API3 Year 0 Wrapped: DAO and Legal Structure

7 min readDec 10, 2021

After 2021’s blistering pace of development, I wanted to recount some of API3’s accomplishments in contributing to best practices in DAO organization, structure, and open-source development in view of its on-chain governance.

Original image: Popular Science, April 1987 issue. Alterations to image by author.

API3 DAO Structure

API3’s permissionless DAO governance prevents reliance on single actors or multi-sig keyholders to affect token grant transfers or alter the parameters of the governance contract, and leverages the security of mainnet Ethereum. The DAO’s treasury is directly interactive through passed on-chain DAO resolution function calls, referencing an IPFS hash which holds each full proposal text.[1] Primary and secondary proposal quora separate USDC and native token treasuries and higher threshold-necessitating parameter change or enaction proposals. Each token recipient grantee team writes monthly reports and communicates frequently in the API3 forum and Discord channel to keep the community apprised of each cycle’s progress and to demonstrate their deliverable achievements with a view to their next cycle’s proposal.

Other best practices leveraged in the API3 DAO contract include voting power thresholds to prevent proposal spam, time delays to prevent flash governance attacks and unstaking ahead of a future insurance claim, focusing on-chain governance on parameter adjustments (such as staking APR min and max, cooldown period length) and token transfers, and limited delegation of voting power.[2] To alleviate gas expenditure in DAO proposal voting, stakers may delegate their voting power to other stakers; however, delegates may not further delegate their cumulative voting power, in order to avoid voting blocs and compounded delegation.[3] To address potential conflicts of interest in API3 voting power delegates, I’ve drafted a delegation disclosure[4] and have encouraged other API3 stakers to adapt this disclosure as a form.

After deploying the governance contract, API3 DAO continued to follow best practices in its IPFS-deployed and ENS-hosted front end interface at api3.eth,[5] as well as demonstrating how anyone may build and run a front end locally for a powerful censorship resistance combination through decentralization.[6] To scale operations and grant possibilities while maintaining strong cryptoeconomic incentives, the API3 DAO is structurally receptive to subDAOs.[7] A community member (i.e. a party not receiving a grant from the API3 DAO) known as “enormousCloud” built a useful analytic dashboard for the API3 DAO[8] for which they were subsequently granted funds by DAO resolution for additional development work — an example of permissionless open source development to help the API3 DAO mission.

The custom DAO governance contract implementation is open-sourced under the MIT License,[9] and was subjected to multiple audits with results posted publicly.[10] API3’s serverless oracle node software, Airnode, is also open-sourced under the MIT License[11] (so API providers may adapt and deploy directly) and is undergoing continual audits[12] both on the node and protocol (smart contract) sides. Airnode is certified to be compliant with the GDPR,[13] demonstrating commitment to data protection standards and avoidance of data collection and API3 involvement in API providers’ Airnode deployments wherever possible.

API3 Foundation Legal Structure

In order to properly reflect API3 DAO’s permissionless governance in a real-world entity, stakers of API3 tokens in the governance contract should be identified as a legally-relevant class, the DAO treasury should comprise the vast majority if not the entirety of the entity’s assets, and entity directors should act only according to DAO mandates. Fortunately, the Cayman Islands, a tax-neutral jurisdiction popular with special purpose vehicles, fund structures and nonprofit software development groups, has a type of legal entity known as the foundation company which permits identifying a class of persons (rather than requiring individually identified persons) as beneficiaries of the foundation and permits delegation of operations governance. By a July 2021 special resolution and adoption of unique bylaws,[14] stakers of the API3 token in the API3 DAO governance contract are formally designated as beneficiaries of the API3 Foundation, and directors of the API3 Foundation may act only in accordance with passed DAO resolutions as permitted by applicable law.

API3 Foundation, the legal entity wrapper for the API3 DAO, was also established to ease entry into legal agreements where contemplated by passed DAO resolution, and to limit the liability of API3 DAO contributors, grantees, founders, contractors, and certain other actors. This wrapper is a virtual necessity for an oracle project like API3 where half of the ecosystem, the API providers, resides off-chain — such legacy entities tend to require confidentiality and specific terms in developing proofs-of-concept and acceding to custom decentralized APIs, memorialized in legal agreements.

The legal structuring of the API3 Foundation was influenced in part by the Pocket Foundation, with modifications to fit the on-chain realities of API3 DAO. The API3 Foundation is a full wrapper, meaning (i) the API3 Foundation’s sole financial assets are the tokens and digital assets held on-chain in the DAO treasury and (ii) the API3 DAO governance directly and permissionlessly interacts with the treasury and dictates the actions of foundation directors, rather than an instructed wrapper where the DAO is a member of, or other separate instructing body to, the foundation legal entity. API3 Foundation is memberless, and was initiated by guarantee rather than share capital (it has no shareholders). I hosted a call following deployment of the authoritative DAO contract to explain API3’s legal structuring and governance processes, in order to ensure beneficiaries would have a public guide to aspects of the structuring: a link to the recording and a summary of the call are available on the API3 forum.[15]

Other projects that have since adopted similar Cayman foundation structuring include Otonomos’s OtoCo Foundation[16] and ENS DAO (an ‘instructive’ wrapper rather than full),[17] with others deliberating adopting the structure.[18] I look forward to further assisting with best practices for DAO wrapping, including other foundation wrappers leveraging tokenized governance structures which are memberless, initiated by guarantee rather than share capital, formally designate token holders/stakers as beneficiaries designated by class, with a bankless on-chain treasury. My drafted forms for API3 are open source,[19] and are being adapted and refined for LeXpunK’s Cayman foundation project team[20] and LexDAO’s LexCorpus.[21]

API3 is continually hardening and decentralizing the off-chain operations and structure wherever possible and as new considerations arrive. API3 Foundation established a wholly-owned Portuguese operations subsidiary to carry out extended-term agreements with vendors, and separates United States ops and development to a separate corporation (ChainAPI) by DAO grants to further avoid any US nexus. To avoid centralization in the DAO interface UI, the front end is accessible by ENS address and IPFS gateway, and may be locally built and run, mitigating a primary regulatory target of primary hosted user interfaces to smart contracts (as noted above).

Airnode and accompanying services are designed to be scalable, adaptable and deployable directly by third parties by thorough documentation for the open source software, establishing Oracle Integration Specifications[22] to ease web2 to web3 transitioning of endpoint readiness, and grant funding of ChainAPI’s Airnode deployment interface and analytics dashboard. The open sourcing of API3’s developed software coupled with the nonprofit and shareholder-free nature of the foundation and wide distribution of governance tokens further assists in avoiding VASP implications: software that may be deployed directly by a third party which is freely adaptable and modifiable under the MIT License without payment to the API3 Foundation or requiring its services clearly is not intended to derive profit for API3 Foundation as a primary going commercial concern. Any payment or revenue from decentralized APIs or other API3- or Airnode-enabled contracts or dApps which ultimately flows to the API3 DAO treasury is only disbursed in grants to builders pursuant to DAO proposals, or burned (if in the native API3 token); never distributed to tokenholders, stakers, or any other actors pro rata as a dividend of profits.

The only software or information not open-sourced or public is that which is subject to a mutual NDA/confidentiality provision by request of a third party entity, enterprise or individual, typically for building out proofs of concept, bespoke data aggregation, etc. (as noted in the rationale for a legal entity wrapper above). Personally, I’m continually building a suite of open-source legal forms for the API3 ecosystem, including organizational documents and grant agreements, as well as more specialized forms such as special purpose vehicle documents for data providers seeking to containerize (and potentially monetize or securitize) their Airnode-related assets and proceeds, to provide further motivation for deployment and avenues for second order financial products.[23] Going forward, I look forward to assisting (barring potential conflicts of interest) newcomers to the API3 ecosystem through more open source legal and dev materials, autonomous lawyering, and cooperative building.