What is a DAO?
The term “decentralized autonomous organization” DAO, or decentralized autonomous group (DAO) refers to those who have formed themselves as a business or another organization, without establishing the traditional hierarchical structure, or central management. A majority of DAOs are entirely online, and members meet in person very rarely or at all. Blockchain technology powers DAOs which makes transactions completely secure and unchangeable.
Due to the possibility of DAO’s use in a variety of traditional organizational frameworks like government and business researchers are examining the possibility of implementing the DAO structure for these sectors. DAOs are also viewed as an option to solve bureaucratic and corruption issues, given their effectiveness and transparency.
This article will dive into the growth of DAOs in the legal sector and also the drawbacks and advantages of DAO-based structures in law firms.
What are the DAOs’ functions?
DAOs operate by a system that is comprised of smart contracts and the decentralized administration. Smart contracts are computerized protocols that help facilitate, confirm or ensure the negotiation of agreed-upon conditions. They are able to automatize a variety of governance processes including voting, as well as managing assets.
Smart contracts are coded and encoded in blockchains, making them unreversible, transparent, and unchangeable. DAOs are effective for a large extent because of their ability to smart contracts to execute agreements without the need for intermediaries.
When the contract’s conditions are satisfied that the smart contract can be completed. Smart contracts are also able to automatize workflows, which allows DAOs to accomplish their work without having to look of an overseer or central authority.
Rules are formulated through the community vote
Rules are approved by the community , and then written into the smart contracts of the DAO. They can be amended via subsequent votes and thereby making DAOs extremely flexible.
Since they are open and transparent No one can alter the rules of an DAO without the approval of the community. This stops a single person or group from bending the rules to meet the needs of their group.
DAO tokens can be bought or given away
Members can buy DAO tokens to take part in voting, or other governance functions. DAO tokens may be used to encourage certain behavior. For instance an DAO could award tokens for members to have completed tasks that benefit the DAO. The tokens are then used to cast votes on proposed projects or to gain exclusive benefits.
The growth of DAOs in the legal sector
A variety of procedural options have been proposed by the legal sector in recent time. Platforms such as Luminance have sought to incorporate AI (AI) in the legal field, especially for lease reviews, contract reviews, data protection due diligence, and many more. Diligen is another platform that makes use of machine learning to analyse contracts.
Although these platforms have significantly improved the legal workflows of those firms that have embraced their services, they haven’t had any major impact on the legal industry overall at the very least, not to the extent that is that is expected in the event that DAOs were to be used as legal frameworks within the next few months.
However, the legal sector isn’t one that can “flow with the times,” in the sense of. Even today there are many firms that adhere to their traditional business models or corporate frameworks. Many resist adopting legal tech solutions such as Luminance as well as Diligen.
DAOs have already made their first foray into the legal world, though the path to acclimatization at the administrative and structural scale is not yet completed. The year 2021 saw ConstitutionDAO who wanted to buy a copy of ConstitutionDAO’s copy of the United States Constitution, was shut down following the loss of its bid to Sotheby’s.
The idea, which was based on the idea that the majority of the populace could have the Constitution and wanted to buy one of the few remaining versions of the Constitution and then display it up for public viewing. The idea took off with a vengeance and has raised more than $40 million in Ether ( ETH).
Following the loss of its bid against a private bidder for $43.2 million the group determined that the project was finished. The funds raised were returned back to those who contributed originally.
Even though it didn’t succeed in achieving its goals, ConstitutionDAO marked a pivotal moment in the realization how it was a sign that the DAO as an instrument could change the legal law.
Legal entities autonomous
Researchers are also studying how autonomous legal entities are governed by law, and what they could do to resolve (or create) current issues in the field. According to the definition an autonomous legal person is one which can take action independently without the requirement for human intervention. It is the same way DAO functions. DAO operates, since the DAO is able to exist and perform its functions without the need of an authority central to it.
There are currently several initiatives focusing on the creation of self-governing legal bodies. In a recent seminar about interoperable governance which was held in conjunction with Stanford Center for Legal Informatics Stanford Center for Legal Informatics Concerns were discussed:
- What is the way that the automated legal entity be considered as legal entities
- What rights do these entities enjoy? Do they have the legal status of a person?
- What is their responsibility to be divided?
- What do the latest legal literature say about legal entities that are automated?
What legal restrictions have stopped DAOs from being fully mainstreamed?
Research conducted by The MIT Computational Law Report emphasizes how the law is not applicable to the algorithms (powered with AI) for DAOs particularly autonomous legal entities. The major concerns are related to AI’s liability as well as its legal status.
The primary issues are related to the possibility of liability. In other words, how can the law make DAOs responsible in certain situations, particularly when crime is in the mix? There’s a myriad of other questions, which we’ll explore further down.
DAOs aren’t considered to be legal entities.
One of the major obstacles in DAO adoption is that a majority of states don’t acknowledge the DAO as an entity legally recognized. In the absence of legal recognition the DAO is not required to adhere to the requirements of registration in the state.
Thus, DAOs aren’t qualified for the corporate privileges that are available to traditional corporate organizations. This does not just limit the kind of business they are able to operate, but additionally prevents the entry into commercial agreements.
There is no standard regulation framework for DAOs. A lot of them fall under partnership status due to the fact that they are not formed as a corporation, and thus impose the same liability to their members.
So long as DAOs aren’t legally recognized and are not legally recognized, they do not provide limited liability protection. That means that those who contribute to the DAO could be personally accountable for the obligations and debts that are owed by the DAO.
This is a major drawback because it could deter the majority of potential contributors from taking part in an DAO. The absence of a limit on liability is also a problem the DAOs’ ability to obtain capital because the majority of investors aren’t willing to put their money at risk.
Risks associated with distributed governance
Another issue with DAOs is the danger of distributed governance. Because DAOs tend to be not centrally controlled and do not have any control by a central entity, they’re usually guided by rules embedded in smart contracts. There is a chance for the rules to be altered or altered, resulting in devastating consequences.
Another problem DAOs confront is the regulatory uncertainty with the regulations they’re surrounded. It is not clear how current regulations will apply to DAOs because they were not specifically designed with regulation in mind. This could lead to regulations that could hinder creativity.
For instance, traditional companies are required to follow Anti-Money Laundering (AML) and Know Your Customer (KYC) policies. They are designed to protect companies from fraud and money laundering. When used in conjunction with DAOs, they would ideally protect token holders, members as well as customers.
But, as DAOs aren’t anonymous, ensuring compliance with the AML-KYC rules is very difficult. The issue of jurisdiction is also a concern because DAOs generally have members from around the globe. This can deter individuals from forming DAOs, thus restricting innovation because of legal uncertainty.
How do you help DAOs be effective in the legal sector
Despite the issues and complications mentioned above, DAOs remain a viable solution for the legal industry. As we have discussed there are already solutions to navigate the legal issues related to the creation of legal entities autonomously.
What can a DAO-based corporate model be applied to law firms for instance? First of all, tokens and token-based voting rights should not be a part of the equation because they aren’t necessary in DAOs. For instance, in typical law firms partners serve as equity holders and carry out management duties. They don’t have separate groups of managers or shareholders.
A DAO-based structure could benefit law firms due to many reasons, including:
It is worth noting however that regarding organizational hierarchy, law firms might continue to maintain their current corporate structure when DAOs are implemented. This is due to the fact that law firms still operate as top-down businesses that are more suitable for traditional hierarchy.
Safely incorporating DAOs to increase growth
In comparison against the legal organizations operating DAOs stand out because of their efficiency in operation. DAOs can be used for rapid mobilization of capital and pooling for instance. With the right programming DAOs are able to automate a lot of business processes as well.
This is why a portion of the billionaires of the world are using DAOs to help safeguard their wealth, but to also increase it. But the most important thing is to do this in a safe and efficient manner.
One way to make sure that your DAO is running smoothly is to collaborate with a team of professionals who know the complexities of the process of setting up the DAO along with the regulatory issues associated with it. This can help you avoid legal issues in the future and make sure that your DAO operates smoothly.