What is a DAO?
Silvia Andriotto
Business Lawyer, LL.M UC Berkeley Technology & Law, Co-Author "Business Future"
Definition
In short, Decentralized Autonomous Organizations (hereafter "DAOs") are how humans come together as a group to make decisions in the digital world.?Theoretically, all sorts of work structures can be created as DAOs. Investment companies, consulting companies, engineering companies. Maybe born because of Covid, where larges communities gathered online and needed organization.?A DAO is an entity with no central leadership or control (decentralized) and is self-governing without outside influence (autonomous). Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain. Incentives are tied to native tokens (currency tied to the DAO project) and active participation by all members of the DAO in governance*.
Why DAO?
First DAOs appeared in 2016.?Being internet-native organizations, DAOs have several advantages over traditional organizations. One significant advantage of DAOs is the lack of trust needed between two parties. While a traditional organization requires a lot of trust in the people behind it — especially on behalf of investors — with DAOs, only the code needs to be trusted, the smart-contract being in principle the governing law. Trusting that code is easier to do as it’s publicly available and can be extensively tested before launch. Every action a DAO takes after being launched has to be approved by the community and is completely transparent and verifiable. DAO structure is thus transparent and incorruptible as the code in smart contract is publicly available and maintained on a blockchain.
Such an organization has no hierarchical structure. Yet, it can still accomplish tasks and grow while being controlled by stakeholders via its native token. The lack of a hierarchy means any stakeholder can put forward an innovative idea that the entire group will consider and improve upon. Internal disputes are often easily solved through the voting system, in line with the pre-written rules in the smart contract.
Whilst traditional corporate law embraces the separation of ownership and control — that is, the dominion of managers/directors, not shareholders, in the operation of the firm, in the DAOs, ownership and participation (and the prospect of control) are mutually dependent, ensuring thus democratic control and ownership.
By allowing investors to pool funds, DAOs also give them a chance to invest in early-stage startups and decentralized projects while sharing the risk or any profits that may come out of them.
How does a DAO work?
Organic growth:
Mature projects:
Underlined technology - Blockchain & Smart Contracts?
Forms of DAOs
There are various types of DAOs, examples are Protocol DAO, Maker DAO, Philanthropy DAOs, Collector DAOs, Investment and Venture DAOs, Grants DAOs, Lobby DAOs, Media DAOs*.?
Set-up/formation?
Legal forms
By way of example, DAOs can take the form of:
i) Foregin Foundation?
ii) Limited Liability Company (LLC)
They are best used for Investment DAOs. DAO members bear limited liability with respect to any DAO actions.
iii) Nonprofit entities?
The Top Legal- frameworks for DAOs around which the above services can be rendered:
Switzerland
a. The Swiss Foundation Law
b. Swiss Association
Cayman Islands
a. Foundation company as a legal wrapper
b. Foundation company as a legal wrapper with a subsidiary
Guernsey Purpose Trust?
The United States of America (not analyzed in this article)
a. Limited Liability Company; Delaware & Wyoming
b. Unincorporated Nonprofit Association; Siloed & Wrapped entity structure
Switzerland
Over the last few years, Switzerland has established itself as an attractive destination for cryptocurrency and blockchain projects, with the small town of Zug nicknamed as “Crypto Valley”.
Progressive DLT regulations , Favourable tax regimes, friendly regulatory structures, and limited liability, has made Switzerland, one the most sought-after countries to incorporate a DAO.
The total number of companies in Crypto Valley alone is 960+ with a market valuation of $254.9bn. Crypto Valley now has 11 unicorn crypto projects with a valuation of over $1bn including Ethereum, Cardano, Polkadot, Aave, Cosmos, Solana, Tezos, Dfinity, Near, Nexo and Diem (formerly Libra).
The Swiss Foundation:
The Swiss foundation is an ideal legal form for long-term infrastructure projects, such as protocol development. Examples include the Ethereum Foundation and the Dfinity Foundation, all of which are based in Zug, Switzerland, and aim to support the development of new open decentralized software architectures.
The Swiss Associations:
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On Taxation:
a. In Switzerland, income taxes are levied on federal, cantonal and communal levels. b. Swiss Associations offer DAOs potential tax savings regarding their treasuries. c. A tax exemption may also be possible for Swiss domiciled associations that conduct the majority of their activities abroad to the extent the other conditions for a tax exemption – in particular the charitable purpose – are still met.
b. Associations that run commercial enterprises and may still be granted a tax exemption provided that the business is a subsidiary and subordinated to the charitable objectives and serves to meet the latter’s goals.
Traditionally, the Association has been the entity of choice for non-profit organizations (NPOs)/ non-governmental organizations (NGOs) and may apply for an exemption from income and capital taxes under certain conditions.
Some prominent nonprofits that are incorporated as an Association include,Amnesty International, the World Wildlife Fund, and FIFA— the International Football Association.
Associations have the following main bodies:
a. the General Assembly
b. the Board of Directors
c. the Auditor (only required, if certain thresholds regarding balance sheet, revenue and full-time employees are exceeded).
The general assembly is the governing body of the association. It appoints the board of directors, decides on the admission and expulsion of members and resolves all matters not assigned to other corporate bodies in the articles of association.
The board of directors has the right and duty to manage the affairs of the association and to represent it in accordance with the powers conferred on it as set forth in the association’s articles of association.
A business organization can incorporate as an Association, given that they operate a number of independent offices, each of which has limited liability vis-à-vis the others. This way, they can operate globally under one brand whilst maintaining separate profit pools and ring-fencing liability in each country in which they operate. Doing so does not bring the Members themselves within Swiss regulations: since control of the Association is decentralized, Members are only bound by regulators in their country. A more recent use case for the Swiss Association was the Libra (now Diem) association. Find more on Swiss Associations here *.
Cayman
The Cayman Foundation Company:
In addition to Swiss the entities seen above, for DAOs is often used a Cayman Foundation Company, which offers like the Swiss ones, the advantages of separate personhood and limited liability associated with a typical corporation. Once the KYC checks have been completed, Foundation Companies can be created in just a day. While managed by a board of directors, the Foundation Company does not have any owners or shareholders; it can be “ownerless.” Instead of being directed by fiduciary duties towards shareholders, Directors and managers have a duty to act pursuant to the foundation company's governing documents. In this sense, the Foundation Company functions similar to a mix of a corporation and a trust. Even without shareholders, Foundation Companies can undertake critical functions for DAOs, including hiring developers, offering a vehicle for early stage funding, marketing DAO projects, holding treasury assets and more. Ownerless foundations like the Foundation Company provide a flexible governance structure that allows for persons other than directors to exercise control. Therefore, the board can be directed by the vote of the DAO token holders to a greater extent than under other regimes. Meanwhile, one or more “supervisors” can be tasked with ensuring that the directors of the foundation company observe their obligations to the DAO pursuant to the foundation company's governing documents. They also have standing to bring suit against the directors if needed.
The Foundation Company can, given the favorable tax treatment in the Cayman Islands, also provide potential tax advantages. However, tax benefits will not be the primary appeal for DAOs. DAOs with US operations or with US actors that exercise control over foundations even if located offshore may still be subject to US taxes. Furthermore, offshore foundations can be relatively complex and expensive to set up, as they will typically require advice from lawyers across multiple jurisdictions and often employ independent directors.
It is also important to highlight that the offshore foundations do not typically “wrap” the DAO, but rather act as an affiliate of the DAO, or even an independent entity, that is directed by the DAO’s token holders for a specific purpose. This relationship has important implications for the potential liability of DAO members (who may not themselves be shielded from liability by a legal entity) and for the directors or managers of the offshore foundation, who may be directed to act by a third party (within the confines of their fiduciary duties).
Guernsey
Guernsey Special Purpose Trust:
Several DAOs have recently employed special purpose trusts formed in the island of Guernsey as part of their legal structure.
These trust structures are not limited to charitable purposes.
A Guernsey trust separates a person’s ownership of property from the right to benefit from that property. It involves a person or entity (settlor) transferring property to another (trustee) who is then charged with holding it for the benefit of a specific purpose.
As such, they can be useful for DAO community treasuries earmarked for a given DAO’s growth and development (like grants)–and clarify the existence, or lack thereof, of any US tax payment and reporting obligations.
Guernsey trusts are governed by trustees, who have general fiduciary duties to act in the best interest of the trust and are subject to removal by other trustees, which can in turn be directed by vote of DAO token holders. Special purpose trusts also have an “enforcer” with broad rights to monitor the trustees and standing to bring suit. DAO token holders can exercise a range of control over actions of Trustees, including to require them to terminate the trust and transfer the assets to a different entity.
One possible advantage this wrapper may have over some other structures is that the Guernsey special purpose trust wrapper does not require any governmental filing to be formed. Instead, as a special purpose trust subject to Guernsey law, it is formed by contract between the grantor and the trustees. It thus may be more resilient to post-hoc charter revocations, and offer the prospect of more clarity and legal finality
Legal Wrappers and DAOs by Chris Brummer, Rodrigo Seira :: SSRN
Successful DAOs
Today we can already count many DAOs established but to name a few of the most known and successful: Uniswap - The DAO - Decentraland.
Critics/challenges
In a pure organizational theory standpoint they work. But let’s see the challenges in practice*.?
General:
Incorporated DAOs:
Entityless DAOs:
Truly decentralized?
Check Oana article outlining other issues of DAO based on a case study. Link in notes*.
*Notes
Spear's 500 Top Recommended - Aircraft Sales and Acquisitions
2 年Thanks Silvia Andriotto . It'll always be a #Portuguese wine region to me!