The Road to Creating Decentralized Autonomous Organizations

With the news that Wyoming is extending corporate law to include decentralized autonomous organizations (DAOs), it’s essential to understand the inner workings of DAOs. This new business structure replaces traditional, hierarchical, and centrally governed companies with an entirely new concept.

So what is this new concept?

A DAO or decentralized autonomous organization is a new way for people with shared goals to organize democratically with software assistance.

Wherever there are human interactions, there must be some form of rules to govern their actions. This helps to either incentivize the right actions — reward or deter evil acts — penalty. Typically, a DAO involves a set of people interacting with each other according to a self-enforcing open-source protocol. DAO applies the principle of smart contracts to govern actions.

The first DAO created, called “The DAO,” had over 11,000 unique individuals with a vested interest in its success. The DAO was formed to act as a venture capital (VC) firm and invest in other blockchain developments within the space.

In theory, this is a great idea; people benefited from investments while also reducing the overhead of a traditional VC firm. All willing governance participants voting on possible opportunities allowed the company to function and choose which projects to back. The given contracts were all visible due to the transparency of the blockchain contracts and code, allowing for seamless and ironclad repayment from these projects. The entire treasury was visible, allowing for full transparency of where funds were allocated. Everything was great until vulnerabilities were discovered, and the dao’s 1/3rd of collected funds were lost due to this exploit. Who was liable for this disaster? Faulty code led to an exploit, but as a DAO, who is at fault? This poses a question without current answers.

In the traditional sense, incorporation helps offset the business owner’s liability if there is a legal dispute. Without incorporation, legal disputes have no central authority to govern the outcome of the established rules, and the DAO itself has no singular leader.

The state should have jurisdiction over the company, but the current laws developed only allow DAO creation with 100 members in Wyoming. This is a good start, but most collectives creating DAOs for governance now have thousands of members. Uniswap distributed its governance token to 98,000 different wallets for participation in its governance. While this seems obvious to include more than 100 people, The first step in the right direction is important.

This is the gap that needs to be overcome. The molasses-like movement of regulation is stifling innovation. Projects like OpenLaw and Aragon are developing systems to have global regulation of DAOs and digital courtrooms to settle legal disputes. Still, these systems are not allowed in the US, which will slow our progression and development compared to more blockchain-friendly countries. With forward momentum gained from states Like Wyoming and “Crypto Mom” Hester Pierce are leading the governmental reform, rapid growth in this sector will soon see the light of day.