DAO vs LAW

By Othman Darwish

Decentralize Autonomous Organization  (DAO) is computer program that  called smart contract , which  acts as rule set for those organization ,the program code "smart contract" is hosted and run inside blockchain , when transacting a smart contract  , a mutable records logged inside blockchain .

One of most challenges for  DAO's is its legal status , the form and the structure of the DAO that will be built on it ,it is general partnership ,  unincorporated associations, or corporation , and if it corporation what the type and the structure of that corporation that limit its members or participants liabilities . DAO promoted as self-organization entity, in a way that the human involvements is limited or not needed at all, is that really true? does DAO going to operate only in virtual world? if not, what about physical world interaction?   How are the legal relationships going to be formalized by contracts and enforced by law with DAO non blockchain entities (real world suppliers, service providers, contractors…etc.)? for example, if DAO going to own physical asset, register untangle property, what is the formal and legal name of that entity, who is the authorized DAO members and how to prove this? How tax could be collected and paid when the DAO members make a profit? what about DAO compliance with continuously changing consumer protection legislation? , bellow is benchmark for DAO legal options , benefits and risks   if it going to be formalized as separate legal entity. 

Public partnership or joint venture:

if it not probably formalized, the court could impose and formalize it. the court would seek for DAO designer or first mover and make him liable. In common law jurisdictions, any participant is being representative of DAO’s interest, each partner would then be held jointly and severally responsible for all liabilities of the business, and all personal assets of each partner are subject to seizure or lien by creditors. Thus, the parties of a DAO may have unlimited potential liability for the entity’s actions, in UK for example, this is called joint and several liability, the court could sue everyone, but even if it found only one individual worth suing, it could sue them for the entire amount.

DAO as corporation

Limited labiality companies LLCs can be formalized to help DAO and give it the legal entity, this legal entity can interact with physical world and enter into contracts, execute actions and held liable for those actions, the members liability of DAO   as corporation will be limited to not more than the money the members committed to the company. The following, is two form that DAO could be structured as limited liability corporation:  

DAO as Limited By Share (LBS) company:

This form of company targeting explicitly for making profit for its members (the shareholders). When the company is first established, the shareholders must purchase the DAO shares as part of founding share capital, when a new member want to participate and invest in DAO, he can purchase shares at the company market price in two ways; from existing shareholders or as part of the capital raise. The total amount of money that shareholders can be pursued, is the total invested capital by shareholders, thus the risk is limited (assuming that the DAOs members are not involved in corrupt or fraudulent acts). The board of directors will be appointed by shareholders, the voting power depend mainly on the number of shares each member hold, and this is very crucial and one of the major drawback of LBS company form, the control of DAO– represented by board directors – could be changed by owing enough shares, for example, one DAO service provider or contractor could purchase shares of DAO, and if it able to collect needed voting power, it could appoint directors and destroy the decentralization nature of DAO and its objective ( avoid the centralization of control ) .

DAO as Limited By Guarantee (LBG) company:

Despite the fact the LGB company targeting for nonprofit businesses, and usually acts as social or community organization, it could be formed and incorporated to act as legal entity for DAO. In addition to its ability to limit their participants or members liability risks exposure, the DAO as LBG corporation   could facilitate the separation between legal control of the company and ownership/rights to profit in DAO. Forming DAO as LBG company contains legal uncertainties in how to make it profitable for its members, for example in UK until 1981 it was possible to form a company limited by guarantee with capital share, currently under section 5 of the Companies Act 2006, new companies cannot be formed as a company limited by guarantee with a share capital.