Blockchain technology has enabled the development of DAOs, or “Decentralized Autonomous Organizations,” which represent a new social organizational model autonomously governed by computer code (so-called smart contracts), without a representative body, and entirely managed by its participants.
Currently, there is no regulation of this model, nor can a clear definition be given. Analyzing past experiences and projects (which are not numerous), DAOs should represent an organization designed to be entirely (or almost entirely) automated and decentralized, without any management structure or board of directors, using funds for a specific purpose. In this context, the issuance of Tokens, in exchange for cryptocurrency or through “proof of work” (the consensus algorithm for validating transactions on the blockchain), would guarantee its holder a right to vote in the management of the organization or additional rights.
For example, we could see a DAO as an association of people, completely democratic and without any hierarchies, whose management is delegated not to a representative body but directly to all members through a transparent decision-making process using self-executing computer programs. The association will, of course, have its own social or profit-making purpose, and its members will contribute to the association’s capital (just as in capital companies) for the right to participate in voting. For example, imagine an association without a representative body whose purpose is to finance volunteer projects with its own capital. Each participant (who has contributed liquidity to the capital) can put forward any beneficial proposal or project for a vote, with the consequent and automatic transfer of funds by the software in case of a favorable vote. The mechanism just described, albeit in an overly concise and certainly not exhaustive manner, undoubtedly demonstrates revolutionary potential. With these assumptions, it would be possible to create any decentralized, autonomous, and completely transparent organization (profit or non-profit) with governance rules managed by software.
The distinguishing elements of a DAO should be:
- The presence of smart contracts that would guarantee the automatic execution of the organization’s management rules. Such software would represent the heart of the organization as it would determine the automatic functioning of governance rules without ambiguity or error and in a completely transparent manner.
- The vote and the Token should be directly related. In fact, participants purchasing Tokens would be able to exercise their right to vote on any proposals or governance rules. Of course, all transactions, rules, proposals, and related decisions would be stored in the corresponding blockchain. In this regard, the DAO could also be configured to function as an autonomous blockchain.
- The democratic and decentralized management of the organization. With no decision-making or representative body, the DAO would represent the maximum expression of democracy applied in an organization and would be entirely managed by all participants themselves.
It should be remembered that this is a decentralized organizational model not yet fully developed and that, while presenting enormous potential for progress, it is still in its embryonic phase in Italy.
One of the common issues in all legal systems would concern the potential responsibility for the actions taken by the DAO. While it is true that the organization acts through smart contracts or without a representative body, it is also true that such actions could cause harm and therefore be a source of liability. In this case, the problem would be to identify the legal subject to whom the responsibility can be attributed since the “DAO” has no legal recognition.
On the subject, one could debate at length without being able to adequately resolve the impasse, as there is currently no regulation in this regard. In theory, the discipline provided for partnerships in collective name (in this case irregular due to the lack of notarial regularization and registration in business registers) with joint management of all members of the corporate administration could be applied by analogy, at least to a limited extent within the Italian legal system, with the natural consequence of unlimited and joint liability for the company’s obligations.
In this regard, just recently (in 2021), the state of Wyoming in America approved a first form of regulation for Decentralized Autonomous Organizations, from which interesting insights can be drawn.
The first insight is certainly represented by the extension of the “Wyoming Limited Liability Company Act” legislation to DAOs, practically attributing to them the so-called limited liability (obviously within the limits and according to the rules provided therein). Therefore, in principle, the organization itself would exclusively respond to the obligations contracted by the DAO (or the underlying smart contract) with its own assets, excluding members from any liability.
Of course, the role of smart contracts in the formation of DAOs finds ample space. For the purpose of applying the same legislation, the algorithmically managed decentralized autonomous organization can be formed provided that the underlying smart contracts can be updated or modified. This is a common-sense rule aimed at avoiding legal significance being given to closed software without the possibility of making necessary improvements or resolving any bugs. In addition, it is stated that the organization’s charter must include a publicly available identifier of any smart contract directly used to manage or operate the decentralized autonomous organization.
The “Management” section is also interesting, where the management of the decentralized organization is regulated; in this regard, it is established that it is exercised alternatively by its members or by the underlying smart contract (where it is managed algorithmically). In principle, therefore, the DAO model could also be used in the absence of a smart contract, giving greater weight to the “human” decentralized management of all members.
The approach taken by the state of Wyoming towards DAOs is certainly not invasive, providing a light regulatory system not burdened by too many rigid rules. On the other hand, these rules are part of a stimulating and extremely favorable legislative context for all Blockchain and Crypto technology, to the point of being the location of the first crypto banks (banks that hold both legal currency and cryptocurrencies) and some well-known Blockchain platforms.
1 https://www.wyoleg.gov/Legislation/2021/SF0038
2 https://www.startmag.it/innovazione/wyoming-criptovalute-blockchain/
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