The Problem with DAOs Nobody is Talking About

Imagine you are part of a global community of enthusiasts, united by a common cause, driven by shared values, and governed by democratic principles. Sounds exciting, right? That’s the promise of Decentralized Autonomous Organizations, also known as DAOs, the new web3 entities changing how we think about organizations.

Before we dive headfirst into today’s episode, my name is Mitch Jackson, and I’m a trial lawyer and private mediator with over 30 years of experience. In each podcast episode, I help you navigate the new and sometimes confusing dynamic digital landscape found at the intersection of law, business, and technology. OK, now that you have a bit of context about the topic of this podcast and the person behind it, I’d like to walk you through a few benefits and pitfalls of DAOs that some of my fellow lawyers, and our clients, are all trying to wrap their heads around.

What are DAOs, and why should you care?

A DAO is a type of organization represented by rules encoded as a computer program that is transparent, controlled by organization members, and not influenced by a central government. Web3 enthusiasts argue that DAOs are the most effective way of establishing a digital company where all decisions are made through community voting, ensuring every member has a say.

Have you ever felt like you don’t have a voice in the decisions made by the organizations you’re part of? Have you wanted to roll out a new project in your business allowing community members to be more active? Well, DAOs may eventually change that.

At the same time, also please appreciate some of the legal downsides that I’m seeing right now with DAOs.

The Dark Side of DAOs.

As with any innovation, DAOs come with their own set of challenges. One major concern is web3 anonymity. How can you trust someone you’ve never met? How do you conduct due diligence on community members when you don’t know their true identity?

And what happens when legal issues arise? Which venue and jurisdiction will apply when members are spread across the globe?

Funding is another significant challenge for DAOs. Traditional venture capitalists are hesitant to invest in organizations where control is decentralized and the future success is in the hands of community members who may lack the necessary skills and experience. How would you feel if your investment was managed by a group of anonymous internet users? It’s a concern that needs addressing.

The Legal Quagmire

From a legal perspective, DAOs are akin to a vast, uncharted territory, riddled with potential pitfalls. One glaring concern is the challenge of ascertaining the identity and location of a wrongdoer.

In traditional business structures, you know who you are dealing with. There are records, addresses, and identifiable information that can be used to hold someone accountable should things go awry—and in business, they always do. But in a DAO, where anonymity reigns supreme, how do you pinpoint the culprit? After all, knowing a public digital wallet address is one thing. Knowing who is behind that wallet is another challenge in and of itself.

And let’s talk about venue and jurisdiction. For the uninitiated, “venue” refers to the place where a case is heard, while “jurisdiction” is the authority given to a legal body to deal with and make decisions on legal matters within a particular geographic area or subject matter. In a DAO, when members are scattered across the globe, determining the appropriate venue and jurisdiction can be a nightmare.

Imagine this: you’re part of a DAO, and a member from the other side of the world violates the rules. How do you take legal action? Which court has jurisdiction over a member who might be located thousands of miles away? The challenge of exerting jurisdiction over DAO members adds another layer of complexity to an already complicated landscape.

Conclusion: The Road Ahead

While the community-building and decision-making abilities of DAOs are undeniably powerful and innovative, we constantly remind our clients not to turn a blind eye to the legal challenges they present. As we step into this new era of web3, it’s crucial for business owners, investors, and consumers to be fully aware of the potential pitfalls of these new business structures.

The Web3, AI and Metaverse Legal and Business Podcast

Episode page:

Listen on Apple Podcasts:

Listen on Spotify: