Behind the compliance trend, DAOs are heading for the real world

“2022 is the first year of the DAO outbreak.” This is one of the trends that are collectively optimistic about the forecasts at the end of 2021.

Recently, many well-known projects such as Gitcoin and SuishiSwap have announced that they have established or plan to set up legal entities for community DAOs. DAOs that have been in a legal gray area for a long time have shown a trend of self-compliance, bringing more possibilities for the interaction between DAOs and the real world. .

On March 21, the GitCoin community, the Ethereum open source software fundraising and donation platform, passed a proposal that the newly incorporated Gitcoin Foundation (Gitcoin Foundation) in the Cayman Islands will become the legal entity representing the Gitcoin DAO. At the same time, the decentralized exchange SushiSwap community has also initiated proposals to establish an association or foundation for Sushi DAO to clarify the rights and obligations of token holders and contributors, limit their responsibilities and reduce risks.

More recently launched DAO organizations have “silently” established similar compliance agencies at the beginning of their establishment. On March 17, Yuga Labs launched the governance token ApeCoin. The announcement page shows that the legal entity ApeCoin Foundation was also established to supervise its governance community, ApeCoin DAO. Even earlier, the ENS Community Governance Charter revealed that a Cayman Islands non-profit organization, the ENS Foundation, acts on behalf of the ENS DAO in the real world.

Why are well-known project communities seeking to establish legal entities? What legal dilemmas have DAO faced so far? What problems can the community’s compliance attempts solve?

Why do we need “compliance”?

DAO (Decentralized Autonomous Organization) connects multiple parties with a system based on code and distributed ledgers. With features such as de-trust and automatic execution, it is expected to reduce the cost of contracting, execution and supervision of modern organizations. It is regarded as a “new organizational structure paradigm”. Long-term optimistic.

According to data from the analysis platform, as of March this year, the number of DAOs has increased to 4,832, of which 216 head DAOs have an asset management scale of US$9.5 billion. increased nearly 10 times.

At the same time, the huge amount of funds is faced with the powerlessness brought about by the awkward legal status. Up to now, DAOs are in a gray area between legal and illegal in major regions of the world, except for the Marshall Islands and Wyoming in the United States. Institutions rarely have clear legal powers to regulate DAOs.

This void means that the DAO is isolated from the existing legal framework and has no responsibilities, but no rights. As Yuga Labs stated in the announcement, most DAOs in reality today “cannot sign leases, hire people, manufacture goods, or anything else the community decides to do on their own.”

In terms of risk, according to the analysis of people familiar with the matter, under the US legal system, when a lawsuit occurs, the DAO may be regarded as a general partnership by default, and all DAO members are jointly and severally liable; accordingly, the tax burden of the DAO organization will also affect individual members. .

Having a legal entity representing DAO in the “real world” can enhance DAO’s ability to interact with the real world and avoid risks. On the one hand, it allows DAO participants to have only limited liability, and on the other hand, the move enables DAOs to contract with other “real world” service providers, legally hold assets, intellectual property, domain names, raise funds, etc.

‘Centralisation’ controversy over council structure

According to H.Forest Ventures research, in addition to establishing a representative legal entity for the DAO, there are other options for DAO compliance such as “operating as a limited partnership (under the legal system of the U.S. state of Wyoming)”. But in practice, referring to the selection of ApeCoin, GitCoin, ENS and other projects, the solution of “council structure” is the most popular.

“Council Structure” means that the DAO designates a core group to represent and execute DAO-approved actions (such as entering into contracts or agreements with other companies) and to appropriately manage the DAO’s day-to-day business. In terms of ApeCoin Foundation and ENS Foundation, this “core group” refers to the “board of directors” established in these institutions.

However, some in the crypto community have questioned that the council structure is not “decentralized” enough to make DAOs no different from the decision-making process of traditional companies. In response to the age-old “decentralization-efficiency” proposition of the blockchain industry, OxMaki, former head of Sushi, said in an interview with The New York Times that he believes that the strengths of DAOs – diversity and decentralization – have also proven to be weaknesses. .

“The DAO is made up of a wide variety of people all over the world, with no relationship between the parties. Each group has a different vision and direction. The DAO never reaches a complete decision internally. It was a mistake.” OxMaki said.

H.Forest Ventures believes that in the short term, council DAOs are the most efficient and seamless option for DAOs to interact with traditional companies.

In the actual design, in addition to acting as a centralized decision maker, the board of directors also has room to exist as a “supervisor”. As in the Yuga Labs design, the ApeCoin Foundation “does not control ApeCoin or the ApeCoin DAO”. The foundation’s board of directors is equivalent to a “third-party project management team”, which is only responsible for overseeing the decisions of the ApeCoin DAO and ensuring that the decisions of the ApeCoin DAO are implemented.

In the ENS and GitCoin communities, the foundation gives the DAO the power to appoint and remove board members to balance the aforementioned concerns about centralization.

Influence and reflection

The establishment of an external legal entity enhances the ability of DAO to interact with the real world, and brings DAO one step closer to becoming the mainstream form of financial and cooperative organizations.

However, this is just an external compliance effort in the DAO space.

At present, the anonymity respected in the encryption community will promote the abuse of power to a certain extent, and the DAO lacks clear obligations and responsibilities in terms of internal management.

At the end of last year, the SushiSwap team was caught in a resignation dispute. A subsequent investigation showed that Suishi’s former CTO Joseph Delong was suspected of forcing away the head of Sushi through an internal power group. The incident ended with Joseph Delong’s voluntary resignation.

CoinGecko author Benjamin Hor summed up these phenomena, saying, “The reality is that members of all DAOs rely almost entirely on trust in selected individuals who can choose to abdicate responsibility for their actions.” When similar events occur, the crypto community often It can only be solved by public opinion, without any standardized internal accountability channels.

In the absence of laws on the outside and self-discipline on the inside, the existing DAO governance mechanism often brings about the “chaebol” centralization effect or “the tyranny of the majority” (the former case has the “big UNI” a16z decision-making in the Uniswap grant event. After the Juno Network community passed the 16th proposal, some assets of the “airdrop whale” were confiscated) .

Therefore, the standardized operation of DAO in the future also needs to be extended to the interior.

As Jake Hartnell, a core member of Juno Network, reflected after the “Proposition 16” storm, with the help of minting/destroying tokens, forcing redelegation, rolling back, and freezing smart contracts, “community governance has a more “dictatorial” approach than centralized institutions in the Web2 era. power”, so every future proposal should be discussed more carefully and fully, and a set of guidelines that cannot be violated should be established in advance.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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