February 24, 2022

The Dao of DAOs: A Primer

Getting ready for TRM Talks epic panel on DAOs next Monday, February 28, at 3 PM ET? Here is a quick refresher:

A DAO, or “Decentralized Autonomous Organization,” is a community-governed entity with no central authority. Software - smart contracts - provides the governance rules and executes decision making. Ultimately, the DAO - think a decentralized corporation - is governed by individual members who make proposals about the future of the company and then vote on those proposals. In a recent CNBC piece Cooper Turley, an investor and builder of several DAOs, explained, “A DAO is an internet community with a shared bank account. Basically, a small group of people come together to form a chat group, and then they decide to pull capital together, [typically] using an Ethereum wallet." From there, they decide how to fund their DAO’s mission collectively, he says.”

A recent New Yorker piece dug into the growing popularity of DAOs. "A DAO, by definition, is simply a business structure, akin to an L.L.C. or a C-corp. They are usually made up of a custom cryptocurrency, or token, and an online community space, such as a chat room on the platform Discord. The community holds internal discussions and then votes on decisions using the token, on apps such as Snapshot, the way one might slip a piece of paper into a cardboard box to elect a class president. The more funding you put in, the more slips of paper you get. DAOs promise that an organization’s decision-making will lie with a wide group of members rather than with, say, the tiny élite of a corporate board. In quieter corners of the Internet, this structure has shown promise, forging an ecosystem for digital startups outside Silicon Valley."

ConstitutionDAO raised forty-seven million dollars in cryptocurrency to bid on one of thirteen original copes of the U.S. Constitution. While the project ultimately failed to acquire the document at auction, the DAO took less than 48 hours to raise $5 million and a week to raise $47 million - the largest crowdfunding effort of its kind, demonstrating the power and promise of decentralized organizations.

As TRM Talks guest and Constitution DAO organizer Graham Novak explained to Forbes, “I’ve found it increasingly fascinating to watch this Cambrian explosion of cool web projects over the last year. The opportunity to actually build one out was something unique.”

And, just last week a group of investors announced plans to form a DAO with the goal of purchasing the NFL’s Denver Broncos - slated to cost around $4 billion. As Sean O’Brien who is spearheading the effort explained to CNBC, "The purpose essentially is to establish an infrastructure so that fans from all walks of life can be owners of the Denver Broncos." The effort is even supported by Denver’s crypto-friendly governor, Jared Polis, who recently announced plans to accept crypto for for state tax payments by this summer. On Friday, the pro-crypto lawmaker told CNBC on the sidelines of ETH Denver — a major conference dedicated to dissecting the present use cases and future of Ethereum — that he would be "thrilled" if their effort comes to fruition.”

Here are some other examples of DAOs on a mission:

The Krause House DAO (named after the architect of Michael Jordan's Chicago Bulls team, Jerry Krause) formed to buy an NBA team.
OG MakerDAO was built on Ethereum to allow lending and borrowing of crypto.
Ready Player DAO was "formed by a gang of gaming nerds and metaverse explorers," and is “committed to harnessing the collective power of play to create equity for all."
ApeDAO amassed a collection of 81 Bored Ape Yacht Club NFTs offering token holders exposure to a collection of popular NFTs like BAYC, CryptoPunks, Mutant Apes, and Cool Cats, among others demonstrating another DAO use case.

But DAOs, like other cryptocurrency organizations that hold funds, are vulnerable to hacks, scams and fraud. In 2016, there was an attack on a DAO called “TheDAO” which was, according to a just-released book and Forbes article on the topic by Unchained’s Laura Shin, the result of a flaw in its code allowing the attacker to slowly drain funds from the main platform into other newly-created DAOs. The hacker stole around 31% of TheDAO’s total ETH, which at the time was around 5% of all ETH ever created.

In 2017, the Securities and Exchange Commission (SEC) issued an investigative report which found that tokens issued by TheDAO were securities and therefore subject to SEC regulation. While the SEC did not bring an enforcement action, it sent a message to market participants that selling tokens for purposes of “crowdfunding” does not exempt an entity from securities laws.

In November 2021, the SEC announced that it had halted the first ever attempt to register digital tokens issued by a DAO under securities laws. American CryptoFed – also the first DAO to take advantage of Wyoming’s new “DAO Law” that attempts to give DAOs legal status – filed registration forms with the SEC in an effort to register tokens. The SEC rejected the registration citing “misleading statements” such as claims that the tokens were not intended to be securities and failure to provide substantive information about the issuer; such as business, management, and ownership structure. Does this make it impossible for a DAO to register with the SEC given the decentralized ownership structure?

And, what about the first-in-the-nation Wyoming law on DAOs? In April 2021, Wyoming Gov. Mark Gordon signed the state’s DAO-focused Bill 38 into law, allowing Wyoming to recognize DAOs as limited liability corporations (LLCs). The law went into effect in July 2021. LLCs are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. As explained to Coindesk by TRM Talks alum, Wyoming Sen. Chris Rothfuss, the bill makes the process of a DAO becoming an LLC easier and cheaper. “A lot of our work in Wyoming on blockchain and fintech governance has been focused on providing legal clarity where ambiguity exists before the court needs to decisively weigh in.” Check out TRM Talks Wyoming and follow these steps to create your own Wyoming DAO.

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