Decentralized autonomous organizations (DAOs): Regulating through company laws

The conventional corporate spaces and the laws governing them have the ability to regulate and recognize the facets of organizations governed by a central authority of a group of the same. The idea of a decentralized system has been paving its way through multitudes of dimensions of fields and areas varying from assets to government. The major share of the ideas or perspectives has been reflecting the objective of decentralizing the entire concept. Whenever the decentralized approach has been introduced into the ecosystem, it has majorly challenged and had the potential to compete or replace the traditional approaches. Such a concept has come up into the corporate structure and also the regulations as a reaction to the traffic into the structure, which needs to be regulated anyways.


DAO (Decentralized Autonomous Organization) is a blockchain-based system that enables people to coordinate and govern themselves mediated by a set of self-executing rules deployed on a public blockchain, and whose governance is decentralized. It is an organization that operates pursuant to a transparent set of software protocols. These protocols allow a distributed group of individuals or entities to make decisions on behalf of the DAO. The DAO’s governance rules are maintained and executed on a blockchain using distributed ledger technology. As a result, a DAO can function on a distributed basis without a central authority or decision-maker. DAOs are one of the most popular concepts in the digital consensus space.

An example to explain DAOs in better ways is the consideration of a simple corporation running a chain of stores. The corporation has three classes of members: investors, employees, and customers. The membership rule for investors is that of a fixed size part of the virtual property; until they sell the shares. Employees need to be hired by either the investors or other employees that are authorized by investors, and the customers have the open doors to become a part by interacting with any store.

DAOs transform the same organization into a decentralized one. Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via a legal system, DAOs have a set of humans interacting with each other according to a protocol specified in code, enforced on the blockchain Membership

Membership in a DAO is granted through one of these 2 ways:

1. Token-based membership

In a token-based membership system, certain tokens are granted to members, that grant the members voting rights proportionate to their token holdings. Any member could be granted certain tokens in a DAO if they invest as part of a coin offering, or if they provide liquidity or any other proof of work. These are automatic and do not need any permission. Leaving the DAO would be easy by just selling the tokens in the open market.

2. Shared Based membership

This particular concept is new and not quite common in the sphere. It needs the person to provide a proposal, offering tribute in terms of money or work. Similar to the shares in a conventional corporation, shares represent the voting power and ownership in the organization. Both the types are not the same as in shared based membership may be redeemed upon exit and the exiting member can receive the proportionate share of the treasury


DAOs go back to 2016 when “DAO” was set up as a venture capital fund without a central authority. It was set up as a smart contract on the Ethereum blockchain.

Back then, one could contribute Ether and receive DAO tokens in proportion to their contribution. As a holder, they could vote on any pitches made to the community and fund projects. After the projects are earned, they would be rewarded on the basis of their DAO token holding.


The state of Wyoming made headlines when its legislature approved a first-of-its-kind bill that grants legal company status to the Decentralized Autonomous Organizations (DAOs) that operate on a blockchain, with the terms that they are organized as a Wyoming limited liability company. The bill codified as Wyoming Decentralized Autonomous Organization Supplement, that applies specifically to the DAOs organized under the Wyoming Limited Liability Company Act. DAOs organized as limited liability companies in states other than Wyoming will not be authorized to do business within the state of Wyoming.

The LLC structure addresses the biggest concern of DAO members – personal liability for the actions of the DAO. The objective of passing the bill is to provide liability protection for DAO members who organize as a Wyoming limited liability company. Without the same, the DAO members would be exposed to their liabilities for any of the DAO’s actions and obligations, considering it as a general partnership. Currently, under this law, the legal protections extend to LLC members that organize the DAO as a Wyoming LLC.

The law recognizes two types of DAOs:


Algorithmically managed

Member-managed DAO is similar to member-managed LLC under the act where certain people are responsible for the upkeep and management of the organization. The algorithmically managed DAO can register as an algorithmically managed LLC if the governing smart contract system is already operational at the time of filing.

The Articles of organization of the DAO LLC must be updated or amended when there is an update or change to the DAO’s underlying smart contracts.

Contract Laws and the contractual challenges

A recognized legal entity (such as an individual, company, or another recognized form of an entity) is a must to enter into a contract. It will take time till most or more of the countries recognize DAOs, or give legitimacy to the contracts entered into under DAOs.


The biggest question in a DAO is the entity that would be sued, and who would be responsible for the actions of DAOs. In order to include any of the new ideas or perspectives into the conventional system, the government would need to include it or categorize it into any of the existing types of corporations. For DAOs, that structure is most likely to be a general partnership (and not limited liability partnership or LLP).

Under US law, a partnership is said to exist where two or more person associate to carry on as co-owners, a business for profit, whether or not the persons intend to form a partnership. The law relating to a general partnership is recognized in India under the Partnership Act, 1932. Under the Act, ‘partnership’ is the relation between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all.

However, unlike US law, where the intent of the parties to form a partnership is immaterial, in India, whether a partnership exists is a determination based on the intent of parties and relevant facts. The key features of a DAO such as sharing of profits, running a business, and making key decisions together are likely to satisfy the requirements of a partnership across jurisdictions.

If DAO is considered or recognized as a general partnership, it would be unfortunate for the partners of DAO as, under the general partnership, the partners have unlimited liabilities. The partners are jointly and severally liable for any liability arising from the business and the acts or omissions of the other partners. This means that each member is responsible for the acts of all the other members of a DAO, where even the personal assets of the partners would be used to pay the debts of the DAO.


The jurisdictions of the DAOs are the questions and the tricky part where the DAO does not have a country of incorporation, a place of governance, or a principal office. Under existing legal systems, the jurisdiction which applies to entities is largely based on the place of incorporation of such organization (incorporation theory) or the place where key managerial decisions of such organization are taken (real seat theory).

Another solution to the same would be the freedom to choose the forum. There too the question of taxation would be till present.


DAOs have opened up a new paradigm of corporate structure. Up until now, corporations were limited to some extent by their jurisdiction and corporate governance rules. DAOs envisage an idea of a truly global, and truly decentralized organization. They have a flat hierarchy in the true sense. And since smart contracts are self-executing, it eliminates human malaise to a great extent and enable democratization of the corporation. A DAO can make it extremely easy to pool resources globally and collaborate, without compromising on trust. 

The future lies with decentralized ecosystems and advanced collaborations. The institutions and legislators would need to recognize the potential of DAOs as they have the potential to revolutionize the system and can prove to be one of the greatest discoveries of all time.

The biggest question in a DAO is the entity that would be sued, and who would be responsible for the actions of DAOs. In order to include any of the new ideas or perspectives into the conventional system, the government would need to include it or categorize it into any of the existing types of corporations. For DAOs, that structure is most likely to be a general partnership (and not limited liability partnership or LLP).

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