DeDi aka “Decentralised Disappointment”
Move over DeFi & CeFi, the new thing is DeDi aka “Decentralised Disappointment”. DeDi is a new term I created when speaking about DAOs (Decentralised Autonomous Organisations) at a blockchain conference yesterday. Don’t get me wrong, I think the DAO concept is amazing but many seem blind to the risks.
Yesterday I discussed a cautionary DAO tale, Spice DAO. Spice DAO paid approx US$3M to buy a script bible for the sci-fi book “Dune.” The bible consisted of the book & a bunch of story boards for what a film of the book might look like. Unfortunately the Spice DAO thought they were buying the rights to make an animated film of the book. Oops!
No they bought the physical book only, nothing to do with the film rights. The book is worth around $30,000 – so the DAO paid around 100 times more than the book was worth. That caused a bad case of Decentralised Disappointment (or DeDi) for members of the Spice DAO.
Some thoughts about DAOs (not necessarily Spice DAO):
1. DAOs have a voting mechanism which harnesses the wisdom of the crowd but just because a majority of the group think the idea is a good one, does not mean it is
2. Some DAOs are not as populist as you might hope, votes are often decided by a handful of people with a lot of coins
3. Generally speaking, unless incorporated in a specific jurisdiction that recognises DAOs (like Wyoming or Vermont), DAOs are likely to be partnerships at law & every member of the DAO faces joint & several liability for the liabilities of the DAO. Here is an interesting scenario, lets say the Spice DAO votes to make the film regardless of not owning the film rights – all members of the DAO might then be liable for the breach of copyright
4. The members of the DAO may be taxed as partners in a partnership. That is complicated.
5. DAO’s have no separate legal identity so it becomes complicated when the DAO wants to interact w. the real world. For example with the Spice DAO, right now they need someone to sign the contract with the book storage facility where they are now going to keep their book. Who signs that agreement? Sometimes foundations etc can be set up to do this – but it is complicated. Often this is left up to the original founders of the DAO who deal with the relationship between the DAO & the real world. Unfortunately that means having to trust individuals & goes against the decentralised philosophy which underpins DAOs
6. If a DAO gets too much money, it is very difficult to return that money to participants as the gas fees (the transaction costs to do the refund) can be 10% to 30% or more of the actual money returned.
7. Make sure to get some legal & tax advice before jumping into a DAO.
I am hopeful #DeDi doesn’t get too popular but I suspect this will not be the last time there is a bad case of DeDi.