The DAO Model Law series will reflect on COALA’s current endeavor to draft a model law for networked organisations that many in the blockchain ecosystem refer to as Decentralized Autonomous Organizations (DAOs). We are looking to engage with blockchain practitioners — technical and legal professionals — as we push through the uncharted territory of recognizing Decentralized Autonomous Organizations as legal persons. We will set out the issues to be addressed and solutions proposed in more detail in a series of blog posts in the following weeks.
DAOs are already a reality.
Since the first proto-versions appeared back in 2014 and later on the Ethereum blockchain in 2015, there have been hundreds of attempts to establish specific types of networked organisations known as DAOs, whose operations are distributed across the nodes of a blockchain network, and whose governance is defined or, more generally, administered by the code deployed on that network. However, as things stand right now, DAOs cannot legally own assets, enter into contracts, sue and be sued, and collaborators may face unknown and unlimited liability. For those building DAOs aimed at interacting with the off-chain world, this poses a major problem.
The goal of this model law is to assist governments in crafting their own DAO laws, so as to recognize full or partial legal personality to DAOs. The objective is to endow them with specific legal rights — and obligations — without requiring them to register or conform to traditional corporate law rules, so long as they satisfy the relevant legal provisions through technological means (e.g., “technological guarantees” afforded by blockchain infrastructure). Those technological means should provide legal protections equivalent to those underpinning traditional corporate legal forms, while taking account of the new opportunities of blockchain technology. At its core, this model law maps the various policy goals underpinning traditional corporate law rules, with a series of technological guarantees that can be regarded as “functional equivalents” to those rules.
Current limitations to mainstream adoption of DAOs
Today, the most successful DAOs do not interface with our legal systems. These are funding-oriented DAOs, like MolochDAO, MetacartelDAO, TrojanDAO, or YangDAO. Most of these DAOs’ transactions are carried almost entirely on-chain, and do not therefore require direct interactions with the legal system or with regulated entities in the normal course of their operations. In many cases, however, the regulatory framework of a particular jurisdiction requires them to comply with specific rules or sanctions, regardless of whether these rules have been codified directly into the code governing these DAOs or recognised by its participants.
The full potential of DAOs will, therefore, only be realised once they can safely engage in both on-chain and off-chain interactions, without the current legal uncertainties concerning their potential liabilities, rights and responsibilities. Yet, currently, given that DAOs lack both legal personality and legal capacity, they cannot create legally enforceable contracts, own property, benefit from limited liability, sue and be sued, or otherwise interface with the legal system. As a result, legal redress against a DAO can only be sought from third-parties found to be somehow related to the DAO.
From the perspective of the legal system, a DAO only exists through its constituent parts, e.g., the natural or legal persons participating in the DAO (such as its makers, members, enablers, or even participants, including external third party service providers).
Today, people transacting with DAOs often do so without appreciating the legal risks and potential liability attached to those transactions. In many jurisdictions, a DAO may be characterized as a general partnership or other form of unincorporated association, where each participant — regardless of the type or scope of participation — may be jointly and severally liable for the DAO’s actions. Depending on the jurisdiction, and the arrangements among participants and third parties, people participating in a DAO might thus be held liable for the actions of other participants acting on behalf of the DAO.
The risk of legal liability is especially important to developers. As a general rule, developers are not considered liable for unforeseeable damages caused by a software bug (unless they intentionally produced malicious code). In the case of a DAO, it may be difficult to pinpoint who should be responsible for any harm it might cause. If the creators, developers or contributors are not readily identifiable, any identifiable person may — for lack of a better target — be regarded as the closest available person to hold to account, and consequently run the risk of being prosecuted. This is an especially problematic issue for open, decentralised infrastructure projects that necessarily rely on the contribution of a global community of developers to create, de-bug and maintain these software systems.
Moreover, once deployed on a blockchain, a DAO may keep operating as long as the blockchain is running, independently of its original creators. Hence, to the extent that the assets of a DAO cannot be seized by a third-party, those who have been wronged by the DAO may have little recourse within our current legal systems.
Accordingly, unless they can be bestowed with the same affordances and constraints, and with the same degree of protection as traditional corporate structures, DAOs are unlikely to be adopted as an organisational structure outside of niche crypto-communities and exist solely as a parallel but isolated alternative system.
The benefits of legal reform
Existing laws were not designed with DAOs in mind. Current legal frameworks are designed around actors and stakeholders who are readily identifiable and operate within a territorially defined jurisdiction. Decentralized blockchain-based systems, on the other hand, are powered by global, permissionless participation. For DAOs to flourish, scale and actually enjoy the legal protections afforded by the legal system, legal reform is necessary. A legal framework providing legal personality and legal capacity to DAOs could incentivize the creation of “legally compliant” DAOs, designed to meet the criteria established by the legal system.
Such a legal framework would need to articulate ways in which technological guarantees conform to the legal requirements of public order — obviating the need to impose anachronistic regulations that cannot easily be enforced within these decentralized and transnational technological structures. Ultimately, this would facilitate the establishment of contractual relationships between DAOs and third-party service providers that would qualify as enforceable contracts under the law. This would support more collaboration between traditional institutions and DAOs, providing legal certainty for DAO participants and better redress for consumers, and potentially even make it possible for a government to properly tax DAOs under certain circumstances.
This work cannot be successfully achieved by regulators alone. The creation of a viable DAO model law requires a bottom-up, community-driven approach informed both by the expertise of legal scholars and policymakers, and by the experience of people working on the ground and interacting with DAOs on a daily basis. The DAO model law requires constant and recurrent interactions between lawyers and technologists, in order to successfully map the policy goals underpinning traditional corporate law rules, with technological guarantees that act as “functional equivalents” to those rules, in the ever-evolving technical landscape of blockchain-based systems. It is our hope that we will be able to engage a broad audience of people and diverse stakeholders interested in participating in this collaborative endeavor. In the following weeks and months, we will set out the issues to be addressed and solutions proposed in more detail, in a series of blog posts. Please do not hesitate to reach out to us at firstname.lastname@example.org if you would like to learn more about the work we are doing and/or contribute to the DAO Model Law project.