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When BLOCKS set off to incorporate as a DAO there were two primary options at play. The first was the traditional methodology embraced by many DAOs in the industry, which is simply to find security in decentralization and not have any legal structuring that limits participant liability. The team at BLOCKS felt that this type of structuring left participants and the greater organization at risk and with unnecessary exposure to the ever changing regulatory landscape.
Working closely with Wyoming lawmakers, the BLOCKS team decided to pursue an LLC structure to not only eliminate personal liability of BLOCKS DAO participants, but also to embrace the US legislature forerunners in the space so that BLOCKS can be set up for long term success in the most legally compliant way possible.
Here we are going to take a look at some of the core differences between a traditional DAO and a DAO LLC like BLOCKS, some of the steps we are taking in running the DAO LLC, and our relationship with the state of Wyoming
A Decentralized Autonomous Organization (DAO) is a new type of Limited Liability Company (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 is structured in a decentralized way. The concept of a DAO was first introduced by Dan Larimer (founder of BitShares, Steemit, and EOS) in 2015. It was further refined by Ethereum’s creator, Vitalik Buterin a year later. Now that DAO LLCs have gained legal recognition in Wyoming, these innovative structures are gaining more and more attention.
The operations of a DAO are based on blockchain technology, which means that transactions are performed via digital asset. The organization is thus able to conduct its activities autonomously through a series of “smart contracts” that function without any human interaction. This means the business can run without a traditional business structure. Rather than a top-down hierarchy, “members” of the DAO have equal say in the actions of the organization.
It is worth exploring the legal compliance aspects of BLOCKS, and distinguishing them from the alternative non-LLC-based DAO. It’s worth looking into under what circumstances DAOs have a legal entity behind them, and the degree to which this is warranted. There is every reason for investors and prospective token holders to feel comfortable with getting involved in a DAO. This is due to the conscientious steps BLOCKS has taken to reduce token holder liability in decentralized organizations. BLOCKS’ aim is to establish a credible, cautious, and secure brand-image: one that stands for socially responsible corporate operations.
Legally compliant DAOs are LLCs, which means that stake-holders enjoy limited liability. The organization is thus considered its own legal entity, regardless of how it pays taxes. While one person or entity may form the DAO, that party does not retain sole control over the DAO, as governance is conducted in a distributed manner thenceforth.
Forming a DAO LLC requires a few additional steps beyond those involved in a conventional LLC. Founders must establish the rules for the DAO before it is officially established through an “Operating Agreement”. Those rules are subsequently embedded in the code as the DAO progresses. The founders must also establish how the LLC will be funded prior to formation. Moreover, the DAO’s code (including any potential bugs and security issues) needs to be vetted before the system can be deployed.
The best reason to create a DAO as an LLC is for the legal protections that an LLC offers. If an organization chooses to create the DAO first, before forming it as a DAO LLC, there are no legal measures to protect investors and stakeholders from legal liability. In financial matters, especially when dealing with cutting-edge technology like blockchain, failing to form an LLC around the DAO may be risky. 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 awry.
A DAO has the added complication that the stakeholders may be global. Consequently, only the stakeholders in the country where the case is being heard will be liable. * If a DAO forms a DAO LLC, then this cannot happen.
An LLC will insulate members from personal risk, and so only the DAO itself will be liable should any litigation occur. As an LLC, the DAO’s assets are the only assets that can be at risk if the DAO is sued. This makes forming an LLC essential for any DAO. The key here is that compliance is a great way to bolster the image of DAOs. **
BLOCKS is the first-ever Wyoming DAO LLC. The BLOCKS Network provides the blockchain-based infrastructure for decentralized solutions. They now excel at automation around industry-agnostic blockchain solution building. 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.
BLOCKS is committed to creating the optimal DAO infrastructure to minimize barriers to entry across non-traditional blockchain prospects (e.g. liability and regulatory compliance snafus). BLOCKS DAO LLC has worked closely with Wyoming lawmakers to ensure that every step was taken in formation to be optimally compliant. The LLC designation will protect all stakeholders of the DAO should legal problems ever arise.
* 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 American 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.
** The original DAO faced legal scrutiny due to concerns it constituted an unregulated securities offering. An infamous 2016 hack drained 3.6 million ETH from the DAO. The capital pooling method soured after the hack, which spurred a major fork in the Ethereum ecosystem, which precipitated the creation of both Ethereum and Ethereum Classic (ETC).
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