The Rise and Recognition of the DAO

“Blockchains” have been hyped as the most important technological revolution since the internet. As of the writing of this article, cryptocurrencies and NFTs are valued at over $1 trillion, despite the continued volatility in their value. While cryptocurrencies are the first thing most think of when they hear “blockchain,” one of the most interesting applications for blockchain technologies is not the next initial coin offering. Instead, it’s decentralized autonomous organizations (DAOs), which offer a new structure for managing organizations and large projects.

The Rise of the DAO

DAOs revolutionize organization management by putting computer code at the center of the organizational structure. While the finer points of the technology behind DAOs are beyond the scope of this article, the general idea is that they are organizations with rules set as smart contracts on a public blockchain.^[1] These smart contracts, once programmed, are public and execute automatically if the conditions of the smart contract are met. The rules of a DAO can still be changed through the voting of its members, who acquired tokens pursuant to the rules of the smart contracts running the DAO.^[2] Using this mechanism, crypto currency and other assets can be collected by the DAO and then allocated into investments, or even used to pay for services. As of the date of this article, the number of known active DAOs is estimated to be nearly 5,000, with a total treasury of $9.7 billion, and over 600,000 active voters. One prominent example of a DAO is the MakerDAO, which manages the “Dai” stable coin.

There are a few notable aspects of a DAO. First, the smart contracts that run a DAO are encoded on a public blockchain. This means the rules governing DAOs are geographically distributed worldwide. Next, while votes of  DAO tokens are public and available for all to view on the blockchain, the actual holders of the tokens that made those votes can be difficult to determine. Finally, and crucially, a DAO does not have a default legal form that limits liability of its members.

A legal form for DAOs is of critical importance to their widespread adoption. This is because the default form of an organization in the U.S. is usually a general partnership. In this form, those holding tokens and based in the U.S. have personal and unlimited liability for the actions of the DAO. So, if the DAO somehow accrues debts that are not paid or is sued for its actions, those in the U.S. holding tokens could potentially have unlimited personal liability (if they can be identified, of course). Even if most tokens are held outside the U.S., those in the U.S. could in theory be held liable for the entire liability of the DAO.

Despite this, most DAOs do not have a prescribed legal form, or they assume that those holding tokens will insulate themselves — such as by having an LLC hold the tokens. Some others have “wrapped” DAOs in a standard form such as an LLC or in foundations based in the Cayman Islands.

Recognition of the DAO

In the past few years, there has been recognition of these types of blockchain-based organizations in the U.S. Three states — Vermont (July 2018), Wyoming (July 2021) and Tennessee (April 2022) — have thrown their hats into the ring to be the “Delaware of DAOs” by adopting legal forms that limit liability for the members and are specific to a distributed blockchain-based organization. We have been very interested in DAOs and the extent to which these legal forms have been used. We found, as of July 2022, that these states have approximately the following number of registrations under these new legal forms:

It is not possible to tell how many of the entities that have organized under these statutes are actually active DAOs. From these numbers, Wyoming is currently in the lead for DAO registrations; however, none of the most well-known DAOs have registered there. Adoption of these forms has been slow, and some commentators have warned away from them.^[6]

There has recently been a proposed model law released to help guide states; it is more specifically tailored to the technical nuances of DAOs. This model law has not yet been adopted by any state. Given the relatively slow adoption rates of the new DAO legal forms in the U.S., states that want to encourage DAO registration may now look to this model law for guidance. Certainly, with the amount being invested into DAOs and the number of people using them to guide their organization, we are likely to see other states offering their own solutions. We will continue to update when new states pass legislation adopting their own DAO legal forms or pass new model laws on the DAO form.

^[1] _{For an overview of the technology, check out this video on DAOs: https://youtu.be/KHm0uUPqmVE.}

^[2] _{DAOs can be set up in numerous ways and coded on different blockchains with different rules, a full explanation of which is well outside the scope of this article. Here, we discuss a “typical” DAO, to the extent that anything related to DAOs can be said to be typical.}

^[3] _{Data collected from https://sos.vermont.gov/corporations/registration/.}

^[4] _{Data collected from wyobiz.wyo.gov.}

^[5] _{Data collected from https://sos.tn.gov/businesses.}

^[6] _{An article in which the author warns to stay away from using these new forms: https://thedefiant.io/starting-a-dao-in-the-usa-steer-clear-of-dao-legislation/.}