Court Ruling Could Affect the Future Direction of DAOs
jdsupra.com
jdsupra.com
Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
[1] https://www.banklesstimes.com/news/2023/03/08/off-chain-gove...
Edit: I'm posting too fast, so here's an edit for a reply
I don't know anything about Ethereum DAOs. Check out Tendermint chains (Cosmos, Osmosis, Crescent, Stargaze, EVMOS, Kava). Gas is cheap and all voting is on-chain. Governance discussions happen mostly on a forum called Commonwealth and then they're put on chain and voted on by validators and stakers.
> To circumvent the very high gas fees associated with full on-chain governance, Decentraland’s DAO uses a combination of free, off-chain voting for the community and a multi-sig wallet controlled by a “DAO Committee” to enact those off-chain decisions on the Ethereum blockchain.
I'm not a huge follower of the crypto ecosystem and DAOs, but this kind of thing seems like it's pretty common.
It's an in depth look/critique.
> a multi-sig wallet controlled by a “DAO Committee” to enact those off-chain decisions
DAOs may empower a multi-sig with certain allocated funds to spend according to a mandate. This is ok. It's like saying America is not a democracy because regulators can make new rules that congress is not voting on.
It also possible to have off-chain voting, but still enforce those results on-chain using a fraud-proof like system, and some do this. Lots of design space to play with.
That actually does appear to be the opinion of the current supreme court, and you can expect further rulings counter to historical precedence WRT chevron deference.
https://www.theblock.co/post/219214/peopledao-hacked-via-goo...
That's partly what makes these individuals an unincorporated organization.
Everyone in a mining (or staking) pool seems more likely to count as a general partnership.
Miners (staker?) aren't partners in the DAO: being a miner doesn't make you an owner of anything, anymore than being an employee or contractor to a partnership in the real world would make you liable for the actions of your employer/client.
The question is whether it is a general partnership or not, and by the rules listed it would appear to be.
Collective ownership implying collective liability is not novel or new, and existed long before LLCs and LLPs did. Legislation allowing those is relatively recent because it has obvious benefits, but comes at the cost of some degree of regulation. In the true crypto spirit of "regulation == bad" this DAO took the path of not making itself an LLC or LLP (and in fact explicitly terminated the LLC), which means it seems fairly obvious that it's a general (e.g. unlimited liability) partnership as the court appears to be concluding.
Directly, the holders of the DAO tokens. That’s what this case is about. Those holders may have further claims against the people who implemented the code or AI. But the liability begins with the general partners, i.e. holders of the governance tokens.
Will be interesting to see the first judgements enforced against holders of a DAO.
Which, in this case, are the bag-holders. Looks like there are benefits to having a real corporation, instead of trying to re-invent corporate governance from scratch, without any input from the courts...
You can't just wind up a toy with a bomb strapped to it, walk away, and disclaim the consequences; nor can you do that with code.
What if the last 'person' was gpt4? is openai responsible?
Things do get murky when there isn't a lot of existing precedent. That's why it's risky to engage in activities that are, let's just say "legally innovative."
If you make an AI that is hooked up to the internet and it does something criminal, you'd be liable. You can't just let your pitbull roam the streets and not be held liable when it bites someone.
When then is responsible for the tornado cash instance? The Ethereum VM node operators who have no idea they're even running it? An unknowable person from Somalia?
A deceased person.
> What happens when the AI spawns more AI, who is responsible for that?
The creator of the first copy.
For example: Imagine I have a cow, and the cow escapes and goes on a rampage. I didn't make the cow escape, I didn't tell it to go on a rampage, and cows think for themselves so are autonomous.
That doesn't mean I get to claim the cow is liable for the damage.
Thsoe will likely make daos more useful, but less differentiated from existing structures
The default form of legal structure for a cooperating group of people is general partnership--unless you take specific legal steps to avoid forming a general partnership, that is how the courts will view the partnership. General partnerships means that all partners are jointly and severally liable.
In layman's terms, that means you just have to find one person involved in the DAO, and sue them, and then you get to collect the full judgement from that person (alone), and it's now their problem to get cooperation from the other partners for the liability.
(If this sounds like a terrible idea, it is. That's why there exists all sorts of fancy legal structures that avoid putting people in this position. But if you're not going to use any of them, you get the terrible idea instead!)
1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
2) If a multi-sig runs your governance contract or treasury it isn’t decentralized. Might as well form an LLC or C corp.
3) From a more NatSec perspective, if a SEAL team or the FBI can reach a few people in your DAO and your project would shut down, you aren’t decentralized.
Which all seems good and as it should be, to stop people LARPing as decentralized to avoid regulations.
One benefit of hosting on the blockchain is that you can build an arbitrary derivative on top of any blockchain object. It's harder to do that with something random running on EC2.
Other than the risk of all your assets getting hacked and stolen to doesn't seem like a bad way to "enforce" a contract.
Maybe would be better if things were split up into different accounts with different people holding different keys so you don't have a single point of failure.
Just like with SVB there should be some kind of insurance for large accounts. with various audit and other processes to keep things "safer"
Legally, it requires paperwork filed ex ante. As the article notes, several states have DAO LLC constructs. DAOs that don't incorporate do, and should, expose their holders to unlimited liability. That is the default. (If you and I start an unincorporated car-washing business, and it destroys someone's car, we will be jointly sued and liable, though I may separately have individual claims against you if you made all the wrong decisions.)
The situation all this seeks to avoid is profit-seeking enterprise having everyone who stood to gain when things went well standing up saying "not it" when things don't. If a DAO–or any other business or person–causes you injury, it shouldn't be your job to figure out who contributed to what degree.
If doing X is illegal, adding blockchain to it doesn't magically mean you're not doing X.
If doing X means you have to pay taxes, doing X with linked lists doesn't mean you don't have to pay taxes.
If doing X means you have a bunch of liabilities, then doing X on a block chain means you have a bunch of liabilities.
The only thing that makes a DAO different from a partnership is that decision making is arguably public on the blockchain, instead of an email thread. Again, why would you think that doing it on a blockchain makes it different from email, or in person, or whatever.
Now in fairness, I certainly didn't think of DAOs as being an unlimited partnership, but that's largely because I didn't think about it because they seem fairly pointless. As the court seems to be saying a DAO is fairly clearly a partnership, and they very deliberately terminated the LLC and didn't create an LLP, so the lack of liability protection follows logically from that.
Creative repayment plan.
> the court focused on statements by the bZx Protocol developers that creation of a DAO would insulate the Protocol “from regulatory oversight and accountability for compliance with U.S. law
Looks like they attempted the "citizen of the earth" card.
Articles of organization shall be amended when:
(i) There is a change in the name of the decentralized autonomous organization;
(ii) There is a false or erroneous statement in the articles of organization; or
(iii) The decentralized autonomous organization's smart contracts have been updated or changed.
I'm guessing that most DAOs don't want the legal liability of an American LLC, so there may not be a lot of takers.
Can I register my out-of-state DAO?
No. A certificate of authority for a foreign DAO cannot be filed
pursuant to W.S. 17-31-116.Maybe like others have said it's mostly about otherwise extant orgs not being able to register.
A Delaware corporation doing business in California must file as a foreign corporation in the latter. It sounds like Wyoming is saying a DAO can't incorporate out of state and take advantage of the Wyoming DAO LLC, but this doesn't appear to have been fleshed out.
Partner 1: $500,000
Partner 2: $250,000
Partner 3: $249,000
Partner 4: $999
Partner 5: $1
They issued paper receipts representing these proportions. All agreed that any rent collected would be paid to the paper holders Pro rata. All parties have to show up to review/approve/reject a tenant, and all have to show up to collect the rent on the due day. Each person writes their own receipts and signs all the others, so no one party is more in charge than any other. Partner 3 sells 100,000 receipts to someone else, we'll call Person A, for $101,000. Then the house burns down and is lost, so there's not going to be any rental income now and nobody is interested in buying the receipts anymore. None of the parties did anything to cause the fire.
Now who can sue successfully?
(Not saying the facts of the case in the article match my hypothetical exactly.)
Nobody? All I see is six morons that have joint ownership in a house that were all too cheap to pay for insurance. And since nobody's at fault for the fire, tough cheese.
Person A might be able to sue whomever sold him the receipts, but only if he was lied to about how the organization functions.
In your scenario, nobody's at fault for anything, so nobody can sue anybody.
But what if Partner 2 set fire to the house? Then the other Partners (now including Person A but not Partner 3) could sue Partner 2 for losses.
Or what if Person B, a tenant, suffered harm due to negligent maintenance of the house? Person B could sue any or all of the Partners (now including Person A but not Partner 3) for damages. And each partner would be "jointly and severally" liable for all of Person B's damages (so if Partner 5, owning a tiny portion of the partnership ended up getting sued and owing damages to Person B, they would need to sue the other partners for reimbursement).
But note that Partner 3 selling his partnership interest to Person A would, in many states, trigger the dissolution of the original partnership. In this case, it doesn't matter since they never bothered to form any custom organization documents or financial allocations.
This is the part I don’t understand, if they succeed in making the case all “owners” are liable wouldn’t they equally be liable for the money they lost?
And the thousand years to get paid back part — are you a hodl or not?
They aren't equally liable, they are jointly and severally liable [1]. Equal liability implies a liability cap where there isn't one.
[1] https://www.investopedia.com/terms/j/joint-and-several-liabi...
For anyone who has been thinking about the intersections between DAOs and the law, this was obvious.
You can still manage your membership on chain, and there are plenty of great structures that are more DAO friendly - my organization uses a MI LLC structure (midao.org is what we used)
So still trying to figure out if this is just a phase or there is some legitimacy to a DAO.
https://us.eversheds-sutherland.com/mobile/NewsCommentary/Le...
What I find most fascinating is that most "DAOs" you see are entirely window dressing: at the end of the day, there are a few people who actually run the assets and control the code being run who are merely promising to take direction at the whim of the people who hold some token, which is effectively just an illegal way to build a corporation and sell stock.
It is possible to do something that is actually run by a truly decentralized and autonomous mechanism but there are serious limits; like, if you are running things on just Ethereum you can write code that handles code upgrades by using an on-chain vote... but it would not be trivial (I won't say quite impossible) for the DAO holders to then vote to transition the system to Polygon somehow, as what would that mean from the perspective of the code running on Ethereum? Or like, you couldn't have the DAO on Ethereum do something as simple as own a .com domain name.
This situation is in some sense no different for this DAO. They apparently had an actually-decentralized one on Ethereum, which is surprising as it is so rare... but, as mentioned in this article I found--and not in the article linked for this thread which is concentrating on the general partnership question--they cut corners when they decided to go multi-chain, and the DAO supposedly owned contracts on a couple other networks, including Polygon.
The hack then wasn't "the DAO decided to use buggy code and now the DAO members are liable": it was a phishing attack against a single developer sitting on a single key that allowed for control of the code--and thereby the money--on Polygon, as the DAO was only really able to ask that developer to take action and then hope he did it.
That extra context to me makes this whole thing even more of a fascinating case study. Like, one might then just want to say "this thing was never decentralized to begin with: the owner of the key was liable" and yet weirdly the case isn't brought merely against that developer... it is brought against the DAO that in some sense supposedly hired the developer and was negligent in letting the one developer have the key for all the money on another network, something they never should have done!
In some sense, then, this is a remarkable win for the concept of a DAO. I mean, sure: some people likely wanted a DAO to be some kind of "regulatory arbitrage" (as noted in complaints about them here on Hacker News) and are going to be sad at the idea that the DAO holders actually have some kind of liability in the actions that the DAO takes...
...but that was NEVER--I am serious: NEVER--an informed take on a DAO. The point isn't to make it somehow impossible to sue the people who own it, it is to build a new form of organization wherein the ownership is liquid and people have a direct democracy over the actions of the organization. If someone sued a co-operative--a common form of company where the customers and/or employees are the owners; I have had numerous friends who lived in the local student housing co-op and I'm myself a member of the local food co-op--it would not be surprising or disappointing to me if all the people who were deemed owners had some potential liability.
Now, I don't think the co-op holders (such as myself if my local food co-op does something bad, even though I absolutely am allowed to go to meetings and vote on their actions!) actually have much liability, but only because American corporate law is out of control on liability separation; like, I personally think big tech shareholders should have joint and several liability over the shit decisions these companies make that harm customers; but that (very sadly to me and I believe incorrectly) isn't how it tends to work in the United States... hell: the employees and even managers of the company taking the actions often don't have liability, which is just crazy-town.
But so, OK: when I see this argument that the DAO can actually be a defendant and can actually have liability that can actually be shared among its owners, to me that is an almost-incredible vindication of the concept. Hell: apparently, the companies that were the original developers of this mess in fact were considered to NOT have liability anymore, having SUCCESSFULLY transferred that to the DAO? That's hilarious!!
Now, does this mean it is a good idea to own "shares" in a DAO? Hell no ;P. And yeah: I'd like to think this would kill a lot of interest in holding a non-negligible quantity (as it can be hard to not own any, which is why this article focused on non-negligible) of the tokens for a DAO, in the same way I can't imagine many people would own stock in Apple if they could be held joint and severely liable (which maybe is actually going "too far"... we here in the US love our liability extremes ;P) for its actions.
It would appear that the court is taking the position that it's not an illegal way to create an corporation, but rather a perfectly legal way to create a general partnership with unlimited liability :D
I especially like how they intentionally terminated the LLC that would have protected them.
I've been very good, mom said that she is thankful I helped her with housework and that my room has stayed very clean. as always, I donate all of my income to charity and volunteer for 40 hours every week. can I have one thing? just one thing? my one wish is to never have my day cluttered with f*king blockchain BS again.
thank you