What is a DAO? Features of a DAO
Decentralized Autonomous Organisations ("DAOs") are essentially groups of code that automatically execute whenever a set of criteria are met. DAOs can be referred to as governing bodies that look after the allocation of resources in a project. They help ensure the long-term success of the project they support.
A DAO is an organisation where decisions are made by a group of people who are collectively members that own the organisation. It is run by members, often through the use of crypto tokens. There are various ways to participate in a DAO, usually through the ownership of a token. A smart contract is created to set benchmarks and processes for automatic execution of decisions per the agreed mandate of the DAO. Funding takes place wherein tokens are sold to raise funds, and these tokens give holders voting rights. This is how a DAO is set up on a blockchain.
How Does it Work?
- DAOs are operated using smart contracts;
- Smart contracts are deployed on numerous blockchains, and Ethereum was the first to use them;
- These smart contracts encode the DAO's rules;
- People holding a stake in the particular DAO get voting rights, and may influence how the organisation operates by deciding on or creating new governance proposals;
- A proposal will only pass once the majority of stakeholders approve it, per the rules for execution of a decision laid down under the DAO; and
- How that majority is determined varies for every DAO, and is specified in the smart contracts.
What are the Benefits of a DAO?
- DAOs are fully autonomous and transparent;
- DAOs are prevented from being spammed with proposals;
- Anyone can view their code, as they are built on open-source; and
- Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
Conclusion / Legal Implication
In August 2022, an Indian startup, Bengaluru-based blockchain firm Polygon, announced that it was building a DAO. A DAO removes the lack of trust between parties who wish to contract, since only the code needs to be trusted. DAOs have the potential to change the way corporate governance works completely.
If a DAO is linked to a legal entity, it will have official legal status and the capacity to sign contracts with third parties. However, this contract will still be signed with the legal entity and not the DAO itself, since a DAO is not, at this point in time, recognised as a separate legal entity capable of executing a contract. Even entering into a contract with a Wyoming-based DAO (one of the few jurisdictions to recognise DAO legal entities) would still result in uncertainty as to enforceability for a contracting party outside Wyoming trying to enforce their rights. To address this issue, affiliated legal entities are usually established that bridge the gap between DAOs and the real world.
In the future, DAOs may be subject to taxes such as capital gains tax on the gains generated from the sale of their tokens. With time, more organisations may adopt a DAO model to help govern some of their activities. Emerging case studies, court decisions and upcoming laws will provide more clarity in the time to come.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.