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The “Autonomous Corporation” Called the DAO Is Not a Good Way to Spend $130 Million

Software that crowdsources investment decisions among cryptocurrency enthusiasts is unlikely to yield returns.

The era of the autonomous corporation is upon us! Eager investors have pledged more than $130 million to the DAO—for Decentralized Autonomous Organization—a system of software that will fund startups based on votes from its more than 18,000 stakeholders.

Many pixels were spilled yesterday explaining why the DAO heralds a new era in investing and corporate governance. In truth there is good reason to think the DAO won’t be very smart and will make terrible investment decisions.

DAO is built using Ethereum, a currency inspired by Bitcoin that has additional features that allow software to control funds and operate contracts.

If you send money in the form of Ethereum to the DAO, it sends back a credential that gives you the power to vote on how it disburses its funds. The idea is that that the wisdom of its crowd of voters will breathe intelligence into the DAO so it can make smart decisions. The profits from its investments will then flow back to its stakeholders. (It’s worth noting that the $130 million is not committed—anyone can pull out their funds until the time they first vote.)

But picking startups to back is hard. Not even venture capitalists—generally well-paid, educated, and connected—are great at it. The venture capital industry has a habit of underperforming public stock markets.

The people controlling the DAO will be asked to make investment decisions based on far less information than VCs get. Many won’t be full-time or experienced investors.

A further reason to believe the DAO will be a dunce is the shared culture of the crowd powering it. Caught up in the idea of Ethereum as they are, they will favor projects involving Ethereum and related ideas—which are very much unproven.

Just take a look at the two proposed investments featured on the DAO website. One is an Ethereum-based system aimed at making it easier to rent access to things like apartments and Wi-Fi hotspots. The other is a company building open-source electric trikes intended to be rented out consumer-to-consumer via the Ethereum network.

Much about the world would have to change for either project to succeed at any scale.

Like so many ideas buzzing around the cryptocurrency world, DAO probably won’t live up to its own hype. Indeed, the DAO’s success at attracting funds can be seen as an indicator of a bigger problem facing cryptocurrencies.

Bitcoin and Ethereum have built up large market caps, of $7 billion and $976 million respectively, on the back of hopes they will become broadly useful. Until that comes about, though, there’s not much to invest Bitcoins or Ethereum into without converting them into conventional currency, says Tim Swanson of R3CEV, a startup that works with banks on Bitcoin-inspired technology.

(Read more: TechCrunch, “Banks Embrace Bitcoin’s Heart but Not Its Soul”)

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