The Wyoming DAO Act creates more problems than it solves. Before the Act is amended, any similar attempts at regulatory clarification will not have the effect of assisting innovation and optimization.
Written by: Joshua Durham, Crowell & Moring Law Firm Blockchain and FinTech Intern Compiler: Perry Wang
The DAO Act of the State of Wyoming, the US, which “shocks the chin” came into effect in July 2021. The bill grants decentralized autonomous organizations (DAO) the opportunity to register as a limited liability company (LLC) in the state. The bill seems to match Wyoming, which is known as the Cowboy State, not only because its nickname embodies the “Wild West” spirit in the emerging cryptocurrency world, but also because Wyoming is also a pioneer in the creation of LLC, and this commercial organization was once Had to lead the trend.
Perhaps more suitable is that the subject of the Act was originally designed as a “DAC” (Decentralized Autonomous Company), because early adopters of cryptocurrency realized that general corporate activities can be automated on the blockchain. However, at present, the main body of the bill has been expanded from DAC to comprehensive DAO, because the blockchain has opened up a human organization that is not limited to commercial applications but has a wider scope of application.
However, should blockchain legislation also cover this wide range? Since the Wyoming Act was born based on a fundamental misunderstanding of DAO’s technology and industry, its actual use will be as limited as its scope.
DAO
One of the most significant innovations brought about by the blockchain is the possession of programmable currency, because the currency on the chain is now digitally native. For example, developers can write certain codes ( “smart contracts” ) to perform simple or complex tasks using cryptocurrency on the Ethereum blockchain. Just like a Rube Goldberg machine in the financial field (a Rube Goldberg machine: a mechanical combination designed to be overly complex, using a circuitous method to complete some actually very simple tasks), it seeks to use smart contracts. Ethereum users of financial services only need to send cryptocurrency to a smart contract, and the smart contract then executes a preset function for using the cryptocurrency. These smart contracts can also perform the functions of a DAO. They are programs written into code by rules to perform and/or automate organizational tasks.
Unlike any passive smart contracts, DAOs are not fully automated-they require some manual input. Members participating in the DAO need to make some management decisions, for example, the issue of the asset pool held by the DAO, or the interaction with other smart contracts. In other words, DAO performs and automates human organization activities, such as maintaining payroll, accounting matters and entity dissolution, dispute resolution, voting on business decisions, and interacting with other blockchain-based entities.
For example, a DAO member who maintains an interest-bearing cryptocurrency pool can vote to use the services of another DAO, which is programmed to provide insurance services. In the distant future, the entire company may transform its management structure into a streamlined and efficient DAO.
However, unless other states introduce further explicit legislation, companies registered in this way may face the threat of being held accountable similar to that of general partnerships.
Crucially, the DAO currently controls and manages most of the multi-billion dollar decentralized finance (DeFi) protocols such as Uniswap, Aave and Curve. However, many of these DAOs started out as private foundations. Just like companies that “go public” after a period of maturity, many DeFi agreements initially choose to be managed by private foundations, and then transfer management rights to members scattered around the world through DAOs that do not require permission. The DAO does not require permission, because anyone with an Internet connection can purchase the governance tokens of the project, and then use the tokens to vote on governance proposals, or to request a share of all the profits generated by the DAO. But DAO does not necessarily have to be profitable and can act as any type of decision-making organization. For example, anyone can create their own DAO on DAOHaus and formulate specific specifications to operate it as a club, distribute subsidies, manage products, or provide other services.
All in all, as the series of problems that may appear in the first impression continue to expand, the novel functions of the DAO give a legislature that fully understands the situation a mature space to play.
Wyoming’s “DAO LLC” Act
Wyoming’s legislators originally drafted the bill in part to ensure that the DAO would not face general partnership liability, but without further amendments, the bill’s own problems would limit its practical use. The drafter acknowledged that this is only a temporary clause and pointed out that “LLC regulations may not be the most suitable for DAO”, so the legislator stated that “this is an unfinished work.”
Fortunately, Wyoming recognized that they were just filling a pothole, not laying a new road. The following are three factors that legislators and practitioners need to consider carefully when attempting to modify or take advantage of the Wyoming DAO Act:
First, the bill classifies all DAOs as “member-managed” unless they choose “algorithm management.” 17-31-104(e) . Therefore, DAO by the manager can not manage – and this means that the project can not foster development from the initial foundation. This restriction is equivalent to forcing a company to go public before finding a suitable product/market fit, or even before testing door locks. In fact, the bill will not protect the DAO, which is in the most vulnerable stage of development.
At the technical level, most DAOs can only perform management functions when active personnel (ie members) are involved, such as voting on management decisions-the code does not vote. These technical realities are hard to imagine. If there is no specific definition in other bills, how exactly would DAO achieve “algorithm management”? Without the intervention of artificial intelligence, the management of the “algorithm management” DAO can be attributed to a passive smart contract as complex as an Excel spreadsheet macro. 17-31-109 .
The key difference between “member-managed DAO” and “algorithm-managed” DAO appears in 17-31-105(d) , which requires “algorithm-managed” DAO to be “updateable, modifiable, or upgradeable “. However, the new feature of blockchain is that its state is immutable . Therefore, any update, modification or upgrade of the DAO is usually managed by deploying a new smart contract, which also requires the amendment of the organization charter to add a new contract address. 17-31-107(a)(iii) . Related to this is that if DAO LLC fails to approve any proposal or take any action within one year, the bill will dissolve it. 17-31-107(a)(iii). This regulation is also unfamiliar to traditional LLCs, and therefore hinders innovative DAO LLCs-if the project is satisfied with the performance of its DAO, no action is actually required.
Second, the bill requires DAO LLC to use “DAO”, “LAO” or “DAO LLC” in its name to register. 17-31-104(d) . Although this nomenclature does exist in the DAO field (for example, MakerDAO, Moloch DAO), it is relatively rare compared to most platforms that choose unique or descriptive names (for example, Aave, Uniswap, Compound) . Therefore, the naming rules in the bill have a persuasive effect on many projects.
Third, the bill requires the DAO to maintain a registered agency in Wyoming. 17-31-105(b) . However, this seemingly trivial rule may hinder the widespread use of the bill because the project party neither needs nor wants it. DAO fundamentally replaces the trustee and the responsible party, because all assets and liabilities exist on the blockchain. In addition, the vast majority of DAO members prefer to remain anonymous. Part of the spirit and marketing theory behind these DAOs is that they operate in a borderless and Internet-native manner. Therefore, although having an in-state agent is the lowest cost of registering an LLC in Wyoming, many DAOs are dismissed considering the cumbersome need to maintain this redundant “physical” infrastructure.
to sum up
For now, the Wyoming bill creates more problems for the DAO than it solves because it was drafted on the premise of technical and industry misunderstandings surrounding the DAO. Subsequent legislative actions should incorporate innovative practices already adopted by a few encryption laws.
It is worth noting that lawyers have developed a demonstration of the code compliance agreement, and even some DAO has passed in Delaware Series LLC. , Ricardo contract (Ricardian contracts) registered as a company way. Both of these methods give specific codes a specific legal meaning, so that the smart contract that manages its DAO can not only be executed, but can also be used as evidence of a legal contract.
Nevertheless, before Wyoming amends the bill, any similar attempts to clarify regulations will still not work. They will only make headlines and will not really help to optimize innovation.
Thanks to James McCall, Kyle Tatich, Sierra Weingartner, Erich Dylus, and Raina Haque for their feedback.
Source link: lexdao.substack.com
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