the main decision-making power is theoretically left to the members, theoretically ensuring that the final decision serves the majority of participants.
“A virtual world in your hands” is the slogan of Decentraland, a virtual game space. Like most DAOs, it relies on online voting to make decisions. Players can use tokens to buy “land” or costumes and participate in virtual social events with their avatars.
Eyal Eithcowich, founder of DeepDAO, sees Decentraland and DXDAO as examples of DAOs that come close to meeting the ideal. Decentraland alone has conducted more than 1,000 surveys on topics such as “Are wearable objects, including firearms, allowed?” Decentraland alone has conducted more than 1,000 different referendums on topics such as “Should wearable objects, including guns, be allowed?
“Back in the day there were Internet forums where you could debate and feel part of a community.” Eithcowich said, “But here you don’t just get a sense of ownership. You actually own a part of the platform, and your vote has a direct impact on the platform. That to me is the beauty of it.”
In fact, several large corporations are participating, such as JPMorgan Chase, which opened a former virtual space at Decentraland, a “lounge” to promote its Onyx payment network, complete with a digital portrait of its CEO, Jamie Dimon.
But the reality of setting up and running these DAOs is often complex.
OlympusDAO, which was born a year ago, has drawn a lot of attention and skepticism for offering extremely high rates of return to cryptocurrency holders who submit tokens to the system at certain times. At one point it offered annualized returns of up to nearly 8,000%.
The platform regularly votes online on proposals, such as the one in January in conjunction with JonesDAO, a startup that allows users to invest in risky crypto derivatives and futures.
But Olympus is largely controlled by anonymous founder Zeus, whose statements about the business model have confused the industry. It has even led cryptocurrency enthusiasts to openly question its possible status as a Ponzi scheme that relies entirely on the continued faith of its participants and the inflow of cryptocurrency to sustain itself.
Jordi Alexander, an executive at Selini Capital, a digital asset trading firm, said little is known about OlympusDAO because there are no disclosures like those required of public companies or private companies raising public money. “No one ends up auditing it to make sure the statements are true.” He has detailed his doubts about Olympus in an article.
After reaching a high of about $1,400, an Olympus token is now worth only about $30, and the project has lost nearly $4 billion in market value. (A person claiming to be Zeus defended the project in an interview, saying he had simply been trying to be truthful and honest.)
The community conflict also triggered a price plunge for Wonderland DAO, whose founders were recently forced to reveal that the platform’s treasurer, Sifu, was really Michael Patryn, who had previously been convicted of financial crimes in the U.S. and Canada and was a co-founder of the defunct Canadian cryptocurrency exchange QuadrigaCX. Previously, the mysterious death of another QuadrigaCX founder made law enforcement suspicious and customers lost approximately $135 million in cryptocurrency.
Since then, there has been much debate in Wonderland’s governance forums about whether DAOs should be dissolved or transformed into more traditional corporate entities by hiring “a team of background-checked professionals, including a chief financial officer, chief legal officer and chief operating officer.
Many of the problems that arise with DAOs often stem from the anonymity of DAOs and cryptocurrencies.
This anonymity can undermine accountability and foster what critics say are abuses of power, such as at SushiSwap, where its creator (Chef Nomi) abruptly left the project, cashing out nearly $13 million worth of tokens in an infight.
A developer named OxMaki, who helped create SushiSwap, told the New York Times in a group chat that the DAO’s strengths – diversity and decentralization – have also proven to be its weaknesses.
“DAOs are made up of a wide variety of people around the world, with no relationships between the parties. Each group has a different vision and direction. the DAO has never reached a complete decision internally. It was a mistake.” He added that he has never met any other Sushi team members in person.
Crypto Fed claims to be the first legally sanctioned DAO in the U.S. It is registered in Wyoming, which passed the first state law to officially recognize DAOs and exempt crypto tokens from state securities laws.
Last September, it notified the SEC that it would create two new cryptocurrencies for payments and governance in its internal economy, both of which would be distributed to the public first before being bought, sold and traded.
But the SEC moved quickly in November to block its token offering, claiming it was an illegal securities offering.
Fearing enforcement jurisdiction from the SEC, decentralized startups are increasingly turning to private equity funds to obtain funding, selling large amounts of tokens to large investors. As a result, VCs like A16z have ended up having more influence in decision making in some cases.
Crypto industry analyst Ryan Watkins has stated that venture funds, founders, core team members, and other insiders controlled nearly 50% of the Solana platform’s token, SOL, at its initial offering, giving them significant governance power in the DAO.
This internal problem is also exacerbated by the typically low turnout of individual token holders, making it easy for large players to influence the outcome.
“The more concentrated the token supply is, the bigger the problem becomes. This raises the question: Is this really a DAO? Or is it just a place where the rich decide everything?”
Watkins said some DAOs are realizing that running a truly decentralized entity can be difficult and are forming leadership committees to oversee certain key operations, which in turn are more akin to a traditional corporate structure.
But that could also be a concern. Last summer, the DAO of decentralized cryptocurrency exchange Uniswap voted to form and support a lobbying group called the DeFi Education Fund, but when the new group sold millions of dollars worth of tokens earlier than promised, it stirred up strong opposition from the community.
Chris Blec, founder of DeFi Watch, a news site dedicated to promoting crypto transparency, said insiders like investment house A16z, which owns a large number of tokens, pushed the proposal.
“Basically, they just initiated the proposal and then voted to pass this thing, which ended up being like a legal bribe fund for them. The whole thing was for their corporate benefit.”
Miles Jennings, an attorney for A16z, said the concerns about internal controls are reasonable.
“Reasonable suspicion is warranted. We’re still in the very early stages.”
He added that venture capital firms based in the digital world are connected to the real world. “We need to comply with laws and regulations.”
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