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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 does a decentralized autonomous organization work?
Decentralized autonomous organizations are based on blockchains and were initially created for a venture capital fund as an organization that does not adhere structurally to traditional business organizations. Traditionally, businesses operate within a hierarchical management structure with decision-makers at the top or as a board of directors. DAOs were created for individuals to have direct control of the organization. There is no hierarchy within a DAO and the stakeholders involved equally share operations within an open-source code protocol. This means equal parts ownership, and decision-making power is created by a preset of rules in a completely transparent environment on open-source code (also known as smart contracts). By having these preset rules, stakeholders within the DAO do not make decisions, rather the smart contract triggers a decision or action to be made and thus eliminates human error or manipulation. Additionally, DAOs are decentralized meaning they are unaffiliated with any country or geographic jurisdiction.
Back to the initial DAO having been created as a venture capital fund. With equal investors; decision-making within an open-source, automated system; and no direct regulation by a particular country—the initial DAO for a venture capital fund could theoretically exist as a flat organization without human manipulation and with the ability to move money anonymously to any part of the world.
Since the inception of the DAO as a venture capital fund, DAOs have been created for multiple other uses such as data distribution, governance, digital currency, social media, gambling, insurance, other types of funding, as well as a number of other use cases.
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.
What are the advantages of decentralized autonomous organizations?
Decentralized autonomous organizations have their advantages in funding and business operations.
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.
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: