What is a DAO LLC? Your Complete Guide to DAOs
One technology that looks set to revolutionize the way we buy, share, and even hold money is blockchain. A relatively new concept to the world of business, based on this idea, is a DAO LLC.
The internet has revolutionized our world and the world of business. Thirty years ago, we could not simply Google our problems, buy things online, or even send a text message. Today, all that is possible, and new technologies are rising. One technology that looks set to revolutionize the way we buy, share, and even hold money is blockchain.
What is blockchain?
Blockchain is a digital platform that allows people to share information securely, without relying on any one organization or even country to control the platform. Blockchain is the technology that cryptocurrencies are held on because no one centralized bank controls the currency.
While cryptocurrency is the thing that blockchain is best known for, there are many more possibilities for how this technology can be used to secure information and move away from centralized, controlled activities.
A relatively new concept to the world of business, based on this idea, is a DAO LLC.
What is a Decentralized Autonomous Organization (DAO)?
A Decentralized Autonomous Organization (DAO) is a new type of LLC in which there is no leading member of the organization that has majority rule. In a normal LLC, there are members who make the core decisions for the business. However a DAO has been modeled on decentralized cryptocurrencies, and it essentially runs autonomously through a series of “smart contracts” that operate without any human interaction. This means the business can run without a traditional business structure. Instead of a food-chain style hierarchy, all “members” of the DAO have equal say in the actions of the organization.
However, not everything can be done legally without human input, so it is not entirely self-sustaining. A DAO is a foreign concept to many and comes with many advantages and disadvantages, which we’ll explore shortly.
The concept of a DAO was first introduced by Dan Larimer, the founder of BitShares, Steemit, and EOS, back in 2015, and then further refined by Ethereum’s creator Vitalik Buterin a year later, but is now getting further attention as DAO LLCs are now recognized in Wyoming, which we’ll also explain in more detail below.
How are DAOs created?
The formation of a DAO is not all that different from forming any other kind of business. Legally compliant DAOs are LLCs, which means they are a limited liability company. Limited liability means that the company is considered its own legal entity, regardless of how it pays taxes. For example, even if a single-member LLC pays taxes through the owner’s tax return, that owner cannot be held legally liable if the company were to be sued.
Forming a DAO LLC requires a couple of additional steps that other LLCs don’t have to do. They must establish the rules for the DAO before it is formed (embedded in the code), and they must establish how the LLC will be funded prior to formation, too. That means that the DAO’s code and any potential bugs and security issues have to be tested and ironed out before the system can be deployed.
While one person or entity must form the DAO, they do not retain sole control over the DAO.
What are the advantages of DAOs?
· They’re more inclusive and responsive to stakeholder input because every member has an equal say. That means you don’t have to know the right people or have a certain amount of skin in the game (beyond the initial required investment) to be included in the decision-making or benefit from the organization's profits.
· Because the organization is run on an algorithm, there is less room for human error.
· You still have the legal limited liability that is so advantageous of LLCs.
· Blockchain gives them access to extremely secure information or funds.
· All transactions are recorded in the blockchain, which is not only secure but allows anyone to access the records of the transaction, which allows for more transparency than is ever experienced in traditional business.
· The technology is still in its infancy, which means a DAO offers huge opportunities to create change and be at the forefront of blockchain technology reaching a mainstream consumer.
What are the disadvantages of DAOs?
· You likely know already that partnerships in business (as a structure)rarely work well, and one of the reasons medium and large businesses are so slow to react to market changes is because they need the go-ahead from so many stakeholders. A DAO can experience these same issues, regardless of the organization’s size, because there are so many fingers in the pie.
· To build on the point above, it also allows anyone of any background to have their say in large financial transactions, which may not be to the benefit of the organization (and MIT believes this structure is unlikely to yield returns).
· Because the organization runs on an algorithm, mistakes may get overlooked that a human eye would catch.
· While blockchain and code leave little room for error, the fact that the entire organization has been build by someone with code means that security errors are more difficult to identify, and may be targeted by hackers and could be exploited before the DAO stakeholders have time to react. In 2016, “The DAO”, a crowdfunding project, attracted record funding, despite having documented security flaws. These flaws were exploited and 3.6 million ETH (equivalent to around $150million) was stolen.
This means that the rules (aka the code) have to be bug-free to be entirely secure, or investors can literally watch as funds are stolen and do nothing because the hacker isn’t breaking the rules of the code. Obviously, this is difficult to do and even more difficult to be certain of without extremely extensive testing.
· The legal framework for DAOs barely exists yet, though this is starting to change. That means there are still many questions about who can be held responsible if a DAO makes a costly mistake. Read on to learn about Wyoming’s new bill that recognizes DAOs as LLCs and what the legislation includes.
Wyoming to Recognize DAOs as LLCs
In April 2021, Wyoming Governor Mark Gordon signed Bill 38. This bill allows Wyoming to recognize DAOs as LLCs, and will take effect on July 1, 2021. This new law defines DAOs as “a limited liability company whose articles of organization contain a statement that the company is a decentralized autonomous organization.”
Wyoming wants to position itself as the most friendly state for digital asset innovation, and their Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology is certainly doing this with their DAO legislation.
What’s in the Wyoming Legislation?
The Wyoming legislation will allow DAOs to legally incorporate, hire employees, scale, and grow. The legislation aims to give DAOs the legitimacy they need to better establish themselves and grow in the worldwide marketplace.
The legislation will require DAO LLCs to maintain a presence in the state through a registered agent, which is required of all LLCs who register in a state other than their own across the country.
Like LLCs, DAOs will be required to include designation in their name, such as “DAO”, “DAO LLC”, or “LAO”.
The DAO can be member-managed, like an LLC, or algorithmically managed, in which case the smart contract must be editable, upgradable, updatable, and modifiable.
The articles of the DAO, or the smart contract, must contain information about how the DAO will govern members, their rights and duties, distributions, and amendments. No member will have an ownership or fiduciary duty for the DAO, besides the implied contractual expectations that they will be doing fair dealings. These articles must be amended if there is a change to the smart contract(s), if the DAOs name changes, or if there is an error that needs to be—or has been—fixed.
The legislation in Wyoming is still in its infancy, and there are still many open-ended questions that may require further refinement of the legislation.
Why Create a DAO LLC?
The biggest reason to create a DAO LLC is for the legal protections an LLC offers. If an organization chooses to create the DAO first, before forming a DAO LLC, there are no legal protections to protect investors and stakeholders from legal liability for that DAO. Of course, pinpointing the liable parties in a large DAO may be difficult, but it still leaves the DAO investors and stakeholders open to legal backlash should something go wrong.
When you’re dealing in financial matters, especially in technology so new as blockchain, failing to form an LLC around the DAO is extremely risky. Without the protection of an LLC, an investor in a DAO may face having their personal assets seized or subject to a lawsuit if the DAO were to be sued. An LLC will insulate any stakeholder from personal risk, and so only the DAO itself will be liable in a legal case.
A DAO has the added complication that the stakeholders may be global, and so only the stakeholders in the country where the case is being heard will be liable. This makes the risks of a DAO without the protection of an LLC even higher. For example, if Americans form a DAO with citizens of other countries, the people from foreign nations will not be held liable if an American sues the DAO, because the damages can be recovered from the American citizens' personal assets through the legal system. It would be up to those citizens to try to recover the damages from the other DAO stakeholders, which would likely prove difficult, if not impossible.
If a DAO forms a DAO LLC, then this cannot happen. The DAO’s assets are the only assets that can be at risk if the DAO is sued. This makes forming a DAO LLC essential for any DAO.
What is an example of a Decentralized Autonomous Organization?
Technically, any organization that does not have centralized governance can be called a DAO, which makes almost every cryptocurrency network a DAO. Here are a few of the most successful:
· BitShares – BitShares is a decentralized cryptocurrency exchange.
· Digix Global – Digix allows people to own gold in a digital format, which shrugs off the difficulties of holding physical gold assets.
· Dash – Dash launched in May 2015 and is the PayPal of the cryptocurrency world, allowing people to hold money, get paid, and shop instantly for less than a cent per transaction. It’s just as accessible as PayPal and is a fast-growing payment platform.
· Augur – a decentralized prediction market platform (a betting platform) with no limits. It aims to make the betting industry fair.
· Steemit – a blogging and social media site (has an interface similar to Reddit) which rewards users with their unique cryptocurrency for publishing and curating content.
· MakerDAO – A cryptocurrency called Dai that aims to give any individual or business access to the benefits of a digital currency.
· DXdao – a collective that develops, governs and grows DeFi protocols and products.
Final Takeaway: Is Wyoming the best place to create a DAO?
Currently, Wyoming is the only place it makes sense to create a DAO as a distinct legal entity, with the same legal protections as any other LLC. If you are involved in forming a DAO, your next natural step once you’ve solidified your rules and funding is to start the process of forming your DAO LLC. The LLC will protect you and all the other stakeholders should the DAO become the subject of a lawsuit or another legal dispute.
Need help incorporating an LLC in Wyoming?
If you’re in the process of forming a new company and believe a DAO structure will be right for you, we are here to help. We can guide you through the process to ensure you have everything you need to incorporate your business. We offer registered agent services in Wyoming, a US business address, annual compliance reminders, US tax filing services, and many more services to ensure incorporation and maintaining your DAO LLC in Wyoming goes smoothly, no matter where you are in the world.
You can live chat with us anytime online to find out more. Alternatively, schedule a time to chat and we’ll be more than happy to discuss your needs and ensure you have all the information you need to move forward.
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