How do you prevent fraud within DACs?

[Troglodactyl]

...
I don't understand how in one breath you worry about the power of "those in control" (meaning a consensus majority of shareholders I guess) and in the same breath you advocate for the exact system that the OP is complaining about which is rife for abuse and fraud and puts huge sums of money in the hands of one individual who has proven nothing.  If all funding for growth must be done up front then it is a perfect justification for people to collect obscene amounts of money for work they haven't done yet.  They have "big plans" and will need this funding some day so they have to get if from you now.

Because I don't see the OP's concern as necessarily a serious problem.  I think that in many cases, he has answered his own question, and that using initial funding to reach a point at which minimal centralized control is required is pretty much ideal.  Initial funding is inevitably high risk, between trust in the initiators and the rarity of truly successful endeavors.  Basing initial investment on trust in individuals and ideas, and risking only that which you can afford to lose is acceptable to me.  Trusting large groups of people not to coalesce into competing interest groups and attempt to exploit their competitors conflicts with my experience with large groups of people.

EDIT: Actually, the AGS gradual donation concurrent with initial development solves a lot of the trust issue raised in the OP.

[Agent86]

Apologies, I wasn't trying to say that accelerated growth was bad, or that saving up profits was the only appropriate path to expansion.  The biggest problem I have here is that capital infusion based growth is not a sustainable permanent strategy.  Eventually you should reach saturation, at which point further dilution serves to reclaim and centralize profits away from the shareholders the delegates or their associates, rather than to create additional value for all shareholders.

The simplest way to handle this dichotomy is to use the IPO funds for accelerated growth (hopefully to the point of self sustenance) and then fall back on gradual profit funded growth.  It's not the only way, but I am suspicious of any system that allows for permanent dilution, since growth cannot permanently outpace profit.  The result seems likely to be a rotting phase following saturation, when those in control loot the minority through malinvested dilution.

I don't understand how in one breath you worry about the power of "those in control" (meaning a consensus majority of shareholders I guess) and in the same breath you advocate for the exact system that the OP is complaining about which is rife for abuse and fraud and puts huge sums of money in the hands of one individual who has proven nothing.  If all funding for growth must be done up front then it is a perfect justification for people to collect obscene amounts of money for work they haven't done yet.  They have "big plans" and will need this funding some day so they have to get if from you now.

[Troglodactyl]

Either the customers pay for the growth eventually, or you're talking your investors into a bad deal.  The question is whether you should charge your customers absurd prices in an attempt to expand quickly (obviously a bad idea), save your reasonable profits patiently in order to expand as you can afford it, or accelerate that growth by attracting investors.  The investors should not invest if they don't expect the profit (customers) to pay for that expansion eventually.  It's just a question of whether the customers pay in advance, or after the fact.

Trog, a lot of these businesses involve a network affect or an unmet need in the market.  Most often you don't have the option to take your sweet time opening a new restaurant every 10 years after you've saved enough profit from the first one.  (you're not going to be the next starbucks that way anyway).  You'll also be disappointed to see someone has ripped off your idea and has used economies of scale to drive you out of the market.

You often have 2 options, and in our case I think this applies:  Expand quickly, meet the unmet need, grab the network effect or let someone else beat you to it.

Once you have grown to meet the market need and hopefully got a network effect you can charge customers a competitive price for the service provided and the profit goes to the shareholders.

Apologies, I wasn't trying to say that accelerated growth was bad, or that saving up profits was the only appropriate path to expansion.  The biggest problem I have here is that capital infusion based growth is not a sustainable permanent strategy.  Eventually you should reach saturation, at which point further dilution serves to reclaim and centralize profits away from the shareholders the delegates or their associates, rather than to create additional value for all shareholders.

The simplest way to handle this dichotomy is to use the IPO funds for accelerated growth (hopefully to the point of self sustenance) and then fall back on gradual profit funded growth.  It's not the only way, but I am suspicious of any system that allows for permanent dilution, since growth cannot permanently outpace profit.  The result seems likely to be a rotting phase following saturation, when those in control loot the minority through malinvested dilution.

[Stan]

Point 1 - holders of DAC shares are a mix of customers and shareholders.  So any strategy has to apply to both of them and their interests are not always aligned.

Point 2 - To grow a DAC quickly before a competitor does, a developer will need to reserve a lot of shares to sell to investors.  Ability to do so will depend on how soon the industry gets over their resistance to that idea. The least competitive DACs will be the ones who give away all their shares without embedding some way to fund upgrades and blitzkrieg promotion.

[Agent86]

Either the customers pay for the growth eventually, or you're talking your investors into a bad deal.  The question is whether you should charge your customers absurd prices in an attempt to expand quickly (obviously a bad idea), save your reasonable profits patiently in order to expand as you can afford it, or accelerate that growth by attracting investors.  The investors should not invest if they don't expect the profit (customers) to pay for that expansion eventually.  It's just a question of whether the customers pay in advance, or after the fact.

Trog, a lot of these businesses involve a network affect or an unmet need in the market.  Most often you don't have the option to take your sweet time opening a new restaurant every 10 years after you've saved enough profit from the first one.  (you're not going to be the next starbucks that way anyway).  You'll also be disappointed to see someone has ripped off your idea and has used economies of scale to drive you out of the market.

You often have 2 options, and in our case I think this applies:  Expand quickly, meet the unmet need, grab the network effect or let someone else beat you to it.

Once you have grown to meet the market need and hopefully got a network effect you can charge customers a competitive price for the service provided and the profit goes to the shareholders.

[Troglodactyl]

...
It is bad business to put the responsibility of funding growth/development onto the CUSTOMER/USER.

An analogy: if you have a restaurant and it is doing well so you want to open up 3 more locations and expand but you don't have the money... How do you do this?  Where does the money come from?  The right way to do it is to get a new investor that has the money and you work together and split the profit.  The wrong way to do it is to try to charge the customers of your first restaurant 4 times the competitive price for their food.

We want to attract customers with LOW transaction fees to get a network affect going.  We do not want to put the burden of funding our future growth and development onto the people who are actually using the system by overcharging them for transactions while the shareholders try to get a free ride and not get diluted.  THIS IS NOT THE RIGHT WAY TO DO BUSINESS.
...

Either the customers pay for the growth eventually, or you're talking your investors into a bad deal.  The question is whether you should charge your customers absurd prices in an attempt to expand quickly (obviously a bad idea), save your reasonable profits patiently in order to expand as you can afford it, or accelerate that growth by attracting investors.  The investors should not invest if they don't expect the profit (customers) to pay for that expansion eventually.  It's just a question of whether the customers pay in advance, or after the fact.

[Agent86]

Yes, the solution to this is DACs that have the ability to issue new shares gradually over time to pay for things like development.  This must be done by shareholder vote.  Some variation of "DAC employees" https://bitsharestalk.org/index.php?topic=4660.0

A DAC could bootstrap a brand new DAC that will honor their shareholders by issuing shares to the developer that he can sell to collect a salary as he works.  If the developer disappears, so do his payments.

This is a SUPER important power that is key to sustainable competitive DACs.

It is also important for growth and I want to expand on this in light of recent discussion about delegate payment structure and transaction fees.

It is bad business to put the responsibility of funding growth/development onto the CUSTOMER/USER.

An analogy: if you have a restaurant and it is doing well so you want to open up 3 more locations and expand but you don't have the money... How do you do this?  Where does the money come from?  The right way to do it is to get a new investor that has the money and you work together and split the profit.  The wrong way to do it is to try to charge the customers of your first restaurant 4 times the competitive price for their food.

We want to attract customers with LOW transaction fees to get a network affect going.  We do not want to put the burden of funding our future growth and development onto the people who are actually using the system by overcharging them for transactions while the shareholders try to get a free ride and not get diluted.  THIS IS NOT THE RIGHT WAY TO DO BUSINESS.

ALSO:
We should do everything we can to not conflate the role of "Delegate" with the role of  "DAC employee".  Funding everything through delegates makes deciding what delegates to approve much more complex than it should be.  You might totally trust a delegate to be a good delegate but don't like the way they spend money so maybe you elect someone else who is cheaper but not as trustworthy.  Mixing the roles is not the appropriate thing to do and creates barriers to entry and confusion.

...end rant

[luckybit]

I've been very excited about PTS from the beginning last year, but took some time away from the Alt market.
I met some of the team in person in Las Vegas Bitcoin conference last December and came away feeling very good about future of PTS.

However, I have a simple, but important concern I was not able to resolve with a few searches around the forum.

I've seen it happen dozens or even hundreds of times now in the bitcoin ecosystem (just look at Bitfunder, or any asset exchange) - most of the "listings" turn out to be scams or fraudulently run. All BTC are somehow lost or founder disappears.

I've seen some GDoc attempts at accounting for PTS expenditures, but what really is to prevent a "DAC" founder from pulling an Enron or running with the AGS funding?

I will say that the best and sole defense I've really seen against this (since there is no auditing in the bitcoin world) is to only create DACs for 100% decentralized businesses that are open-source (someone else can "right the ship") and pretty much run themselves, and require minimal "centralized" management towards development etc.. If this is the only way DAC funds will be used, I've answered my own question.

Examples would be centralized betting, poker, asset exchange, coin exchange, file sales (music, documents) etc.

What about collateral?

[Stan]

The ultimate fraud is to take over the world.

Not if you are up-front about your intentions to do so...

[CLains]

The ultimate fraud is to take over the world.

[gamey]

When a developer writes a DAC and pays themselves in shares, there is not near the incentive for longterm maintenance.  If they can manage to sell their shares at a reasonable price then everyone owns a DAC that no longer has an interested developer.  With dilution the incentive is there for the developer to continue improving the DAC.  There isn't a big bag of money at the start where the effort might be into scheming how to sell.

Agent86 argues that it is needed for growth.  I agree with that too.  Between these 2 reasons we really need dilution.

The interesting part is there are so many ways to do this.  A developer could make the inactivity fee self-adjusting and pegged to a certain fiat rate and be paid from this.  Then it wouldn't be "dilution".  You would be taxing those inactive share owners basically ....

[bytemaster]

DACs are designed to prevent fraud found in traditional accounting methods.  This is why certain leading companies are interested in making their shares tradable on a DAC... they don't trust the traditional exchanges to prevent naked shorting of their stock. 

[renkcub]

I will check out the thread.
I am 100% convinced of the integrity of the Bitshare team.

However, I urge caution in dealing with DACs.
There is a reason people say "not to loan money to friends/family" and reason the NYSE etc are audited (not that it always works, still!) - That reason is you can't trust anyone.
Transparency/checks and balances/decentralized control are the solution.

[Empirical1]

There will be risks when people offer third party DAC's. Even without fraud the reality is that the majority of new businesses fail.

However the beauty of PTS is that third party DAC's will be potentially honouring PTS with shares for free. So beyond your purchase price/cost of PTS, the risk to you is limited.

Personally I think the DAC's that they (BitShares/I3) will be heavily involved in creating themselves, makes PTS an attractive buy just on it's own. 

I've seen some GDoc attempts at accounting for PTS expenditures, but what really is to prevent a "DAC" founder from pulling an Enron or running with the AGS funding?

There is nothing preventing it. However AGS has already raised most of the money it will raise via the BitShares X snapshot on the 28/02/14. So if they wanted to run away with the money they would have done it then imo.

Instead they have spent the money on hiring a great team and working extremely long days.
I'm not very technical, but I think it would have been possible to make XT tradeable earlier, They could have pumped it, spent $100k generating a lot of hype and then sold their shares without delivering anything.
The fact that they've not done that and spent a lot of time and effort developing whole new blockchain systems like DPOS too, makes me certain their intentions are not to make a few million and run away. 

Threads like this, also convince me, the founders have much bigger visions and ideals.
https://bitsharestalk.org/index.php?topic=2853.15 

[gamey]

This is why we need dilution, but it will take time for people to come around. 

There is no way to prevent that stuff.  Once Bitshares X launches and Bitshares ME you have created a low barrier of entry.  THat is good and bad... Some people will be fleeced though. 

With DACs we'll see actual value though.  If you invest in a fork then it will likely work out like it has in the altcoin.  Altcoins are slightly different but 90% have almost no difference to the end user.  This is not true with DACs.