The range of applications for blockchain technology is continuously expanding, with so-called "DAOs" being just one such example of this. DAO stands for decentralised autonomous organisation. This typically refers to a decentralised organisation that acts autonomously and is based on a large number of interacting smart contracts. It facilitates – similar to ordinary corporate forms – an organised interaction of people within the framework of a predefined system of action.
Prominent DAO projects that have recently been circulating in the media include the Constitution DAO, which had raised nearly USD 47 million to enable the purchase of a rare copy of the US Constitution, and the AssangeDAO, which generated close to USD 56 million to support the release of WikiLeaks founder Julian Assange.
The idea behind the DAO as a form of organisation
One of the best-known DAO projects was The DAO, which was launched by Jentzsch. One of his motivations in creating a decentralised and automated organisation was so that he would no longer have to rely on a human to assume the role of the managing director or be the person in charge. Furthermore, the "partners" or investors are supposed to play a very decisive role when decisions are made about the assets that are contributed. However, this is but one of the many advantages of this form of organisation.
How DAOs work
The infrastructure of a DAO is, in essence, based on a large number of interlinked smart contracts that are stored on the blockchain. Smart contracts are used to facilitate the automatic execution of predefined processes that take the form of if-then conditions. If a predefined event occurs, such as the payment of a purchase price, a process (also predefined) is automatically executed, for instance the fulfilment of the contract. Storing smart contracts on the blockchain ensures that the automated rules are virtually unchangeable and publicly available.
By using program code, key features of the organisation are specified – similar to a partnership agreement – such as participant rights, as well as the price and number of shares in the DAO, the minimum amount of capital to be raised (creation goal), and the period in which this goal must be achieved (creation phase).
Investors can acquire shares in the DAO in the form of tokens by paying a purchase price (usually in a cryptocurrency such as Ether). These tokens confer ownership and voting rights and are freely transferable. The activity of a DAO by and large consists in managing the financial resources that have been raised, which are then used in accordance with predefined rules. Token holders can also actively participate in decisions on how the capital is used.
Legal classification problems
Given that this organisational form is a relatively new phenomenon, most countries do not have a specific regulatory framework in place (yet) and there are many unresolved legal issues. In Austrian literature on the subject, the DAO is predominantly subsumed under the catch-all corporate form definition of a civil law partnership, which means that a DAO does not have legal capacity. For example, this means that the "partners" bear the risk of unlimited liability vis-à-vis creditors.
It also remains unclear which law applies to a DAO because it does not have a "registered office" in the conventional sense; it "sits" on the blockchain and is therefore decentralised. However, even if one were to conclude that there is an applicable law, there is still the problem that a DAO, due to its lack of legal capacity, does not have locus standi, and can therefore neither sue nor be sued. It is only possible to sue the token holders themselves, but often they are untraceable.
Wyoming as a trailblazer
The US state of Wyoming has played a pioneering role in the creation of its own legal framework, having recently passed a law that regulates the establishment and administration of DAOs. Developments in Austria and Europe remain to be seen. It appears essential, however, that the legislator takes action in view of increasing popularity and the large number of associated – and largely unanswered – legal questions. Moreover, this could make it possible for the DAO to be traded (legally) off the blockchain. To date, it is still necessary to go through an intermediary or trustee to act in the analogue world.
Marcus Lusar, LL.M., BSc., Associate
Clara Sator, LL.M., Junior Associate