Blockchains buys the creators of The DAO project

The company behind The DAO project has been acquired by incubator and developer Blockchains.

While well-intentioned, The DAO is infamous for being hacked to the tune of $50 million and for being singled out by the U.S. Securities and Exchange Commission (SEC) in its first assertion of control over initial coin offerings (ICO).

The DAO was the brainchild of slock.it, which built the Ethereum-based decentralized autonomous organization in order to create a venture capital fund run entirely by smart contracts without any central authority or headquarters location. Decisions would be made by a vote of dao token holders.

In acquiring slock.it, Blockchains is focused on the German firm’s internet of things (IoT) product Incubed, the company said in a release. Incubed is intended to resolve security and interconnectablity problems affecting Ethereum-based IoT systems, the company added.

Blockchains made clear that the purchase is also a talent acquisition, particularly of founders Christoph and Simon Jentzsch. The highly regarded developers will become vice president of technology and director of blockchain development, respectively.

“This is an exciting acquisition for Blockchains,” said David Berns, its president. “slock.it’s team of nearly three dozen experienced developers and professionals will allow Blockchains to significantly fast-track its product roadmap and enhance its collaboration efforts.”

The now-merged firms are planning to release a series of open-source developer tools within the next few months. Other projects include storage of digital assets, self-sovereign identity, and decentralized products and systems.

“This is a natural marriage,” said Blockchains CEO Jeffrey Berns. “With Blockchains’ partnerships and slock.it’s technical prowess, this union allows us to fulfill the promises of blockchain technology and foster an ecosystem that applies blockchain solutions to better our everyday lives.”

The hack that split Ethereum

The DAO project launched in May 2016, with slock.it crowdfunding it with a sale of dao tokens that raised about 12 million ether (ETH), then worth more than $150 million. The sale was “an order of magnitude larger,” than the company expected, and brought a great deal of attention, Christoph Jentzsch wrote in an August 2016 slock.it blog post.

Unfortunately, that attention included a hacker who found and exploited a flaw in the smart contract code to steal about 3.5 million ether on June 17.

After much infighting, a hard fork of the Ethereum blockchain was agreed to in order to reverse the theft.

But, the vote to fork exposed a divide in the Ethereum community, and a significant minority refused to implement the hard fork, citing the importance of immutability. This divided the blockchain into the new Ethereum with The DAO’s theft reversed, and a second chain that became Ethereum Classic (ETC).

But The Dao project was dead and exchanges began delisting dao tokens that autumn.

The SEC drops a bombshell

The DAO’s story did not end with its death, however. The high-profile sale also attracted the attention of the SEC, with dire consequences for cryptocurrency developers working on ICOs.

On July 27, 2017, the SEC issued The Dao Report, “cautioning market participants that offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities law,” the agency said in a press release.

While it chose not to bring charges or issue violations, the report was a shot across the bow of the cryptocurrency and blockchain industry. It was a warning to ICO promoters, but more importantly it was also an assertion of control over the central funding process of cryptocurrencies.

The report was also the first instance of the SEC’s vague guidelines for ICOs, which continue to draw criticism to this day.

In a familiar refrain, SEC Chairman Jay Clayton said in the release that “[t]he SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us. We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

On April 3, 2019, the SEC finally pre-approved an initial token offering (ITO), issuing a no-action letter to Turnkey Jets, declaring that its ITO did not appear to be the sale of a security.

That came on the same day the SEC issued its long-awaited “plain English” guidance on defining an ICO. It drew a lot of criticism from the cryptocurrency industry, which had hoped the SEC would expand the situations in which an ICO was not a security.

But, what it did was reiterate the SEC’s long-held opinion “that nearly every sale of digital assets is going to be the sale of a security,” cryptocurrency attorney Joshua Klayman told Modern Consensus. “Why people keep expecting a different answer from them, I don’t know.”