Emerging Trends: DAOs and Corporate Law

What is a DAO?

A DAO, or Decentralized Autonomous Organization, is a term for an organization of people who agree to be subject to a set of rules under a common purpose. These rules are written into code through the use of smart contracts, which are then stored on a blockchain, and when specific criteria are met, the algorithms will run.

This all might sound complicated at first glance, but let’s break it down. A blockchain is essentially a ledger that links records together securely. A smart contract is a program that is stored on a blockchain and will automatically run according to the predetermined terms of a contract or agreement. Essentially, the DAO subjects itself to the agreed upon terms in a smart contract, which is securely stored on blockchain. Once the code is written into blockchain, it can only be changed through the collecting voting of the members in the DAO.

DAOs are written on what’s known as “open-source” blockchain, so the code is transparent and anyone can see it. Any transactions, proposals, audit, or any other actions are recorded on the blockchain and kept as a transparent record. This transparency is meant to facilitate trust between the members of the organization.

What does this mean?

DAOs allow its members to create a fund to do almost anything. The structure is autonomous and transparent, governed only by smart contracts. Organization members put forth proposals and come together to vote on them. DAOs ensure that members must be in consensus as to the terms in the smart contract, or else they will not be codified on the blockchain. Once on the blockchain, terms cannot be altered without the members voting on it. Transparency and unanimity are requisites for DAOs.

What do DAOs mean for corporate law?

DAOs provide an alternative to traditional corporate law for groups of individuals looking to enter into a collective agreement. Smart contracts on blockchain can be used to incorporate organizational governance rules into the code itself. Rather than shareholders entrusting a board to make decisions for a corporation through officers, they can instead directly vote their interests. This is a distinct advantage of using DAOs as they are a method of self-governing where the community can come together to achieve a common goal. Because these goals are codified, conflicts that usually occur in a corporation, such as conflicting priorities between shareholders and directors, can be avoided. The self-governance afforded by a DAO is better suited to unify stakeholder perspectives.

In terms of structure, DAOs operate more similarly to a partnership. In fact, it can be argued that until the law assigns legal status to DAOs, they should be considered a partnership. The Alberta Partnership Act defines a partnership as “the relationship that subsists between persons carrying on a business in common with a view to profit;’ this definition almost seamlessly describes DAOs as a form of partnership, but there are also clear differences, one being that smart contracts are not equivalent to a partnership agreement, although partnership agreements are not required for the formation of a partnership. A disadvantage of deeming DAOs a partnership still has to do with liability: as long as there is no partnership agreement, the individual members of a DAO are subject to unlimited liability as a result. Additionally, the lack of regulation is also a disadvantage because it leaves the door open for potential fraud or theft, amongst other things.

What do DAOs mean for the future?

DAOs can be a useful tool for any corporation, but in particular, new startups should be considering the use of DAOs, as well as not-for-profit organizations. For startups, particularly tech startups, DAOs can ensure that members are moving forward in consensus and cohesively, without internal conflict. Because funding tends to be limited as well, rather than paying legal costs, members can instead utilize their expertise in writing code to create smart contracts. It is important to note that although this might be passable for the infant stages of a startup, legal counsel must be brought in eventually in order to incorporate, create a partnership agreement, and/or provide legal advice on how to avoid liability.

Final Thoughts

DAOs are an exciting opportunity to incorporate emerging technology into the sphere of corporate law. They allow organizations and their members to ensure that they are on the same page, and to have a direct say on how and what decisions should be made within the organization. Although the law is essentially non-existent when it comes to DAOs, in practice they operate similarly to a partnership, so it is important for DAOs to know if they choose to use smart contracts to govern their organization, it leaves members open to liability. That being said, DAOs are here to stay and only time will tell how they intersect with the field of law.

For more information on the emerging trend of DAOs and the potential intersections it may have on corporate law, please contact Sarmad Syyed. Click here to learn more about Swainson Miki Peskett LLP’s Corporate-Commercial Team.

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