Opinion | Wyoming's DAO Bill Aims to Create a "DAO Headquarters," but is Doomed to Disappointment

This article is authorized for reprint from ChainNews, for the original English article please see here.

The issues created by the Wyoming DAO Act are more than it solves, and any similar attempts at regulatory clarification before modifying the Act will not assist in optimizing innovation.

By Joshua Durham, Blockchain and FinTech Intern at Crowell & Moring

Advertisement - Please scroll down for more content

Compiled by Perry Wang

The "jaw-dropping" DAO Act in Wyoming, USA, went into effect in July 2021. This Act allows Decentralized Autonomous Organizations (DAOs) to register as Limited Liability Companies (LLCs) in the state. The Act seems to be a fitting match for Wyoming, known as the "Cowboy State," not only because its nickname reflects the "wild west" spirit of the emerging cryptocurrency world but also because Wyoming has been a pioneer in LLC formation, leading the way for this business organizational structure.

Perhaps more appropriately, the subject of the Act was initially designed for "DACs" (Decentralized Autonomous Corporations) as early cryptocurrency adopters realized that typical business activities could be automated on the blockchain. However, the subject of the Act has now expanded from DACs to comprehensive DAOs as blockchain has opened up a realm of human organizations beyond just business applications.

However, should blockchain legislation cover this broad spectrum equally? Due to the Wyoming Act's birth from a fundamental misunderstanding of DAO technology and industry, its practical application will be as limited as its scope.

DAO

One of the most significant innovations brought by blockchain is the concept of programmable money, as the currency on the chain is now digitally native. For example, developers can write code (smart contracts) to execute simple or complex tasks using cryptocurrencies on the Ethereum blockchain. Similar to a Rube Goldberg machine in the financial realm, Ethereum users seeking financial services through smart contracts simply need to send cryptocurrency to the smart contract, which then executes predefined functions using that cryptocurrency. These smart contracts can also fulfill the functions of DAOs, which are programs where rules are written into code to execute and/or automate organizational tasks.

Unlike passive smart contracts, DAOs are not fully automated—they require some human input. Members involved in a DAO need to make managerial decisions, such as issues regarding the asset pool held by the DAO or interactions with other smart contracts. In essence, DAOs automate and facilitate human organizational activities, such as maintaining payroll, accounting matters, entity dissolution, dispute resolution, voting on business decisions, and interacting with other blockchain-based entities.

For example, members of a DAO maintaining an interest-bearing cryptocurrency pool could vote to use the services of another DAO programmed to provide insurance services. In the distant future, entire companies may transform their management structures into streamlined and efficient DAOs.

However, unless further explicit legislation is introduced in other states, companies registered in this manner may face similar liability threats as regular partnerships.

It is crucial to note that DAOs currently control and manage decentralized finance (DeFi) protocols worth billions of dollars, such as Uniswap, Aave, and Curve. Many of these DAOs initially started from private foundations. Similar to companies that "go public" after a period of maturation, many DeFi protocols initially opt for management by private foundations and then transition governance to members distributed worldwide through permissionless DAOs. DAOs are permissionless, as anyone with internet access can purchase governance tokens of the project and use them to vote on governance proposals or request a share of all profits generated by the DAO. However, DAOs do not necessarily need to be profit-oriented and can function as decision-making organizations of any kind. For instance, anyone can create their own DAO on DAOHaus, establish specific rules, and use it for club operations, subsidy distribution, product governance, or other services.

In conclusion, as a range of issues that may arise from first impressions continues to expand, the novel features of DAOs provide mature legislative opportunities for understanding situations thoroughly.

"DAO LLC" Legislation in Wyoming

The legislators in Wyoming initially drafted parts of the bill with the aim of ensuring that DAOs would not face the liabilities of general partnerships, but without further modifications, the bill's own issues would limit its practical use. The drafters acknowledge this as a temporary provision, stating that "LLC regulations may not be the best fit for DAOs," and therefore, the legislators express that "this is a work in progress."

Fortunately, Wyoming recognizes that they are merely filling a gap rather than paving a new road. The following are three factors that legislators and practitioners need to consider seriously when attempting to amend or utilize Wyoming's DAO legislation:

Firstly, the bill classifies all DAOs as "member-managed" unless they opt for "algorithmic management." 17-31-104e. Therefore, DAOs cannot be managed by managers—meaning projects cannot be nurtured and developed by initial foundations. This limitation is akin to forcing a company to go public before finding a suitable product/market fit or even testing the locks. In reality, the bill does not protect DAOs in their most vulnerable developmental stages.

Technically, most DAOs can only execute management functions when there is active participation by individuals (i.e., members), such as voting on management decisions—code does not vote. These technical realities make it challenging to envision how DAOs would achieve "algorithmic management" without specific definitions in other bills. How can DAOs achieve "algorithmic management" without artificial intelligence intervention? If algorithmic management of DAOs does not involve human intervention, could management be attributed to passive smart contracts as complex as Excel macros? 17-31-109.

The key distinction between "member-managed DAOs" and "algorithmically managed" DAOs appears in 17-31-105d, which requires "algorithmically managed" DAOs to be "updatable, modifiable, or upgradeable." However, a unique feature of blockchain is that its state is immutable. Therefore, any updates, modifications, or upgrades to DAOs are typically managed by deploying entirely new smart contracts, which also require amending organizational bylaws to add new contract addresses. 17-31-107aiii. Relatedly, if a DAO LLC fails to approve any proposals or take any actions within a year, the bill would dissolve it. 17-31-107aiii. This provision is unfamiliar even to traditional LLCs, thus hindering innovative DAO LLCs—if a project is content with its DAO's performance, there is no need for any actions.

Secondly, the bill mandates that DAO LLCs must register with "DAO," "LAO," or "DAO LLC" in their names. 17-31-104\d\. While this naming convention does exist in the DAO space (e.g., MakerDAO, Moloch DAO), it is less common compared to platforms that opt for unique or descriptive names (e.g., Aave, Uniswap, Compound). Consequently, the naming rules in the bill may deter many projects.

Thirdly, the bill requires DAOs to maintain a registered agent in Wyoming. 17-31-105b. However, this seemingly minor rule may impede the widespread use of the bill, as projects neither need nor want this requirement. DAOs fundamentally replace trustees and responsible parties, as all assets and liabilities exist on the blockchain. Moreover, the vast majority of DAO members prefer to remain anonymous. The ethos behind these DAOs and part of their marketing theory is that they operate in a borderless and internet-native manner. Thus, while having a registered agent in the state is the minimum cost of registering an LLC in Wyoming, many DAOs are discouraged by the cumbersome maintenance of this redundant "physical" infrastructure.

Conclusion

As it stands, the Wyoming bill poses more problems for DAOs than it solves, as it was drafted based on misunderstandings surrounding DAOs' technology and industry. Subsequent legislative actions should incorporate innovative practices that a few crypto laws have already adopted.

It is noteworthy that lawyers have developed model code compliance agreements, and some DAOs have already registered as companies through Series LLCs and Ricardian contracts in Delaware. Both approaches assign specific legal meanings to specific codes, allowing smart contracts managing their DAOs to not only execute but also serve as evidence of legal contracts.

Nevertheless, until the Wyoming bill is modified, any similar regulatory clarification attempts will remain ineffective, merely making headlines without truly aiding innovation optimization.

Special thanks to James McCall, Kyle Tatich, Sierra Weingartner, Erich Dylus, and Raina Haque for their feedback.