Business Law

How And Why To Create A DAO (Decentralized Autonomous Organization) Company

Have you heard of the acronym DAO, but either do not have an appreciation for what it means or need help with setting one up? If so, then you are not alone. DAO stands for Decentralized Autonomous Organization, which is a type of corporate entity structured to operate on a blockchain and without any form of central authority or specific decision-maker(s). Many people have looked to the laws of the State of Wyoming to assist them with properly registering their DAOs.

If you have an interest in creating a DAO or simply seek more information about such an entity, then feel free to contact us about your particular issue. We keep all communications confidential, pride ourselves on quick and active responses, and do not charge for initial consultations.

On April 21, 2021, the Governor of the State of Wyoming signed into law a bill on DAOs. It specifically allows for the creation of DAOs as limited liability companies that have articles of organization containing a statement that the company is just that — a DAO. It also permits existing LLCs formed under the Wyoming Limited Liability Company Act to convert to DAOs by amending their articles of organization to include such a statement.

DAOs in Wyoming must also include a conspicuous statement in their articles of organization or operating agreement that indicates the rights of members in the DAO may differ materially from the rights of members in other LLCs and that the Wyoming Decentralized Autonomous Organization Supplement, underlying smart contracts, articles of organization and operating agreement, if applicable, of a DAO may define, reduce or eliminate fiduciary duties and may restrict transfer of ownership interests, withdrawal or resignation from the DAO, return of capital contributions and dissolution of the DAO.

A unique aspect of a DAO is that it can be defined as an algorithmically managed entity, which may only exist if the underlying smart contracts are able to be updated, modified, or otherwise upgraded. Further, these types of algorithmically managed entities must have articles of organization and smart contracts that govern:

  1. Relations among the members and between the members and the decentralized autonomous organization;
  2. Rights and duties under this chapter of a person in their capacity as a member;
  3. Activities of the decentralized autonomous organization and the conduct of those activities;
  4. Means and conditions for amending the operating agreement;
  5. Rights and voting rights of members;
  6. Transferability of membership interests;
  7. Withdrawal of membership;
  8. Distributions to members prior to dissolution;
  9. Amendment of the articles of organization;
  10. Procedures for amending, updating, editing, or changing applicable smart contracts; and
  11. All other aspects of the decentralized autonomous organization.

The most interesting aspect of these DAOs is that membership interests in a member-managed DAO are calculated by dividing a member’s contribution of digital assets to the organization, divided by the total amount of digital assets contributed to the organization at the time of a vote.

Wyoming is the first state to legally recognize DAOs as entities that can be their own legal form. You do not have to live in Wyoming to register a DAO there, but you will need to name a registered agent who has a mailing address in the state. A big benefit of being able to actually register these DAOs as corporate entities is that, like a more traditional LLC, it can shield the individual members from personal liability for the acts and obligations of the DAO (assuming the corporate veil cannot be pierced by an outsider).

Finally, it is important to note that DAOs are distinguished from more traditional LLCs in that the members do not owe a fiduciary duty to the DAO. LLC members typically owe duties of loyalty and care to the company and their fellow members. That said, members of a DAO do subject themselves to an implied contractual covenant of good faith and fair dealing.