This case just confirmed what we already knew before: DAOs are just groups of people working together, and they don't get any special treatment just because they coordinate their activities via blockchain instead of email.
Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
For a rather hilarious example of this, PeopleDAO's "autonomy" turned out to be a few guys with a Google Sheet. They accidentally shared the link and someone added themselves to the payout list, to the tune of $120k.
Governance activities are talked about on forums and chatrooms. Governance is voted on on-chain
Edit: I'm posting too fast, so here's an edit for a reply
I don't know anything about Ethereum DAOs. Check out Tendermint chains (Cosmos, Osmosis, Crescent, Stargaze, EVMOS, Kava). Gas is cheap and all voting is on-chain. Governance discussions happen mostly on a forum called Commonwealth and then they're put on chain and voted on by validators and stakers.
> Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
The default form of legal structure for a cooperating group of people is general partnership--unless you take specific legal steps to avoid forming a general partnership, that is how the courts will view the partnership. General partnerships means that all partners are jointly and severally liable.
In layman's terms, that means you just have to find one person involved in the DAO, and sue them, and then you get to collect the full judgement from that person (alone), and it's now their problem to get cooperation from the other partners for the liability.
(If this sounds like a terrible idea, it is. That's why there exists all sorts of fancy legal structures that avoid putting people in this position. But if you're not going to use any of them, you get the terrible idea instead!)
Whenever an organization does something, someone or something has liability. If you don't go through the process to create an LLC, that someone is the members of the organization. Liability doesn't go away just because you organize via a blockchain.
Why would it be difficult to enforce individual liability? The DAO needs to interact with the outside world somehow, pay bills and get paid etc, and distribute income to members, so you can just follow the money, can't you?
Jurisdiction of the enforcing party must have overlap with the individual members targeted. In practice I would expect any member under that jurisdiction would bear full responsibility of the actions of any of the collective members.
If you assume a DAO is de facto a corporation/partnership (as this court decision suggests), most US States (including California, which is relevant to this specific case) and many countries start from an unlimited, collective liability default for corporations/partnerships and limited liability is the properly registered (and taxed!) opt-in. (The article also points to states that are not California that realize this and have started to offer easy LLC opt-in for DAOs. Presumably in part because it is a potential tax revenue source.) [IANAL, but this is fascinating.]
I believe miners wouldn't, because while they might technically coordinate their efforts in deciding which version of a cryptocurrency to mine, they aren't pooling their resources and representing themselves as a single entity.
That's partly what makes these individuals an unincorporated organization.
ETH no longer has miners since the switch to PoS. There are now stakers, validators, liquid staking tokens, block builders, ... it has gotten a lot more complex than it was before.
What? Why would they be liable? The whole point is the liability in a partnership is shared between the partners: that is the entities that own the partnership.
Miners (staker?) aren't partners in the DAO: being a miner doesn't make you an owner of anything, anymore than being an employee or contractor to a partnership in the real world would make you liable for the actions of your employer/client.
If the DAO is very explicit about non-US residents, they should also be able to show that in court, and it could be determined that the US citizens who ignored that waived any protections the court would otherwise offer. Alternatively, it might instead be that the DAO should have done more to ~spy on~ "know" their customers so they could determine that they're not serving US citizens.
Regulatory arbitrage in Web3 seems to be coming to and end. My assumption is
1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
2) If a multi-sig runs your governance contract or treasury it isn’t decentralized. Might as well form an LLC or C corp.
3) From a more NatSec perspective, if a SEAL team or the FBI can reach a few people in your DAO and your project would shut down, you aren’t decentralized.
Which all seems good and as it should be, to stop people LARPing as decentralized to avoid regulations.
> 1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
One benefit of hosting on the blockchain is that you can build an arbitrary derivative on top of any blockchain object. It's harder to do that with something random running on EC2.
Seems to me to make sense. if you don't file any paper work with the state and agree to start a money making enterprise with more than one person your a general partnership. Whether your an active or passive investor or not would probably depend on how much "work" you put into the partnership(not related to the article just my thought). Not a Lawyer so take anything I say as anything more than uneducated internet speculation.
Other than the risk of all your assets getting hacked and stolen to doesn't seem like a bad way to "enforce" a contract.
Maybe would be better if things were split up into different accounts with different people holding different keys so you don't have a single point of failure.
Just like with SVB there should be some kind of insurance for large accounts. with various audit and other processes to keep things "safer"
> your an active or passive investor or not would probably depend on how much "work" you put into the partnership
Legally, it requires paperwork filed ex ante. As the article notes, several states have DAO LLC constructs. DAOs that don't incorporate do, and should, expose their holders to unlimited liability. That is the default. (If you and I start an unincorporated car-washing business, and it destroys someone's car, we will be jointly sued and liable, though I may separately have individual claims against you if you made all the wrong decisions.)
The situation all this seeks to avoid is profit-seeking enterprise having everyone who stood to gain when things went well standing up saying "not it" when things don't. If a DAO–or any other business or person–causes you injury, it shouldn't be your job to figure out who contributed to what degree.
Why do people think "doing the same as X but 'with blockchain' instead of paper" means "legally different from X"?
If doing X is illegal, adding blockchain to it doesn't magically mean you're not doing X.
If doing X means you have to pay taxes, doing X with linked lists doesn't mean you don't have to pay taxes.
If doing X means you have a bunch of liabilities, then doing X on a block chain means you have a bunch of liabilities.
The only thing that makes a DAO different from a partnership is that decision making is arguably public on the blockchain, instead of an email thread. Again, why would you think that doing it on a blockchain makes it different from email, or in person, or whatever.
Now in fairness, I certainly didn't think of DAOs as being an unlimited partnership, but that's largely because I didn't think about it because they seem fairly pointless. As the court seems to be saying a DAO is fairly clearly a partnership, and they very deliberately terminated the LLC and didn't create an LLP, so the lack of liability protection follows logically from that.
> The plaintiffs alleged they lost $1.7 million in the cyberattack and that the repayment plan would take thousands of years to make them whole
Creative repayment plan.
> the court focused on statements by the bZx Protocol developers that creation of a DAO would insulate the Protocol “from regulatory oversight and accountability for compliance with U.S. law
Looks like they attempted the "citizen of the earth" card.
Interesting law. It seems that this kind of DAO is a Wyoming LLC with all the existing obligations and the extra requirement that you have to file Wyoming paperwork if your smart contracts are modified:
Articles of organization shall be amended when:
(i) There is a change in the name of the decentralized autonomous organization;
(ii) There is a false or erroneous statement in the articles of organization; or
(iii) The decentralized autonomous organization's smart contracts have been updated or changed.
A DAO may not be "foreign", but it's not defined what exactly that means: "The secretary of state shall not issue a certificate of authority for a foreign decentralized autonomous organization."
I'm guessing that most DAOs don't want the legal liability of an American LLC, so there may not be a lot of takers.
I think that clarification makes sense though. You'd normally (this may vary from state to state) need to amend an Articles of Organization if your LLC Operating Agreement changed, which usually outlines the nature of a joint-ownership model. Since that's handled via smart contracts, you'd want those to be legally binding, which would imply that you need to follow the normal meatspace government lawyer process of updating your articles of organization.
Readit News
Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
[1] https://www.banklesstimes.com/news/2023/03/08/off-chain-gove...
https://www.theblock.co/post/219214/peopledao-hacked-via-goo...
Edit: I'm posting too fast, so here's an edit for a reply
I don't know anything about Ethereum DAOs. Check out Tendermint chains (Cosmos, Osmosis, Crescent, Stargaze, EVMOS, Kava). Gas is cheap and all voting is on-chain. Governance discussions happen mostly on a forum called Commonwealth and then they're put on chain and voted on by validators and stakers.
The default form of legal structure for a cooperating group of people is general partnership--unless you take specific legal steps to avoid forming a general partnership, that is how the courts will view the partnership. General partnerships means that all partners are jointly and severally liable.
In layman's terms, that means you just have to find one person involved in the DAO, and sue them, and then you get to collect the full judgement from that person (alone), and it's now their problem to get cooperation from the other partners for the liability.
(If this sounds like a terrible idea, it is. That's why there exists all sorts of fancy legal structures that avoid putting people in this position. But if you're not going to use any of them, you get the terrible idea instead!)
That's partly what makes these individuals an unincorporated organization.
Miners (staker?) aren't partners in the DAO: being a miner doesn't make you an owner of anything, anymore than being an employee or contractor to a partnership in the real world would make you liable for the actions of your employer/client.
Everyone in a mining (or staking) pool seems more likely to count as a general partnership.
1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
2) If a multi-sig runs your governance contract or treasury it isn’t decentralized. Might as well form an LLC or C corp.
3) From a more NatSec perspective, if a SEAL team or the FBI can reach a few people in your DAO and your project would shut down, you aren’t decentralized.
Which all seems good and as it should be, to stop people LARPing as decentralized to avoid regulations.
One benefit of hosting on the blockchain is that you can build an arbitrary derivative on top of any blockchain object. It's harder to do that with something random running on EC2.
Other than the risk of all your assets getting hacked and stolen to doesn't seem like a bad way to "enforce" a contract.
Maybe would be better if things were split up into different accounts with different people holding different keys so you don't have a single point of failure.
Just like with SVB there should be some kind of insurance for large accounts. with various audit and other processes to keep things "safer"
Legally, it requires paperwork filed ex ante. As the article notes, several states have DAO LLC constructs. DAOs that don't incorporate do, and should, expose their holders to unlimited liability. That is the default. (If you and I start an unincorporated car-washing business, and it destroys someone's car, we will be jointly sued and liable, though I may separately have individual claims against you if you made all the wrong decisions.)
The situation all this seeks to avoid is profit-seeking enterprise having everyone who stood to gain when things went well standing up saying "not it" when things don't. If a DAO–or any other business or person–causes you injury, it shouldn't be your job to figure out who contributed to what degree.
If doing X is illegal, adding blockchain to it doesn't magically mean you're not doing X.
If doing X means you have to pay taxes, doing X with linked lists doesn't mean you don't have to pay taxes.
If doing X means you have a bunch of liabilities, then doing X on a block chain means you have a bunch of liabilities.
The only thing that makes a DAO different from a partnership is that decision making is arguably public on the blockchain, instead of an email thread. Again, why would you think that doing it on a blockchain makes it different from email, or in person, or whatever.
Now in fairness, I certainly didn't think of DAOs as being an unlimited partnership, but that's largely because I didn't think about it because they seem fairly pointless. As the court seems to be saying a DAO is fairly clearly a partnership, and they very deliberately terminated the LLC and didn't create an LLP, so the lack of liability protection follows logically from that.
[1] https://earth.cheap/
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Creative repayment plan.
> the court focused on statements by the bZx Protocol developers that creation of a DAO would insulate the Protocol “from regulatory oversight and accountability for compliance with U.S. law
Looks like they attempted the "citizen of the earth" card.
https://sos.wyo.gov/Business/Docs/DAOs_FAQs.pdf
I'm guessing that most DAOs don't want the legal liability of an American LLC, so there may not be a lot of takers.