Challenging traditional businesses? 5 Critical Problems DAOs Need to Solve Now

Ethereum co-founder Vitalik Buterin: “You can’t start a DAO to be a DAO, you need a DAO to actually do something”.

Decentralized Autonomous Organizations, also known as DAOs, are becoming an increasingly popular term in the crypto world. A DAO is an organization that operates on a series of smart contracts, whose code determines the organization’s management and decision-making. In simple terms, a DAO is a group of “organizations” that raise funds to accomplish a specific task, and some see DAOs as “an internet community with shared bank accounts.” Friends with Benefits (FWB) DAO manager Raihan Anwar described it this way — “digital flash mob with money in his pocket”.

In recent months, DAOs have become the most hyped concept in blockchain technology alongside non-fungible tokens (NFTs). As DAOs continue to grow in size, they increasingly interact with the non-crypto space, seemingly doing everything from signing contracts to procuring services (such as developers building platforms), buying physical assets (such as land), and borrowing fiat currencies , the rapid development of DAO poses a threat to traditional companies. However, DAOs currently lack sufficient legal and regulatory certainty, leaving a question mark on how they can continue to scale.

Challenging traditional businesses? 5 Critical Problems DAOs Need to Solve Now

This article will examine the following five key issues that DAOs need to address and provide practical examples of why they are important and solutions:

Who legally owns the DAO’s assets/treasury?

Who is ultimately responsible for the DAO’s responsibilities?

Does the DAO have the legal capacity to enter into contracts?

Can DAOs sue and be sued?

Do DAO contributors have an employment relationship?

Who legally owns the DAO’s assets/treasury?

While intuitively the DAO itself owns the treasury/assets, from a legal perspective the issue is actually not entirely clear.

Let’s take a hypothetical ArtDAO example. ArtDAO’s role is to invest in all different types of art, from NFTs to physical art. The DAO decided to buy the Mona Lisa one day, and they won the auction, and the DAO’s founders agreed to hold the Mona Lisa for “custody”. However, the founder is an “actor” with a different appearance, and he decided to sell the portrait to another party and pocket the proceeds.

Now, if the DAO were a company, the law would recognize the company as the legal owner of the Mona Lisa portrait. Therefore, the founder’s actions are a clear case of theft/embezzlement.

However, the legal status of DAOs is unclear, especially whether DAOs can actually legally own assets (in the same way that a person can own assets). Therefore, it is possible that the founders are considered to be the actual legal owners of the Mona Lisa, and thus have no crime and no recourse against the DAO itself.

Challenging traditional businesses? 5 Critical Problems DAOs Need to Solve Now

While this uncertainty exists, it could lead to DAOs not participating in asset purchases in the physical world, for fear that their assets might be retrieved by any so-called “legitimate means”.

Proposed solution: Jurisdictions recognize DAOs as the legal owners of assets in their treasuries and as structures capable of owning assets on their own.

Who is ultimately responsible for the DAO’s responsibilities?

A key feature and innovation of corporate structures is the concept of “limited liability”. Limited liability means that shareholders’ liability is limited to the value of their investment (for example, if they buy $1,000 worth of stock, their loss will be limited to $1,000). This is not the case for other structures with unlimited liability, such as partnerships. Unlimited liability means that if the entity becomes insolvent/insolvent, the member will be liable for the entity’s outstanding debts.

Whether members in a DAO have unlimited or limited liability is an important question for a DAO. Take the example of an individual investing $5,000 in DAO’s governance tokens and becoming an active contributor. The DAO made a series of investments, including borrowing large sums of money. The investment went poorly, and in the process, the DAO was effectively bankrupt (owing more assets than it held). In this situation, what are my responsibilities as a DAO member? Am I responsible for the DAO’s excess debt? Will I lose more than my original $5000 investment?

Obviously, if the DAO is considered to have unlimited liability to its members, given this additional risk, there will be significantly fewer people who invest and contribute to the DAO.

Proposed solution: DAOs should have limited liability like corporations.

Does the DAO have the legal capacity to enter into contracts?

Legal capacity is an important aspect of DAOs as it affects how they operate in trade and commerce. While individuals and companies are capable of entering into contracts, it is unclear whether DAOs can enter into contracts, for example:

PropertyDAO is a DAO originally set up to invest in digital assets such as in Decentraland. The DAO community then voted to buy a high-rise apartment building in New York.

The DAO entered into negotiations and agreed to buy the property. However, when it comes to contracting – DAOs may not be considered to actually be capable of contracting. Legally, a DAO might be seen as a “dog” trying to sign a contract (no one would admit that a dog has the power to sign a contract, does it?). Without the legal capacity to enter into a contract, it means that the contract itself has no legal effect.

Challenging traditional businesses? 5 Critical Problems DAOs Need to Solve Now

If this issue is not resolved, it could mean that the individuals in the DAO need to sign the contract themselves (presenting a risk to both the DAO and the individual) or to create a company for the DAO to sign the contract (which may reduce the members’ decision to control the DAO) .

Proposed solution: The DAO should have recognized legal capacity to enter into contracts.

Can DAOs sue and be sued?

Another important aspect of legal capacity is the ability to sue and be sued. This is very important for DAOs because they cannot enforce contracts without being able to sue them.

Take a DAO that wants to build a new product platform on its website. They contract with a group of developers to build the site, paying them $1 million up front. After a few months, the developer didn’t do any code work on the site and seemed to have run away with the money, and the DAO community voted to sue the developer.

Now, if the law does not recognize the DAO’s ability to sue, the court will only dismiss the case in the first instance (before the DAO has even had a chance to argue its position). This puts DAOs in a precarious position as they are prevented from signing contracts – limiting their ability to grow and scale.

Proposal: DAOs should have the ability to sue and be sued.

Do DAO contributors have an employment relationship?

Another key issue is the relationship between contributors and the DAO itself. The DAO’s decentralized model is in some ways as flawed as the traditional corporate structure. DAOs theoretically have no bosses, but the organization still has to decide who gets rewarded for their work. Currently, DAOs often reward contributors with tokens (usually Based on votes) for their work in assisting the DAO, which can be considered the actual salary of the contributors.

This raises the question, if contributors are paid, are they actually employees of the DAO? If so, this would mean that the DAO as an employer has obligations (eg annual and sick leave entitlements). This in turn adds to the complexity of running a DAO, as the DAO needs to comply with the employment obligations of each jurisdiction in which the contributor is based.

Proposed solution: Contributors to the DAO should not be considered employees of the DAO unless they expressly enter into a formal employment contract.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/challenging-traditional-businesses-5-critical-problems-daos-need-to-solve-now/
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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