What is a DAO?
A decentralized autonomous organization is one where there’s no human element leading the company. In normal LLCs, members (can be one person or many) make the business decisions, but in a DAO, “smart contracts” do this for them. Smart contracts operate a little like an ITTT (if-this-then-that) program, making decisions based on a set of predetermined rules.
These smart contracts run the business autonomously, with humans only doing what is absolutely necessary legally.
What are DAOs being used for?
DAOs are used in a wide range of businesses and organizations, from fintech to social groups, to science organizations and media. Most DAOs raise funds by allowing members to buy into the organization for a minimum investment fee or raise funds through crowdfunding. Due to the newness of DAOs and the fact that the majority of people still don’t understand what blockchain is or how it works, the majority of decentralized organizations are in the investment space.
Why create a DAO LLC?
DAOs offer unparalleled levels of safety, transparency, and efficiency for all involved. The rules of the business are laid out on the blockchain for all to see. Unlike so many other business structures, when a DAO makes a decision, all members must vote for the change, no one can overrule the others to make something happen.
The LLC element of a DAO LLC gives the members of a DAO the same benefits as the members of a normal LLC. In other words, no member of the DAO LLC can be held legally liable for the DAO itself.
When you’re dealing in business as new and unfamiliar to the masses as blockchain, failing to register your DAO as an LLC will leave the business open to legal problems that could lead to stakeholders being held accountable.
The other benefits of a DAO LLC include:
- Stakeholders aren’t given preferential treatment by how much money they invest into the business. Beyond the initial required investment, all stakeholders get equal treatment.
- DAOs are new, and so any business forming one has the opportunity to be at the forefront of blockchain technology as it reaches mainstream consumers.
- All information and funds are secure because its on blockchain.
- The smart contracts running the business mean human error is far less likely and the business doesn’t rely on human input to operate.
- All records are transparent because they’re available through blockchain.
How do you create a DAO LLC?
Creating a DAO LLC from the incorporation point of view is really no different than registering any other kind of business. You simply need to fill in the right forms with the right information and file them with the secretary of state in the state you want to register in.
At the time of writing (early May 2022), you can only register a DAO LLC in Wyoming or Tennessee.
Technically speaking, your DAO will need a way to handle proposals and votes (either on-chain or off), a share system or governance token (this is the way people prove their “shares”), and a fund management system, which is usually a wallet that needs multiple signatures.
Are there any disadvantages to DAO LLCs?
DAOs avoid many of the issues businesses face due to their structure, but they’re certainly not immune from problems of their own. Here are some of the disadvantages of DAOs:
- DAOs are often large with many stakeholders. Just like other large businesses with many stakeholders that have a say in how the business is run, DAOs may be slow to react to market changes and disagreements between stakeholders may mean the business can’t move forward for some time.
- MIT believes this business structure will struggle to yield returns, largely due to the fact that having that many people invested in a company (often with little business experience) with the ability to have their say on any aspect of the business may not be fruitful. For example, you may have a large number of people coming from a technology background trying to handle marketing and financial matters that are not in their zone of genius.
- Computers do make mistakes from time to time, as do the humans programming them, so having a business run entirely on smart contracts with no human element may lead to mistakes.
- DAOs are only as strong as the people who build (or code) them. Just because it’s a DAO on blockchain does not mean it’s immune to security issues. Hackers are becoming more sophisticated all the time and flaws may be exploited before DAO members can react. This has happened in the past – in 2016 a crowdfunding project called “The DAO” had documented security flaws that weren’t fixed, and hackers stole 3.6 million ETH ($150 million) before anyone could react.
- Rules need to be literally flawless to be entirely secure. Because of the way blockchain works, hackers can exploit flaws to steal money and nothing will stop them because they aren’t breaking any rules. To protect against this vulnerability, all DAOs need to be extensively and aggressively tested.
- DAOs are still new and many people don’t understand them, which will mean some people aren’t sure how to interact with DAO LLCs and there is still some ambiguity around who is liable for what.
- DAO members often have to put their trust in strangers (who are often anonymous), which can backfire with no recourse.
What’s in Tennessee’s DAO legislation?
Tennessee’s new DAO legislation allows DAO LLCs to register in their state.
This legislation specifies:
- Any decentralized autonomous organization must use any of the following abbreviations in its business name to denote its status: DO, DAO, DO LLC. or DAO LLC.
- Tennessee DAO LLCs can be member-managed or smart-contract managed, but it must be specified in the articles of organization or it will be automatically considered member-managed. (Member-managed operates just like any other LLC.)
- They need to have a registered agent in Tennessee if they don’t operate in the state.
- Amendments must be made when there is a change made to the smart contracts.
You can find the full legislation here.
Are there any differences between a DAO registered in Tennessee vs. Wyoming?
Not really – the Tennessee legislature is almost identical in most ways, with a few minor differences. The differences are as follows:
- Tennessee’s definition of a “smart contract” is less vague – Wyoming describes smart contracts as “automated transactions” whereas Tennessee describes them as an “event-driven computer program”, which is more accurate.
- In Tennessee, you can refer to your DAO as a DO, and they refer to DAOs as DOs in the majority of their legislation. This is likely due to the way DAOs currently function, which is not always completely automated.
Are there any downsides to registering my DAO in Tennessee vs. Wyoming?
No – registering in either state will give you the same result. The only criticisms of DAO LLCs affect both states and come because the language is still vague and will take some time to iron out as we move forward and see DAOs operate in the real world.
Should I form a DAO LLC in Wyoming or Tennessee?
Forming an LLC of any form in your home state is easiest, so if you live in either state, register there. Since this will not apply to the majority of people reading this article, then there’s really little difference between the two. If you’re looking to move to set up your business, Nashville is becoming a technology hub, so you may find it more beneficial to live there.
Need help choosing between Wyoming and Tennessee for your DAO LLC?
Tennessee’s legislation is still very new, so it’s worth seeking expert advice about which DAO structure will be right for you. If you’re looking to register your DAO in the US, we’re here to help. We can help you decide which state to register in, act as your registered agent if you don’t reside in either state and ensure all your legal administrative tasks stay on track.
Reach out to us via our live chat now or schedule a time to talk that suits you.