Democratized Capital Transfers Power from Wall Street to Main Street

People walk past shops in Notting Hill, London. Traditionally small businesses wanting to launch retail or restaurants have been all but ignored by venture capital firms and investors, but DAO may change all that by combining crowdfunding with traditional equity investment. Maremagnum/Getty

The middle class might not have to bend over and kiss its ass goodbye after all.

Two events at the end of May point the way to a more equitable future—as in, a future that’s good for a broad swath of society, not just the tiny slice that can blow $55,000 on a Louis Vuitton City Steamer alligator bag.

Those events are a crazy blockchain apparatus called the DAO raising $125 million, and the U.S. government adopting a new set of rules that will make it easier for almost anyone to buy equity in private companies.

Both might take a while to have a serious impact, yet both are about something really big: the democratization of capital. If you play that out, the movement will take power from the hands of Wall Street, hedge funds and venture capital companies and make it more likely that the middle class will share in the successes of the networked economy. That would be a lot better outcome than some of the predictions that say software and robots will punt 95 percent of the population out of meaningful work.

DAO: Arcane and maybe illegal

So let’s start with the weird one: the DAO. The initials stand for "distributed autonomous organization." The basic code was built by a German programmer named Christoph Jentzsch, but once the DAO was set free on the internet, it became something of a self-actualized robot venture capital operation. Within two weeks, the investment fund raised $125 million from people all over the globe.

Boil it down, and the DAO is supposed to work like this: Anyone can put money into the fund, all the investors get to vote on which startups the DAO finances, and software-defined contracts autonomously track the performance of the companies and manage the fund. If a funded company succeeds, the software directs the proceeds back to the fund’s investors. In other words, the whole thing works much like a venture capital outfit, except that investors in the fund don’t have to be rich people or institutions like Harvard’s endowment, and there is no VC in charge.

The DAO is like a test flight—most normal people would look at that contraption and sit this one out. First of all, it doesn’t take real money. It is built on a digital currency called Ether, which is even more arcane and hard to get than bitcoin. And in many countries, including the U.S., the whole scheme might be illegal. “The list of technical hurdles goes on and on,” wrote author and Wired founder Kevin Kelly in a Facebook post. He called the $125 million raised “pure speculation.” Yet, Kelly said, “it does seem like the natural extension of social media and the inevitable decentralization of everything, so I am trying to buy a few Ether to see what happens.”