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DACs That Spawn DACs?

Published on November 13th, 2013 by stan
By Stan Larimer, President, Invictus Innovations, Inc.

What if we created a blockchain-based crypto-asset whose sole purpose was to speculate on the value of an idea.  Instead of book keeping metaphorical “coins” they would track “shares” of stock in the idea.  What if those shares gave you the ability to share in the success of one or more implementations of that idea?

  [caption id="attachment_1567" align="alignright" width="300"]Image credit: Flickr Image credit: Flickr[/caption] Distributed Autonomous Corporations (DACs) are a generalization of the concept of a crypto-currency where the currency is backed by the services its miners perform rather than a real-world commodity like gold, oil, or, ahem, thin air.  If we can barter for goods and services, why can’t we back currencies with goods or services? I recently suggested in Bitcoin and the Three Laws of Robotics that Bitcoin was even more like an unmanned company than a currency.  Using the DAC metaphor, I marveled at the potential of incorruptible companies that could be guaranteed to obey transparent business rules implemented in open source software.   Such companies would not get their charters from human governments (e.g. Bitcoin, Inc.) but from international market forces that accepted their individually chosen incorruptible by-laws (e.g. Bitcoin, DAC). DACs may be polymorphically viewed as crypto-currencies and unmanned businesses. As businesses, they perform services intended to be valuable to their customers.  Such services might include money transmission (Bitcoin), asset trading (BitShares), domain name services (DomainShares), or a thousand other business models sure to emerge as people realize that DACs are not mere “altcoins”. Most importantly, I noted that a DAC could be released into the wild from anywhere in the world where freedom still flickers and, being massively decentralized, could be engineered to remain beyond the control of anything but global market forces.  Short of some evil global empire seizing control of the Internet and scouring every PC and cell phone for unauthorized software, no individual country or aspiring tyranny could impose its own rules to the detriment of everyone else.

The Dangers of Dabbling in DACs

Regardless of the merits of the DAC metaphor, it introduces at least one new risk.  Although DACs may be no different in essence from your typical altcoin, the mere act of someone using a shareholder metaphor to explain its operation might encourage an overzealous regulator to invoke every obscure international security and exchange regulation he can find, drowning the new paradigm in crippling red tape. In Innocence is No Excuse, I explored this possibility ad absurdum via a fractured Aesop's fable, while asking the serious question:

“If the same altcoin is being polymorphically used by different people, in different places, at different times, in different ways as a ballot, a currency, a coupon, a share of stock and a medium for transmitting capital across boarders, which regulations apply to it?”

 If we are not careful, the answer could default to be “all of them.” This philosophical question becomes distressingly concrete if a DAC developer should try to raise money to develop a DAC by selling its shares on an open exchange.  Even though the DAC shares are implemented and sold in exactly the same way as bitcoins, merely calling it a share in a corporation could open the door to new legal challenges.  What’s in a name?  An altcoin by any other name might invoke ten thousand new rules! To continue this discussion, I need to introduce a new, more general name: Bit-Asset - A unit of account in a blockchain-based system whereby its users exchange value.  An altcoin is a bit-asset used in a currency blockchain.  A DAC share is a bit-asset used in a Distributed Autonomous Corporation.  Other bit-assets might include bit-ballots, bit-coupons, or any other metaphor that suits the purpose of the blockchain-based decentralized system developer or its users. I emphasize that both beauty and metaphor are in the eye of the beholder.  As my fractured fable dramatized, the creators and users of a single bit-asset may innocently choose different metaphors to describe what is happening in the same system.  This creates many opportunities for Wile E. Regulator to pick and choose her own metaphors!  Let industry authors beware.  The words you merely use to explain your DAC can come back to haunt you. If this were the case, how would a distributed autonomous corporation ever do an Initial Public Offering (IPO) without inheriting all the IPO regulations that plague mortal brick and mortar and flesh and blood start-ups? Call a bit-asset a currency and you can apparently sell it freely on any (perhaps regulated) exchange.  Call the same bit-asset a share of stock and excited regulators may beat a path to your door. The obvious answer is to engineer your own regulatory environment!
  • Raise capital by mining and trading a simple DAC altcoin currency.
  • Give that currency value by backing it with another DAC’s stock.
  • Isolate your mortal development team from the semantic details.

Altcoin Based Crowd Sourcing in Lieu of DAC IPOs

Suppose you wanted to raise money to launch a new killer DAC, perhaps by selling pre-mined shares in that DAC.   You’d like to simply create, say, 20,000 shares, sell them for $10 each, and thereby raise $20 million to develop your new unmanned company.  But, how would you do that without running afoul of securities and exchange regulations in multiple countries?   If you take the unmanned corporation metaphor too far, you wind up inheriting a whole new class of unnecessary, innovation-strangling regulations.  Your DAC may be autonomous, but your mortal development team needs real capital and must play by the rules of the jurisdictions in which it operates. I suggest here that the best way to address these concerns is to break the fundraising process up into very simple atomic enterprises, each of which has a clear purpose and a well-articulated single metaphor.  Keep the regulatory surface area of each enterprise as small as possible.  Keep any mortal brick and mortar and flesh and blood interfaces equally simple.  Release as many of these atomic components into the wild as possible and ensure that your own mortal business entities have nothing further to do with them. Applicable DAC launch regulations might be suitably streamlined using just three brick-wall independent enterprises that could be implemented by one or several cooperating flesh and blood enterprises some of which might even be competitors.  For example:
  • Enterprise A develops and releases an altcoin-derived “protocoin”.
  • Enterprise B operates a common web discussion forum.
  • Enterprise C develops and releases the objective DAC.
The whole, we shall see, will be much greater than the sum of these three parts!

The DAC Crowd-Sourcing Cookbook

Here is a suggested recipe for bringing new DACs into existence, sans unnecessary new regulations, via three completely independent but synergistic enterprises.  You can think of it a powerful new form of crowd sourcing, with many advantages for both investors and investees.  Here’s how to launch your World’s Greatest DAC (WGDAC).

Enterprise A – Create a WGDAC Protocoin

  1. Create a new “protocoin” as an ordinary altcoin style currency, cloned from any existing open source altcoin you happen to like.
  2. Name this protocoin whatever you like.  Let’s call ours “ProtoWGDAC”. Allow anyone to mine these coins into existence and trade them as coins on any forward-thinking exchange able to see where this is going.
  3. Release ProtoWGDAC into the wild where it will sink or swim on its own without further involvement or connection to its creator.  (Hopefully it will be adopted by a distributed crowd of anonymous Steely Eyed Geeks, perhaps still including its creator in the capacity of a concerned private citizen.)
  4. Disband.  Enterprise A is no longer needed and should not be left lying around to be subject to stray regulations.
So far ProtoWGDAC is just Yet Another Digital Currency (YADC), offering nothing new.  Its likelihood of success as a competitor to Bitcoin is negligible, but at least it is regulated the same necessarily minimal way as Bitcoin… after all, there is no material difference.  In fact, since it has no human owner to seduce or coerce, it can’t be regulated at all.  It is a fully sovereign distributed autonomous corporation implementing a currency that can be used by anybody for anything – just like gold or silver or bitcoins.

Enterprise B – Sponsor a Debate Forum called, say, WGDACtalk.com

Now, independently from the above protocoin release, exercise your rights to free speech (if you have any) by sponsoring an information only web site.  Do no business there.
  1. Create an advocacy website with a debate forum to explore your idea for the World’s Greatest Distributed Autonomous Corporation (WGDAC).
  2. Select any crypto-currency you like, even Bitcoin itself, to be used as the shares for a prediction market on the following proposition: “What is the expected value of a future share of WGDAC?”  (This is the probability that such a DAC will be implemented times the anticipated market value of one of its shares if it did exist.)  Hey look, there’s a protocoin out there already called protoWGDAC!  What a coincidence. We might as well use that!
  3. Post a protoWGDAC download button.  This is where anybody can get a copy of the open source code for mining, holding, and trading protoWGDAC protocoins.  (This is where future DAC miners and/or wallets that can serve as their own download mirrors will come in handy.)
  4. Pitch Your Business Plan.  Use the WGDAC advocacy website to make the case for why a WGDAC would be a profitable enterprise.  Think of it as an interactive proposal to a million small-time venture capitalists (or eventually, a few forward-thinking Big Venture Capitalists).  The forums will naturally attract promoters and naysayers for the idea who will expose potential problems and suggested ways around those problems.  These debates will drive the demand for ownership in protoWGDAC– especially if one or more competitors start developing such a DAC under a social contract that guarantees owners of protoWGDAC coins a stake in the objective WGDAC’s shares.
  5. Advocate listing on one or more exchanges.  Using your business plan and the forum traffic volume, convince as many exchanges as possible to list protoWGDAC as a profitable trading object.
Keep Enterprise B in promotional operation until the launch of the objective WGDAC and perhaps beyond as its already up and running forum.  It should not be subject to undue regulation, since it is only publishing free software, information and opinions.

Enterprise C – Develop and Launch a WGDAC

Now, independently from Enterprises A and B, you and your competitors begin to develop implementation(s) of the WGDAC idea.   You would probably do some of the following steps:
  1. Buy Low.  If you really believe in your WGDAC idea, presumably you will buy/mine protoWGDAC coins early - speculating that they will go up in value as you make your case and your idea is vetted in the forum of informed opinion.  Over time, the value of protoWGDAC coins should begin to predict the value of a share of WGDAC itself.  This value will of course rise greatly as soon as you and your competitors begin to do credible work on one or more implementations. (You may want to get your protocoins before going public with your own development plans.)
  2. Go Public. Announce in the WGDACtalk.com forum your intention to launch your brand of WGDAC (e.g. ACME WGDAC) and explain why investors should believe you would succeed.  The more credible evidence you provide (white papers, sample code, working prototypes, actual products and services, etc.) the more interest there should be in owning protoWGDAC coins.  Over time your track record will help.
  3. Hope that you will have competitors.  The more competitors, the more likely that the original idea will be implemented and the higher the price of those protoWGDAC coins you wisely purchased in the beginning.  You are rewarded for recognizing the value of the idea first and they are rewarded if they can come from behind and deliver a better product sooner.  Everybody wins.
  4. Make the connection explicit.  Drive up the value proposition to owners of protoWGDAC by committing that they will receive a proportional stake in the shares of your WGDAC brand.   This could be a one-for-one exchange of ACME WGDAC shares for protoWGDAC coins or any other social contract that gives holders of protoWGDAC coins a vested interest in ACME WGDAC.  Investors that believe your social contract is reliable will presumably want to gobble up more protoWGDAC coins in order to capture a strong initial position in your brand.  Important:  you are not selling shares in ACME WGDAC!  You are giving them away to owners of protoWGDAC coins as a way to promote interest in your brand.
  5. Monetize the results. As the market develops, you have at least two new ways to obtain the funds you need to complete development of ACME WGDAC.  You can reluctantly sell some of those increasingly valuable protoWGDAC you bought low on whatever exchange wisely decided to list them.  Alternatively you can use the success of protoWGDAC and the results of the forum’s vetting process as evidence that a Big Venture Capitalist should want to own part of your DAC development company, ACME DACs International, Inc. – and then proceed as a traditional start-up from there.
Note that ACME DACs International does nothing but develop DACs and release them into the wild as free open source downloads from somebody else’s information-only website.  Oh yes, and it speculatively buys and sells somebody else’s protoWGDAC coins that it thinks will appreciate as a result of its efforts.  It is a free open source software company making a living by lawful trading of obscure crypto-currencies on government-regulated exchanges. This should work well to limit regulatory risks, at least in jurisdictions that still respect the Rule of Law.

Frequently Asked Questions

Ok, so I’m the first one to ask them, but I expect to hear them frequently… FAQ:  How does buying an autonomous protoWGDAC guarantee my ownership in somebody else’s DAC without an armed regulator to enforce that contract? There is no contract to enforce.  The art of engineering freedom is arranging the game so that people do the right thing naturally, in their own self-interest. Who would want to abandon the entire universe of forum-informed early adopters by reneging on their rights as founding shareholders?  If someone deploys an open-source DAC without honoring its social contract to protoWGDAC, someone else can simply fork the code, and honor the promise.  The network effect and wrath of informed early adopters will do the rest. FAQ:  If more than one DAC implementation is fielded, which one does a protoWGDAC holder get shares in? That would depend on the social contract published by each DAC developer.  Expect experimentation with ways to distribute WGDAC shares to protoWGDAC coin holders.  Some will want to trade protoWGDAC coins for WGDAC shares.  Others will just take a snapshot of the protoWGDAC blockchain at product launch and use that as the WGDAC shares genesis block for ownership initial conditions.  A protoWGDAC coin holder could wind up holding matching shares in all implementations and begin trading for ownership in the best DAC from there. Can you imagine if you had owned protocoins for the idea of a web browser?  By the time Netscape, Firefox, Internet Explorer, Safari, and Chrome had been implemented, you would own shares in every one of them!  Who would try to introduce a new browser without honoring the market share of current browser protocoin holders?

Protocoins are like ownership in a patent that never expires, entitling you to “royalties” in all future implementations of the idea!

FAQ:  You implied I could use Bitcoin itself as a protoWGDAC.  Surely you jest! No, and don’t call me Shirley.  The approach works best if the protoWGDAC coin chosen is used exclusively to predict the value of a single idea.  Otherwise, its price reflects the sum of all market forces on the protoWGDAC.  Using bitcoins as prediction shares would yield incomprehensibly muddy results.  But you could.  The only reason I mentioned it is to ask would-be regulators this question:

If someone independently decides to treat bitcoins as shares in a prediction market for an exciting new Distributed Autonomous Corporation, will you now attempt to apply securities and exchange regulations to Bitcoin because it is viewed as a “stock” in somebody else’s imagination?

FAQ:  What makes you think that regulators won’t arrest everybody for participating in an unlicensed regulatory façade? The fact that Enterprise B (a web forum) promotes a product of Enterprise A (an altcoin), or that Enterprise C (a DAC developer) offers a promotion to holders of protoWGDAC from Enterprise A, should not change the minimum rules that apply to the three independent enterprises. Each is obeying all regulations that should apply to it.  (Your actual mileage may vary.) FAQ:  I’m a wily regulator.  Why are you spoiling all my fun? There is still a critically important role for honorable regulators (those without a hidden ideological or special-interest agenda).  As I mentioned in Bitcoin and the Three Laws of Robotics, there is a shortage of Steely Eyed Geeks (SEG) to inspect all the open source code.  (DACs are only incorruptible if their code gets thoroughly looked at.)  This is where you come in.  You get to inspect the code to make sure it implements its social contract as published and doesn’t implement any hidden “features”.  Let governments fund thousands of this kind of regulator. Then all the independent, anonymous SEGs need to do is focus on the aggressive spot-checking needed to keep regulators honest!


In this article, I have provided a framework for crowd-sourcing venture capital for a Distributed Autonomous Corporation through simple enterprises that accomplish the function of an IPO in a decentralized manner. All this was done without the assistance of an underwriter, without an army of lawyers and without jumping through excruciating and costly regulatory hoops. And no DAC stakeholder was worse off.  They had all the protection they needed in reverse game theory based freedom engineering and in the DAC’s own inviolable business rules, enforced with robotic blockchain integrity. And that should make all the difference.

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