If you’ve been in the crypto space for any amount of time you’ve probably heard the term DAO tossed around more than a frisbee at a family BBQ. Thing is, what is a DAO? According to some people, their Discord “alpha” chat is a DAO, but the reality is that’s flat out wrong.
Other important questions to consider are why use a DAO? How is a DAO treated as a legal entity? Is there any liability from being a member in a DAO? If there is, how can we limit that liability? Well, let’s dive in.
What is a DAO?
A Decentralized Autonomous Organization (“DAO”) is an organization that is controlled by a set of coded rules that are voted upon or established by community members of the DAO. In other words, a DAO can be thought of as a community run organization with no one central authority.
Why or when do I use a DAO?
DAOs afford a given community the ability to act cohesively, while also allowing for each member of the DAO to have a say. So, for example, MonkeDAO can be a community of holders in different places each with independent autonomy, but act in unison through the use of a DAO. Instead of a normal club or other type of organization that would have a President/CEO, CFO/Treasurer, etc., who make major decisions about the direction of the organization, there is no central authority figure in the DAOs. Instead, major decisions are made by voting on paths forward with the use of smart contracts to execute those voted upon decisions.
The advantage decentralization provides in this context is truly democratizing decisions, instead of trusting a main figurehead.
Legal Entity Treatment of DAOs
Here’s where things get tricky. If a DAO is formed today and that DAO has not been incorporated as an LLC, or formed under Wyomings bespoke DAO entity, it will be treated as a General Partnership (“GP”). I’ll dish out some insider corporate lawyer info here . . . BEING TREATED AS A GP IS BAD.
A General Partnership affords ZERO personal liability protection. What does that mean Sir Esquire? Well, it means that if you’re part of a GP and that GP gets sued, guess what? You’re on the hook and so are your personal assets. This means that merely being a member in a DAO could open you to legal liability, and your personal assets could be in jeopardy (yeah, that counts your 14 Okay Bears you snagged with that mint bot).
Now, that said, there would be significant hurdles to getting sued given that the majority of the population using DAOs right now is composed of anons. However, if you’re currently doxxed and in one, or if you become doxxed while in one, there is serious value in considering whether membership is worth it if your DAO is a GP.
So, as any good lawyer does, I’ve told you the problem and potentially scared the sh*t out of you. But as any great lawyer does, I’m going to give you some potential solutions.
Limiting Liability for DAOs and Their Members
DAOs can avoid general partnership treatment by forming as a Limited Liability Company (currently, this would have to be done in the Caymans because of membership restriction laws for US LLCs–whole separate can of worms), OR by forming under Wyoming’s custom DAO entity.
The LLC or Wyoming legal entity structure blocks liability from extending to members’ personal assets. Simply put, if the DAO gets sued, the only thing the plaintiff can reach is the DAO’s assets, not its members assets too (99% of the time, there’s this thing called piercing the corporate veil, but that’s another blog post).
Conclusion
As DAOs become increasingly common place over the next few years, I’d expect many states to adapt like Wyoming has done and make specific DAO entity structures that afford unique protections. However, until that time, keep your eyes open about what you’re agreeing to by being a member of a DAO and keep your personal assets safe.