DAO launching in 2024

In 2024, decentralized autonomous organizations (DAOs) are captivating the Web3 branch with their potential for community-driven ventures. These blockchain-powered entities offer transparency, inclusivity, and innovative governance models, but launching a DAO requires careful consideration.

This article will assist in plunging into the legal complications of DAO formation, exploring when startups should embrace this structure, the potential assets & obligations, and the various legal entities that can provide a compliant framework. We will examine the four most common legal pitfalls to avoid, chart the critical stages of DAO launch, and analyze the progressive regulatory field and governance trends in 2024, equipping you with the knowledge to navigate the exciting yet complex world of DAOs.

DAO, in simple words:

As Investopedia informs, a decentralized autonomous organization (DAO) is an emerging form of legal structure with no central governing body and whose members share a common goal to act in the entity’s best interest. It’s an entity structure in which tokenholders participate in the management and decision-making of an entity with the distribution of power and blockchain management. It’s really important for DAOs to ensure security and automatization in cryptocurrency transaction processes. It operates through smart contracts, which automatically execute the rules and regulations defined by the members.

Launching the DAO is a relevant and sometimes hard decision for web3 founders; there is no one-size-fits-all for it, but there are some cases where it’s high time to think about setting up this decentralized system:

• you have created such an empowered and engaged community who has resources to manage and participate as owners in the processes
• you are seeking fundraising initiatives in the token sphere that should be clear and transparent
• your projects involve token-based membership

Legal structuring, business models, and dividing DAOs into types is applicable which jurisdictions can be applied both in for-profit and nonprofit organizations):

• DAO LLC
• DAO foundations
• DAO associations

In terms of strategic and goal-oriented approaches, DAOs can vary as

• Community protocol DAO, which may include staking/yielding token rewards and minting tokens for performing ecosystem tasks
• Service DAO, which involves the receipt of revenue from the provision of services to the general asset
• Investment DAO which can also be called a crowdfunding vehicle or a collective investment scheme.

Benefits and liabilities of DAO Leveraging the power of blockchain technology, DAOs empower individuals worldwide to collectively own and manage ventures, shifting decision-making authority from centralized entities to token-holding members. This paradigm shift unlocks a multitude of advantages and disadvantages.

• The benefits of setting up DAOs are:

1. Global collaboration

DAOs transcend geographic boundaries, enabling individuals worldwide to contribute and share ownership. This fosters diverse perspectives and talent pools, fostering innovation and agility.

2. Transparency & accountability

Blockchain technology ensures all actions and votes are publicly recorded, promoting transparency and building trust among members. This incentivizes responsible behavior and discourages self-serving actions.

3. Community-driven decision-making

Every token holder has a voice, fostering a sense of ownership and engagement. This participatory approach can lead to more informed and well-rounded decisions.

4. Flexible & adaptable

DAOs are inherently adaptable, allowing them to evolve based on community consensus quickly. This responsiveness can be crucial in fast-paced environments.

However, DAOs also face limitations to consider:

1. Decision-making speed

Reaching consensus among a large, geographically dispersed group can be time-consuming. Proposals and votes often require lengthy discussions and coordination, potentially hindering agility.

2. Educational burden

Educating a diverse group of token holders about complex proposals and technical nuances can be challenging. This can lead to uninformed voting and hinder efficient decision-making.

3. Operational inefficiency

Coordinating large numbers of individuals across various time zones can create logistical hurdles. Reaching consensus and implementing decisions can be slow and cumbersome compared to traditional structures.

4. Security vulnerabilities

DAOs, like any digital platform, are susceptible to cyberattacks and exploits. Robust security measures are crucial to protect treasury funds and maintain member trust.

Real-world examples showcase the potential and challenges of DAOs:

Constitution DAO

• This DAO aimed to acquire a rare copy of the US Constitution, raising over $40 million but ultimately falling short. It highlighted the community-driven funding potential and limitations of reaching a consensus promptly.

Decentraland

• This virtual world DAO empowers users to own and monetize virtual land parcels. It demonstrates the potential for DAOs in governance and community-driven development, but also faces challenges in scaling and ensuring fair participation.

Uniswap

• This decentralized exchange operates as a DAO, allowing token holders to vote on governance proposals and protocol upgrades. It showcases the use of DAOs in managing complex financial systems, but also raises questions about regulatory frameworks and accountability.

Stages of DAO launching and scope of legal implications

• The developing world of DAOs offers a unique opportunity for decentralized collaboration, but navigating the launch process requires careful consideration of both potential and pitfalls. Here, we dive into the three critical stages of DAO creation, highlighting the legal risks associated with each and strategies for mitigation them:
• Stage 1
• Building a community with initial token distribution

Risk

• Improper token distribution can lead to regulatory scrutiny, accusations of securities offerings, and potential disqualification from public offerings

Mitigation

• Define straightforward token utility and avoid promises of guaranteed profits. Ensure compliance with relevant securities regulations and seek legal counsel for tokenomics design and distribution strategy
• Stage 2
• Establishing the DAO Treasury

Risk

• Improper treasury management can expose the DAO to theft, mismanagement, and legal challenges regarding fund allocation

Mitigation

• Implement robust smart contract security audits and utilize multi-sig wallets for secure treasury management. Clearly define treasury allocation rules and decision-making processes within the DAO’s governance framework
• Stage 3
• Creating the DAO with decentralized governance

Risk

• Lack of legal clarity and structure can lead to ambiguity in decision-making, liability issues, and potential regulatory challenges

Mitigation

• Establish a legal wrapper for the DAO, such as a DAO LLC or foundation, to provide legal recognition and clarify liability. Define clear governance structures, voting rights, and decision-making processes within the DAO’s charter and smart contracts

Additional considerations

• The legal field surrounding DAOs is constantly progressing, so staying updated on regulatory developments and seeking expert legal advice is crucial
• An active and informed community is essential for successful DAO governance and risk mitigation
• Regular security audits of smart contracts and treasury management systems are paramount in safeguarding DAO funds and assets.
• By understanding the legal risks associated with each stage of DAO launch and implementing effective mitigation strategies, Web3 founders can navigate these exciting new projects with greater confidence and pave the way for a thriving and sustainable decentralized future.

#5 legal mistakes in DAO organizing and a quick review of prevention tools!

Decentralized Autonomous Organizations (DAOs) offer a tantalizing glimpse into a future of shared ownership and collective governance. However, navigating the uncharted legal terrain presents a plethora of potential pitfalls. By understanding the common mistakes and equipping yourselves with the right legal tools, you can transform these roadblocks into stepping stones for a successful launch.

• Mistake #1

Infrastructure lost without a strategy

• Problem

DAOs lack the established infrastructure of traditional organizations often struggling with reporting, budgeting, and management tools. This “build-it-yourself” approach can lead to inefficiencies and hinder growth

• Prevention

Explore DAO-specific tools, leverage the burgeoning ecosystem of tools designed specifically for DAO governance, treasury management, and communication, collaborate with specialized service providers who can fill the gaps and ensure smooth operations

• For example, Aragon, Colony, and DAOStack offer comprehensive toolkits for DAO management
• Mistake #2

Legal battles without qualified support

• Problem

The unclear legal status of DAOs creates ambiguity, potentially leading to regulatory roadblocks and legal battles

• Prevention

Stay informed & keep yourself updated on evolving regulations specific to DAOs as establishing a DAO LLC or foundation can provide clarity and mitigate legal challenges

• Example: Wyoming has emerged as a pioneer in DAO-friendly legislation, allowing DAOs to operate under LLC regulations.

Mistake #3

• Decentralization vs. expertise, not as a partnership
• Problem

While pure token-based voting embodies the DAO spirit, it may overlook crucial expertise needed for complex decisions

• Prevention

Hybrid models Implement models like the ENS DAO, where token holders elect qualified individuals for technical decision-making, foster a culture of knowledge sharing and upskilling within the community to ensure informed decision-making.

• Example: The MakerDAO empowers token holders to vote on proposals while a core group of technical experts manages the protocol’s stability.

Mistake #4

• Transparency issues aren’t visible
• Problem

Lack of defined roles and opaque reporting can breed mistrust and vulnerabilities within a DAO

• Prevention

Establish clear governance frameworks and decision-making processes & be transparent in reporting, valuation, and tax implications

• Example: The Gitcoin DAO publishes detailed financial reports and encourages community discussions around resource allocation.
• Mistake #5

Limited recourse should be hidden

• Problem

The absence of established legal mechanisms for dispute resolution leaves DAO members vulnerable

• Prevention

Develop transparent dispute resolution procedures within the DAO framework alternative mechanisms & seek legal advice on incorporating alternative dispute resolution methods, such as mediation or arbitration

• Example: The Aragon Association offers a dispute resolution framework designed explicitly for DAOs

By acknowledging the potential pitfalls, collaborating with experts, and leveraging the available legal tools, you can build a sustainable and thriving DAO community ready to navigate the exciting future of decentralized governance.

In the Web 3 world, as we discovered, DAOs present both revolutionary opportunities and uncharted legal complexities for startups in 2024. This report serves as a comprehensive roadmap for navigating this engaging, innovative field, equipping ventures with the knowledge to launch a compliant and successful DAO by providing effective management instruments.

We begin by defining DAOs and analyzing their inherent legal and regulatory ambiguities, including the ongoing debate surrounding tokenization, smart contract vulnerabilities, and jurisdictional uncertainties. Recognizing both the potential benefits of community-driven governance and the associated liabilities, the review offers practical strategies for mitigating risks through the selection of suitable legal entity options, such as limited liability companies or foundations.