In May 2016, the Slock.it team dreamed up a genius way to raise money for their project without prostrating themselves before VC firms. They created a Decentralised Autonomous Organisation (DAO) that raised money from investors in the form of Ether. Each investor became a limited partner (LP) of the DAO. An Ethereum smart contract governed the DAO whereby LPs voted on which projects to fund. Conveniently the first and most popular project was Slock.it.
The DAO raised $150 million of ETH, and at the time was the largest crowdfunding project in human history. Unfortunately the DAO’s smart contract was written poorly, and an individual was able to siphon off a third of the AUM by exploiting a flaw in the code.
“Code is Law” – the mantra of DAO cheerleaders, which included Vitalik and his acolytes at the Ethereum Foundation. Their blind faith in shoddy smart contract code landed them in a bind.
Should the foundation use its political capital to persuade exchanges, miners, and holders to accept an Ethereum hard fork to bail out greedy punters? The foundation chose Yes, breaking the first commandment of DAOs: hard forking Ethereum so that the DAO never happened.
Many in the community, especially exchanges, were not pleased that the Ethereum Foundation bailed out DAO investors. The foundation naively assumed no one would want to want the own the chain that contained the tainted DAO. Poloniex saw an opportunity, and listed Ethereum Classic (ETC). The rest is history.
The Present Day
This week the SEC ruled that the DAO was a collective investment scheme, and thus a security. They did not bring any enforcement action against the promoters or exchanges that allowed trading of the DAO, they just issued caution.
The SEC displayed a great deal of restraint by not perp-walking principals at Slock.it and or the Ethereum Foundation.
Shortly after the hard fork, rumours began circulating that the SEC pressured the Foundation to rewrite history via a hard fork. The threat was clear: face a civil or criminal action for sponsoring and selling unlicensed securities, or hard fork. Given the recent inaction by the SEC, there is serious weight to these allegations.
Step back and think about it. The SEC may have created ETC. How ironic.
Many of the truly innovative and disruptive applications built on the Ethereum protocol will challenge the supremacy of governments in various industries. However, going on one year since the bending over, is Ethereum decentralised enough now to weather concerted action against it by a concerned government regulator? Would the foundation, under government pressure, attempt another hard fork to remove an application that is subversive to a powerful agency.
For those who invest heavily in “disruptive” Ethereum based projects, this chain of events should give them pause. Their new and shiny token might be obliterated by an alphabet letter agency dangling the prospect of government sanctioned rape in front of scared founders. Bend over, or hard fork.
What’s Next for ICOs?
The SEC did not pass judgement on all ICOs. Rather they clarified that if your token is clearly a security, don’t play in the US. Most ICO projects go to great length to avoid this scarlet letter.
This action will certainly dampen investor enthusiasm for a time; however, the underlying premise of selling usage rights in an application is unchallenged. The world will see fewer ICOs with equity like features, but after the DAO those types of deals were never the most popular anyway.
Tezos, Eos, and Bancor are the top three ICOs of 2017 in terms of money raised. All of them are protocols to perform a set of tasks. None of these tokens are collective investment schemes, or provide the owner with rights in a privately listed company. Keep calm, and party like it’s 1999.