RIP DAOs?
Wake up babe, the Orbs are decentralizing our iris scan hashes
Here we go again! Worldcoin: totally not a real-life Black Mirror episode. Virtual pet OGs say take your metaverse hype elsewhere. And the implications of the Ooki DAO saga run deep. This is Glitch #4.
In this issue:
Stuff that has us like 👀
a. Worldcoin’s big “if”
b. Neopets ditches its metaverse
Life after DAOs
1. Two things that have us like 👀
Biometric proof-of-personhood
(Stefon voice) The internet’s hottest club is Worldcoin. It has EVERYTHING: Orbs. Iris scanners. Zero-knowledge proofs. Lofty promises of decentralization. And proof-of-personhood. You know, it’s that thing where we can no longer tell the difference between humans and AI online, so we need a form of identity that can vouch for the fact that a living, breathing human is on the other end of an interaction without revealing who they actually are?
In all seriousness, the Worldcoin project is … multifaceted. There’s so much to talk about it’s hard to know where to start. So let’s follow Ethereum creator Vitalik Buterin’s lead and focus on how Worldcoin has developed a new approach to something called “proof-of-personhood” or PoP.
Worldcoin’s creators inform us that PoP is needed because “advances in AI make it difficult to distinguish between AI and humans on the internet.” Worldcoin is a “future-proof” way to prove “humanness,” they say. All you gotta do is stare at a chrome orb so it can scan your irises!
The project has, unsurprisingly, inspired outrage and disdain among crypto purists. Not only are the optics dystopian and the potential privacy risks dire, but the onboarding tactics have also been questionable, to say the least. Besides that, the whole thing just reeks of traditional, centralized Silicon Valleyness.
Buterin, for his part, spent thousands of words avoiding a judgment as to whether Worldcoin is philosophically acceptable. Instead, he tried to elevate the conversation by writing to a question: “What do I think about biometric proof of personhood?”
PoP is important, he argues, because without it “decentralized governance (including ‘micro-governance’ like votes on social media posts) becomes much easier to capture by very wealthy actors, including hostile governments.” Translation: if we can’t verify that real humans are voting for things on the internet, voting for things on the internet won’t work. No pressure, but online democracy may depend on this shit.
As Buterin points out, there are other ways to do it that don’t involve collecting biometrics and assuming horrendous privacy risks.
But if (...if…!) Worldcoin’s system works like the company says it’s supposed to, that risk is limited because the Orbs don’t publish the iris scans themselves, only hashes of them—cryptographically generated digital fingerprints. Once your iris hash is in the database, you can verify your personhood by generating a zero-knowledge proof that you hold a private cryptographic key associated with one of the hashes—without revealing which one.
“On the whole, despite the ‘dystopian vibez’ of staring into an Orb and letting it scan deeply into your eyeballs, it does seem like specialized hardware systems can do quite a decent job of protecting privacy,” Buterin writes.
Perhaps, but if the goal is also to avoid having to trust yet another big tech company with sensitive data, we’ve got some problems. Though the source code that Orbs run is “mostly public,” Worldcoin-affiliated startup Tools for Humanity is the only one building the actual devices right now. And the iris hashes live on a centralized server. Worldcoin intends to replace this setup with a decentralized system “once they are sure the hashing mechanism works,” according to Buterin. 👀
To recap: We need PoP for decentralized decision-making. Worldcoin has developed a novel approach based on biometric data. It uses specialized hardware and advanced cryptography to keep the data private—except that the team isn’t sure yet if that cryptography works. Once they are sure that it actually verifies humanness, they will decentralize control over the whole system. Trust them! —Mike Orcutt
Neopets’ NFT drama
Remember Neopets? The phenomenally successful, cutesy, and, crucially, free online “virtual pets” game from the late-90s? Well, it’s still a thing. And the company behind it has spent more than 18 months trying to iron out a dispute with its loyal players over what it now says was an ill-advised stumble down the NFT rabbit hole.
The saga began in September 2021 with an announcement from Neopets parent company Jumpstart Games that seemed to confuse even its own employees: 20,500 NFTs based on Neopets characters were set to be released on the Solana blockchain the next month, through a partnership with a crypto company. The project was to be called Neopets Metaverse.
A virtual pet game seemed like a natural fit for NFTs—and the trendy tech seemed like a way to breathe fresh life into a classic game. The idea was that the new critters could be used in a blockchain-based world where people would be able to buy and sell their characters. But NFTs, a metaverse, and a new Discord server filled with crypto-related memes were not what Neopians (a totally real term) wanted.
The backlash was immediate. People who had been playing the game for literally decades complained that there were bug fixes to be done and upgrades to be had before the developers should even entertain the idea of introducing NFTs. It also seemed icky to some that there would now be a barrier to entry since people would have to buy a crypto-token in order to play.
The foray into NFTs may have even caught members of the Neopets team off guard. At first, Neopets seemed to claim it was a scam. Hours later, though, it confirmed that the NFT project was, in fact, legit. The developers kept working on it, and sold as many as 9,000 Solana NFTs in the process. In January of this year, Neopets announced that the Metaverse project had raised $4 million from big crypto players like Avalanche and Polygon Ventures.
Then, last month, Neopets abruptly killed the NFT project. In a blog post, the team said it was under new leadership, that it had “taken a close look at every nook and cranny of Neopets,” and that it had decided to “transition away” from the Neopets Metaverse game and “redistribute those resources to the development of a game that we feel can better reflect our values and vision.” Let us never speak of this again. —Lucy Harley-McKeown
2. Are DAOs dead? Long live DAOs.
One theory of innovation (albeit a cynical one) is that most of what technologists call “innovation” is really just an attempt to exploit regulatory gaps before they close—to capture “value” in areas where legal precedent is shaky and the technology in question is misunderstood, and then leverage this confusion as much as possible for growth and power and money before these opportunities go away.
If you find this theory compelling, you’ll probably look at companies like Uber and Lyft and see something that looks a lot like a cab company. Rather than seeing the transition from dispatch to smartphone-based ride hailing as novel and fundamental, you’ll see a trivial tweak that allowed these companies to circumvent important rules—rules that forced cab companies to provide things like employment contracts and job security, say, and allowed ridesharing companies to ignore the assertion of transit authorities that they were, in fact, cab companies. (Innovation!)
You’ll probably also agree with a legal stance recently taken by the US Commodities Futures Trading Commission (CFTC), the government agency in charge of regulating the derivatives market. In a lawsuit against Ooki DAO, a “decentralized autonomous organization” that describes itself as a “protocol for tokenized margin trading, borrowing and lending,” the agency argued that Ooki DAO wasn’t innovative at all. It was, regulators said, little more than an “unincorporated association”—something like a non-violent version of a mafia crime syndicate.
In a bizarre episode of American jurisprudence (which involved the CFTC serving Ooki DAO via the chatbot on its website only to find that nobody bothered to show up in court), a federal judge agreed, ruling in June that while Ooki DAO may think of itself as a neutral software protocol operating as a digital cooperative, it’s really just a trading platform that’s been acting unlawfully since 2021.
In light of the decision, a group of crypto lawyers—operating on another, more charitable theory of innovation—now say it’s time to re-think the entire concept of a DAO. Ooki DAO may have been a grift, they admit, operating under the false assumption that by adopting a DAO structure they could evade the law. But the idea of the DAO in general is worth defending, as it can allow for things that traditional organizational structures cannot—things like coordinating finances democratically, and transparently while sharing resources between strangers without the need for an intermediary. (Actual innovation!)
The case of Ooki DAO figures to be a body blow for DAOs—and it’s not a huge stretch to imagine that they may be dead, at least in their current form. But as the concept begins to fall within the auspices of the law, we may be entering a new era of online coordination. Long live the DAO.
The Case Against Ooki DAO
The court’s ruling in June came after a period of legal uncertainty, which began in September 2022, when the CFTC issued an order (meaning it filed and settled charges simultaneously) against a company called bZeroX and its founders, Tom Bean and Kyle Kistner. The agency charged the group with illegally facilitating the sale of assets the CFTC regulates, while also failing to adopt a customer identification (KYC) program.
At the same time, it charged Ooki DAO with the same crimes.
Ooki DAO is the operating name of bZx DAO, which in August 2021 took over control of the bZx protocol from bZeroX. In its complaint, the CFTC argued that, for all intents and purposes, Ooki DAO was the same type of organization as bZeroX. It ran the same software “in the exact same manner.”
The CFTC claimed that by transferring control of bZeroX’s software to a DAO structure, its founders believed that its operations would be “enforcement-proof,” and that its founders touted as much to the bZeroX community. As the CFTC cited in its complaint, on a phone call that took place before bZeroX transferred its property to Ooki DAO, one of its founders said:
“It’s really exciting. We’re going to be really preparing for the new regulatory environment by ensuring bZx is future-proof. So many people across the industry right now are getting legal notices and lawmakers are trying to decide whether they want DeFi companies to register as virtual asset service providers or not – and really what we’re going to do is take all the steps possible to make sure that when regulators ask us to comply, that we have nothing we can really do because we’ve given it all to the community.”
The enforcement action in September ordered Bean and Kirstner to pay a $250,000 civil monetary penalty, and warned that if Ooki DAO didn’t respond to the charges within three weeks, it would receive a “default judgment.” That’s what happens when the defendant doesn’t show up in court so the claimant (in this case, the CFTC) receives everything they want.
The CFTC argued that Ooki Dao ran afoul of the Commodity Exchange Act, a law from 1936 that regulates commodity trading in the U.S. According to the agency, since Ooki DAO was operating as an unincorporated association, in legal terms it also qualified as a “person” and was thus liable for violations of the law. That’s based on a legal concept called “corporate personhood,” in which corporations, and other similar entities, have the same rights as “natural” persons, aka humans.
By pursuing a default judgment, the CFTC angled to enshrine its arguments as law, with no opposition. And it worked: In June, the CFTC got its default judgment. Ooki DAO owes the CFTC about $650,000 and needs to end registration in the DAO immediately. And if reporting from the crypto media is correct, it will also shut down. Boop.
DAO enthusiasts argue that the CFTC has been running roughshod over due process and unilaterally setting all sorts of legal precedents. For example, when the CFTC served Ooki DAO legal notice via its chatbot—nobody had ever done that before. No court had ever established that a DAO token holder is a “member.” For that matter, none had ever established what a DAO really “is,” in the eyes of the law.
But what’s really at stake here isn’t just the fate of some minor software project hosted by crypto bros. What’s at stake is the future of DAOs as a concept, and, by extension, the way people organize online.
A Brief Primer on DAOs
While the concept of DAOs hit the mainstream around 2018, the idea itself is about a decade old and it came from the same place as a lot of crypto’s other “social innovations:” Vitalik Buterin, and the launch of Ethereum.
Soon after Vitalik came up with the concept of Ethereum, which he envisioned as a general-purpose decentralized computer, he and a few other people invented the idea of DAOs, which were supposed to be autonomous organizations run exclusively using blockchain-based computer programs called smart contracts.
They would be “decentralized,” as in, they would have no executive leadership; “autonomous” as in self-governing and run primarily through computer code; and “organizations”—well, they would consist of people, who would get together to do stuff.
Of course, this is crypto, so things got weird. The concept of the DAO was applied to all sorts of projects; many of which were not decentralized, or autonomous, or, really, organizations, either. Since the first DAOs were launched around 2016, the model has “blitz-scaled.” According to one tracker, there are now more than 12,000 DAOs, controlling more than $18 billion in assets.
Famous examples include The DAO, which in 2016 raised about $180 million on the premise that it would be the world’s first truly open global investment fund. TechCrunch hailed it as "a paradigm shift in the very idea of economic organization,” offering investors “complete transparency, total shareholder control, unprecedented flexibility, and autonomous governance.” But only months after its launch, roughly $60 million was siphoned off in a hack, leading to the Ethereum network’s first hard fork (when a blockchain is artificially returned back to a previous state). It also led to the end of The DAO itself, which eventually returned the remaining funds to the original investors.
Another example is ConstitutionDAO, which in 2021 raised about $47 million in a matter of days to purchase a rare version of the U.S constitution. Despite its members making a lot of noise on Twitter—and showing up in the Sotheby’s virtual auction room to spam the message board with crypto battle cries—the project failed when it was outbid by Ken Griffin, the CEO of the hedge fund giant Citadel (and veritable avatar of the “tradFi” economy), who shelled out $43 million just to prevent America’s founding document from falling into the DAO’s clutches. As in the death of The DAO, after the initial drama played out, all the funds raised during the hype were returned to the initial investors.
Even though the dream of ConstitutionDAO wasn’t realized, it shows why it’s hard to say the concept isn’t at least slightly innovative. Because while the objectives of the group might seem trite and banal, consider how difficult it would be to coordinate the same thing using the rails of the traditional financial system.
Putting aside things like the tedium of incorporating a business or setting up a tax structure, if you attempted to raise $47 million in a flash, using an application like Paypal, you’d be stuck relying on a system that’s just not designed, or really capable, of managing such a thing. Each transaction would take 2-3 days to complete. You would have to calculate exactly how much people own using third-party tools. You would be charged a high transaction fee for transferring that money to a bank account. But most importantly: you’d have to have a hell of a lot of trust in the person doing the organizing. That they wouldn’t just walk away with your money. That they have as much money as they say they have. That they haven’t siphoned off some money to their own personal stash.
The way that blockchain technology works is that all of a wallet’s transactions are visible and immutable, and so is the amount of money that exists within the wallet. So, if you send money to a project like ConsitutionDAO, you don’t need to rely on someone to guarantee that the money will be used as advertised. Or that it hasn’t been used in some nefarious way. You can see it and confirm it on your own.
This is what people in crypto mean when they call something “trustless”: the rules of the tech itself prevent bad behavior. DAOs allow you to add a governance layer on top of this structure, where people can vote on the way funds are used and make such decisions technologically binding. This is why people in crypto say that DAOs can make finance more democratic.
Of course it doesn’t always work as advertised—when humans and money mix, problems often ensue. Most DAOs have their own tokens, which means that they can be extremely valuable as organizations, since, if the price of the token goes up, so does the value of the funds held in its treasury. And this means that DAOs are just as amenable to price pumping as other crypto projects. Tokens are used to do stuff like vote on proposals and incentivize certain kinds of participation (think: solving coding problems, boosting the DAO on Twitter). But (again, in practice), they’re also used primarily for trading and, on average, participation in DAO governance is super low. This means that DAOs are often overrun by large investors, or “whales,” who buy up all of the governance tokens and basically make the whole DAO their plaything. Of course, there are exceptions. But this process is probably closer to the rule.
The Tao of DAOs
Which brings us back to the Ooki DAO case. Even if it’s true that the DAO was just a front for a centralized business, the CFTC’s legal approach in the case will have implications for all DAOs.
In one swoop, the agency was able to establish not only the way that DAOs fit into the eyes of the law (as an “unincorporated association,” with voting token holders considered “members” in that association), but in doing so, it opened up those “members” to explicit legal liability. According to Alex Golubitsky, a lawyer who co-wrote an amicus brief that was filed in the case, that was exactly the CFTC’s intention.
As Golubitsky explained to me, “The important thing about that category of entities (by which he means, unincorporated associations, or general partnerships) is that unlike an LLC or a corporation, [they] do not have limited liability for members of that association.”
In other words, as members, they can be sued for the actions of the entire association.
That’s part of the reason why Ooki DAO did not defend itself in court. And it's the main reason why DAO structures are now more or less dead—the case set the precedent that simply voting in a DAOs governance proceeding is enough to qualify someone as a member of that DAO. And members can be held liable for the actions of that DAO.
It’s a tradeoff that few, if any, people are likely to make.
So if you’ve set up a DAO, and you want people to continue participating in your DAO, you will need to adopt some other legal structure. Presumably one that protects people, and fits more favorably within the constraints of the law.
This is already starting. Just a few weeks ago, an outfit called Abracadabra DAO decided to appoint a trustee to manage things like trademarks and server expenses, and also to be a point of contact in the case that it gets sued. Similarly, Sushi DAO opted for a new corporate structure to manage its affairs, dividing its administration between a DAO, a foundation, and a corporation.
And while becoming more centralized might undermine the original vision of DAOs, some crypto lawyers now think a change of identity is exactly what’s needed in order to preserve what they still see as an innovative idea.
Like, for example, Gabe Shapiro, general counsel at crypto R&D firm Delphi Labs, who, a few months before the Ooki case, helped pen a sort of conceptual prospectus for a new kind of on-chain organization they call a “BORG.”
In it, they argue that the concept of a DAO no longer has any clear or distinct meaning, and that the term “now refers to any group of people engaging in virtually any kind of activity that uses smart contracts or blockchains to some modest extent or is otherwise pro-crypto.”
But these entities are “intrinsically and insuperably” centralized, Delphi’s report says, and may effectively just be unincorporated software firms or consulting companies. In other words: DAOs only in name. And by pretending to be something they’re not, they have opened themselves, and their participants, up to legal problems while diluting the meaning of the concept into a vague, imprecise, puff.
What the Delphi team suggests is returning the DAO paradigm to its original meaning (the on-chain cybernetic organization described by Vitalik et al. back in 2013), while “re-characterizing” some purported DAOs as BORGs, so named to riff on sci-fi cyborgs who combined human or “natural” characteristics with robotic ones like artificial limbs and microchips.
They suggest BORGs will augment “state-chartered entities” (legal persons) with autonomous software like smart contracts and AI:
“Similar to DAOs, BORGs operate mostly in public and seek to utilize cutting-edge technology and economic incentive mechanisms to minimize traditional trust-based reliance on intermediaries, fiduciaries and other agents. Unlike a DAO, however, BORGs are not intended to be fully transparent, fully decentralized or fully autonomous or to rely on technological and economic incentive mechanisms alone; instead, they are incorporated as state-chartered entities and rely on a mix of legal, technological and economic mechanisms.”
So, depending on your perspective, DAOs’ path to innovation is either on its way to closing, or it is still right at the start. Because if you’re a crypto cowboy, and you want to wrangle regulatory gaps, you might have a hard time convincing your peers to go along with you. At least, within this particular gap.
But if you’re a true believer in the opportunities that on-chain organizations might beget, then stitching your “innovative” baby to a traditional one, like an LLC, might be just the sort of bootstrap you need to achieve the coveted goal of “mainstream adoption.”
And that may be quite innovative indeed.
—Sam Venis