BitShares as a Bank - The origin of the DAC

My father and I were discussing BitShares one evening (fall 2013) and I was trying to describe how BitShares is different from an altcoin. I used an analogy that described BitShares as a crypto-equity in a decentralized bank and exchange called BitShares. The shareholders of the bank are those who own bitshares (BTS). I then went on to explain how this decentralized bank can create dollars just like their centralized counterparts. I posted a variation of this article on Let's Talk Bitcoin and it launched the concept of a DAC (Decentralized Autonomous Corporation).

Since then legal worry worts have relabeled the concept of a DAC into DAOs (Organizations) or simply DAs (Distributed Applications). I have personal chosen to use many different variations on the DAC acronym to help communicate the many different perspectives that are possible and bring added clarity and precision to the term. I now use Distributed Automated Company, Community, Coop, Country, or Currency depending on the situation.

Overview of Modern Banking

All banks these days operate on what I like to call a fictional reserve basis. When you approach the bank for a loan to buy a house, the bank creates new dollars from thin air backed by your collateralized promise to pay back the loan. In this case, your house is the collateral and the bank may call your loan and foreclose if you stop making the required payments or if the value of the house falls too much. When you pay off your loan the dollars are destroyed and the bank keeps the interest payments and the lien is removed from your house. The key thing to remember here is that these dollars are nothing more than an IOU from the bank. People trust the value of the IOUs because they trust the bank to honor their promise to pay a dollars worth of value.

Let's step back one step further and consider that a dollar use to be defined as 412.5 grains of 99.9% pure silver. When you received a bank note it was a promise to pay one dollar worth of gold and the law defined the fixed ratio of gold to silver required to give the bank note a tie to the real world.

Dividends & Interest Payments

All banks attempt to operate for a profit and therefore charge interest on loans along with transaction fees and inactivity fees. The bank profits are the distributed to the shareholders as dividends. In the case of the BitShares there are also transaction fees, registration fees, margin-call fees, etc. and the profits that result from charging these fees are paid to the shareholders via a stock buyback.

When someone wishes to borrow BitUSD from the bank they do not get to borrow this money interest-free. Instead they pay interest based upon the market demand for borrowing USD. The more people that want to borrow BitUSD relative to the people wanting to lend (buy) it the higher the interest rate shorts will pay. In practice the interest rate on BitUSD will be proportional to the short term growth expectations of BTS and the relative demand for leverage.

It is through this explanation of BitShares that the concept of a Decentralized Autonomous Company was born and a new take on the nature of Bitcoin as a decentralized autonomous company rather than just a crypto-currency came to be.

Recent Developments

When this article was originally written (Fall 2013) the concept of a DAC was very young. Since that time the analogy has been expanded upon and the metaphor has lead to major advancements in the crypto currency space including: Delegated Proof of Stake which eliminated mining and enabled dilution as a means to permanently fund the growth and development of decentralized businesses.

Max Wright in is book BitShares 101 goes into much greater detail in describing DACs as it relates to what BitShares is today. In his book he describes how Bitcoin is a DAC and provides great detail about the power of Delegated Proof of Stake (DPOS). I highly recommend you check it out.

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