Suppose we have a DAO that wants to issue “debt,” which we will define as (i) a claim that must be paid and if it isn’t the the debt claimants have a right to force an event called “bankruptcy”, (ii) in the event of a “a bankruptcy” this claim must be paid before “equity.” (Note that this notion of debt is distinct from what is currently contemplated by others; most other notions of debt are implicitly secured debt collateralized by a financial asset and here we are contemplating an unsecured debt claim). Here “equity” is understood to be the token that allocated the resource being created by the DAO and with which the “management team” (eg, keepers) are compensated.
The following are several “attacks” that occur in “normal life” corporate settings that have been fixed by making them illegal, but do not appear to have a tractable solution in decentralized governance. I want to discuss how these attacks can be avoided:
1) Frauds to the Estate: suppose this DAO has a “fee” that is used to pay for costs of goods sold that cannot readily be handled by one party. An example is a large advertising budget or fees to use to pay an external vendor. Once we allow the DAO to make decisions on spending, how do we ensure that keepers do not defraud the DAO by spending on themselves and not things that benefit the DAO? Note that token ownership is never sufficient to stop this. (If I buy a $1mm jet with company and own 1% is the company that bought me the jet, then I just got a jet for 99% off pretty much.) Moreover, the law is never sufficient to stop this (if it is truly decentralized, we cannot ensure the fraudster is in any particular legal jurisdiction nor is it clear how this case would be prosecuted).
2) Value Leakage to Equity: there are multiple ways to conduct this attack. One way is that equity holders can capitalize the company with 50% debt and thereby raise a lot of funds. then they rewrite the credit agreements of the company such that they are now allowed them to pay themselves a special dividend of all the cash they raised. Then they file for bankruptcy and the equity token and debt ends up worthless, but the equity holders got the cash from their special dividend and thereby screwed creditors.
3) Existential Effects of Distress: normal corporations have value either because it will issue or currently issues dividends, because it can be liquidated for its underlying assets or because it will be bought by another company (which will realize value in one of the two previous ways). In bankruptcy, distress will force equity holders to get none of the value and all the value goes to the more secure of creditors. It’s difficult to see how this would work with tokens, but I can imagine a couple ways to create a similar property for a DAO. Curious to hear what others have thought of.
