Introduction to Decentralised Autonomous Organisations (DAOs)
Background – what are DAOs?
A DAO creates an ‘organisation’ by establishing relationships between people software that operates on the blockchain. A DAO uses the capabilities of smart contracts and decentralised technology to streamline and enhance its decision-making processes. For example, DAOs are currently used by groups of people for purposes such as fundraising, charity, investment, borrowing and buying NFTs.
DAOs are member owned and operated. They differ to the traditional company structure as governance is written in code and enforced through a flat corporate structure of members voting rather than through a centralised legislated structure of boards, committees and executives managing on behalf of shareholders.
DAOs are not currently recognised as a legal entity across the world, including Australia, with the only real exception being the State of Wyoming in the US. However, the Australian Government has indicated that will commit to preparing a draft proposal for legislation surrounding DAOs.
This article will introduce how DAOs operate in a basic sense and broadly, the current legal implications of their technology. For more technical and in-depth information relating to DAOs, please see our DAO Whitepaper here.
How do DAOs work?
The rules and governance of a DAO is contained on a blockchain in a coded form, otherwise known as a smart contract. This can be seen as the ‘constitution’ of a DAO which ensures that member decisions are made and recorded automatically before being self-executed by the code.
To become a member of a DAO, users typically join the DAO by buying its native cryptocurrency. Holding the asset then gives the user the voting rights, often proportionate to the amount they hold.
Once a proposal is put before members of a DAO, a majority of votes is typically required to reach quorum and pass the proposal however rules may differ depending on the DAO. The proposal is then instated and completed based on the predetermined code, taking advantage of the efficiency without having a centralised authority.
DAO Structure/Hierarchy
DAOs operate with a flat and democratic structure, having no central leader or figurehead like in the recognised structures of companies, partnerships, associations etc. With DAO decision-making being tokenised, it is much more accessible and reliant on a representative consensus when compared to the decisions made by a smaller-sized central board or management of a recognised structure. Additionally, as decision-making is digital and autonomous, member voting within DAOs can take place much more frequently and efficiently, whereas member voting for traditional corporations may be limited to certain times of year and subject to strictly prescribed, manual processes.
A DAO is transparent with every decision within it being pitched, discussed, voted on and documented publicly. This allows the organisation to function with a collective understanding that all members will follow a specific set of pre-determined rules and that their pooled money will only go towards financing the organisation’s purposes.
DAOs can either be structured as ‘wrapped’ or ‘unwrapped’. Unwrapped DAOs are not legally registered in any jurisdiction and rely purely on their internal digital code for governance and dispute resolution. Wrapped DAOs use existing legal structures to register a part of the DAO as a recognised company or other not-for-profit entity, therefore giving it legal personality and the ability to, for example, own property and sue in its own name.
Legal Implications/Questions
As Australian law does not legally recognise DAOs, many issues consequently arise with their operation including:
Without legal personality, the DAO cannot sue and be sued, or own property
Members may be exposed to personal liability as well as the organisation’s liabilities – which is akin to a traditional partnership setup
The legal ownership of the assets controlled by a DAO is unclear
Who within a DAO is accountable is something goes wrong? This is made more difficult by the anonymity that blockchains allow
If the pre-determined, self-executing smart contracts within a DAO are flawed, are there any protections available to members who are adversely affected?
Key Takeaways
DAOs are becoming increasingly utilised with the rise of blockchain technology and cryptocurrencies. They provide many advantages for an organisation in comparison to the traditional company structure, however, also have the potential for significant flaws. The idea and implementation of DAOs is polarising, with many commentators either dismissing them as a fad, or touting them as a new way of doing business. Nonetheless, their progress and development should be watched closely, particularly within the legal and regulatory landscape. If you require further information or assistance with DAOs please refer to our DAO Whitepaper here and contact our office:
Paul Gray
Principal
T: 03 5225 5231 | M: 0414 195 886
E: pgray@ha.legal
Ryan Popovski
Lawyer
T: 03 5226 8572
E: rpopovski@ha.legal
