The rise and recognition of the DAO | Kramer Levin Naftalis & Frankel LLP

Blockchains have been touted as the biggest technological revolution since the internet. At the time of writing, cryptocurrencies and NFTs are valued at over $1 trillion, despite continued volatility in their value. While cryptocurrencies are the first thing people think of when they hear “blockchain,” one of the most exciting applications for blockchain technologies isn’t the next initial coin offering. Rather, they are Decentralized Autonomous Organizations (DAOs), which provide a new structure for managing organizations and major projects.

The rise of the DAO

DAOs revolutionize the management of organizations by placing computer code at the center of the organizational structure. While the intricacies of the technology behind DAOs are beyond the scope of this article, the general idea is that they are organizations with rules defined as smart contracts on a public blockchain.[1] These smart contracts, once programmed, are public and automatically execute if the conditions of the smart contract are met. The rules of a DAO can always be changed by the vote of its members, who have acquired tokens according to the rules of the smart contracts running the DAO.[2] Through this mechanism, cryptocurrency and other assets can be collected by the DAO and then allocated to investments, or even used to pay for services. As of the date of this article, the number of known active DAOs is estimated to be nearly 5,000, with a total treasury of $9.7 billion and over 600,000 active voters. A striking example of DAO is the MakerDAO, which runs the “Dai” stablecoin.

There are a few notable aspects of a DAO. First, smart contracts that run a DAO are encoded on a public blockchain. This means that the rules governing DAOs are spread geographically around the world. Second, while DAO token votes are public and available to anyone on the blockchain, the true holders of the tokens who cast those votes can be difficult to determine. Last but not least, a DAO does not have a default legal form that limits the liability of its members.

A legal form for DAOs is critically important for their widespread adoption. Indeed, the default form of an organization in the United States is generally a general partnership. In this form, those who hold tokens and are based in the United States have unlimited personal liability for the actions of the DAO. So if the DAO somehow accrues debt that doesn’t get paid or is sued for its actions, those holding tokens in the US could potentially have unlimited personal liability (if they can be identified, of course). Even though most of the tokens are held outside of the US, those in the US could in theory be held responsible for the full liability of the DAO.

Despite this, most DAOs do not have a prescribed legal form, or they assume that those who hold tokens will isolate themselves, for example by having an LLC hold the tokens. Some others have “packaged” DAOs in a standard form such as an LLC or in Cayman Islands-based foundations.

DAO Recognition

Over the past few years, these types of blockchain-based organizations have gained recognition in the United States. Three states – Vermont (July 2018), Wyoming (July 2021) and Tennessee (April 2022) – have thrown their hats into the ring to be the “Delaware of DAOs” by adopting legal forms limiting member liability and specific to a distributed organization based on the blockchain. We have been very interested in DAOs and the extent to which these legal forms have been used. We found, in July 2022, that these states had approximately the following number of registrations in these new legal forms:

It is not possible to say how many of the entities that have organized themselves under these statutes are actually active DAOs. From these numbers, Wyoming currently leads in DAO records; however, none of the more well-known DAOs registered there. Adoption of these forms has been slow and some commentators have warned against them.[6]

A model law proposal was recently released to help guide states; it is more specifically adapted to the technical nuances of CAD. This model law has not yet been adopted by any State. Given the relatively slow adoption rates of new DAO legal forms in the United States, states wishing to encourage DAO registration can now turn to this model law for guidance. Certainly, with the amount invested in DAOs and the number of people using them to guide their organization, we will likely see other states coming up with their own solutions. We will continue to update as new states pass legislation adopting their own DAO legal forms or pass new model laws on the DAO form.


[1] For an overview of the technology, watch this video on DAOs: https://youtu.be/KHm0uUPqmVE.

[2] DAOs can be configured in many ways and coded on different blockchains with different rules, a full explanation of which is well beyond the scope of this article. Here we are discussing a “typical” DAO, since anything about DAOs can be considered typical.

[3] Data collected at https://sos.vermont.gov/corporations/registration/.

[4] Data collected from wyobiz.wyo.gov.

[5] Data collected on https://sos.tn.gov/businesses.

[6] An article in which the author warns against the use of these new forms: https://thedefiant.io/starting-a-dao-in-the-usa-steer-clear-of-dao-legislation/.

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