Nolan Bauerle is a former researcher and writer for the Canadian Senate Banking Committee, for which he drafted a 2015 report on cryptocurrencies and blockchain technology. He is the founder of tech strategy firm Borderless Blockchain.
In this op-ed, Bauerle frames the recent launch of decentralized organization The DAO as an evolution of stock exchange infrastructure, as well as within the progression of technology in the past two centuries.
This story has to begin with the big news: the decentralized autonomous organization known The DAO has raised millions worth of ether, the native cryptocurrency of the Ethereum network, in just a few weeks.
If you've read The DAO's whitepaper, you might have managed to understand what it is: blockchain code that emulates the behaviour of a crowdfunding business entity that can fund and earn a return from other blockchain-coded business proposals.
The DAO and its valuation will be an effective ether index of the proposals it accepts, much like the Dow is a stock market index. The difference is that The DAO is owned by market participants who choose what is funded, listed and potentially provides a return on those investments.
One of the first proposals set to be voted on by The DAO following its creation phase – wherein voting tokens are created through the exchange of ether – will be submitted by Ethereum-based startup Slock.it.
Slock.it makes smart lock hardware that can be opened or closed through cryptographic keys used on the Ethereum blockchain, aiming to normalize the Nick Szabo 'vending machine' smart contracts that will be essential for the Internet of Things (IoT) to be useful and secure.
In its first proposal, Slock.it will offer the creation of what they call the Universal Sharing Network, an effort aimed at creating a technology backbone for Ethereum. The creators of Slock.it are also the creators of The DAO, just so that's clear.
Part of The DAO's recipe for success is that the creators came at blockchain from two angles. The combination of a blockchain-coded business entity (The DAO) funding an IoT hardware product (Slock.it) that is controlled through a blockchain for use in the sharing economy is just too sexy for the futurist blockchain community to resist.
On raising money, it's a big success. But, the true measure of success for The DAO will be how the blockchain entity they've coded ends up working.
The DAO will use votes to accept or reject funding for future proposals like Slock.it. Watching how the significant holding of ETH is used to fund other proposals will be fun. It will also be participatory, as thousands of people appear to have purchased voting rights.
This may be a powerful innovation for capital markets, something that has been suggested ever since the implications of bitcoin became understood. Innovating capital markets the way The DAO is suggesting could have profound effects on society.
Forward to the past
The recent history of innovation is more than a list of who invented what and when. The history of 19th and 20th century innovation is the story of near-universal adoption of many inventions.
Major inventions have been democratized to the point that it's no longer considered a luxury to drive a car, turn on a light, catch a flight or have an Internet connection on a phone that talks with satellites in space.
Computers, commercial flights, cars, fertilizers — the result of their widespread uptake is that the average person today is able to live like royality did just a few decades ago. By offering privileges, inventions have driven successive industrial, commercial and communications revolutions on a global scale.
This is important to keep in mind when considering the current state of capital markets.
Global capital markets have been a cloistered community since they began. Capital markets are not democratized in the sense that the people participating belong to a unique demographic and are able to navigate the particular and complex language of investment finance.
Because the language is so complex, information has only flowed within limited Wall Street-type communities of regulators, financiers and lawyers. It is the flow of information that has been the friction point in the democratization of capital markets.
Regulators have struggled with this friction and flow of information since the first securities regulator was charged with cracking down on unfair information sharing after the stock market crash of 1929.
While the invention of the Internet means we live in an era of incredible advances in the flow of information around the world, this progress has yet to truly penetrate the financial industry. Professionals continue to operate in a world that seems foreign and intimidating to the average person.
This has proven to be a great barrier to entry for billions of people – but the environment is changing.
Capital markets are seeing challengers as digital finance innovations accelerate. Crowdfunding platforms like Kickstarter and Indiegogo were only the beginning.
The arc of these stories is simple: lots of average people raising capital for ideas they believe in. The interface and information flow is simple and user friendly, requiring a bit of time and an Internet connection. There are no brokers, no analysts, no obscure metrics and language.
While The DAO needs some work on communication (only the blockchain community can use or understand it), interface and ease of use, the change it suggests is staggering. It is an entirely new form of capital market infrastructure.
The platform leverages blockchain to be the market's digital backbone, breaking down the friction in the flow of information. If this creates a market that will benefit micro-investors as well as entrepreneurs seeking that elusive first million dollars, it could mean the difference between an idea growing or dying on the vine.
It will also bring governance of a business into a transparent, blockchain-based sphere. Meaning, there will be off-the-shelf blockchain code to set-up and operate a business proposal for funding and listing on The DAO.
If The DAO achieves this it will represent useful innovation in capital markets, bringing the privileges of accessible capital and easy-to-deploy, cheap to set-up corporate governance. The net to catch genius or a tinkerer's good idea will be cast over the entire planet.
If this happens, it will make the funding news a footnote in history.
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