Conventional corporate spaces and the laws that govern them have the ability to regulate and recognize aspects of organizations governed by a central authority of a group of the same. The idea of a decentralized system makes its way through multiple dimensions of fields and domains ranging from assets to government. The main share of ideas or perspectives reflect the decentralization goal of the whole concept. Each time the decentralized approach has been introduced into the ecosystem, it has challenged and had the potential to compete with or replace traditional approaches. Such a concept has emerged in the corporate structure and also in the regulations as a reaction to the traffic in the structure that has to be regulated anyway.
A DAO (Decentralized Autonomous Organization) is a blockchain-based system that allows people to coordinate and manage themselves, mediated by a set of self-executing rules deployed on a public blockchain, and whose management is decentralized. It is an organization that operates according to a transparent set of software protocols. These protocols allow a distributed group of individuals or entities to make decisions on behalf of the DAO. The DAO governance rules are maintained and executed on a blockchain using distributed ledger technology. As a result, the DAO can operate on a distributed basis without a central authority or decision maker. DAOs are one of the most popular concepts in the digital consensus space.
An example of explaining the DAO in a better way is looking at an ordinary corporation running a chain of stores. The corporation has three classes of members: investors, employees, and customers. The membership rule for investors is that of a fixed-size piece of virtual real estate; until they sell the shares. Employees must be hired either by investors or other employees who are authorized by investors, and customers have open doors to become a part by interacting with each store.
DAOs transform a single organization into a decentralized one. Rather than a hierarchical structure governed by a set of people who interact in person and control ownership through a legal system, DAOs have a set of people interacting with each other according to a protocol defined in code enforced by blockchain membership
DAO membership is granted in one of these 2 ways:
1. Token-based membership
In a token-based membership system, certain tokens are allocated to members that grant members voting rights in proportion to their tokens. A member may receive certain tokens in a DAO if they invest as part of a coin offering, or if they provide liquidity or other proof of employment. They are automatic and do not need any authorization. Leaving the DAO would be easy by simply selling the tokens on the open market.
2. Shared membership
This particular concept is new and not very common in the field. There is a need for the person to make an offer, offering a tribute such as money or a job. Like stock in a conventional corporation, stock represents voting and ownership rights in the organization. Both are not the same as in a share-based membership, can be redeemed on leaving, and the leaving member can receive a pro rata share of the treasury
HISTORY
The DAO goes back to 2016, when the "DAO" was established as a venture capital fund with no central authority. It was set up as a smart contract on the Ethereum blockchain.
Then a person could contribute ether and receive DAO tokens in proportion to their contribution. As holders they could vote on any proposals made to the community and fund projects. Once the projects were won, they would be rewarded based on their DAO token holdings.
WYOMING AND ITS LEGISLATION
The state of Wyoming made headlines when its legislature approved a first-of-its-kind bill that grants legal company status to decentralized autonomous organizations (DAOs) that operate on blockchain, with the stipulation that they are organized as a limited liability Wyoming company. The bill is codified as an amendment to the Wyoming Decentralized Autonomous Organization Act that applies specifically to DAOs organized under the Wyoming Limited Liability Company Act. DAOs organized as limited liability companies in states other than Wyoming will not be allowed to do business in the State of Wyoming.
The LLC structure addresses the biggest concern of DAO members - personal responsibility for the DAO's actions. The purpose of passing the bill is to provide liability protection for DAO members who organize as a Wyoming limited liability company. Without the same, the members of the DAO would be exposed to their liabilities for any of the actions and obligations of the DAO, treating it as a general partnership. Currently, under this law, the legal protection extends to LLC members who organize a DAO as an LLC in Wyoming.
The law recognizes two types of DAOs:
MEMBER MANAGES
Algorithmically controlled
A member-managed DAO is similar to a member-managed LLC under the law, where certain people are responsible for maintaining and managing the organization. An algorithmically managed DAO may register as an algorithmically managed LLC if the governing smart contract system is already operating at the time of filing.
DAO LLC's Articles of Organization must be updated or amended whenever there is an update or change to DAO's underlying smart contracts.
Contract law and contractual challenges
A recognised legal entity (such as an individual, company or other recognised form of legal entity) is required to enter into a contract. It will take time for most or more parties to recognise the DAO or to give legitimacy to contracts concluded under the DAO.
RESPONSIBILITY
The biggest issue in the DAO is the entity that will be sued and who will be held accountable for the DAO's actions. In order to incorporate any of the new ideas or perspectives into the conventional system, the government would have to incorporate or categorize it into one of the existing types of corporations. For DAOs, this structure is most likely to be a general partnership (rather than a limited liability company or LLP).
Under U.S. law, a partnership is said to exist when two or more persons associate to carry on, as co-owners, a for-profit business, whether or not the persons intend to form a partnership. The law pertaining to general partnership is recognized in India under the Partnership Act, 1932. Under the Act, a "partnership" is a relationship between persons who have agreed to share the profits of a business carried on by all or some of them acting for all.
However, unlike US law where the intention of the parties to form a partnership is immaterial, in India the existence of a partnership is a determination based on the intention of the parties and the relevant facts. The key features of a DAO, such as sharing profits, managing the business and making key decisions together, are likely to satisfy the requirements of a partnership in different jurisdictions.
If the DAO is considered or recognized as a general partnership, it would be unfortunate for the partners of the DAO, since in a general partnership the partners have unlimited liabilities. The partners are jointly and severally liable for any liability arising out of the business and acts or omissions of the other partners. This means that each member is liable for the actions of all other members of the DAO, where even the personal assets of the partners will be used to pay the debts of the DAO.
JURISDICTION
Jurisdictions of the DAO are the issues and the tricky part when the DAO has no country of incorporation, place of management or principal office. Under existing legal systems, the jurisdiction that applies to entities is largely based on the place of incorporation of such organization (incorporation theory) or the place where key management decisions of such organization are made (actual seat theory).
Another solution to the same would be the freedom to choose the forum. And that's where the taxation issue will stand for the time being.
CONCLUSION
DAOs have opened up a new paradigm of corporate structure. Previously, corporations were limited to some extent by their jurisdiction and corporate governance rules. DAOs envisage the idea of a truly global and truly decentralized organization. They have a flat hierarchy in the true sense. And because smart contracts are self-executing, this eliminates human malaise to a large extent and allows for democratization of the corporation. The DAO can make it extremely easy to pool resources globally and collaborate without compromising trust.
The future lies with decentralized ecosystems and advanced collaboration. Institutions and legislators will need to recognise the potential of DAOs as they have the potential to revolutionise the system and could prove to be one of the greatest breakthroughs of all time.
The biggest issue in the DAO is the entity that will be sued and who will be held accountable for the DAO's actions. In order to incorporate any of the new ideas or perspectives into the conventional system, the government would have to incorporate or categorize it into one of the existing types of corporations. For DAOs, this structure is most likely to be a general partnership (rather than a limited liability company or LLP).