These are unprecedented times. You have volatile markets, a changing world order, and a massive leap into a technology-driven work environment. Imagine forming a corporation with by-laws encrypted in code. Does that sound like a great idea?
It may offer enormous opportunities for ease of business.
With a Decentralized Autonomous Organization (DAO), you can organize a corporation (DAO LLC) with people from different parts of the world. You will not be dependent on legal documentation, guidelines and rules, and a central authority. You can make decisions autonomously, and all transactions happen on a blockchain network.
Because operations and transactions are decentralized, the government, its regulators, or central banks cannot control or influence them. With no central authority, everyone has a say.
Like any virtual currency, the premise of DAO’s decentralized status is to achieve certain security and privacy levels unobtainable to traditional currencies and their respective transactions.
You should seriously consider making a DAO organization because this entity can take out investor fund manipulation and human error in the equation. A DAO places the decision-making power in a crowdsourced undertaking and automated system.
DAO also allows members and investors to transfer funds from anywhere in the world anonymously. To carry out these transactions, these investors are provided with DAO owner tokens corresponding to their voting projects on future projects. That means the investor community governs the decision-making, organized around a computer-defined set of rules called a smart contract enforced on a blockchain.
Smart contracts allow investors or token holders to take an equal part in the decision-making processes inside the organization. In layman’s language, it is like holding a stake in a company. You have voting rights in the company’s decision-making based on the number of your shares.
If what you have learned so far is not enough to sway you to start a DAO, read on and know how it’s more appropriate than forming a C Corp.
What Is a DAO?
Most people are new to DAO, and this has got them asking, “what’s DAO?” Since they’re used to traditional business structures, they’re wondering if DAO is just another cryptocurrency, a legal entity in a general partnership, or blockchain technology.
By definition, DAO is a virtual organization characterized by transparent computer code and controlled by a group of people who are members of the DAO. We can also say that a DAO is “an Internet-based community with a shared bank account.” You might think of it as a mutual fund, but instead of a central manager, the participants in the fund decide on investment decisions.
Since the rules in a DAO are embedded in code, there’s no need for managers or executives to make decisions in day-to-day operations, board meetings, or board resolutions. This effectively removes hierarchy or bureaucracy hurdles in the equation that characterizes traditional business structures familiar to most people.
DAOs operate based on smart contracts, which automatically execute operations or transactions when pre-determined criteria are met. These incorruptible smart contracts are usually deployed on blockchains, and hence, anyone can check and verify all the financial transactions made by the DAO. Members of a DAO don’t have to trust each other – they only need to trust the code.
The first to try forming a DAO was a team of developers on the Ethereum blockchain network. However, DAOs did not start too well. The first-ever modern DAO was launched in 2016 and was “hacked.” It ultimately led to the original Ethereum network hard-forking.
But that debacle did not keep future DAOs from forming. Among the best-known DAOs today include Aave (AAVE), Compound (COMP), Curve DAO Token (CRV), Dash (DASH), Maker (MKR), and Uniswap (UNI.)
You can find the encrypted rules of the DAO in its smart and incorruptible contracts. The DAO token owners get voting rights depending on the number of tokens they own. This is their way to influence the organization’s operations.
Like the traditional business structure, DAO members can create and decide on new and future governance proposals. For a proposal to pass, a majority of DAO members need to vote for it. Determining what constitutes a majority vote varies from one DAO to another. This agreement is also specified in the governing smart contracts.
How to Launch a DAO
A group can launch a new business as a DAO by following three steps:
1. Creation of the smart contracts
2. Generation of funds through different rounds of investment
In the first step, a team of developers will be responsible for making smart contracts. Once they launch the DAO, they can change the set rules only through their governance system. This means they need to test the codes in the smart contracts using a Test-net to avoid overlooking the critical details.
The funding phase determines how the DAO can enact governance and receive funds. Tokens are usually sold to raise funds to run the DAO.
The developers or their respective teams reach out to the investors in different investment rounds with various token prices and sign contracts with them, promising to send tokens to them once the DAO is finally deployed. These tokens, in return, give the potential investors voting rights. This technology offers the individual DAOs the power to run an organization through a series of smart contracts.
Lastly, the deployment phase happens when everything has been successfully set up. This is when the DAO is subsequently uploaded on the blockchain. The DAO stakeholders will determine the organization’s future through encrypted company rules upon deployment. It’s important to note that those who made the smart contracts no longer influence the project after deployment.
How to Start a DAO LLC
Forming an LLC in Wyoming is an excellent idea because of the user and investor-friendly banking and incorporation laws. Those planning to form a DAO will be glad to know that on April 21 last year, the governor of Wyoming signed Senate Bill 38, allowing the state to consider a DAO as a legitimate LLC.
The new law made Wyoming one of the friendliest when it comes to digital asset innovation. If you need help in incorporating your Wyoming DAO LLC, consider doola.
You can also seek doola’s assistance when you have questions about incorporation, limited liability partnerships (LLP), Wyoming LLC Act, and securities law.
What is a C Corporation?
A C corporation is a legal structure applicable to corporations with stakeholders or owners taxed independently and separately from their organization. This is the most prevalent type of corporation subjected to payment or corporate income tax. Since the organization and its stakeholders are taxed differently, double taxation happens.
C-corps are comparable with limited liability companies (LLCs) and S corporations in how the organization’s assets are treated to be separate and distinct from its stakeholders. However, C-corps differ from these two corporations in tax treatment and legal structures from these two corporations. C-corps are taxed in the same manner as to benefit corporations (B-corporations). But the latter differs from C-corps in terms of transparency, accountability, and purpose.
A C-Corp is the most preferred corporation structure in the U.S. because they offer unlimited growth opportunities through sales of stocks. The sale of these stocks is how C-corps attract investors. Any shareholder can also buy and own as many stocks as they want.
One of the downsides of forming a corporation is that although the stakeholders are separate and distinct personalities from the legal business entity, there are instances wherein the corporate veil is pierced. In this case, stakeholders could be liable for the corporation’s debts.
DAO vs C Corporation
Now that you have learned what a DAO and a C-Corp are, it’s time to compare and contrast these two organizations to highlight which is more beneficial. Below, we’ll be comparing these two concepts based on these factors — ease of formation, level of external control, and methods of raising funds.
Bitcoin is said to be the earliest fully functional example of DAO. Sadly, not all DAOs reached Bitcoin’s success. A German startup launched ‘The DAO’ as Airbnb’s decentralized version. It was a huge success when it started. It raised more than $150 million Ethereum from a crowdfunding campaign. The DAO’s success was, however, short-lived. Because of issues with the code, hackers successfully siphoned $50 million Ethereum from it.
In the succeeding paragraphs, you’ll learn more about Bitcoin as a DAO project, along with the pros and cons of creating a DAO. Through these, you can carefully weigh if it’s truly worth a try. You may be convinced that despite the vulnerabilities of a DAO, it’s still better than forming a C-corp.
Bitcoin As the Earliest DAO
Some blockchain experts regard Bitcoin DAO (BTC) as the first-ever DAO created. The Bitcoin network scales through community agreement despite the participants not meeting and knowing each other. Since it doesn’t have a coordinated governance mechanism, nodes and miners had to signal support.
Bitcoin is no longer considered a DAO based on modern-day standards. Considering the current metrics, Dash ticks all the boxes as a genuine and legitimate DAO. Dash is also supported by governance mechanisms that enable stakeholders to use its treasury through voting.
Two years ago, decentralized finance (DeFi) protocol distributed a new governance token through mining. Anybody who interacted with the said protocol received rewards in tokens. People responsible for making these protocols soon adopted the same model.
Now, there is an extensive list of projects that fall under the qualification of a DAO. Over time, the concept of the DAO has become more apparent, progressively gaining traction. While there are new projects in the pipeline, these projects are still achieving complete decentralization following the DAO concept.
DAOs can change how corporate governance functions. The idea may still be maturing, but with the increasing number of organizations adopting the DAO model in governing their activities, these legal grey areas will soon be cleared.
Benefits of DAOs
Here are some of the advantages of a DAO to help you decide whether it’s suitable for your organization:
DAOs are more responsive and inclusive when it comes to stakeholder input. Each member or stakeholder has a say. This means you don’t need to have more investment or know the influential people in the organization for your decision to matter. Every token owner has a stake.
Not prone to human error
DAOs run on algorithms. The system is also automated, which explains why there’s no need for a manager to run the system. As such, there’s less room for committing errors.
Secure funds and information
Blockchain is highly secure, which means your funds and information encrypted in the chain are likewise safe. Every transaction is inscribed in the blockchain. Anyone can access the transaction records, allowing more transparency than traditional businesses.
If you’re planning to set up a DAO LLC in Wyoming, seek professional help and guidance from doola. You can also read their comprehensive LLC guide to know the company and its services.
Drawbacks of DAOs
After discussing the upsides of DAOs, let’s also discuss some of their drawbacks. Check them out below:
Experience the same issues as traditional businesses
Business partnerships rarely function smoothly throughout their lifespan. One of the reasons businesses are slow to respond to market changes is they need to get the approval of different stakeholders. A DAO may have the same problem since all members have a say in business operations.
Mistakes can be overlooked
The DAO runs primarily on algorithms. While the system is less prone to human error, it’s not fool-proof. There might still be errors that could be overlooked. Some of these errors might be negligible, while others could be fatal.
Legal framework barely exists
Though things are looking up, the DAO’s legal framework isn’t stable. Yet, until this framework is established, there will be a lot of questions as to who should be held liable should DAOs make a fatal mistake.
Should Your Next Company Be a DAO?
In summary, you should seriously consider forming a DAO if you satisfy the following conditions:
- Willing to take the risk despite the downsides
- Ready to embrace decentralization, automation, and other benefits
- Want safe and secure transactions that are free of government, or other external restrictions
Need Help With Starting a DAO? Contact doola Today.
DAO may still be a work in progress regarding its legal framework, but it already offers many benefits to people and groups looking to build an organization. It is decentralized, so no external force or entity controls your organization and its processes. It’s also automated, making it less prone to human errors or manipulation.
While a DAO shares some issues with any business structure, the benefits outweigh the drawbacks. If you’re ready to give DAO LLC a try, you can also seek the help and guidance of doola. For more information, reach out to them now through this link.
FAQs on When Should You Start a Dao Instead of a C Corp
Is a DAO a corporation?
No, a DAO is not a corporation because there’s no board of directors or CEO making decisions for the company. Instead, it’s a limited liability company because although an entity or a person has to form a DAO, no one person retains sole control over it.
Is a DAO a legal entity in Wyoming?
Yes, a DAO is a legal entity in Wyoming. On April 2, 2021, the governor of Wyoming signed Bill 38, allowing the state to consider a DAO as a legitimate LLC. This made the state one of the friendliest when it comes to digital asset innovation. The law went into effect on July 1, 2021.
How do you incorporate a DAO in Wyoming?
Anyone can form a DAO LLC by following the requirements for applying with the Wyoming Secretary of State as published here. The person who initiates the forming of the DAO need not be a member of the organization.