Cryptocurrency | Decentralized Autonomous Organizations

Decentralized Autonomous
Organizations Attorney

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What are decentralized autonomous organizations?

A decentralized autonomous organization (DAO) is an organization that operates on blockchain networks that are completely independent and only follow rules encrypted in smart contracts—there is no human intervention. The advantage to DAOs is that instructions are executed when triggered by predetermined rules, which enables transparency, cost savings, and decentralized decision-making in an encrypted environment. Because DAOs are decentralized they can be distributed across multiple countries and jurisdictions, which can create legal issues. Additionally, because the members and investors tend to have a general partnership in a DAO, there can be legalities around liabilities.

How do you create a decentralized autonomous organization?

Anyone can create a DAO with the right community and funding. Below are common steps taken to create a DAO.

1Problem and Solution
If you are considering creating a DAO you need to first identify a unique problem on something that you are passionate about that requires fixing or intervention.
2Community + Goal
Once you’ve identified your problem and make it your goal to fix it, you need to build an engaged community who is willing to work toward addressing the problem.
3Game Plan
With the problem, goal, and solution in mind, begin documenting how funding will specifically impact this goal. Identify what capital is needed to meet this goal. Then identify what the incentives are to invest in this fund and how to get your community on board.
4Smart Contract
With your game plan set, start writing a set of rules that indicate how the DAO will operate. These rules are then encoded in a smart contract. A smart contract is an encrypted piece of code that lives on a blockchain as an agreement between a seller and a buyer.
With your game plan and programmed smart contract, you’ll need to seek funding from your community. Funding is usually in the form of investing in tokens that are spent within the organization. Community members who invest will now have voting rights on the organizational operations.
Once the funding phase has ended, you are ready to deploy your DAO. Upon deployment the DAO is completely autonomous and independent of the initial creator. The DAO now lives on the blockchain and your smart contract takes automated actions based on your preset rules. At this point the DAO is open-source and all financial transactions are recorded on the blockchain for anyone to see.
3Moving Forward
Once the DAO is fully functional, any decisions that need to be made about distributions of funds and proposals for the future are voted on my investors or members of the DAO. The majority vote will rule on changes to the DAO moving forward.

What are the advantages of decentralized autonomous organizations?

Decentralized autonomous organizations have their advantages in funding and business operations.

When a DAO is established, there are is a type of governance or preset rules encoded into the blockchain protocol. Any proposed changes to the code are voted on by the DAO shareholders. Depending on the size of a user’s investment will indicate voting power. Larger investors will receive more voting power than smaller investors. This type of governance ensures all shareholders are aware of the rules up front and have a vote in operations.
DAOs are flat organizations in which each individual investor in the network are equal contributors and have a vote. This encourages community participation to achieve any specific goal of the DAO and have influence on shaping the DAO.
Financial transactions taken place in a DAO are recorded on the blockchain and available for anyone to view. Investors in the DAO can visibly see how funds are spent, which helps in how to spend and vote on fund allocations in the future.

What are the challenges of a decentralized autonomous organization?

While DAO’s appear to be the new wave of the future for business, there are disadvantages to DAOs.

The first venture fund DAO was the “largest crowdfunding project in human history” raising $100 million in cryptocurrency in two days on the Ethereum blockchain in 2016. However, a hack resulted in a $55 million theft of that cryptocurrency. Although DAOs are based on encrypted blockchain technology that is usually impenetrable there is always a chance for vulnerabilities and hackers could have negative impacts on the DAO and investors of the DAO.
Having a decentralized system has its advantages as it does not necessarily have to abide by regional jurisdictions, however, if there is a legal issue then a DAO being a decentralized system may encounter challenges. DAOs function in the transfer of funds across multiple counties and should a legal matter occur then legal action would have to be addressed in multiple countries and jurisdictions as well as deal with cross-border contractual issues.
3Legal Uncertainty
Decentralized autonomous organizations are in their infancy and evolving constantly. With this ever-changing digital landscape there are a number of legal gray areas such as regional jurisdictions, intellectual property, and personal liabilities.

Decentralized Autonomous Organization Use Cases

As DAOs gain in popularity there are a number of new and interesting ways DAO blockchain platforms are being adopted. As of now, we are seeing DAOs used in corporate governance, funding, venture capital, social media, data distribution, gambling, insurance, and other business activities and continues to grow.

Examples of Decentralized Autonomous Organizations

Decentralized autonomous organizations vary in function. Below is a list of popular DAOs.

  • Augur – A peer to peer, decentralized gambling exchange powered by Ethereum
  • Dash – Allows the transfer of digital money globally
  • DXdao – Develops, governs, and grows DeFi protocols and products
  • MakerDAO – Decentralized, collateral-backed cryptocurrency
  • MetaCartel – Awards grant funding to support dApps in finding customers and pilot opportunities
  • MolochDAO – Speedily and efficiently awards grant funding to projects across the Ethereum ecosystem
  • Steem – A social blockchain that generates revenue streams to users sharing content
  • Synthetix – Supports derivative trading in DeFi
  • The DAO – The initial crowd-funding campaign dealing in Ethereum
  • Uniswap – A decentralized automated liquidity protocol built on Ethereum

Why do I need legal guidance about decentralized autonomous organizations?

There can be a number of legal gray areas when it comes to DAOs spanning from regional jurisdictions on the execution of smart contracts to partnerships and liabilities. Depending on the nature of the DAO and what jurisdictions it crosses over, it’s important to secure legal counsel like Blake Harris Law to give guidance on how regional laws and cross-border contracts could impact DAOs.

Legal jurisdictions aside, there is the other matter of who could become liable for debts or legal action taken against a DAO. While the nature of a DAO is to run without human intervention, there are humans behind the creation of a DAO and those humans can be members or investors of a DAO. Whether you’re a member of a DAO or an investor in a DAO, the default assumption is that each person is part of a general partnerships, meaning every stakeholder (member or investor) is responsible for liabilities like money or services owed to another party. Should a DAO go south, anyone in the general partnership of a DAO could be in danger of losing their personal assets. To avoid such risk, at the beginning of the formation of a DAO it is essential to have legal contracts in place to protect all DAO stakeholders and other potentially liable individuals or businesses involved. At Blake Harris Law, our team can advise on the appropriate contracts required when forming a DAO in order to avoid potential damaging financial and legal risks in the future.

Glossary of Important Terms

Here are some important terms to learn when it comes to decentralized autonomous organizations:

1Smart Contract
A smart contract is an encrypted piece of code that lives on a blockchain as an agreement between a seller and a buyer
2General Partnership
A general partnership is a business arrangement in which multiple people agree to shares of all assets, profits, and financial and legal liabilities. Since each partner owns an equal share, any partner can be sued for business debts.
By law, a liability is something a person or company is responsible for owing (e.g., loans, debts, services, mortgages, taxes).
DeFi, also known as decentralized finance, performs financial transactions over a blockchain cutting out the middleman by bypassing traditional banks and financial institutions.

To find out how Blake Harris Law can help you with your Decetenralized Autonomous Organizations (DAO), please call us at 833-ASK-BLAKE or contact us here.