DAO Epic Fail

The surge in Bitcoin vs. the collapse of DAO and ETH was a crypto storybook ending. After raising over $150 million during it’s Initial Coin Offering, DAO began trading Saturday on various secondary markets.

In the lead up to the conclusion of the DAO ICO, ETH began puking. The price was down 37% by the weekend. As DAO holders watched their paper gains evaporate more interesting developments occurred.

Due to heavy criticism and analysis of the mechanisms that governed how proposals are submitted and voted upon, the lead developers sent out an “whoops” blog post. Whoops, we need some more money to fix this thing. Whoops, can you please approve $1.5 million dollars worth of ETH for development and “2-3 expert security analysts”. The proposal smells distinctly like a “pay us now, ask questions later” scheme to quickly start extracting money from the DAO. If not, when even the lead developers recognise the glaring flaws in the DAO governance structure, confidence surely dips.

I didn’t personally invest anything into this project. But traders long DAO were faced with a triple whammy of bad juju. The ETH value of their investment was down 40% from the high, Bitcoin was surging, and the lead developers’ scammy proposal shattered confidence.

When Saturday arrived, DAO holders were primed to hit the eject button. While the trading volumes were not as impressive as LISK, the DAO/ETH exchange rate traded below DAO’s intrinsic value of 0.01 ETH. That shouldn’t happen as arbitrageurs should be willing to buy DAO below 0.01 ETH, burn it for 0.01 ETH, and in the process earn the spread.

As I write, the DAO/ETH exchange rate is 8% below intrinsic value. The BitMEX DAOETH futures contract is trading 12% below. Obviously traders do not have confidence in the ability to burn DAO for 0.01 ETH.

This presents a great buying opportunity for those who can take a longer term view. Holders of digital currencies are hungry for investment opportunities. If the DAO organisation fixes the obvious flaws, there is a bright future ahead and capital gains for early investors.