Decentralized Autonomous Organizations: Legal Implications Of An Emerging Trend

By August 1, 2022Ethereum
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As the world becomes increasingly digitized, organizations known as decentralized autonomous organizations (DAO) have grown in popularity.

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Such organizations are run through smart contracts on a blockchain network, such as Ethereum. They are autonomous in that they are self-governing and exist outside of traditional legal frameworks. What do these traits mean? That DAOs have the potential to radically change the way we do business.

However, as with any new technology, there are legal implications to consider. This article will explain what DAOs are before exploring some of the related legal issues.

What Is A DAO?

As mentioned earlier, a DAO is an organization run through smart contracts on a blockchain while maintaining autonomy and eschewing traditional legal frameworks.

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The development of DAOs is still in its early stages, and, as such, there is no one-size-fits-all definition of what they are. However, there are some key characteristics shared by all DAOs:

  • DAOs are decentralized. They are not controlled by any single person or entity. For example, the Ethereum network is considered decentralized because it is not under the control of a government or company.
  • DAOs are autonomous. They are self-governing and are not beholden to any existing legal frameworks. This means that DAOs have the potential to operate completely differently than traditional organizations.
  • DAOs are transparent. All transactions and activities within a DAO are recorded on the blockchain. This transparency is one of a DAO’s key advantages over traditional organizations.
  • DAOs are inclusive. Anyone can participate in a DAO, regardless of their location or identity.

Examples Of DAOs

DAOs can be created for any purpose, but some of the most popular examples are listed below.

1. Decentralized Exchanges

These organizations facilitate the trade of cryptocurrencies and other digital assets without the need for a central authority. Instead, direct peer-to-peer trades are made between two parties with the help of smart contracts.

During the past year, decentralized exchanges have gained in popularity due to their ability to offer greater security and privacy than traditional centralized exchanges.

A decentralized exchange ensures that there is no central point of failure that can be hacked or manipulated. Additionally, decentralized exchanges are often built on top of blockchain platforms, allowing them to offer improved transparency and immutability.

2. Decentralized Crowdfunding

In this type of setup, backers send funds to a smart contract, which holds them until the project reaches its funding goal. If the goal is reached, the funds are then released to the project team; if the goal is not reached, the funds are returned to the backers.

Projects using DAOs for crowdfunding are able to receive funding from a global pool of backers while enjoying the transparency and immutability of decentralized organizations.

3. Decentralized Governance

When a DAO is used for decentralized governance, members of the DAO vote on proposals that are then implemented by smart contracts.

Decentralized governance offers a number of advantages over traditional governance models, including increased transparency and accountability. Additionally, decentralized governance can be used to make decisions more democratically.

4. Decentralized Organizations

There are also numerous organizations — ranging from small startups to large enterprises — using DAOs to decentralize their operations.

Decentralizing their operations allows organizations to offer their members a number of advantages, including increased transparency, security, and privacy.

Legal Implications Of DAOs

DAOs are still in their infancy, so there are no clear legal guidelines regarding their operation. This lack of clarity presents a number of risks for those involved in DAOs in the following fields.

Formation And Contract Law

Since DAOs are not traditional organizations, they do not fit neatly into existing legal frameworks, so it is unclear how DAOs will be treated under contract law.

This lack of clarity concerning the rights and obligations of parties involved in DAOs could lead to disputes. Additionally, the lack of clarity could lead to regulatory uncertainty, as it is still unknown how DAOs will be regulated by governments.

Taxation

Taxation is another area where there is legal uncertainty because it is not clear how DAOs will be taxed by governments. This could lead to problems for DAOs, as they may be subject to double taxation or other unexpected taxes.

It is also worth noting that the decentralized nature of DAOs may make it difficult for governments to track and collect taxes from them. The resulting loss of revenue for governments could ultimately lead to regulation or crackdowns on DAOs.

Securities Laws

The uncertain relationship between decentralized autonomous organizations and securities laws is in part due to DAOs being such new entities and in part due to securities laws being notoriously complex. However, there are some basic principles that can help us understand the potential implications of DAOs and securities laws.

First, it is important to understand that a DAO is not like a traditional corporation. DAOs do not have any centralized management or control. Instead, it is run by code on the Ethereum blockchain that controls how the DAO functions and how its funds are used.

In addition, because a DAO is not centrally managed, it is important to consider how its actions will be governed — specifically whether the DAO’s actions will be subject to the jurisdiction of any particular country or regulatory regime.

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Legal uncertainty also surrounds the licensing, copyrights, and software code of DAOs because it is not clear how these intellectual property rights will apply to DAOs.

It is worth noting that, because DAOs are decentralized, it may be difficult for governments to enforce these intellectual property rights, which could lead to a loss of revenue for governments and the ensuing regulation or crackdowns on DAOs.

Final Words

This is a general overview of some of the legal implications of DAOs — not an exhaustive list. Remember: the law is constantly evolving. As such, it is important to seek professional legal advice if you are planning on launching a DAO or if you are already running one.

Olga V. Mack is the CEO of Parley Pro, a next-generation contract management company that has pioneered online negotiation technology. Olga embraces legal innovation and had dedicated her career to improving and shaping the future of law. She is convinced that the legal profession will emerge even stronger, more resilient, and more inclusive than before by embracing technology. Olga is also an award-winning general counsel, operations professional, startup advisor, public speaker, adjunct professor, and entrepreneur. She founded the Women Serve on Boards movement that advocates for women to participate on corporate boards of Fortune 500 companies. She authored Get on Board: Earning Your Ticket to a Corporate Board Seat and Fundamentals of Smart Contract Security. You can follow Olga on Twitter @olgavmack.

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