Decentralized Autonomous Organizations: From Dream to Reality! DAOs, a New Rival to Legal Entities
Just as blockchain unlocked digital assets for the economy, Decentralized Autonomous Organizations (DAOs) paved the way for universal participation of individuals.
Creating legal entities is one of humanity’s innovations to strengthen participation and teamwork. A phenomenon that brings collective agreement into existence, grants it rights and duties and imposes penalties or fines if laws and commitments are violated. All this happens even though we know that a legal entity does not have a physical, real existence nor an independent will—it is entirely abstract. However, the needs of the times and the complexities of human interactions in modern societies have made the existence of legal entities inevitable. Forming legal entities in each country is subject to specific laws and regulations, and failure to comply with them results in legal consequences. Additionally, legal entities have advantages and limitations; for instance, certain activities require a specific type of legal entity, may have greater access to banking facilities, and are subject to more oversight.
DAOs Pave the Way for Universal Participation of Individuals
If you want to start an activity with a group of people in Iran, you inevitably need to do so under one of the legal entities recognized by the legislator. Business activities must also be conducted under the framework of companies defined in the Commercial Code, the Cooperative Sector of the Islamic Republic of Iran’s Economy Act, or other laws. Social matters are organized through NGOs with permits from the Ministry of Interior, and other activities have their respective governing bodies and rules. The process of forming and registering legal entities is time-consuming and costly, and sometimes there are restrictions on forming a company—such as having no criminal record, possessing certain skills, a specialized degree, or sufficient capital. Company managers must be accountable for their duties and performance to stakeholders such as shareholders and regulatory bodies, and some decisions require the approval of certain authorities or specific formalities. On the other hand, legal entities enable the participation of many individuals in commercial, cultural, and social activities. They make small-scale capital available to entrepreneurs and specialists, and they organize individual capabilities toward charitable and public-benefit causes.
With the birth of blockchain, a new form of participation has emerged. Just as blockchain unlocked digital assets for the economy, Decentralized Autonomous Organizations (DAOs) have paved the way for global, universal participation of individuals.
Decentralized Autonomous Organizations, utilizing blockchain, smart contracts, crypto-assets, and governance by code, have created a platform that allows individuals from anywhere in the world to collaborate on various matters without the need for legal formalities, excessive costs, or time investment. Some of the advantages of DAOs include 24/7 financing without the constraints of traditional financial systems, increased transparency in financial operations, direct decision-making by stakeholders, and the ability to form various organizations on a global scale.
What many people once dreamed of is now a reality. You no longer need to provide identification documents for global participation, use a false identity due to sanctions, travel to another country, or face international legal challenges to appoint a legal representative. All you need is to own the crypto-assets or tokens of a DAO and participate in its decision-making processes—whether it’s supporting a political movement, contributing to a humanitarian effort, or purchasing a piece of art.
There have been both successful and unsuccessful examples of DAOs in recent years, from organizing to purchase an old copy of the U.S. Constitution to fundraising for the release of Julian Assange!
ConstitutionDAO, a single-purpose DAO, was formed when a group of internet friends and cryptocurrency investors had the idea that they might be able to facilitate the collective purchase of an old copy of the U.S. Constitution—a copy that was first signed in 1787 in Philadelphia. This document was put up for auction by Sotheby’s (one of the largest auction houses for art, jewelry, and collectibles in the world), and it was estimated that the sale price would be between $15 and $20 million. A week before the auction, on November 11, the public was informed of this idea. The participants were very successful in raising funds, and by the time of the auction on November 18, more than 17,000 individuals had collectively raised $49.5 million by purchasing the PEOPLE token. The auction eventually closed at $43.2 million, which was less than the $49.5 million the DAO had raised. However, due to insurance, auction fees, and transportation costs, the DAO was unable to place a higher bid. Afterward, the project was dissolved, and a process for returning the funds to contributors was put in place.
A Few Examples of DAOs in Recent Years
With the birth of blockchain, a new form of participation has emerged. Just as blockchain unlocked digital assets for the economy, DAOs have paved the way for universal participation of individuals. Decentralized Autonomous Organizations, leveraging blockchain, smart contracts, crypto-assets, and governance by code, have created a platform for this participation.
Another example is AssangeDAO, which issued the “JUSTICE” token. This DAO was established in December 2021 to help secure the freedom of Julian Assange, the founder of WikiLeaks. Since its inception, AssangeDAO has raised over 14,871 Ether to support Assange’s legal defense. AssangeDAO’s plan includes offering a unique NFT (non-fungible token) created by Pak, a renowned digital artist who collaborated with Julian Assange on the “Censored” collection. The proceeds from the auction will benefit the Wau Holland Foundation to support Assange’s legal defense. While the JUSTICE tokens currently have little actual value, their holders can vote on future proposals for the DAO.
DecentralandDAO is another example, which is both a game and a virtual metaverse world. Decentraland is a blockchain-based virtual community and world where users develop and purchase plots of land, art, and non-fungible tokens. Members also participate in the decentralized governance of this platform. As a DAO, Decentraland empowers its community to take part in the governance of the project.
Estaban Ordano and Ari Meilich, the developers of Decentraland, created a virtual space featuring customizable digital real estate, items, and other assets, all of which can be bought using the cryptocurrency MANA. MANA is an ERC-20 token (a protocol built on the Ethereum network). Players on the platform, known as “Decentralanders,” can acquire MANA from various exchanges. The ERC-721 non-fungible tokens (NFTs) represent unique assets in Decentraland, including LAND and other collectible items.
Decentraland is a project built on the Ethereum blockchain to create a free virtual world where users can interact in ways similar to the real physical world. This means that individuals can socialize, explore, and trade within this virtual environment—all made possible by blockchain technology. The concept was first proposed in 2015, and the initial coin offering (ICO) for Decentraland took place from August 16 to 18, 2017, raising approximately 86,206 Ether (around $26 million at the time) in exchange for Decentraland’s native tokens. This fund was managed by the Decentraland Foundation, established to promote the platform’s development. Twenty percent of the ICO funds, intellectual property rights, and the Decentraland website are controlled by this foundation. After the ICO, Decentraland launched its DAO to transfer project management to its users, demonstrating the system’s full autonomy.
One of the interesting aspects of Decentraland is its emphasis on decentralization. The player community controls the land, digital assets, and developments within Decentraland. As a DAO, this virtual world uses open-source code to govern its rules. Anyone who stakes their MANA tokens or owns LAND tokens can create and vote on proposals.
Despite their advantages, DAOs face significant uncertainties and challenges. Time will tell whether DAOs can overcome these hurdles, increase their efficiency, and become a serious rival to traditional legal entities in the future.
Serious Challenges Facing DAOs
It is often said that since DAOs operate on the blockchain, they are decentralized, transparent, and more efficient than traditional institutions. Decentralization and transparency eliminate monopolies, and decision-making and governance within these organizations are democratic. Anyone, regardless of their financial standing, can participate in decision-making and express their views. But are DAOs this way, or are we facing something more akin to the dream of a free internet? The DAO project, which led to the “Hard Fork” on the Ethereum blockchain, shows that not everything said about DAOs is accurate, and they face serious challenges such as security, scalability, lack of accountability, conflicts of interest, market manipulation, and legal ambiguity.
While blockchain platforms offer transparency, the anonymity of users allows DAO participants to coordinate online and make decisions that benefit them. For instance, individuals with more capital and voting power may decide that a project should be carried out by another company in which they have a vested interest or fund a project that benefits them through the DAO. This raises serious concerns about conflicts of interest within DAOs. The anonymity of participants and the lack of sufficient oversight also heighten worries about exploitative behavior, such as fraud or crimes like money laundering and terrorist financing. The absence of any requirement to be registered with an official authority and the lack of sufficient guarantees for compensating harmed parties reduce the responsibility of those who set up a DAO, increasing the risks for investors. In traditional systems, there are usually adequate legal and criminal safeguards in place to protect stakeholders.
Not All DAOs Are Decentralized or Efficient
Moreover, not all DAOs are decentralized or efficient as claimed. In many models, DAOs require a central entity or organization to take action to ensure security and maintain technical infrastructure. Additionally, the large number of participants in a DAO can create problems for collective governance. For example, making decisions about critical issues like software updates can be delayed due to lack of participation or the time it takes to involve everyone, which can sometimes lead to irreparable damage. This leads us to question whether decentralization or majority-based governance models are always efficient. There are many such concerns, especially regarding governance models in DAOs. Some also believe that the lack of transparency in the participation models of certain DAOs, the use of technical loopholes, or reliance on algorithms and proxy voting can lead to disillusionment among members, allowing a few opportunists to monopolize wealth and power within the DAO.
Since DAOs operate on the blockchain, they are decentralized, transparent, and more efficient than traditional institutions. Decentralization and transparency eliminate monopolies, and decision-making and governance in these organizations are democratic. Anyone, regardless of the amount of assets they hold, can participate in decision-making and express their opinions. But are DAOs really like this, or are we facing something akin to the utopian dream of a free internet?
The legal status of DAOs is also worth considering. Do DAOs have a legal identity in the conventional sense? Which laws apply to them, and under which jurisdiction do they fall? Can DAOs be equated with existing legal entities like companies, or does a new legal framework need to be defined for them? Are individuals who unintentionally hold a governance token, perhaps due to an airdrop or gift, subject to the same obligations as an initial participant? In the event of technical failure or breach of obligations, who is responsible for compensating the losses? Should DAOs be registered and taxed? How can a DAO hire and compensate individuals, and should it be regarded as a legal entity with rights and obligations toward employees? These are just some of the legal uncertainties surrounding DAOs. In conclusion, while DAOs offer many advantages, they face significant ambiguities and challenges. The question remains whether DAOs can overcome these hurdles and increase their efficiency to become serious competitors to traditional legal entities in the future.
