What exactly is a Decentralised Autonomous Organisation?

Decentralised autonomous organisations (DAO) are a new form of digital organisation emerging on the blockchain in the USA.  They are organisations controlled by rules encoded in a transparent computer program, controlled by the organisations’ members/shareholders.  As the rules are embedded into the code, no managers are needed, thus removing many bureaucracy hurdles.  The anonymous nature of the members is something unique and presents a variety of questions and uncertainty as to how issues would be handled.  In this article we provide an overview of DAO operations overseas and Australian committee recommendations for future structures.

Is a DAO a legal entity?

A DAO is not considered a legal entity.  They operate within a legal “grey area” because the law regulating blockchain technology and autonomous entities has not been established.  Many DAOs are unregistered, however it is possible for them to be registered as a legal entity with limited liability in the USA.  Often the developers of the DAO are a legal entity.  For instance, Mycelium Ventures Pty Ltd ACN 630 576 635, a Brisbane-based company, is developing “Reputation DAO” and “Tracer DAO”.

Policy makers face a challenge in that the protocols run by DAOs touch local jurisdictions, particularly at the point where currency is exchanged for “tokens”, however the markets are fundamentally global, making them outside the reach of current national laws.

In June 2021, the Coalition of Automated Legal Applications (COALA) published the model for DAOs (DAO Model Law).  The DAO Model Law is a transnational legal framework and seeks to become the foundational paper for best practices for developers and participants of DAOs.  As most DAOs are unregistered, the DAO Model Law is a positive step to solving legal uncertainty.

Where is the DAO located?

DAOs exist on the blockchain and are run and maintained entirely across computers on a peer-to-peer network.  They utilise ‘smart contracts’ to enforce decisions, define rules, and verify transactions.  Smart contracts are self-executing, meaning they are stored on the blockchain and only come into effect when predetermined conditions have been met.

This removes the need for any centralised management, instead putting an emphasis on governance through computer code, transparency and collective participation by all token holders in the decision-making process.

How is a DAO launched?

A DAO launch usually occurs in three (3) major steps:

• smart contract creation;
• funding; and
• deployment.

Smart contract creation involves a developer creating the smart contract behind the DAO.  After launch, they can only change the rules set by these contracts through the governance system.  The contracts must be extensively tested to ensure important details are not overlooked.

Funding occurs after the smart contracts have been created.  The DAO needs to determine a way to receive funding and how to enact a governance framework.  This is mostly achieved through selling tokens.

Deployment is the final step and involves implementing the DAO on the blockchain.  From this point on, token holders (similar to the position of a corporate shareholder) decide on the future of the organisation.  The organisation’s creators (developers of the smart contracts) no longer influence the project any more than other stakeholders.

How does a DAO operate?

DAOs have no central leadership, with decisions made from the bottom-up, governed by a community organised around the specific set of rules enforced on the blockchain.  Decisions are made via proposals, which the group votes on during a specified period.  DAOs have built-in treasuries that are only accessible with the approval of their members.  Decentralisation means inventors have new ways to finance projects, govern businesses, and share value.  That said these are extremely foreign concepts for those used to traditional company management.

DAOs aim to democratise governance by making use of Web 3.0 technologies to empower digital communities for collective business participation.  Web 3.0 is the upcoming 3^rd generation of the internet where websites and applications will be able to process information in a smart, human-like way through technologies such as machine learning, big data and distributed ledger technology.  Data will be interconnected in a decentralised way.

How does a member join a DAO?

Cryptocurrencies such as Bitcoin or Ethereum are used to purchase tokens (a crypto asset) and receive voting rights in the DAO.  Anyone with a token can become a member of a DAO.  The more tokens held, the more voting rights the owner has.  In this sense, tokens are similar to shares in a company, (except that the actual owner cannot be identified) and the more held often confers more rights to the shareholder.  Generally, token holders will vote on every decision to be made by the DAO, such as what projects to invest in, ensuring that the goals of the DAO are achieved.

The Australian position on DAOs

In 2021 the Select Committee on Australia as a Technology and Financial Centre, chaired by Senator Andrew Bragg, released their final report (Bragg Report) which included at Recommendation 4:

“The committee recommends that the Australian Government establish a new Decentralised Autonomous Organisation structure”.

This recommendation was made as currently DAOs have no board members, leaders or official agreements in place, other than what is agreed to by the members and via smart contracts.  This recommendation demonstrates that Australia is moving to implement a firm policy to guide the future structure of DAOs.

Takeaways

DAOs pose some legal uncertainty particularly with respect to jurisdictional issues and anonymous ownership.  Practically the anonymous nature of the members is something that we are not used to as lawyers.  There is a need for further guidance on the structure of DAOs including rights of members and procedures for when legal issues arise.  Australia has been clear in its position that there is a need to develop a structure for DAOs.  We are likely to see further developments in this space in the near future.

Links and further references

Other links

Bragg report

DAO Model Law

Further information about decentralised autonomous organisations

If you need advice on decentralised autonomous organisations, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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