Skip to main content

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!
 

Comments

Popular posts from this blog

The Rundown on CBDCs

Everyday there is a news report about a country that is "exploring" or "studying" the possibility of developing a central bank digital currency (CBDC). In the past few days, I've read articles about Rwanda, Israel and France looking to pilot programs with CBDCs. And yesterday, the Bank of International Settlements announced its backing of the development of CBDCs. With approximately 80% of central banks around the world taking a closer look at CBDCs, now is as good a time as any to learn more about them. What Are They? A central bank digital currency is exactly what it sounds like--a digital currency issued by a central bank. In the same way our central bank, the Federal Reserve, issues the U.S. dollar, it would similarly issue some official U.S. digital currency ('digital dollar'). This is pretty much where the simplicity of it all ends. Things get really hairy (really fast) when central banks have to figure out how CBDCs fit into a traditional financ

Before You Mint Your NFT

With NFT season taking a bit of a breather (kinda), I thought this would be the perfect time to lay out a few things to consider before minting an NFT.  If you missed the frenzy, well, welcome. "NFT" stands for non-fungible token and these digital tokens represent real world ownership and provenance of a particular asset. NFTs are minted (i.e., produced), stored and transacted (bought/sold/traded) on a distributed ledger like blockchain. Some NFTs represent ownership of tangible assets and some NFTs are digital/virtual assets  (yes, a digital piece of art was purchased for $69M). "Non-fungibility" is a scary word but it essentially means that the asset is unique, cannot be interchanged with another asset, and cannot be replicated. Think of NFTs as either collectibles, like artwork and trading cards, or title to tangible/real property, like real estate and cars.  So with all the excitement having simmered down a bit, below are a few things to think about before you

A Curious Crypto Caper Chronicle

The Hack Earlier this month, a hacker executed a massive crypto heist on PolyNetwork--a decentralized finance (DeFi) platform. The hacker was able to steal more than $600 million in crypto from thousands of users on three separate PolyNetwork blockchains (Binance Smart Chain, Ethereum & Polygon) and involving more than a dozen cyptocurrencies. In other words, this hack was * major *. The PolyNetwork protocol operates on multiple blockchains and allows users to send/receive tokens across these different blockchains using various smart contracts (also known as "bridges"). The hacker exploited a vulnerability in one of these smart contracts which maintains significant amounts of crypto to maintain liquidity and this allowed him to overwrite instructions and redirect all crypto funds to himself. From there, the hacker attempted to move the stolen crypto into various liquidity pools.   The Blacklist The hacker was successful in moving some of the crypto. But shortly after the