Doing business with DAOs

Without formal leadership, their actions are usually determined by vote – and in many cases, this decision-making is built into a DAO’s structure through smart contracts, which act as a DAO’s version of a constitution. Most follow an open-source set of smart contracts on the Ethereum blockchain, which are then modified to fit with the specific needs of the DAO. Voting rights may be conferred by crypto-coin ownership: in which case, the more you own, the greater your say.

DAO treasuries have reportedly surged from $400m of crypto funds at the start of 2021 to an estimated $21bn now, with DAOs becoming a particularly popular model for new crypto and metaverse ventures. They reflect the belief of some Web3 pioneers that traditional corporate models are outdated and that organisations – including profitable commercial organisations – can exist entirely on blockchain.

Legislation and regulation have not yet caught up with that notion, and DAOs are still something of a legal black hole, creating considerable uncertainty both for their members and those who do business with them. If a dispute arises, for instance, it may be difficult to determine who could bring a claim on the DAO’s behalf – or who would serve as a defendant in an action brought against a DAO.

This means that using a smart contract is probably the best way of doing business with a DAO. A well-made smart contract will circumvent many concerns about a DAO’s authority and decision-making, and up to a point could include automatic recompense for non-performance.