DAOs, Tokens, and Regulation

As the blockchain evolves, various innovations have been built around its promising technology. One of these is the DAO which has seen a rapid rise in popularity over the past year. We have DAOs for everything, from DeFi to NFTs, and of course to gaming metaverses. But what exactly is a DAO and how is it useful? This article is a primer covering the DAO’s definition, benefits, and its interactions with the law.

What is a DAO?

A Decentralized Autonomous Organization is a blockchain-based organizational entity where there is no central governing body. Instead, it is co-owned and managed solely by its members. People may join a DAO by obtaining its governance token through one of many ways: some of which are purchasing it, earning it as a reward, or by staking it through smart contracts to receive it as an incentive. All members work are incentivized to work towards a common goal for the betterment of the organization.

Since there is no central authority in a DAO, decisions are made by its members through an automated voting process, the results of which are processed by smart contracts. A member’s voting power depends on the number of tokens they own. Thus, if a member has 10 tokens, their vote carries 10 times as much weight as a member with only one.

What are the Benefits of DAOs?

Essentially, DAOs bring back power to the majority. Due to its decentralized nature, no single person or even a small number of authority figures control it. Decision-making duties are spread out across all token holders, and any stakeholder can put forth their ideas which will be voted upon by the majority. In short, everyone has a voice when it comes to the management, planning, and design of the organization’s future.

Furthermore, DAOs afford a high level of transparency to the decision-making process, theoretically superior to that of traditional organizations. This is because all important votes are done on the blockchain, where they are permanently recorded and disclosed to the public. Trust is not required because it is already encoded in smart contracts, and even the DAO’s code can be audited by the community. Thus there are no middlemen, meaning corruption and collusion between central authority figures is impossible.

Finally, DAOs foster a sense of community among its disparate members. Everyone has a seat at the table and may work towards a single vision of how the organization may prosper. This empowers individuals who have no access to traditional means of investment and banking to gain a voice and a chance to prosper.

Of course, it does mean that the votes of the largest stakeholders (i.e. the members who own the most tokens) carry more weight than the rest. That said, there is a trade-off in terms of responsibility: they carry the burden of ensuring the organization’s success while staying within the confines of the law. After all, should something legally go wrong with the organization, it’s possible regulators may come after the DAO’s members.

Which brings us to the next critical topic: how do DAOs interact with the law?

DAOs and Regulations

The reason why regulators have turned their eye on DAOs is due to its means of monetization. DAOs raise capital by selling their tokens to interested buyers, who as mentioned, use these tokens to vote in the DAO. The organization’s progress and success cause their token’s value to rise, which in turn entices more members to join. The members may also vote to increase their assets by other means, such as issuing NFTs or creating more tokens to sell.

Possible Liability of DAO Members

If a DAO does go afoul of the law for some reason, who winds up being liable, and to what extent? It can depend on whether the DAO is legally considered to be a corporation or not.

“If a DAO is to be treated as an unincorporated association, general partnership or similar such organisation, its founders, developers and members are unlikely to have the benefit of limited liability and may be subject to joint and several and, critically, unlimited personal liability in the event of a claim.”

In other words, if a DAO is not incorporated into a company (i.e. an LLC), it is possible for DAO members to be personally liable should someone decide to sue the DAO.

As of now, whether or not a DAO can be incorporated is a question of location. Some states in the U.S., such as Wyoming, permit DAOs to be registered as LLCs. Tennessee allows companies to register as DAOs. Outside of the U.S., the options are fewer. The Marshall Islands allow DAOs to register as companies, but places like the U.K. do not recognize them as legal entities. As such, until an internationally accepted law is established to decide the matter, the DAOs’ legal status will continue to remain unclear.

It’s essential for governments and regulators to provide protection for the investing public, but it’s just as important to allow useful technological innovations to flourish, particularly if they help individuals who have no access to investments or centralized banking systems on their own. DAOs can provide that service, so it’s worthwhile to strike a balance between the two sides.

At this point, it’s important to note that Cryptopia plans to evolve into a DAO. That has always been the plan for the game; the creators will guide the direction of Cryptopia during its initial stage, but they will gradually turn over control to the community. As such, we in Cryptopia are carefully studying the laws being used on DAOs. Our objective is to create a safe and transparent environment that empowers our players while staying in good standing with the law.

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