DAOs, Smart Contracts, and DAO LLCs Explained

Below we explain what a decentralized autonomous organization is, as well as a smart contract, since it’s critical to making a DAO.

We’ll also cover:

  • the difference between a DAO and a DAO LLC

  • how to convert an LLC to a DAO

Understanding DAOs and Smart Contracts

DAO stands for decentralized autonomous organization. In essence, it’s like forming a traditional company but with a unique twist. Instead of paperwork defining organizational rules, DAOs use software in the form of smart contracts. These contracts, written in code, dictate the rules of the organization.

Think of smart contracts as an immutable ledger sitting on the blockchain. Immutable means it can’t be changed without a record of it happening.

What makes this interesting is that it allows anyone in the organization to know if something was tampered with or changed. So instead of having an accountant managing things, the entire organization has transparency and visibility into this ledger, or the blockchain, to check if any changes have been made.

DAOs vs. Traditional Group Dynamics

A good analogy is to visualize a DAO as a group chat with a shared bank account.

Picture this: you and your friends decide to pool money for a common goal. Instead of individually wiring funds or using Venmo, a DAO automatically lets you create this group chat and wire funds into one place on-chain. You can then go buy things in the real world or on the blockchain, like NFTs.

In the past, if you wanted to raise and deploy capital, you had to form a company, wire money to a bank account, and sign actual real world contracts. With a DAO you can instantly create a group, instantly wire funds and then instantly deploy it all in one go.

The Rise of DAO LLCs

The summer of 2021 witnessed legislative breakthroughs in Wyoming with the introduction of DAO LLCs, which gives which gives DAOs the same type of legal protection and legal registration typically reserved for LLCs.

It grants liability protection, the ability to obtain an EIN, and legal recognition similar to traditional LLCs.

Incorporate your DAO LLC.

Can an LLC Be Converted Into a DAO?

It is possible to convert an LLC into a DAO, but it involves a structured process. First and foremost, you need a smart contract address housing your DAO protocol. This address is then submitted to the state of Wyoming for registration as a DAO LLC.

While this route may not be necessary for all businesses, it offers increased transparency and on-chain organization for those who value these aspects.

Overview

While DAOs are intriguing, LLCs remain the go-to choice for many due to their simplicity and proven liability protection. When starting a business, especially ventures like Amazon stores or SaaS businesses, an LLC is often the safest and most practical option.

Oftentimes you actually might not need a DAO, the biggest reason why people create an LLC is for liability reasons. But there could be cases where having increased visibility or transparency is necessary, and that’s when a DAO could be beneficial.

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Suhailul Aslam
Suhailul Aslam
Contributor
doola's website is for general information purposes only and doesn't provide official law or tax advice. For tax or legal advice we are happy to connect you to a professional in our network! Please see our terms and privacy policy. Thank you and please don't hesitate to reach out with any questions.

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