Benefits and Risks of Decentralised Autonomous Organisations (DAOs) – Notes from Memery Crystal and Rosenblatt’s breakfast briefing

Hosted by Rosenblatt Partner Laura Clatworthy, and moderated by Helen Disney, Director of Blockchain and Digital Assets at The Realization Group, our panel featured industry specialists Kate Baucherel, an Emerging Technology Consultant, Blockchain Specialist and Lecturer; Tee Ganbold, Co-Founder & Executive Chair of ESG DAO; and Ebba Theding, CFO, ChromaWay.

Key takeaways:

• Described by the World Economic Forum as ‘an experiment in governance’ and facilitated by blockchain, DAOs are a new corporate structure built around the principle of a digital community, with no centralised Board or corporate management structure. Core principles are that the community collaborates, co-creates and contributes to the community whole.
• The ‘Decentralised community’ construct is not unique – it is already seen in crowdfunding, where people are brought together (without knowing each other or meeting) in support of a common objective, whose outcome is determined by collective action (i.e. raising/not raising target funding). Conversely, on the basis that ‘wider communities can’t always be trusted to make the right decision’, is there a need for a ‘council of elders’ within DAOs or does this defeat the object of a decentralised autonomous organisation?
• DAOs are a way to collaborate in a trusted manner around a common cause, like ESG. They are becoming increasingly popular in the global digital community as a solution for decentralised management of collectively-owned assets.
• As an example of using the DAO model to encourage positive changes in business behaviour, ESG DAO is building an open, democratic and credibly neutral ESG scoring system to engage consumers and incentivise companies globally to contribute to a more sustainable future.
• The DAO concept is often confused with smart contracts; they are not the same. In essence, DAOs are an ‘automatic decision-making engine’ enabling transparent participation in collective action, for example, voting on a specific matter.
• A major challenge in creating DAOs is ensuring sufficient participation to prevent skewing of outcomes (a bit like elections where only a minority percentage of eligible voters may participate in the ballot). It is also important to ensure that different ‘voting rights’ do not enable undue influence by sections of any DAO community.
• There is the need for legal certainty in these developing technologies to enable the market to mature and for the UK to be a hub for this market.
• English law is considered to be ‘sufficiently flexible to accommodate digital assets’ with tokens considered at law to be ‘property’, the UK Joint Taskforce indicated in February 2023 that  it considers English law can accommodate digital bonds on a public blockchain, and the Law Commission in its Call for Evidence in respect of DAOs has expressed the broad view that English law has a variety of flexible tools and principles to provide a high degree of certainty in respect of DAOs.
• While there is potential to put legal wrappers around DAOs e.g. Wyoming LLC, there are many unregistered DAOs and risks within the broader DAO structure for those that have sought to use a legal wrapper which could lead to joint and several liability for DAO participants or a class of them. It is essential to map out DAO structures carefully to take account of legal and commercial risks.
• Asked how a DAO obtains its funding, Ebba Theding referred to a theme park analogy, where visitors pay for a wristband that allows them on all the rides. The DAO in effect sells a finite amount of ‘wristbands’ at a fixed price, creating a treasury from which the DAO’s stated goals are financed. In the case of ChromaWay, its first DAO-controlled project is the game My Neighbor Alice, built by its game studio Antler Interactive.

Overall, the panel concluded that DAOs present a huge and exciting opportunity. Setting up a DAO, however, requires clarity and definition about the different layers in a DAO ecosystem with respect to who owns what layer of the structure, who adds what value and who has what voting rights.

How we can help

If you are a business or individual starting or present in this sector or expanding your existing operations, Rosenblatt’s Tech Team can provide you with the assistance you need to deliver your DLT or Crypto-based operations efficiently, cost-effectively and in a compliant manner.

If you would like to find out more about how we can help you and your business please contact Laura Clatworthy at laura.clatworthy@rosenblatt.co.uk.