What Is a DAO?
DAO: What is it, how does the law treat it, and how to start one
What is a DAO?
DAO stands for Decentralized Autonomous Organization, and it is a new type of organization that has arisen with the expansion of blockchain technologies into new spaces. DAOs can be used for businesses, for recreation, for investing, and so on. Members of a DAO can be allowed to vote on the activities of the DAO. Who is allowed to vote and how much their votes will count can be set by the DAO’s founders.
One example of a DAO is the now-infamous Constitution DAO. The purpose of Constitution DAO was to raise funds to—you guessed it—buy an original copy of the US Constitution. Despite the organization’s success in raising funds ($47 million!) to purchase the copy, the auction organizer, Sotheby’s, decided to sell the copy to another purchaser ($43.2 million) out of concerns that Constitution DAO would be unable to properly care for the historical artifact. While unsuccessful in it’s purpose, Constitution DAO represented a major milestone in raising awareness of DAOs, what they can do, and the power of autonomously organized crowdsourcing.
So DAOs can bring people—and money—together. That’s a terrific first step. But blockchain technologies, and tech in general, have a way of getting ahead of the law (I recently wrote about this in the context of NFTs and copyright law). DAOs are treading a similar path.
How Does the Law Treat DAOs?
So far, the law mostly doesn’t treat DAOs. Business entities are governed by state law and administered by the Secretary of State’s office in each individual state. Most states have taken no action regarding DAOs. Laws often change slowly, but that’s not always the case. Despite the newness of DAOs, at least one state at the time I am writing this has taken legislative action. Wyoming, widely known as one of the world’s top tax havens, has taken quick action via its state legislature to bring LLC protections to DAOs. DAO LLCs in Wyoming are formed similarly to ordinary LLCs.
If you’re curious enough to read the legislative text, click here.
That means in every other states (so far), a DAO may not really be… anything but a handshake deal among participants. And if you’re a lawyer reading this, your eyebrows have already gone up and probably crashed through the ceiling. Because that means a DAO in any state except Wyoming could be, potentially, be a general partnership. If you’re a partner in a general partnership, you could be held personally liable for actions of the general partnership, whether the actions were yours or not. I am not aware of any major lawsuits testing this hypothesis, but I do know you probably don’t want to be a named litigant in such a suit.