Legal and Administrative Challenges of DAOs Despite Their Potentials




A cutting-edge model of organizational governance is the decentralized autonomous organization (DAO). The DAO organizes a new paradigm where the decision-making process is not only automated and transparent but also decentralized, making use of blockchain technology. Every stakeholder (or token holder) has the opportunity to participate in the decision-making process because of the DAO's unique decision-making environment, which operates in accordance with the fundamentals of democracy. Each token that is held equates to one vote, ensuring complete transparency, verifiability, and independence in organizational management. However, the DAO's novel structure brought about a number of legal and regulatory issues.



1. Legal Status: It's difficult to say for sure whether the DAO is a legitimate business entity. According to conventional legal systems, a defendant or plaintiff must have legal personality, which the DAO does not currently possess.



2. Legal liability: Determining a DAO's legal liability in the event of a dispute or illegal activity is challenging. Creators, token owners, or even the DAO itself may be held liable.



3. Regulation: DAOs cross international borders to conduct business. The applicability of various national regulations, like tax compliance, in various jurisdictions is called into question by this.



4. Protect Investors: Because DAOs are decentralized and anonymous, conventional investor protection mechanisms might not be appropriate.



5. In a DAO setting, it can be challenging to determine who owns and controls intellectual property.


6. Compliance with contractual obligations. The legality and enforceability of these contracts may be disputed in various jurisdictions because The DAO operates through smart contracts.



7. Protection of data and privacy. Data protection and privacy issues may arise when using a public blockchain, especially in light of GDPR regulations.



8. Dispute resolution in the DAO can be challenging in the absence of a centralized authority or clear legal guidelines.


9. Bankruptcy statutes: In the event of bankruptcy, conventional laws may not be applicable, leaving gaps in the process of liquidation and in the payment of creditors.



Despite being a significant advancement, DAOs had some operational flaws.



  1. There could have been financial abuse. If one organization wins the majority of tokens, it might be able to influence decisions and misuse the DAO's resources.


  1. Threats to the management. Various government attacks, such as "bribery attacks" and "rush attacks," among others, can be used to undermine the decision-making process.



  1. Technical risk: Smart contracts, the skeleton of DAOs, may contain bugs or vulnerabilities that disrupt operations or result in money loss.



  1. Due to the DAO's reliance on the underlying blockchain's stability and security, any unrest there could have an impact on the DAO.



  1. Securities Laws: Tokens are a common method used by DAOs to raise money, but in some countries, these tokens may be considered securities. This raises complicated legal issues, and given their decentralized nature, DAOs must abide by a number of securities regulations.



  1. Fighting against the financing of terrorism and money laundering. The DAO must abide by anti-money laundering (AML) and counter-terrorist financing (CTF) laws, just like other businesses using cryptocurrencies. Compliance with these rules may be challenging due to the anonymity or pseudonymity of blockchain transactions.



  1. Cross-Border Legal Harmony: Because of their global reach, DAOs engage with a variety of legal systems. It can be challenging to maintain legal coherence across these various legal systems, each of which may hold a different perspective on decentralization, cryptocurrencies, and blockchain technology. In addition, the DAO encountered the following operational issues.



  1. Fluctuations in Token Prices. The DAO's governance depends heavily on tokens, and the value of these tokens is susceptible to wide swings. The operation and stability of the DAO may be hampered by this volatility.



  1. Off-chain versus on-chain management: While on-chain management decisions are transparent and auditable, many significant decisions are made off-chain, in forums and chat groups. It's possible that this off-chain decision-making process is opaque and manipulable.



  1. The DAO's code is the ultimate deciding factor. However, if bugs or errors do happen, there might not be a simple way to fix them without a consensus code change mechanism, which can be tedious and contentious.



In order to mitigate these risks, it is necessary to have effective internal controls, engage the public actively, and have a thorough understanding of the relevant legal and regulatory environment. Politicians from all over the world now acknowledge the necessity of a legal framework that can support these novel structures while safeguarding the interests of all parties involved.

The DAO must promote an inclusive and transparent culture at the same time. The DAO's most valuable resource and strongest line of defense against both internal and external threats is its engaged community. After all, what gives DAOs their special power is the community's diversity of viewpoints and collective intelligence.

In conclusion, while DAOs represent a significant shift toward a future that is more decentralized and democratic, they also present a special set of difficulties that call for careful work. Our ability to fully realize the enormous potential that The DAO promises will depend on how well we handle these difficulties as we continue to explore this fascinating new territory.




Author: Pooyan Ghamari, Swiss Economist and Specialist in Blockchain Technology





Published: 2023-06-25