DAOs: What they are and how the law treats them

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 most other states (so far), the entity treatment of a DAO is largely unsettled — which raises real governance, liability, and intellectual-property questions for the people who organize and participate in one. These are the kinds of emerging-technology questions Lynch LLP works through with founders.

Talk to Sean about emerging-technology entity and IP questions →