Decentralized Autonomous Organizations (DAOs) are touted as the next evolution of corporate governance. These loosely knit groups made waves last year by crowdfunding and organizing around a variety of causes, including buying art (Pleasr DAO), encouraging web3 development (Developer DAO), and even buying a golf course (LinksDAO). But can they work as a legal structure?

There are some similar structures already existing in the world, and you can learn more about DAOs in a content marketing capacity here. Or check out what it’s like working in a decentralized workplace.

The corporate structure of Japan changed after World War II and quickly recovered to become an elite powerhouse in the global economy. While there are a lot of factors involved, one that shouldn’t be overlooked is the switch from zaibatsu to keiretsu corporate governance structures.

Zaibatsus (which translates to “monopoly” in English) were family-owned small businesses that evolved into enterprises and holding companies much like the US. These were seen as undemocratic and corrupt, so a switch was made to a more decentralized system of governance in keiretsus. 

Although they’re not DAOs, this democratization is similar to what’s happening now. DAO ecosystems are being built every day, and there are approximately 1.3 million people involved in various groups with different focuses. We’ve already seen ConstitutionDAO trying to buy the US Constitution at auction, EduDAO funding academic research, and LinksDAO aiming to buy a golf course.

But many of these DAOs have an underlying company registered as an LLC that physically executes the will of the virtual collective. That means the DAO itself only acts as the front-facing side – the business skeleton is still fitting into existing defined corporate structures. This is because of the legal liabilities of virtual worlds interacting with the real world.

So, what happens when DAOs end up becoming legally recognized as an organizational structure?

DAOs Explained

DAOs are not much different than owning shares in a business like Facebook. Except participating in a DAO is a much more community-oriented action than a stock investment.  

At its core, a DAO acts as a decentralized company with a bank account that any number of people, from a few to thousands, all effectively share. Not that any individual can just make a withdrawal, but rather that everyone who helped fund this account gets a proportional vote in how it is spent. The DAO is built on a decentralized network, like Ethereum, and powered by smart contracts, or decentralized code. 

What this means is that there’s no way to cheat the system. The funds in the pool will be spent as determined by the voting, and there is really no way for an individual malevolent party to change this – the majority of the group would need to agree on any malicious intent.. Yes, the code itself could be updated, but again only by a transparent community vote. This limits the ways that the system can realistically be manipulated, and creates a more fair “will of the people” type model.

This means DAOs are equal parts corporation and social club, with the entire group acting as one whole. It’s a Web3 experiment that’s growing in popularity, and one day they could replace the traditional organizational structure.

Not to say that the DAO is inherently perfect. 

First off, the code still has to be written correctly. For example, what was considered to be the first true DAO, created to shape the future of the Ethereum ecosystem and simply named “The DAO,” suffered a now infamous loss when a flaw in the underlying code allowed an attacker to steal over $50 million. This highlights that, for DAOs to work, the code needs to be audited, tested and airtight before any real money gets put into it. 

Another issue could come from the fact that, if votes are proportional to stake, then those who have more assets to begin with stand to still dominate the say of the masses. This issue would be highly dependent on how the DAO is structured and what it is being used for, but could erode the whole idea that this model is flat. Nouns DAO, for example, has votes tied to NFTs, so buying multiple NFTs could give you multiple votes. The problem could be mitigated with code however, for example putting a cap on the amount of leverage having extra assets actually gives a single entity. 

But if done correctly, DAOs are proving their potential to outpace a traditional company. They raise funds overnight and implement an organizational structure based on the group’s skills.  Raid Guild built a Web3 design and development agency that operates much like a traditional agency and could even replace a freelance marketplace like Fiverr. The question then arises, can a DAO replace traditional corporate bylaws and other governance structures?

The Traditional Business Model

Traditional business models are commonly based on a hierarchy of authority, even keiretsus. Generally you have the CEO at the top, often other primary executives, and plausibly a board of directors. The CEO is responsible for major final decisions, and even with input from those around them, we’re talking about a couple of dozen individuals who have the power to drive potentially thousands, or even millions of others, depending on the size of the business.

This situation, especially as businesses have become global, has led to inefficiencies, corruption and general dissatisfaction among many of the working class. Countless examples, from Enron to Theranos, show how a small, elite group of people profiting off the back of a larger group can be a toxic combination. Both companies turned out to be frauds, but even successful enterprises like Facebook and Amazon face accusations of antitrust violations and more.

Of course, that isn’t to say the traditional framework is without merit. People have a wide variety of specializations and skillset, and leadership is one that not everybody has. Having a small group of strong leadership at the top can, when it is competent, help to focus a larger group of people who may themselves have a dizzying array of their own education and ambitions. 

It is a model that emulates our tribal roots, and is seen in many social mammals, so clearly there’s value in it. Nonetheless, on a global scale, and given modern technology, the existing model is beginning to feel dated. 

The internet enabled communications free of geographical borders, and the pandemic proved we can heavily rely on decentralized work models. Although 70 percent of companies are adopting a remote work model that no longer relies on office buildings, they still lean heavily on centralized leadership.

DAOs are the final step in decentralizing governance to finally democratize corporate structures.

DAOs Can Do More

One of the biggest challenges in existing corporate structures is each entity is ultimately only looking out for themselves. That means there’s an adversarial relationship among businesses, instead of working together. 

Consider multiple DAOs working in connection, forming a much more multifaceted ecosystem. Still each DAO would have well defined rules about who could engage and how, as well as the ways they would all function together. This “nested DAO” concept then means that businesses could explore new types of crowdfunding, community engagement and internal governance. 

BitDAO was designed to encourage and grow a DAO ecosystem. This DAO allocated $630 million over the past 90 days to fund other independent DAOs that all become intertwined.to act with a common goal. 

This is a technology that stands to offer benefits to startups, small businesses, and global corporations alike. As the general understanding of DAOs permeates various industries, it is likely we will see an array of use cases begin to emerge. Governance outside of business, at almost any organizational level, can leverage these new tools to improve performance and balance compensation.

It’s still very early, and many businesses won’t be ready for such a transition just yet. Nonetheless, DAOs stand to bring flexibility, modernization and general equality to the legacy organizational model that will push global workforces into the 21st century. Being ahead of the curve on this shift could even provide a meaningful competitive edge to those who embrace it, but ignoring this technology completely feels like a misstep.

Of all the many ways blockchain is going to change our lives, the decentralized autonomous organization (DAO) is the most interesting. Unlike disorganized hate groups filled with trolls, DAOs aim to change the world in a positive way.

It’s a big claim in a culture that likes to claim big, but I think it’s justified. DAOs’ potential reach goes far beyond finance, gaming and art to cover, well, just about anything. A DAO is more than tech; it’s a living, breathing entity that can be anything from a small group of hobbyists to a multimillion-, even multibillion-dollar organization, as illustrated in this DAO Landscape.

In this biography I’ll touch on a few examples of DAO disruption in publishing, education and climate change. There are plenty more. Halfway through 2021, a new academic paper analyzed data from 72,320 DAO users and 2,353 communities. At the point when that study was signed off, they were probably addressing most of the DAO universe. As I write, DataDAO is telling me there are 1.6 million users, and snapshot shows 4,175 communities. 

That user growth figure – from under 100,000 to 1.6 million in about 6 months – is fascinating. The blockchain environment is no stranger to paradox, but here’s another to add to the list: DAOs, which have autonomous operations right in the center (literally) of their autobiography and often operate on a pseudo-anonymous basis, only exist because of engagement between people. You can read the passion for yourself in the Discord channels.

What’s causing that level of desire to get involved even when your personal contribution might go unrecognized? 

There’s something psychological in play here that’s worth a closer look. My guess is it’s because involvement in a DAO is a bit like having a relationship with a living person, with its own life story. This is a short biography of the DAO.

DAOs as a Living Entity

DAOs are all about how something happens. The ‘something’ can be anything the collective group agrees on. The ‘how’ is also a collective agreement that uses machine systems built on blockchain components to implement the shared goal. These components can include a treasury, governance using voting and smart contracts for the execution of decisions, and tokens to allow people into the endeavor. 

Often, action mandated by a decision will depend on things happening outside the DAO – market prices, for example, and here information from the outside world is introduced via data oracles that take real-time data feeds to support decision-making and execution.

There are two main ways a DAO is born. The first is called ‘DAO-First’, when a team comes together, motivated by a common vision, and with the belief that a DAO offers a new, better way to pursue that vision. 

DAO-First starts with a team determining capital and token allocations. If you’d like to know more about how the DAO-First process feels for the human beings involved, the Barnbridge DAO’s experiences make interesting and colorful reading. The lead activist in this DAO clearly had something to get off his chest when he tweeted: “OK, this one has been building for a while so strap in. I talk to at least 2-3 seed stage founders/teams every week. Without fail every single one of them is fucking up some aspect of capital formation for crypto protocols. Every. Single. One.”

Exit-to-DAO is where an established community transitions into a DAO. This involves handing over control of key functions to the DAO, rather than the individuals who were driving the community. Capital allocation and token allocation are decided in stages, as the project vision and execution matures. 

There are over 4,000 possible DAO biographies out there, so let’s focus on just a couple. 

Birth of a DAO-First

First, KlimaDAO. Klima is a social startup from Berlin with the goal of “making a dent in the fight against global warming”. It was established in 2019 by Markus Gilles, Jonas Brandau, and Andreas Pursian-Ehrlich who have been in the tech-for-good world over many years, involved with civil discourse, quality journalism, and women’s empowerment. They started Klima to commit to the most important challenge of our lifetime, turn climate neutrality into a mass movement and unleash the power of individual action at scale.

Klima aims to solve critical problems in carbon trading – illiquidity caused by fragmentation of the market; lack of transparency allowing buyers to underbuy the market; and inefficiency from friction and barriers to buying and retiring carbon credits.  

Is it having the desired impact? It’s early days but so far, so good. Jacob Greber in the Australian Financial Review wrote: “ … potential demand created by a new carbon backed digital currency called KLIMA, which in the past two weeks has absorbed and retired 7 million carbon credits, which is 23 times more than BHP [a $150 billion mining group] required in the last year.”

An Exit-from-DAO is Born

As an example of an exit-from-DAO strategy, BitDAO, a decentralized autonomous organization overseeing more than $2.5 billion in assets, has just launched EduDAO, a funding channel for student-led projects focused on blockchain and Web3 innovation. The DAO is  partnered with eight of the world’s top educational institutions, including Harvard University, the University of Oxford in England, Tsinghua University in China and the University of California, Berkeley.  

BitDAO’s treasury also funds Game7, a video game DAO supported by a dozen high-profile partners, including Warner Music and Forte.This organization is formed to support open-source blockchain gaming development and, like EduDAO, runs as its own independent sub-DAO within the BitDAO ecosystem.

Sub-DAOs are DAO procreation, and over the next generation, we will see the offspring of DAOs either following or rebelling against the structure set by their parents. Familial ties within DAOs also highlight the importance of human connection.

For a healthy life, a DAO must have community engagement

Once born, a DAO lives or dies by the engagement of its community. If people are not attracted to the vision, participation will stall, liquidity will drop and, eventually, you have a dead DAO.

Klima DAO is an example where the protocol is working – because so many people around the world are motivated by climate concern to participate by buying, staking and holding KLIMA. Other DAO models are built to create an even more participatory level of engagement. 

Mirror is a Media DAO that brings readers and authors together with the vision to displace the centralized publishing industry that currently decides who and what gets into print. New members receive WRITE tokens, which they use to vote on authors’ pitch proposals. Winning pitches automatically receive the tokens pledged during voting to fund their writing. It’s a model that gets people’s juices flowing: “Write club is brutal. My fate will be decided in a two hour voting window …” 

Like Klima, engagement is creating success. Mirror has added various elements to enable monetization for users, unlocking the ability to offer NFT collectibles, hold auctions, and even launch crowdfunding campaigns. In April 2021, the writer Emily Segal funded her next novel on Mirror. In July, the creators of an upcoming documentary film about Ethereum raised $1.9 million worth of ETH through a Mirror crowdfunding drive.

Death, afterlife and evolution

DAO death does happen. Website Coinopsy keeps a record of coins and DAOs that are no longer active, including NeuoDAO, which was set up in 2017 because “[human] development is an ongoing and necessary process that has no limits of perfection… In this process we are happy to support you.” There are no users, making the project a ghost town.

One of the earliest DAOs, called The DAO and founded in 2016, was an attempt at a fully-automated, blockchain-based solution for pooling and allocating capital to fund projects. However, it is no longer active, having failed to survive the long-term impact of an early hack. 

In the world of DAOs, however, death need not be terminal. Resurrection is possible with capital and code contributions, reinvigoration of the core objectives, or evolution into new forms. The DAO, for example, was followed by The Ethereum Foundation’s Ecosystem Support Program (ESP) for funding tools and projects identified as priorities by the community and the ESP evolves continuously to improve its offering.

But DAOs aren’t people, despite all the life cycle analogies drawn here. They do clearly excite people, encouraging them to engage in new communities. And engagement is what makes DAOs persist and grow. With the ability to evolve in its DNA as well, I confidently expect DAO diversity to expand even further and create entirely new ways for people, businesses and society to interact in the future. 

1. To what extent will DAOs increase in number this year and become larger and more popular?

DAOs are growing on every end, and the scope of vision for each individual DAO is drastically different. A DAO is organized chaos, and it’s not so much that the model will replace traditional institutions. Moreso, they’re coexisting among them.

Constitution DAO is an industry milestone in that it raised awareness of what DAOs can really accomplish. It’s a model of coordination and organization, and people are learning to unplug from the Matrix, so to say, just like we did with the burgeoning gig economy.

DAOs are simply automating organizations through smart contracts, which ultimately brings transparency. You can go into any number of DAOs right now on Discord and Telegram. You have media DAOs like BanklessDAO, investment DAOs like BitDAO’s $2.5 billion treasury, protocol DAOs like Sushi and Maker, collector DAOs like PleasrDAO, and social DAOs like Friends with Benefits.

Although DAOs with funky ambitions like buying the U.S. Constitution or reviving the Blockbuster brand make headlines, many are pulling together with committees and subcommittees to accomplish everything from creating a real estate investment trust to forming a business to compete with major enterprises.There are even service-based DAOs like LexDAO, which is a collective of legal engineers who understand both traditional and smart contracts.

LinksDAO is one of the people you can see in Discord discussing the legal implications of starting a golf club. This transparency is unheard of in typical corporations, where deals are often made behind closed doors. While buzzy stories of DAOs may be few and far between in the mainstream media, the reality is that there are at least 100 really strong DAO projects out there that are contributing to very strong use cases that aren’t going away anytime soon.

2. In what specific areas or sectors will DAOs to gain the most traction?

We’re honestly seeing traction made across every industry – many of the DAOs I mentioned earlier are still running and very successful. Investment DAOs like MetaCartel and BitDAO are specifically focused on funding the next generation of innovative open-source tools through the DAO ecosystem. 

It’s very similar to how Y Combinator works – instead of just giving people grants and letting them do whatever they want, they’re held accountable to the DAO’s transparency standards. If you promise the community something, you have to provide status updates to the community. This is standard business practice even in traditional businesses, but DAOs make it much more front-and-center. You basically have to keep reapplying for community approval, so if you get off track too much, you can be cut off.

The professional organization DAOs like LexDAO are interesting, because you have this group of licensed attorneys creating essentially a non-profit cooperative. All these attorneys from around the country are contributing their time in order to understand how to best navigate the traditional courts with smart contracts.

And in doing so, they’re helping create the next generation of organizations. If you wanted to, you could get legal advice from LexDAO, advertising and marketing assistance from Jump DAO, development help from Developer DAO, etc. No matter what your specialty is, there’s a DAO you can participate in, and the interconnectivity of these DAOs working together in a DAO-to-DAO (D2D) manner is what will truly define the traction they make.

In that sense, DAOs are uprooting the traditional corporation competition structure in which it’s every man for himself with a more collaborative approach. In the future, you could find yourself working for a dozen DAOs instead of a single corporation. It’s not that a law firm or ad agency won’t exist, but you’ll have more options to choose from with independent, centralized, and decentralized entities.

3. Do you expect DAOs to face any regulatory or legal challenges?

DAOs will absolutely face legal challenges, as there have already been sticky situations in the past. Spice DAO, for example, learned the hard way that spending $3 million on a physical Dune manuscript doesn’t give you the intellectual property rights to turn it into a movie. 

Constitution DAO raised over $43 million but failed in its goal of buying the Constitution when it was outbid. That left it trying to figure out how to get the money back to the people who donated. BadgerDAO was hacked for $120 million and could face a lot of the same problems Target, Sony, and other major corporations did when they faced major data breaches.

For instance, the Attorneys General of 47 states and major banks both filed lawsuits against Target, as did Mastercard and Visa. Additionally, it faced a class action from affected consumers as well. With legal fees, the company paid over $290 million, which pales in comparison to BadgerDAO, which thus far hasn’t faced any legal scrutiny for the hack.

Just like any other small business, DAOs will face legal and regulatory challenges. It’s something LexDAO is proactively working to protect DAOs from, in fact. There are a slew of legal challenges any business will face when dealing with trademarks, copyrights, employment, liability, etc. The more DAOs interact with the real, physical world, the more legal hurdles they’ll need to overcome.

At their root, many of these DAOs still largely boil down to a Delaware LLC, although Wyoming is becoming more popular now. The law is notoriously slow in picking up trends in technology, and that means it’s going to be a rough road with a few injuries and casualties along the way.

I don’t think DAOs will be outlawed in the U.S., maybe in a handful of other countries. But the legal and regulatory heat will surely rise as they continue making headwaves in every direction.

Whether you’re using NFTs, selling governance tokens, or simply organizing to raise money, every DAO should be minding their legal p’s and q’s to be on the right side of history when compliance becomes necessary.