Decentralized Autonomous Organizations (DAOs), enabled in the past decade by blockchain technology to manage transparent treasuries and governance, have considerable promise to accelerate human coordination to accomplish important goals in the coming decade and beyond.

New “no code / low code” solutions for creating and maintaining DAOs have facilitated a rapid growth in both interest and experimentation with new DAO structures. I was recently referred to Alexandra Sims’ PhD Thesis on DAOs: Governance, Dispute Resolution and Regulation (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3971228, published May 31, 2021), and I was delighted to read it over the holidays. While I won’t pretend to fully represent the work presented by Dr. Sims (and instead refer you to the PDF linked above), in this article I will attempt to share a brief summary of its content and my own personal reflections.

Before we dive in, a quick word about why I’m so interested in DAOs: Professionally, my partners and I at Prota Ventures work with entrepreneurs to invest time, labor, and capital into the earliest stages of a startup’s journey (you can learn more about me/us on LinkedIn here). In addition to the dozens of companies I have personally helped start and grow over the past 15+ years, I’ve had a front-row seat to observing and advising the beginning steps of hundreds of others. Not surprisingly, I have a keen appreciation for the importance of proper legal and financial structures when doing anything of significance in the startup world. Dr. Sims’ thesis does a remarkable job to help set the stage for not only defining what DAOs are (and what they are not), but also how DAOs should work with attorneys to set a solid foundation for success.

The paper is organized into seven key chapters:

1. Introduction
2. Theory and Research Design
3. DAO Categories
4. Governance of DAOs
5. Dispute Resolution for DAOs
6. Legal Structures for DAOs
7. Conclusion

In the introduction we are presented with “a brief background to organisational forms and the regulatory environment, distributed autonomous organisations and facilitating technologies, and DAOs and the regulatory environment.”

In chapter two - in addition to outlining the theory/design of Dr. Sims’ thesis - we are introduced to the concept of Institutional Cryptoeconomics, i.e. “the study of how blockchains interact with our existing and future social institutions, from the nature of contracts, to the shape of the firm, to the structures of global trade, all the way to the dynamics of capitalism and geopolitics.”

In chapter three we learn how Dr. Sims’ categorizes nine types of DAOs and describes the difference between DAOs, “Pseudo DAOs”, and “Proto DAOs”. In fact, DAOs “can be formed to run a specific project, a blockchain, and even potentially a nation state” 

The nine types of DAOs presented are:

1. A Blockchain Platform
2. Creating a Cryptocurrency or Other Tokens (Including Non-fungible Tokens)
3. Providing a Specialized Platform
4. Distribute Funds for Projects (For-Profit)
5. Not-for-Profits
6. Coordinating a Project
7. Running a For-Profit Organization
8. Managing a Commons
9. A Nation State

In chapter four we get a deep dive into DAO governance, including how they differ from traditional organizations. Dr. Sims evaluates the effectiveness of various DAO governance approaches. It’s interesting, for example, to learn how various types of DAOs have approached the voter apathy and experience-level problem when proposing, evaluating, and approving a proposal.

In chapter five we get a fantastic analysis of how decentralized dispute resolution has, can, and should work in DAOs.

In chapter six, Dr. Sims warns that without being intentional about legal structures for DAO, most will be treated by default as a Partnership and thus unable to be recognized as a unique entity. This means that each participant is held personally liable (legally and financially). Instead, we are introduced to concepts such as a blockchain-based LLC (BBLLC) and other mechanisms by which the organization can interact legally with governing jurisdictions.

In chapter seven, we read Dr. Sims’ “key findings, contributions to the literature, practical implications and policy recommendations as well as the thesis’ limitations and avenues for future research. The thesis’ key findings include that DAOs take various forms and are not all for-profit, and that governance frameworks are often, but not always, complex. Using [Institutional Cryptoeconomics] as its methodological framework, the contribution of the thesis is the examination of the interrelationships between three themes central to DAOs: governance, dispute resolution and legal structures.”

Reflections

I appreciate how Dr. Sims leads us into thinking about the differences between the institution (specifically the technological and legal integrations) and the organization of the DAO (i.e. the people and the practical coordination and governance).

Specifically, Aragon, DAOstack, DAOHaus, and Colony were brought up, which feels timely. Even 7-8 months after publication, these are still the popular go-to “no code / low code” services for creating DAOs. I’ve recorded a few podcasts recently with a developer of DAOHaus (here, here, and here), and am currently working with a group to spin up a DAO to help each other learn and build Web3 (https://www.BanyanDAO.xyz).  

I suspect that starting a for-profit DAO with non-transferable shares that can only be acquired by doing work is likely the best way to kick off a DAO. These can be BBLLCs, or - in many cases - a simple Wyoming or Delaware LLC wrapper will likely make your legal team sufficiently comfortable (obviously, please get your advice from them directly). DAOHaus promotes the use of moloch-style DAOs that require voting-in members, have non-transferable shares by default, and allows any member - at any time - to quit (“RageQuit”) and claim their proportional share of the treasury.

For non-profit DAOs, Dr. Sims’ both admits and recommends that they will/should be treated as unincorporated associations. For example, LexDAO - an association for legal engineering professionals “building the next generation of contracts” - is explicitly an unincorporated nonprofit association under Wyo. Stat. Title 17, Ch. 22 of the laws of the State of Wyoming.

The many facets and nuances of DAOs (this is a good thing)

Practically, I appreciate how Dr. Sims leads us into understanding the wide range of types, practices, jurisdictions, dispute resolution services, and operating structures of DAOs. In my own experimentation with DAOs over the past 4-5 months, which started with this LinkedIn post calling for product managers interested in rapidly learning how to build in Web3, I’ve learned that the various types of “DAO Tooling” can be used at different seasons of DAO formation. For example, Discord can be used (and is often used in Web3) to kick things off and gather people to chat about the vision/strategy/tactics. Coordinape can be used to give each other shares of the DAO in exchange for work. DAOHaus - for moloch-style DAOs - can be used to manage a treasury and voting in new members, etc…

I’m not (yet) as familiar - practically speaking - with public governance-token DAOs. These types of organizations are the much more common style of DAOs. Many of these DAOs use Aragon and/or Snapshot to manage their voting and governance. I suspect starting these types of DAOs will make lawyers (and potentially participants) more uneasy given the potential to quickly “pump and dump” the governance token (which is likely a security, BTW) and jack up the ownership dynamics. For better or worse, many people starting DAOs right now aren’t thinking at all about the legal/jurisdictional issues and likely going to get themselves in trouble.

Overall, I’m excited about how the DAO space will shape up and progress this year and beyond. We need to look to our lawyer friends and colleagues to help innovate new forms of legal structures that will make regulators as comfortable as possible, and I very much appreciate Dr. Sims’ work to help educate the rest of us about the various aspects of DAOs that we all should be thinking about.