The Era of Legally Compliant DAOs

OpenLaw
OpenLaw
Jun 26 · 6 min read

OpenLaw releases its first vertical OpenLaw DAO to enable the creation and deployment of “limited liability DAOs” in minutes. Creating a legally compliant DAO and related tokens is as easy as filling out a form.

The year 2020 is shaping up to be the year of the DAO. Over the past 12 months, there has been rapid iteration and improvement in the creation and management of decentralized organizations and decentralized autonomous organizations.

With the launch of OpenLaw’s first vertical, OpenLaw DAO, the creation, deployment, and management of DAOs has become dramatically easier, abstracting away the need to be a developer to deploy a DAO or even to have a significant amount of blockchain experience.

Below we provide an overview of DAOs and other forms of decentralized organizations and introduce OpenLaw DAO.

What are DAOs?

One of the main benefits of Ethereum is that it enables a community of strangers to pool value together and execute on their shared goals with less need for trust or organizational overhead. Disparate groups of people online can organize by relying on the predictability of blockchain-based “smart contracts” to execute on their group decisions and transfer value according to hard-coded rules in a highly “tamper proof” digital environment.

For example, a distributed team of software engineers might want to quickly establish shared and transparent control over a grant award in ether by deploying an Aragon digital organization that matches their desired team voting requirements (e.g., 2/3 consensus to execute decisions) and has smart contract applications for common business needs, like tallying group sentiment, recording work history, and managing shared custody of grant funds through a multi-signature digital wallet (e.g., requiring 2/3 member signatures to activate fund transfers).

DAO deployment screen for Aragon.org: https://mainnet.aragon.org/#/

Alternative approaches for more fluid organizational structures, like dxDAO aim to deliver open access to governance on the DutchX protocol — a decentralized trading mechanism with no predefined online membership. Unlike Aragon, dxDAO relies on blockchain-based coordination and DAOstack holographic consensus to determine how the digital organization will evolve and enact decisions over DutchX.

View of test dxDAO “Vote Staking Interface”: https://dxdao.daostack.io/stake-for-your-vote

Here at OpenLaw, we’ve been actively studying the implications of these tools and their ability to create borderless and more scalable online cooperation. But, these initial use cases highlight that DAOs thus far have been deployed to coordinating grants in the form of digital assets to fund public goods like software protocols and post-ICO treasury management. They have been also used to establish rules and permissions over earmarked assets often in the form of ether or other ERC-20 digital tokens.

More immediately, though, we can already see how aligned forums and chat rooms now have fairly intriguing choices for organizing themselves over assets and delivering services online, as well as to experiment with DAOs on Ethereum by utilizing smart contract templates open-sourced through Aragon.org, DAOstack.io, Colony.io, and MolochDAO.

Ongoing Forum -> DAO onboarding experiment via ONC Forum

Limited Liability Wrappers for DAOs

Despite the rapid innovation related to DAOs, these organizational structures suffer from certain limitations. Unlike a traditional organization, the legal status of DAOs is opaque. Many courts and lawyers would describe the relationship between members of a DAO and their investors as the default “general partnership.” Legally speaking, a general partnership puts every stakeholder of a DAO as liable for any debts or legal actions that the DAO may face.

To avoid this sweeping liability, having the proper legal wrapper is critical. To fully effectuate the rights, obligations, and legal status desired by all stakeholders requires one or more contracts that protect stakeholders and other potentially liable parties who are members or participants in a DAO. To bring this to life, we’ve created OpenLaw DAO.

Introducing OpenLaw DAO

OpenLaw provides the blockchain-based tools to rapidly build legal templates to deploy “limited liability wrappers” for DAOs, making it as easy as executing a click-wrap agreement.

Using these limited liability wrappers, OpenLaw extends the predictability of settlement of DAOs “on chain” to off-chain disputes among organization members, as well as provides an important corporate veil over DAO business activities to remove the default joint and several liability imputed by most standing law to these transactions.

By relying on a limited liability wrapper, the plateau of potential use cases for DAOs expands. These legal shields give members of DAOs the ability to manage off-chain physical assets, like real estate, and to interact more securely with their legal proxies and other agents affecting group consensus that otherwise cannot be resolved digitally through smart contracts. They also enable groups of folks who may be deemed manager of these organizations the ability to waive or limited fiduciary obligations.

Limited Liability DAOs

In effect, OpenLaw permits the creation of hybrid-organizations that combine liability-limiting public legal fictions (like LLC-DAO form) with the private ordering benefits of Ethereum.

These limited liability DAOs organized as LLCs seek to optimize their governance with smart agreements (themselves a hybrid of “dry” and “wet” code) and “decentralized finance” applications, while still enjoying traditional controls over their business risks and membership.

OpenLaw’s tools help extend early experiments with limited liability DAO formation and maintenance, like the first limited liability DAO created by OpenEsquire (organized as LLC-DAO in New York) and the second limited liability DAO organized in Vermont by dOrg.

And OpenLaw’s new vertical contains an easy to use set of features to rapidly build and deploy limited liability DAOs, including a:

(A) Legal Wrapper Library: A set of legal wrappers and day-to-day agreements that can serve as DAO primitives, including legal wrappers to generate digital token to reflect group membership and network utility. The Library contains a variety of forms for various DAO legal and business needs and will expand over time; and

(B) Interactive Forms: Easy to use forms that enable users to easily deploy tested limited liability DAO forms and explore automation of filing and related entity registration services, starting with OpenEsquire and dOrg legal forms, but also contemplating collaborative service offerings, research publications, and best-practice summaries that can aid more effective use of the Library, such as LLD MetaData Standards:

Walk Through of OpenLaw DAO

Below we provide a short video that illustrates the core functionality of OpenLaw DAO, creating a DAO organized as a Limited Cooperative Association in Colorado in just a few moments and generating a custom ERC-20 digital token to manage an on-chain “digital guild.”

In addition, we can see how initial OpenLaw DAO offerings can simplify limited liability DAO operations with forms for Consulting, NDA, MOU and Code Deference, among others tailored for DAO business transactions:

See, e.g., selecting among USD, Ethereum assets and Facebook Libra as transaction currency for a DAO consulting arrangement.

Finally, selecting from curated Token Forge forms, users can contribute to research on digital guilds and ether-based crowdfunding, as well as test out customizable ERC-20 token creation and transfers:

DigitalGuild source code

Looking Ahead

If these tools are of interest to your distributed team or blockchain project, we greatly welcome contributions to help crowdsource legal, data, and business automation standards for DAOs.

Please reach out below to discuss OpenLaw DAO.

About OpenLaw

OpenLaw is arranging the world’s commercial transactions. Using OpenLaw, anyone can more efficiently engage in commercial transactions, all while leveraging next-generation blockchain-based smart contracts.

To learn more about OpenLaw, check out our site and documentation for an overview and detailed reference guide and. You can also find us at hello@openlaw.io or tune in in our community Slack channel. Follow our Medium and Twitter for further announcements, tutorials, and helpful tips over the upcoming weeks and months.

OpenLaw

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OpenLaw

A legal operating system for blockchains. By @awrigh01 and @bmalaus; a @ConsenSys spoke. https://openlaw.io/