Legal issues facing decentralized autonomous organizations (DAOs)

The concept of smart contracts dates back to the 1990s[1]. Even now, smart contracts are still difficult to implement unless some incredible things are invented. Distributed, trustless public ledgers provide the necessary components for the implementation of smart contracts, making smart contracts a reality. Some thinkers have gone a step further and imagined building companies or non-profit organizations based on smart contracts. In 2014, a project called Ethereum was established[3][4], which is committed to the development of smart contracts and making smart contracts closer to reality. Ethereum was launched on July 30, 2015[5]. It is now possible to use code (or visualization tools) to create distributed autonomous organizations (DAOs) on the Ethereum platform[8]. How DAOs adapt to the real world and what practical problems will be faced when creating a DAO are the focus of this report.

Virtual vs. Reality

DAOs can be created using smart contract platforms (Ethereum is the most popular currently, but there are others). We list the main issues facing businesses using DAOs.

law

•The current legal system does not yet recognize the DAO system, which may simply be classified as a part of a software whose creator acts as an agent to create the DAO.
•An unresolved issue is the accountability of DAOs; without a clear legal framework, who is responsible for such legal proceedings?[11]
• A DAO should have a clear legal owner (a court could appoint one if necessary), and it may be its own owner if the legal system allows the company to be run without anyone.
•One way to run a DAO is to set up a company and have each manager appoint an agent to the DAO. The managers are then protected by the company and the DAO has the legal authority to conduct business as agents of the managers.
• A more complex solution is that each manager is represented by a smart contract. These smart contracts are combined, and a DAO is formed by such individual smart contracts. These DAOs composed of smart contracts do not conflict with the original purpose of the DAO. This solution is complex, but more suitable.
• Do we need to consider proxy law? It has never been seriously tested for DAOs, so it is unclear whether DAOs are agents of traditional corporate structures or managers of such structures.

Related regulations

• A DAO’s regulations are meant to be coded for an ongoing existence, and as such, a DAO will have a hard time adapting to changing regulations. A change in the regulatory regime could be considered obsolete for the DAO.

Practicality

•Interact with the real world. DAOs have no ability to handle fiat currency, no ability to register and manage traditional bank accounts, no clear laws for owning assets (assets are tied to the blockchain),
• Bringing in real-world information remains an unsolved problem. There are third-party services called “oracles” [6][7] that provide information, but the reliability of these services has not been proven. Regardless, bringing in information from the outside world into a DAO organization remains a problem.

Advantages of DAO

• Strictly adhere to the coded rules • Minimize (or end) corruption. A DAO organization cannot bribe, it simply executes the code requirements.
•Management is fair and decentralized[10].
•Increase transparency and audit compliance.

Summarize

DAOs undoubtedly have a bright future, but they are not ready for mainstream business yet. It will take some pioneers to force the legal system to adapt to DAOs. It is not advisable for boards to adopt DAOs as a corporate structure at this time. It may be worth trying this approach in a basic project under the protection of a joint stock company. Although DAOs have many advantages, they face an uncertain legal recognition and treatment. Perhaps the biggest problem with DAOs is the issue of liability. There are also some practical limitations to deploying a DAO, and the blockchain ecosystem is not yet fully ready to interact with the whole world.

References:
[1] http://szabo.best.vwh.net/smart_contracts_idea.html
[2] Nakamoto, Satoshi. “Bitcoin: A peer-to-peer electronic cash system.” (2008).
[3] Wood, Gavin. “Ethereum: A secure decentralized generalized transaction ledger.” Ethereum Project Yellow Paper (2014).
[4] https://github.com/ethereum/wiki/wiki/White-Paper
[5] https://en.wikipedia.org/wiki/Ethereum
[6] https://github.com/codius/codius/wiki/Smart-Oracles:-A-Simple,-Powerful-Approach-to-Smart-Contracts
[7] https://blog.ethereum.org/2014/07/22/ethereum-and-oracles/
[8] https://en.wikipedia.org/wiki/Decentralized_autonomous_organization
[9] http://www.coindesk.com/succeed-as-decentralized-autonomous-organization/
[10] https://slock.it/dao.html
[11] http://www.coindesk.com/how-to-sue-a-decentralized-autonomous-organization/
[12] http://www.ofnumbers.com/the-guide/