The 5 things DAOs need resolved to challenge traditional corporations

An overview of the key unresolved legal and regulatory questions that need to be solved to promote the growth of DAOs

Published in

Coinmonks

7 min readJan 31, 2022

Decentralised Autonomous Organisations, also known as DAOs, are an emerging organisational structure pioneered in the crypto space. The rapid development of DAOs as an organisational entity threatens to challenge the dominant hierarchical corporate structure that permeates most the world’s economy today. However, DAOs currently operate without sufficient legal and regulatory certainty around their activities which impacts their ability to grow and compete with corporations.

In short, DAOs are organisations that run on a series of smart contracts, the code of which dictates the organisation’s management and decision-making. This has led some to deem a DAO as “an internet community with a shared bank account”.

DAOs have grown in prominence despite their auspicious beginnings, doing everything from providing seed capital to crypto projects to even attempting to buy the US Constitution.

While DAOs predominately operate in the crypto space, they do not exist solely in a digital bubble. As DAOs grow in size and scale, they will increasingly interact with the non-crypto world, doing everything from entering contracts to procure services (e.g. developers to build platforms), buy physical assets (e.g. land) and borrow fiat currency.

However, there is limited legal and regulatory certainty around what DAOs are, and more importantly what they are able to do and not do. This uncertainty can have a chilling impact on the development of DAOs and their contributors. For example, if it is unclear whether DAOs can actually legally own property, they are unlikely to buy physical assets. If it is unclear that DAOs can legally enforce contracts they are party to, they are unlikely to enter into contracts in the first place.

Having legal and regulatory certainty is essential to allow DAOs to grow and scale, allowing this model to eventually challenge the large traditional corporate hierarchies.

This article will examine the below five critical questions that DAOs need resolved, giving practical examples as to why they are relevant and the preferred path forward:

Who legally owns the DAO’s assets/treasury?
Who is ultimately liable for DAO’s liabilities?
Does a DAO have the legal capacity to enter into a contract?
Can a DAO sue and be sued?
Are contributors to a DAO in an employment relationship?

Who legally owns the DAO’s assets/treasury?

While it seems intuitive that the DAO itself owns their treasury/assets, this question is not actually entirely clear from a legal perspective.

Let’s take an example of a hypothetical ArtDAO. ArtDAO’s remit is to invest in all different types of art, from NFTs to physical art. The DAO decides one day to buy the Mona Lisa. The DAO purchases the Mona Lisa at auction and the founder of the DAO agrees to hold the Mona Lisa for “safekeeping”. The founder is a nefarious actor and decides to sell the Mona Lisa to another party and pocket the proceeds.

Now if the DAO was a corporation, the law would recognise the corporation as the legal owner of the Mona Lisa. Therefore, the founder’s actions are a clear-cut case of theft/embezzlement.

However, the legal position of a DAO is not clear, particularly whether DAOs are able to actually legally own assets (in the same way that a person is able to own an asset). Therefore, it’s possible that the founder may be held as the actual legal owner of the Mona Lisa and therefore has committed no crime, with no recourse for the DAO.

While this uncertainty exists, this may result in DAOs not engaging in asset purchases in the physical world for fear that they may have their assets taken with any legal avenues available to get them back.

Proposed solution: Jurisdictions recognise the DAO as the legal owner of assets in their treasury and as a structure capable of owning assets in their own right.

Who is ultimately liable for the DAO’s liabilities?

A key feature and innovation of corporate structures is the concept of limited liability. Limited liability means that shareholders’ liability is limited to the value of their investment (e.g. if they buy $1000 worth of shares, their loss is limited to $1000). This is not the case for other structures, such as partnerships, which have unlimited liability. Unlimited liability means that in the event the entity goes bankrupt/insolvent, the members would be liable for the outstanding debts of the entity.

Whether members in a DAO have unlimited or limited liability is a significant issue for DAOs. Take for example an individual who invests $5000 in a DAO’s governance token and becomes an active contributor. The DAO makes a series of investments, including borrowing a large amount of funds. The investments go poorly, and in the process the DAO is in effect bankrupt (owing more than the assets it holds). In this circumstance, as a member of the DAO what would my position be? Would I be liable for the excess debts of the DAO? Could I therefore lose more than my $5000 initially invested?

Clearly in the event that a DAO is taken to have unlimited liability for its members, there would be significantly less people investing in and contributing to DAOs given this additional risk.

Proposed solution: DAOs should have limited liability in the same manner as corporations.

Does a DAO have the legal capacity to enter into contracts?

Legal capacity is an important point for DAOs, as it impacts how they can operate in trade and commerce. While individuals and corporations have capacity to enter into contracts, it is unclear whether a DAO can enter into a contract. Take the following example.

PropertyDAO is a DAO set up initially to invest in digital property (e.g. in Decentraland). The DAO community then votes to purchase a high-rise apartment building in New York.

The DAO enters into negotiations and agrees to buy the property. However, when it comes to signing the contract — the DAO might not be recognised as actually having the capacity to enter the contract. The DAO may be treated in the eyes of the law in the same manner as a dog trying to enter into a contract. Without the legal capacity to enter into a contract, it means that the contract itself would have no legal effect.

Without this question resolved, this may mean that individuals in the DAO would need to enter the contract themselves (creating risk for both the DAO and the individual) or a corporation being set up for the DAO to enter into the contract (which may reduce member’s control over the DAOs decisions).

Proposed solution: DAOs should have a recognised legal capacity to enter into contracts.

Can a DAO sue and be sued?

Another essential aspect of legal capacity is the ability to sue and be sued. This is very important for a DAO, as without being able to sue they are unable to enforce contracts.

Take for example a DAO that is looking to build a new product platform on their website. They contract out to a group of developers to build the website, paying them $1M upfront. After a few months, the developers have done no work on the website and appear to have disappeared with the money. The DAO community votes to sue the developers.

Now if the law does not recognise the DAO as having the capacity to sue, the courts would simply reject the case in the first instance (before the DAO even has the opportunity to argue their position). This leaves DAOs in a precarious position, as they would be deterred from entering contracts — limiting their able to grow and scale.

Proposed: DAOs should have the capacity to sue and be sued.

Are contributors to a DAO in an employment relationship?

Another key issue is the relationship between the contributors and the DAO itself. Currently, DAOs often reward contributors (typically based on a vote) with tokens to recognise and reward their work in assisting the DAO. This can be thought of as a de facto salary for contributors.

This raises the question, if contributors are receiving a salary, are they in fact employees of the DAO? If so, this would mean there are obligations placed on the DAO as an employer (e.g. annual and sick leave entitlements). This in turn would increase the complexity of operating a DAO, as the DAO would need to adhere to employment obligations in every jurisdiction that a contributor lives.

Proposed solution: Contributors to a DAO should not be considered employees of the DAO unless they enter explicitly into a formal contract of employment.

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