Introduction 

A decentralized autonomous organization (DAO) is an emerging form of legal structure. With no central governing body, every member of a DAO typically shares a common goal and strives to act in the best interests of the entity. DAOs, which have gained popularity among cryptocurrency and blockchain technology enthusiasts, make decisions with a bottom-up management approach.

Therefore, there are various legal frameworks in different jurisdictions all over the world for the smooth operation of the DAO through, DAO members, voting system, proposal, and decision-making. 

What is the purpose of a DAO?

DAO stands for Decentralized Autonomous Organization, which operates transparently and autonomously, meaning independent of any human intervention. These organizations have their rules and structure written in codes known as smart contracts and do not have a hierarchical system, meaning no single commanding body behind decision-making. Decisions are made via a voting system on proposals during a specified period by those who have invested in these organizations or through algorithms depending on the type of DAO. These organizations are collectively owned and managed by their members only. DAO ownership is attained by selling tokens to the investors provided by the platform in exchange for virtual currency used on the blockchain on which the DAO code has been deployed. This provides voting rights to the token holders to accept or reject a smart contract-based business proposal. However, the legal status of DAOs is still uncertain. Despite the growth of the decentralized autonomous organization, the legal status has become a hurdle in its technological advancement and exposes risk to its members. 

Formation of DAO

The organization was launched on April 30, 2016, after the Ethereum protocol engineer, Christoph Jentzsch, released the open source for an Ethereum-based investment organization. It was first meant to operate as a venture capital fund for crypto and decentralized spaces. DAO, called earlier ‘The DAO,” was a decentralized platform that relied on crowdfunding through token selling. Those who bought these tokens became token investors and decision-makers. The idea behind DAO is to form an automated, decentralized platform wherein decision makers are the members of that platform, and decisions are taken collectively without the interference of a centralized governing authority. 

The general structure of DAO 

There are two stages for DAO; one is the Pre-DAO stage, and the other is the Post-DAO stage. DAO, initially in its pre-DAO stage, is a centralized project that is managed by its founders. Further, smart contracts are launched, tokens are issued, the members of the DAO are selected, the governance system is formed, and the DAO then enters the Post-DAO stage that fully decentralizes the ownership and the management.

The structure of the DAO includes a DAO governance system, a DAO constitution, DAO membership, a DAO voting rights system, and a decision-making process.

DAO members

The selection of members of the Decentralized Autonomous Organization is decided by the founders. They usually rely on a single criterion wherein a minimum limit of tokens is decided that a token holder possesses to become a member of DAO. However, there are other criteria to decide upon, such as the members of DAO, wherein those participants are welcomed who are contributors and play an important role in its work, such as validators, oracles, or creators, for example.

Voting Rights 

Once the members of the Decentralized Autonomous Organization are decided, the founders then structure the voting right mechanism that allows participants in the decentralized governance system of a Web3 decentralized project. The founders issue Liquidity Provider tokens to all the members of DAO as proof of the number of the project’s tokens staked by a DAO member. However, in other cases, founders may issue a separate type of governance token. These tokens must be non-transferable and non-tradable; otherwise, they will be considered securities.

Proposal making

Once the members and their voting rights are decided, subsequently, the founders determine which of the Decentralized Autonomous Organization members will have the right to create proposals and how many members must support it to put it to a vote of the entire DAO.

Decision making

The members of the DAO then participate in the decision-making by deploying their voting rights. These decisions include the issuance of additional tokens, burning of tokens, increasing liquidity pools, disposing of the treasury, and the like.

In summary

Decentralized Autonomous Organizations are internet-native organizations that are owned and managed collectively by their members. They have built-in treasuries that can only be accessed with the permission of their members. Decisions are made through proposals that the group votes on over a set period.

DAOs are a highly effective and extremely safe way to collaborate with like-minded people all over the world.  DAOs, as internet-native organizations, have the potential to completely transform corporate governance. As the concept matures, more organizations may choose to use a DAO model to help govern their activities.

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Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

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