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What is a DAO? Can It Help My Business?

June 06, 2022

Posted in Blog

What is a DAO? Can It Help My Business? A DAO (decentralized autonomous organization) allows a group of people to pool their money and quickly reach a common goal. It’s a business using an interconnected web of smart contracts to automate its processes. It’s community-led and built with blockchain technology. The smart contracts include built-in treasuries to fund the community’s projects or goals. 

Sound good? If not, it might after this is translated into English:

  • Blockchain technology: This allows a computer network to agree at regular intervals on the state of a distributed ledger. A ledger may have different kinds of shared data and is often secured through a mix of cryptography (using codes to secure computer networks) and game theory (a theoretical framework for conceiving of situations among competing players)
  • Smart contract: A program stored on a blockchain that runs if a predetermined condition is met. Smart contracts automate an agreement’s execution so all those involved can be certain of the outcome without any intermediary or lost time
  • Built-in treasury: A method of holding something valuable in a blockchain

By the end of last year, an estimated 180 DAOs held $10 billion in assets. They can achieve many different purposes, like investment, philanthropy, or collecting art. A Ukrainian DAO organized after Russia invaded the country raised nearly $7 million for humanitarian relief in less than a week.

How Does a DAO Work?

To join one, the organizer exchanges your contribution to the treasury for one or more digital tokens. They allow you to vote on initiatives. DAOs lack a central authority or management because decisions are democratically made by members. Each member has a say in its goals and future, but those with more tokens have more power over DAO decisions.

Operating rules are in smart contracts, which can’t be changed without a vote by members. DAO actions, like paying funds, can be handled automatically by smart contracts. DAO activities on the blockchain are transparent and can be audited.

Are DAOs Legally Recognized?

A DAO is not a legal entity but a tool that one can use. A DAO can’t enter into contracts with outside entities, hold bank accounts or assets, or make cash payments. A DAO must come with an associated legal entity to function in the real world – usually a general partnership. Its members have unlimited personal liability, and it’s treated as a partnership for tax purposes. What is a DAO? Can It Help My Business?

Conflicts may arise because this general partnership has central management and a human operation, while a DAO has more democratically oriented community values. Wyoming was the first state to authorize DAOs to work as limited liability companies. They could shield members from personal liability for the DAO’s acts and obligations.

What Legal Problems May a DAO Have?

With or without an associated legal entity, securities laws present legal issues depending on the DAO’s goals. Membership interests in one that’s an investment fund or a for-profit venture could be considered securities. If so, it’s subject to federal and state securities laws if they’re considered investment contracts (the DAO’s profits are derived only from others’ efforts). If a DAO membership is a security, noncompliance by the issuer or promoter to applicable laws could result in civil and criminal liability. 

How Can a DAO Help My Business?

A DAO and a business can be linked in several ways. You could:

  • Run your business as a DAO. If you have the most tokens you’d have the most control. Members would invest in your business 
  • Seek investment in your business by an existing DAO
  • Create a network of companies that pool their funds for office space, software subscriptions, and other costs
  • Pools investment capital and create a venture fund. Members vote on companies to fund 

DAOs are relatively new developments. As time goes on, businesses will be more creative in using them, opening new possibilities.

Looking for Legal Information and Advice Concerning DAOs?

If you’re looking for advice and counsel, give us a call. We are an established and growing law firm that helps clients facing a wide range of needs. We’re available at (714) 415-2007, or reserve your spot by clicking here.