This case just confirmed what we already knew before: DAOs are just groups of people working together, and they don't get any special treatment just because they coordinate their activities via blockchain instead of email.
Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
For a rather hilarious example of this, PeopleDAO's "autonomy" turned out to be a few guys with a Google Sheet. They accidentally shared the link and someone added themselves to the payout list, to the tune of $120k.
Governance activities are talked about on forums and chatrooms. Governance is voted on on-chain
Edit: I'm posting too fast, so here's an edit for a reply
I don't know anything about Ethereum DAOs. Check out Tendermint chains (Cosmos, Osmosis, Crescent, Stargaze, EVMOS, Kava). Gas is cheap and all voting is on-chain. Governance discussions happen mostly on a forum called Commonwealth and then they're put on chain and voted on by validators and stakers.
> To circumvent the very high gas fees associated with full on-chain governance, Decentraland’s DAO uses a combination of free, off-chain voting for the community and a multi-sig wallet controlled by a “DAO Committee” to enact those off-chain decisions on the Ethereum blockchain.
I'm not a huge follower of the crypto ecosystem and DAOs, but this kind of thing seems like it's pretty common.
This is actually very common for the allegedly decentralized apps. A centralized service controls the actual application while some resulting data is recorded to the blockchain. Decentralized in name only, but most users don't know and those who understand are only happy to oblige the hype.
There are all kinds of governance models, as there should be.
> a multi-sig wallet controlled by a “DAO Committee” to enact those off-chain decisions
DAOs may empower a multi-sig with certain allocated funds to spend according to a mandate. This is ok. It's like saying America is not a democracy because regulators can make new rules that congress is not voting on.
It also possible to have off-chain voting, but still enforce those results on-chain using a fraud-proof like system, and some do this. Lots of design space to play with.
>It's like saying America is not a democracy because regulators can make new rules that congress is not voting on.
That actually does appear to be the opinion of the current supreme court, and you can expect further rulings counter to historical precedence WRT chevron deference.
> Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.
The default form of legal structure for a cooperating group of people is general partnership--unless you take specific legal steps to avoid forming a general partnership, that is how the courts will view the partnership. General partnerships means that all partners are jointly and severally liable.
In layman's terms, that means you just have to find one person involved in the DAO, and sue them, and then you get to collect the full judgement from that person (alone), and it's now their problem to get cooperation from the other partners for the liability.
(If this sounds like a terrible idea, it is. That's why there exists all sorts of fancy legal structures that avoid putting people in this position. But if you're not going to use any of them, you get the terrible idea instead!)
Whenever an organization does something, someone or something has liability. If you don't go through the process to create an LLC, that someone is the members of the organization. Liability doesn't go away just because you organize via a blockchain.
I could see legal changes to bring in limited liability to DAOs, but I don't think DAO users will like the rest of what that entails, eg reporting and kyc requirements.
Thsoe will likely make daos more useful, but less differentiated from existing structures
What if we can't tell who the last person was? Do we just go down the line until we find someone to blame? What if that person didn't add any of the menacing features of the code?
What if the last 'person' was gpt4? is openai responsible?
The person responsible will be whoever the courts think is responsible. Courts use case law and judicial precedent to determine responsibility for a wide variety of complicated legal situations.
Things do get murky when there isn't a lot of existing precedent. That's why it's risky to engage in activities that are, let's just say "legally innovative."
If they can't find the person solely responsible for something, then they got away.
If you make an AI that is hooked up to the internet and it does something criminal, you'd be liable. You can't just let your pitbull roam the streets and not be held liable when it bites someone.
What if I release the AI onto the internet, and then tragically die in a car accident? Who is responsible for the AI? What happens when the AI spawns more AI, who is responsible for that?
Yeah this reminds me of a thought experiment with Ethereum virtual machines. If someone writes and produces the code for tornado cash, publishes it on the internet as free speech but never deploys it obviously they are not at fault. So lets say they publish it and some anonymous person from Somalia publishes it to the Ethereum network and the nodes absorb the program.
When then is responsible for the tornado cash instance? The Ethereum VM node operators who have no idea they're even running it? An unknowable person from Somalia?
Right now the node operators worldwide even to this day are running tornado cash on their EVM, including validating transactions to sanctioned contract addresses.
And keep in mind, the US Treasury has said that it would issue licenses to Americans who need to be able to withdraw their legitimate funds from Tornado cash. Some validator needs to be able to process those transactions, and would have no idea whether any particular TC withdrawal is licensed or not.
Yeah, booby traps are the first example I can think of illegal automation that comes to mind where the property owner is liable. Setting up something and not pulling the trigger yourself doesn't absolve you.
> Whoever made the decision was it to implement them as an actor, most likely?
Directly, the holders of the DAO tokens. That’s what this case is about. Those holders may have further claims against the people who implemented the code or AI. But the liability begins with the general partners, i.e. holders of the governance tokens.
Will be interesting to see the first judgements enforced against holders of a DAO.
Which, in this case, are the bag-holders. Looks like there are benefits to having a real corporation, instead of trying to re-invent corporate governance from scratch, without any input from the courts...
For example: Imagine I have a cow, and the cow escapes and goes on a rampage. I didn't make the cow escape, I didn't tell it to go on a rampage, and cows think for themselves so are autonomous.
That doesn't mean I get to claim the cow is liable for the damage.
Why would it be difficult to enforce individual liability? The DAO needs to interact with the outside world somehow, pay bills and get paid etc, and distribute income to members, so you can just follow the money, can't you?
Jurisdiction of the enforcing party must have overlap with the individual members targeted. In practice I would expect any member under that jurisdiction would bear full responsibility of the actions of any of the collective members.
If you assume a DAO is de facto a corporation/partnership (as this court decision suggests), most US States (including California, which is relevant to this specific case) and many countries start from an unlimited, collective liability default for corporations/partnerships and limited liability is the properly registered (and taxed!) opt-in. (The article also points to states that are not California that realize this and have started to offer easy LLC opt-in for DAOs. Presumably in part because it is a potential tax revenue source.) [IANAL, but this is fascinating.]
It is an organization, there is no question there.
The question is whether it is a general partnership or not, and by the rules listed it would appear to be.
Collective ownership implying collective liability is not novel or new, and existed long before LLCs and LLPs did. Legislation allowing those is relatively recent because it has obvious benefits, but comes at the cost of some degree of regulation. In the true crypto spirit of "regulation == bad" this DAO took the path of not making itself an LLC or LLP (and in fact explicitly terminated the LLC), which means it seems fairly obvious that it's a general (e.g. unlimited liability) partnership as the court appears to be concluding.
I believe miners wouldn't, because while they might technically coordinate their efforts in deciding which version of a cryptocurrency to mine, they aren't pooling their resources and representing themselves as a single entity.
That's partly what makes these individuals an unincorporated organization.
ETH no longer has miners since the switch to PoS. There are now stakers, validators, liquid staking tokens, block builders, ... it has gotten a lot more complex than it was before.
What? Why would they be liable? The whole point is the liability in a partnership is shared between the partners: that is the entities that own the partnership.
Miners (staker?) aren't partners in the DAO: being a miner doesn't make you an owner of anything, anymore than being an employee or contractor to a partnership in the real world would make you liable for the actions of your employer/client.
If the DAO is very explicit about non-US residents, they should also be able to show that in court, and it could be determined that the US citizens who ignored that waived any protections the court would otherwise offer. Alternatively, it might instead be that the DAO should have done more to ~spy on~ "know" their customers so they could determine that they're not serving US citizens.
Regulatory arbitrage in Web3 seems to be coming to and end. My assumption is
1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
2) If a multi-sig runs your governance contract or treasury it isn’t decentralized. Might as well form an LLC or C corp.
3) From a more NatSec perspective, if a SEAL team or the FBI can reach a few people in your DAO and your project would shut down, you aren’t decentralized.
Which all seems good and as it should be, to stop people LARPing as decentralized to avoid regulations.
> 1) If your contract is upgradeable it isn’t decentralized. Might as well be hosting on EC2.
One benefit of hosting on the blockchain is that you can build an arbitrary derivative on top of any blockchain object. It's harder to do that with something random running on EC2.
Seems to me to make sense. if you don't file any paper work with the state and agree to start a money making enterprise with more than one person your a general partnership. Whether your an active or passive investor or not would probably depend on how much "work" you put into the partnership(not related to the article just my thought). Not a Lawyer so take anything I say as anything more than uneducated internet speculation.
Other than the risk of all your assets getting hacked and stolen to doesn't seem like a bad way to "enforce" a contract.
Maybe would be better if things were split up into different accounts with different people holding different keys so you don't have a single point of failure.
Just like with SVB there should be some kind of insurance for large accounts. with various audit and other processes to keep things "safer"
> your an active or passive investor or not would probably depend on how much "work" you put into the partnership
Legally, it requires paperwork filed ex ante. As the article notes, several states have DAO LLC constructs. DAOs that don't incorporate do, and should, expose their holders to unlimited liability. That is the default. (If you and I start an unincorporated car-washing business, and it destroys someone's car, we will be jointly sued and liable, though I may separately have individual claims against you if you made all the wrong decisions.)
The situation all this seeks to avoid is profit-seeking enterprise having everyone who stood to gain when things went well standing up saying "not it" when things don't. If a DAO–or any other business or person–causes you injury, it shouldn't be your job to figure out who contributed to what degree.
Why do people think "doing the same as X but 'with blockchain' instead of paper" means "legally different from X"?
If doing X is illegal, adding blockchain to it doesn't magically mean you're not doing X.
If doing X means you have to pay taxes, doing X with linked lists doesn't mean you don't have to pay taxes.
If doing X means you have a bunch of liabilities, then doing X on a block chain means you have a bunch of liabilities.
The only thing that makes a DAO different from a partnership is that decision making is arguably public on the blockchain, instead of an email thread. Again, why would you think that doing it on a blockchain makes it different from email, or in person, or whatever.
Now in fairness, I certainly didn't think of DAOs as being an unlimited partnership, but that's largely because I didn't think about it because they seem fairly pointless. As the court seems to be saying a DAO is fairly clearly a partnership, and they very deliberately terminated the LLC and didn't create an LLP, so the lack of liability protection follows logically from that.
> The plaintiffs alleged they lost $1.7 million in the cyberattack and that the repayment plan would take thousands of years to make them whole
Creative repayment plan.
> the court focused on statements by the bZx Protocol developers that creation of a DAO would insulate the Protocol “from regulatory oversight and accountability for compliance with U.S. law
Looks like they attempted the "citizen of the earth" card.
Interesting law. It seems that this kind of DAO is a Wyoming LLC with all the existing obligations and the extra requirement that you have to file Wyoming paperwork if your smart contracts are modified:
Articles of organization shall be amended when:
(i) There is a change in the name of the decentralized autonomous organization;
(ii) There is a false or erroneous statement in the articles of organization; or
(iii) The decentralized autonomous organization's smart contracts have been updated or changed.
A DAO may not be "foreign", but it's not defined what exactly that means: "The secretary of state shall not issue a certificate of authority for a foreign decentralized autonomous organization."
I'm guessing that most DAOs don't want the legal liability of an American LLC, so there may not be a lot of takers.
> What does that even mean for a DAO to be out of state?
A Delaware corporation doing business in California must file as a foreign corporation in the latter. It sounds like Wyoming is saying a DAO can't incorporate out of state and take advantage of the Wyoming DAO LLC, but this doesn't appear to have been fleshed out.
I think the more interesting question is what does it mean for a DAO to be considered in state to qualify for this type of LLC? Do they need to keep at least a PO Box as presence in the state? Some amount of real estate? Some number of state-resident members with voting power? Do the other usual LLC requirements apply?
In terms of a pure DAO though that's a weirdly nebulous distinction. Before incorporation they're nowhere legally speaking, there's not a single physical location it's operating out of.
Maybe like others have said it's mostly about otherwise extant orgs not being able to register.
I think that clarification makes sense though. You'd normally (this may vary from state to state) need to amend an Articles of Organization if your LLC Operating Agreement changed, which usually outlines the nature of a joint-ownership model. Since that's handled via smart contracts, you'd want those to be legally binding, which would imply that you need to follow the normal meatspace government lawyer process of updating your articles of organization.
What would happen in the case of a general partnership where 5 people put some money together to buy a house for $1M:
Partner 1: $500,000
Partner 2: $250,000
Partner 3: $249,000
Partner 4: $999
Partner 5: $1
They issued paper receipts representing these proportions. All agreed that any rent collected would be paid to the paper holders Pro rata. All parties have to show up to review/approve/reject a tenant, and all have to show up to collect the rent on the due day. Each person writes their own receipts and signs all the others, so no one party is more in charge than any other. Partner 3 sells 100,000 receipts to someone else, we'll call Person A, for $101,000. Then the house burns down and is lost, so there's not going to be any rental income now and nobody is interested in buying the receipts anymore. None of the parties did anything to cause the fire.
Now who can sue successfully?
(Not saying the facts of the case in the article match my hypothetical exactly.)
In your scenario, nobody's at fault for anything, so nobody can sue anybody.
But what if Partner 2 set fire to the house? Then the other Partners (now including Person A but not Partner 3) could sue Partner 2 for losses.
Or what if Person B, a tenant, suffered harm due to negligent maintenance of the house? Person B could sue any or all of the Partners (now including Person A but not Partner 3) for damages. And each partner would be "jointly and severally" liable for all of Person B's damages (so if Partner 5, owning a tiny portion of the partnership ended up getting sued and owing damages to Person B, they would need to sue the other partners for reimbursement).
But note that Partner 3 selling his partnership interest to Person A would, in many states, trigger the dissolution of the original partnership. In this case, it doesn't matter since they never bothered to form any custom organization documents or financial allocations.
Nobody? All I see is six morons that have joint ownership in a house that were all too cheap to pay for insurance. And since nobody's at fault for the fire, tough cheese.
Person A might be able to sue whomever sold him the receipts, but only if he was lied to about how the organization functions.
> And the question remains whether the court would reach a different result if it turns out that the named plaintiffs hold BZRX tokens. That could mean those plaintiffs are fatally conflicted from pursuing their claims, as they would effectively be both plaintiffs and defendants under their theory of the case.
This is the part I don’t understand, if they succeed in making the case all “owners” are liable wouldn’t they equally be liable for the money they lost?
And the thousand years to get paid back part — are you a hodl or not?
DAOs require a legal identity, otherwise one will be provided.
For anyone who has been thinking about the intersections between DAOs and the law, this was obvious.
You can still manage your membership on chain, and there are plenty of great structures that are more DAO friendly - my organization uses a MI LLC structure (midao.org is what we used)
I have been out of the loop of DAO and how they are organized and manage changes. My first explaining of that was in Folding Ideas part of Decentraland [1]. The DAO portion did not look so good.
So still trying to figure out if this is just a phase or there is some legitimacy to a DAO.
What I find most fascinating is that most "DAOs" you see are entirely window dressing: at the end of the day, there are a few people who actually run the assets and control the code being run who are merely promising to take direction at the whim of the people who hold some token, which is effectively just an illegal way to build a corporation and sell stock.
It is possible to do something that is actually run by a truly decentralized and autonomous mechanism but there are serious limits; like, if you are running things on just Ethereum you can write code that handles code upgrades by using an on-chain vote... but it would not be trivial (I won't say quite impossible) for the DAO holders to then vote to transition the system to Polygon somehow, as what would that mean from the perspective of the code running on Ethereum? Or like, you couldn't have the DAO on Ethereum do something as simple as own a .com domain name.
This situation is in some sense no different for this DAO. They apparently had an actually-decentralized one on Ethereum, which is surprising as it is so rare... but, as mentioned in this article I found--and not in the article linked for this thread which is concentrating on the general partnership question--they cut corners when they decided to go multi-chain, and the DAO supposedly owned contracts on a couple other networks, including Polygon.
The hack then wasn't "the DAO decided to use buggy code and now the DAO members are liable": it was a phishing attack against a single developer sitting on a single key that allowed for control of the code--and thereby the money--on Polygon, as the DAO was only really able to ask that developer to take action and then hope he did it.
That extra context to me makes this whole thing even more of a fascinating case study. Like, one might then just want to say "this thing was never decentralized to begin with: the owner of the key was liable" and yet weirdly the case isn't brought merely against that developer... it is brought against the DAO that in some sense supposedly hired the developer and was negligent in letting the one developer have the key for all the money on another network, something they never should have done!
In some sense, then, this is a remarkable win for the concept of a DAO. I mean, sure: some people likely wanted a DAO to be some kind of "regulatory arbitrage" (as noted in complaints about them here on Hacker News) and are going to be sad at the idea that the DAO holders actually have some kind of liability in the actions that the DAO takes...
...but that was NEVER--I am serious: NEVER--an informed take on a DAO. The point isn't to make it somehow impossible to sue the people who own it, it is to build a new form of organization wherein the ownership is liquid and people have a direct democracy over the actions of the organization. If someone sued a co-operative--a common form of company where the customers and/or employees are the owners; I have had numerous friends who lived in the local student housing co-op and I'm myself a member of the local food co-op--it would not be surprising or disappointing to me if all the people who were deemed owners had some potential liability.
Now, I don't think the co-op holders (such as myself if my local food co-op does something bad, even though I absolutely am allowed to go to meetings and vote on their actions!) actually have much liability, but only because American corporate law is out of control on liability separation; like, I personally think big tech shareholders should have joint and several liability over the shit decisions these companies make that harm customers; but that (very sadly to me and I believe incorrectly) isn't how it tends to work in the United States... hell: the employees and even managers of the company taking the actions often don't have liability, which is just crazy-town.
But so, OK: when I see this argument that the DAO can actually be a defendant and can actually have liability that can actually be shared among its owners, to me that is an almost-incredible vindication of the concept. Hell: apparently, the companies that were the original developers of this mess in fact were considered to NOT have liability anymore, having SUCCESSFULLY transferred that to the DAO? That's hilarious!!
Now, does this mean it is a good idea to own "shares" in a DAO? Hell no ;P. And yeah: I'd like to think this would kill a lot of interest in holding a non-negligible quantity (as it can be hard to not own any, which is why this article focused on non-negligible) of the tokens for a DAO, in the same way I can't imagine many people would own stock in Apple if they could be held joint and severely liable (which maybe is actually going "too far"... we here in the US love our liability extremes ;P) for its actions.
> which is effectively just an illegal way to build a corporation and sell stock.
It would appear that the court is taking the position that it's not an illegal way to create an corporation, but rather a perfectly legal way to create a general partnership with unlimited liability :D
I especially like how they intentionally terminated the LLC that would have protected them.
I've been very good, mom said that she is thankful I helped her with housework and that my room has stayed very clean. as always, I donate all of my income to charity and volunteer for 40 hours every week. can I have one thing? just one thing? my one wish is to never have my day cluttered with f*king blockchain BS again.
Enforcement will be the interesting part. If a DAO has anonymous members and no LLC or corporate structure associated with it, then a court can rule that the members are liable, but it could be very difficult to enforce that liability.