The crypto world has a response to hawkish regulation, it’s called a DAO

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Ethan Lou: A clash looms with regulators over decentralized autonomous organizations

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Ethan Lou, Financial Post Special Between regulators and the crypto industry, the DAO idea will surely be part of the next big clash. Photo by Dado Ruvic / Illustration Reuters Content of the article

In the cryptocurrency world, the past weekend has been anything but a hiatus. The house was on fire, the drums were pounding, and the tension was so great that you could stuff a mattress with it.

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The problem was the cryptocurrency tax declaration provision in the US government’s new $ 3.5 trillion infrastructure bill. Throughout the weekend, lawmakers battled as the industry lobbied and bit their nails.

And that drama is just a smudge of paint in a larger backdrop. Binances’ international problems, China’s crackdown, the hawkish tone of new US Securities and Exchange chairman Gary Gensler, the big R word is looming.

All of this gives revealing context to crypto exchange veteran ShapeShift’s decision in July to dissolve his legal company and adopt a unique blockchain structure: the Decentralized Autonomous Organization, or DAO. The libertarian founder of ShapeShifts, Erik Voorhees, told an industry publication that such a move takes away some of the ability of regulations to apply.

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There’s a lot to unbox out there, but this marks a major move, and not just for ShapeShift. It also reflects the Newtonian adage that for every action there will be an equal and opposite reaction. Between regulators and the crypto industry, the idea of ​​DAO will surely be part of the next big shock.

The Switzerland-based ShapeShift was founded in 2014, which in the crypto era might as well have been 1842. It facilitates anonymous transactions, but for over two years it had demanded personal information of customers, being constrained by regulators. The ShapeShifts ethic of financial sovereignty has long faced constant resistance. No more.

A DAO, made possible by networks like Ethereum, is essentially a standalone, leaderless entity on the blockchain, making its movements based on how users interact according to predefined, foolproof rules. The idea behind the ShapeShifts movement is that there would theoretically be nothing the law could do about such an entity. ShapeShift would no longer control the platform, as there would no longer be a ShapeShift, like the way Bitcoin exists without a central body running it.

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This general concept is not new. Since the start of the year, ShapeShift has been running what’s known as a decentralized exchange, much like a scaled-down version of its current vision. In an industry that only exists virtually, creative corporate structures are also well known. Besieged Binance has a Byzantine global network of legal entities, almost becoming a case study of the ship of Theseus to whom or what does the term Binance refer to? No large company, however, has done the same as ShapeShift.

In this novelty, however, there is also a drawback. The name DAO may sound familiar. One such entity, called The DAO, collapsed in 2016 after an infamous hack. Controversially, the developers then rewrote Ethereum to recoup the lost millions, essentially shaping the network we know today. This case reveals two relevant issues.

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The hack shows that an organization without a leader managed by predefined rules only works when these rules are perfectly designed. And the ability of Ethereum developers to rewrite the blockchain shows that true decentralization is rare. ShapeShift’s success as a CAD remains to be seen. Again on Tuesday, the decentralized Poly Network said hackers had stolen coins worth $ 600 million.

The digital currency wars are coming and China makes the first comeback of the stages of the Bitcoin salvo with predictions of US $ 100,000. Binance Problems Continue, PayPal Expands Crypto Services, And Happy New Ethereum Day

But ShapeShifts Voorhees has obviously taken all of this into account. By taking the first steps towards it this year by starting a decentralized exchange, he had given his reason for choosing this time: like director James Cameron when he made Avatar, Voorhees had long wanted to do it, but the technology had failed. not been developed. sufficient. Voorhees is described in Ben Mezrichs Bitcoin Billionaires as pragmatic, and this new movement was not born out of ideological impulse but calculated and planned.

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Already, the stage is set for a confrontation. The new SEC chairman, Gensler, spoke out last week against the broader DeFi (decentralized finance) movement of blockchain-based banking services without intermediaries in which DAO is an important pillar. We need more authorities in Congress, Gensler said at a world conference, calling for more power from lawmakers.

Ultimately, this will be more than just ShapeShifts facilitating anonymous transactions. Facebook’s cryptocurrency has failed where Bitcoin has succeeded because one has a company behind it that is subject to regulations, while the other only includes a faceless horde. Napster’s centralized music piracy only survived two years, but truly peer-to-peer BitTorrent lives on today.

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A successful ShapeShift (the new decentralized entity, not the company that will no longer exist) would be a trailblazer, paving the way for a potential flood of similarly oriented DAOs that would be difficult to master, pursuing all kinds of different goals. Whether it is good or bad depends on who you ask. Governments’ response will certainly be strong.

Ethan Lou is a journalist and author of Once a Bitcoin Miner, to be released this fall.

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