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Enter the DAO

Does anyone know what Dru Hill is up to these days? This post isn't about them (though, note the nod to an iconic late 90s album) but I'm really curious. 

Enter the DAO. What's that again?

Distributed autonomous organization. A DAO is an organization that is governed in whole or in part by a series of smart contracts. As a reminder, smart contracts are self-executing programs encoded on a blockchain. These programs automatically take whatever actions are directed by the code when predetermined conditions are met. A DAO could run completely autonomously. No CEOs or COOs. No board of directors. 

Like in any organization, there are lots of decisions that need to be made in a DAO. How are members or participants admitted to the organization? What are the rights, responsibilities and privileges of membership/participation? Under what circumstances can a participant withdraw from the DAO? What kinds of actions can the DAO take and under what circumstances? In a DAO, the rules of the organization are encoded in the blockchain and these decisions are automatically made in accordance with those rules. For example, if the code only allows a member/participant to cast a vote on a particular matter if 1) she has staked X amount of tokens and 2) has participated in Y% of other votes in the past 3 months, someone that does not meet either criteria will automatically be blocked from casting a vote on that matter. 

Because DAOs are largely governed by the code, the need for intermediaries and central authorities is minimized. The code is both the judge and jury and there are no appeals (kinda).

Wyoming Recognizes DAO LLCs

Earlier this month, Wyoming, the most crypto-friendly state in the nation (and it's not even close), became the first state to allow DAOs to legally form as limited liability companies (LLCs). By way of background, it was the Cowboy State that created the limited liability company in the 1970s so Wyoming has a bit of a legacy when it comes to corporate innovation. In upholding that legacy, lawmakers have been proactive in creating an ecosystem where blockchain can flourish and this new legislation is the latest move. 

The recognition of DAOs in state legislation is significant on its own. However, the more significant development is the conferring of limited liability on DAO participants. Any type of business enterprise has a corporate form and the default form for a multi-person enterprise is a partnership. In a partnership, general partners are subject to personal liability for the debts and liabilities of the partnership. By allowing DAOs to organize as LLCs, the participants do not have to worry about being personally liable for the debts or liabilities of the organization. Given the relative infancy of DAOs and the evolving legal framework for these types of entities, this allows participants to push forward and participate without fear of being held personally liable if things go very wrong.

The Wyoming Secretary of State published a very helpful FAQ document for individuals interested in forming a DAO LLC. You don't need to reside in the state (but you do need a registered agent who meets the statutory requirements).

Beyond DeFi

Many of the DAOs that make their way into headlines are ones in the defi space and that makes sense given how high the barriers to entry are in traditional finance. However, DAOs have a lot of potential beyond finance. Any organization that relies on the collective action/consensus of its participants or that tracks many things, such as inventory, bets or continuing legal education credits, could potentially leverage a DAO. 

I'm excited to see what non-defi projects emerge in the coming months!


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