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The DAO Model Law

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 info@coala.global if you would like to learn more about the work we are doing and/or contribute to the DAO Model Law project.

WATCH THE STANDFORD WORKSHOP POLICY ROUNDTABLE

Follow The Coin has shared some footage from the private policy round-table event at the Stanford Blockchain Workshop, and the COALA formation announcement by Stanford Blockchain Workshop organizers Constance Choi and Primavera De Filippi, and Amor Sexton.

How Blockchain is like or not like the Internet

A Keynote presentation by Joichi Ito, Director of MIT Media Lab, at the Berkman/MIT Workshop.


Identity & Reputation

COALA’s Identity & Reputation Working Group focuses on the various challenges and opportunities of blockchain technologies at the critical intersection of privacy, data integrity, and security. This working group investigates different blockchain-based identity systems, including current credential management and access control systems, and analyzes these projects against existing regulations and policies for identity verification, and privacy issues regarding digital authentication.  

This working group has developed a thorough technical analysis of existing blockchain-based credential management and access control systems that provides: (1) overview of the state-of-the-art of technological advances in blockchain-based identity systems; (2) a technical benchmark in which various metrics can be applied across projects to assess the extent of “decentralization” of their underlying architecture; (3) in-depth analysis of each existing system’s architecture that enables the public to better understand how specific technical decisions bear on the inherent tradeoffs between usability, individual privacy, control, interoperability, and systemic security.

The group also focuses on the challenges and risks of leveraging blockchain technology for identity solutions and the security and privacy considerations that may need to be taken into account during the conception and development of these technical solutions. This group aims to elaborate a policy framework that contemplates (1) hard requirements mandated by law (2) policy analysis of tradeoffs between usability, individual privacy & systemic security; (3) best practices for the development and deployment of blockchain-based access control and credential management systems.

 

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Intellectual Property

We live in a knowledge economy, a world where value creation is shifting away from moving atoms around, to moving bits around. The value in this economy comes from ideas, which are —by their very nature— inherently intangible. Intellectual Property (IP) laws provide a set of legal tools by which authors, artists and creators can manage rights over their intellectual creations. Managing IP includes claiming rights in a particular idea or expression, and transferring these rights to a third party, through an outright assignment or licensing of rights. The goal of this working group is to identify key areas in which blockchain technologies may be applied for the management of intellectual property, including the deployment of digital rights management systems, micropayments, and peer-to-peer content discovery or compensation systems. The working group also aims to investigate how blockchain technologies can be used to create alternative business models and viable structures to promote innovation and creativity without increasing artificial scarcity on digital assets.

 

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Blockchain Governance

This working group investigates the ways in which blockchain technologies can enable new organizational structures and distributed governance models, and how these could be used to “regulate” or “govern” the deployment of blockchain-based applications. This working group focuses on exploring and developing sense-making and decision-making tools, to building new paradigms of organizational structures and social system design.

We have identified three distinct areas to address:

Governance of the infrastructure

We investigate the mechanisms used to “regulate” or “govern” the deployment and operations of existing blockchain-based applications. We explore current implementations of blockchain-based governance systems, and investigate the pros and cons of on-chain vs off-chain governance systems. In particular, this group focuses on issues of recentralization and the invisible “soft power” inherent in structures where stakeholders and hierarchies are opaque. 

Governance by the Infrastructure

We investigate governance systems developed thus far to support the operations of DAOs: from plutarchy, to futarchy, to the new types of meritocratic organizations that operate via a distributed reputation system and analyse their advantages and drawbacks, especially with regard to the risk of power concentration and re-intermediation. This group also analyzes how governance systems optimize for particular outcomes in terms of decentralization, inclusive participation, speed of decision-making, efficiency, and scalability.

Hybrid Systems of On-Chain & Off-Chain Governance

Much of today’s discourse around governance of blockchain-based systems focuses inordinately on “decision-making” or “on-chain” governance, ignoring other critical facets of decentralized governance, e.g., sense-making, building common knowledge and legitimacy, and identifying the relevant pool of stakeholders. This working group analyzes the pros and cons of on-chain and off-chain governance mechanisms, and aims to elaborate hybrid systems that leverages automation for certain atomic governance functions, and enables human intervention where judgment is required. The goal is to build governance systems that allow for more democratic and participatory decision-making and coordination. 

 

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Regulation Tech

COALA’s Regulation  Tech Working Group focuses on two goals: (1) to investigate and elaborate blockchain-based techno-legal tools and legal frameworks that deploy technological advances to support current regulatory and policy goals;  and (2) to explore how blockchain technologies can be specifically deployed for institutional governance.

Institutional Governance:

In this subgroup, we explore the spectrum of ways in which we can leverage blockchain technologies to address the growing deficit of accountability and trust in both public and private institutions by creating incorruptible systems. We have identified two ways in which this can be achieved:

Blockchain-Assisted Governance (ex-post governance mechanisms)

Blockchain-based Governance (ex-ante governance mechanisms)

The working group addresses these questions by investigating the use of blockchain technology and smart contracts for enhanced information security and institutional governance, with particular focus on the new opportunities for technological due process and institutional accountability that these technologies provide.

The goal is to identify key areas where smart contracts can outperform existing processes in traditional (legacy) institutions through the use and deployment of decentralized ledger technologies, transparent and tamper-resistant databases, multi-signatures, automated logic, and so forth.  Improvements include reduced transaction costs, increased efficiency, enhanced verifiability and auditability of transactions, and, more generally, a greater degree of transparency and accountability. 

The working group also aims to explore a new generation of security concerns that emerged in parallel with the use of blockchain technologies for distributing and decentralizing control. It does so by identifying and elaborating security standards and key management practices (key generation, storage, usage, access and compromise policies) for blockchain-based applications.

Techno-Legal Tools & Frameworks:

In this subgroup, we investigate and elaborate specific regulatory and policy frameworks for blockchain technology that will balance promote innovation and growth whilst preventing systemic risk and protecting consumers and entrepreneurs against economic harm and illegal activity.  The working group addresses questions in the following macro areas:

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Institutional Governance

The COALA Institutional Governance Working Group explores the spectrum of ways in which we can leverage blockchain technologies to address the growing deficit of accountability and trust in both public and private institutions by creating incorruptible systems. This can be done in two ways:

Blockchain-Assisted Governance (ex-post governance mechanisms)

Blockchain-based Governance (ex-ante governance mechanisms)

The working group addresses these questions by investigating the use of blockchain technology and smart contracts for enhanced information security and institutional governance, with particular focus on the new opportunities for technological due process and institutional accountability that these technologies provide.

The goal is to identify key areas where smart contracts can outperform existing processes in traditional (legacy) institutions through the use and deployment of decentralized ledger technologies, transparent and tamper-resistant databases, multi-signatures, automated logic, and so forth.  Improvements include reduced transaction costs, increased efficiency, enhanced verifiability and auditability of transactions, and, more generally, a greater degree of transparency and accountability.

The working group also aims to explore a new generation of security concerns that emerged in parallel with the use of blockchain technologies for distributing and decentralizing control. It does so by identifying and elaborating security standards and key management practices (key generation, storage, usage, access and compromise policies) for blockchain-based applications.

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Smart Contracts

The COALA Smart Contracts Working Group investigates the legal validity and enforceability of smart contracts and the need for alternative enforcement or adjudication mechanisms.

In particular, it focuses on two essential aspects: the definition of a smart contract and its enforceability within existing regulatory frameworks. The group also explores the correlation (if any) between smart contracts and legal contracts, along with the various mechanisms that can be used in order to “glue” these two things together into a mixed (legal and technical) contract. The group looks at examples of existing smart contracts to understand what are the characteristics that will ensure their validity and enforceability under the law.

Specifically, this working group brings together various initiatives aiming at bridging the blockchain world and legal world (e.g. Lexon, Mattereum, DAOlink, Aragon). Currently, the group is working on an overview of the key challenges with regard to the validity and enforceability of smart contracts under different legal jurisdictions, with particular focus on the issues related to the transnational character of these contracts. 

Many of the contributors to this working group also collaborate in the Alegality Working Group, where these concepts are being implemented into a “legal API” that combines smart contracts and legal theory to create “gateways” between blockchain-based systems and the physical world.

 

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Crypto-equity and ICOs

COALA’s Crypto-equity Working Group investigates the technical implementation and legal viability of new governance structures based on the issuance and distribution of digital tokens. Blockchain technologies provide new ways of issuing secure and tradable digital tokens on a distributed network. Although these tokens are often described as cryptocurrency, they have many other potential applications, ranging from traditional stocks and securities, claims to an underlying property title, proof of ownership over specific assets, voting rights or other privileges within an organization, and many other use-cases. As a general rule, these digital tokens can be classified into the following categories:

Some of the aforementioned use-cases might subsist outside of existing legal regimes. Indeed, the legal system is currently lagging behind these new technological developments and does not properly account for the granularity of these digital tokens, which currently stand in the gray-area of the law. Legal uncertainty might dissuade people from adopting these technologies, thus discouraging the deployment of new applications that could be highly beneficial to society.  Hence, while the need for a legal reform is pressing, for the time being, it is important to understand how we can benefit from the opportunities provided by blockchain technologies in a way that remains compliant with the law.

The purpose of this working group is to examine the problems and potential of blockchain-based applications from the standpoint of the existing legal infrastructure. In particular, it hopes to answer the following questions:

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Blockchain and Crypto-economics

The Blockchain Economics Working group is composed of economists, cryptographers, and protocol architects. As an interdisciplinary group, it aims to develop thought leadership in the emerging field of “cryptoeconomics” —a formal discipline that focuses on the design of blockchain-based protocols for the production, distribution and consumption of goods and services in a decentralized digital economy.

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Decentralized Autonomous Organisations (DAOs)

As their name indicates, DAOs are not controlled by any given entity; they rely on smart contracts to establish a set of blockchain-based rules for the governance of an organization, along with a system of tokens that represent some kind of equity (or crypto-equity) in these organizations. As such, DAOs make it possible for people to benefit from pooling resources into a centralized system, without the traditional drawbacks of centralized institutions and hierarchical decision-making. Their governance structure obviate the asymmetrical power dynamics characteristic of centralized institutions, thus significantly reducing the potential for corruption, while increasing transparency and accountability of the organization.

The aim of this working group is to investigate whether DAOs can be deployed as a proxy between a variety of individuals who might benefit from various forms of cooperation or collaboration with one another, but who do not want to rely on a centralized trusted authority. The working group also focuses on the risks that might emerge from the establishment of cryptographically-enforced relationships that might be too rigid and unresponsive for the evolving needs of individuals — which have been, until now, always delegated to other individuals.

Many of the contributors to this working group also collaborate in the Alegality Working Group, where these concepts are being implemented into a “legal API” that act as interoperable “gateways” between blockchain-based systems and the physical world.

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Blockchain Ethics

The decentralized space continues to grow rapidly, enabling new organizational structures, power dynamics, social interaction and human coordination. It is a new frontier, at the forefront of which we have a responsibility to facilitate the growth of a culture of healthy social and ethical norms that foster individual and collective responsibility. This working group focuses on the following macro issues:

We work under the belief that “Taking individual responsibility facilitates collective responsibility” (Vlad Zamfir)

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Identity & Privacy

COALA’s Identity and Privacy Working Group focuses on the fundamental problem of trust on a trustless Internet. It aims at identifying the various challenges and opportunities of blockchain technologies to the identity/privacy dilemma, elaborating potential interim solutions (e.g., federated KTC) and sketch out a variety of issues related to the developing world (e.g., persistent identity and secure land records) which may require distinct treatment.In addition, the working group explores ways in which blockchain technologies may be applied to existing AML/CTF frameworks. To that end, the group has conducted an exhaustive survey and impact assessment of current AML/CTF policies, as applied to emergent blockchain technologies.

 

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Alegality

The COALA Alegality Working Group convenes a deeply interdisciplinary group of experts from law, social sciences, and blockchain architecture and protocol design, to explore the challenges and opportunities faced by traditional organizations and bounded jurisdictions as they interact with decentralized networks and autonomous blockchain-based code within global infrastructures.

At its heart, the Alegality WG addresses fundamental questions of interoperability between, on one hand, centralized models defined by borders and identifiable spheres of power, and on the other, emergent decentralized networks characterized by diffuse, soft power and borderless participation.

The Alegality WG focuses on developing evolutionary legal frameworks and building techno-legal mechanisms – a “legal API” – that will enable DAOs and blockchain-based systems to participate and interoperate with traditional systems and legacy rules in the physical space.

Currently, the Alegality Working Group tracks the following issues:

 

 

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