Decentralized Autonomous Organisation (“DAOs”) are essentially group of code that automatically execute whenever a set of criteria are met. DAOs can be referred to as governing bodies that looks after the allocation of resources in a project. They help in ensuring long term success of the project they support.
WHAT IS A DAO?
FEATURES OF DAO
DAO is an organization where decisions are made by group of people who are collective of members who owns the organization. It is run by members, often through use of crypto tokens. There are various ways to participate in a DAO, usually through the ownership of a token. A smart contract is created to set benchmarks and processes for automatic execution of decisions per the agreed mandate of the DAO. Funding takes place wherein tokens are sold to raise funds and these tokens give holders the voting rights. This is how a DAO is setup on a blockchain.
HOW DOES IT WORK?
• DAO are operated using smart contract;
• Smart contracts are deployed on numerous blockchains and Ethereum was the first to use them;
• These smart contracts use the DAO’s rules;
• The people having stake in the particular DAO get the voting rights;
• Those with a stake in a DAO then get voting rights and may influence how the organization operates by deciding on or creating new governance proposals;
• A proposal will only pass once the majority of stakeholders approve it and per the rules for execution of a decision laid down under the DAO; and
• How that majority is determined varies for every DAO, and is specified in the smart contracts.
WHAT ARE THE BENEFITS OF DAO?
• DAOs are fully autonomous and transparent;
• DAOs are prevented from being spammed with proposals;
• Anyone can view their codes as they are built on open-source; and
• Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
CONCLUSION/ LEGAL IMPLICATION
In August 2022, an Indian startup, Bengaluru-based blockchain firm namely Polygon announced that it is building a DAO. DAO removes the lack of trust between the parties who wish to contract. Herein, only the code needs to be trusted. DAOs have the potential to change the way corporate governance works completely.
If a DAO is linked to a legal entity, it will have an official legal status and will have the capacity to sign contracts with third parties. However, this contract will still be signed with a legal entity and not the DAO, at this point in time, since DAO is not recognised as a separate legal entity to execute a contract.
Since DAOs are still unrecognized in most jurisdictions, entering into contracts/transactions with a DAO is tricky. For example, DAOs are legal entities in Wyoming. But until all jurisdictions do not recognise DAO as a legal entity, entering into a contract with a Wyoming-based DAO would still result in uncertainty as to the enforceability for the contracting party (not in Wyoming) trying to enforce their rights. To address this issue, affiliated legal entities are usually established that bridge the gap between DAOs and the real world.
In the future, DAO may be subject to taxes as capital gains tax on the capital gains generated from the sale of their tokens. With time, more and more organizations may adopt a DAO model to help govern some of their activities. The emerging case-studies, decisions of courts and upcoming laws will provide more clarity in the time to come.
The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.
Key words: Smart contract, Blockchain Technology, Non-fungible.