The Metaverse: Decentralized Autonomous Organizations (DAOs) | Holland & Knight LLP

In recent years, constructs that have traditionally been the domain of governments have found analogues in the metaverse. Bitcoin and other cryptocurrencies are government-backed fiat currency substitutes. Non-fungible tokens (NFTs) replace government-approved title deeds. Smart contracts replace traditional contracts (which, although usually entered into by private parties, are enforced by courts). The rise of Decentralized Autonomous Organizations (DAOs), which are roughly analogous to government-approved legal persons, follows the same pattern. This article explores DAOs, including what they are and how they work, as well as recent developments at the state level to recognize them as legal forms of business.

I. What is a DAO?

As with businesses, DAOs are collections of people and assets that are organized to achieve goals. The individual constituents of the DAO typically own cryptocurrencies (or NFTs). When decisions need to be made, DAO voters vote democratically. This governance is “decentralized” because there is no board of directors or CEO. It is as if each shareholder of a company could vote on each of the shares of the entity. In most DAOs, cryptocurrency ownership translates to voting power. For example, a DAO could be organized such that each cryptocurrency is worth one vote, so an individual with 100 coins would have twice as much voting power as an individual with 50 coins. As with cryptocurrencies, the vote is linked and recorded on a blockchain, and often the votes of each individual constituent are known to the public simply by examining activity on the blockchain. A DAO is “autonomous” because it is powered by smart contracts that run automatically to move the organization towards its goals.

DAOs can have a number of purposes. As an example, in 2021 a group called ConstitutionDAO claimed to have pooled $40 million worth of Ethereum (mostly) to purchase a rare copy of the US Constitution at auction. The effort failed (the winning bid was $43.2 million) and the DAO is now in the process of reimbursing voters. (Oddly enough, the voting coin for this defunct DAO is still actively traded.)

As a second example, the Decentraland metaverse is organized like a DAO. Decentraland is a 3D virtual world where all assets and goods are represented by tradable NFTs. Each Decentraland constituent has a Voting Power (VP) metric that is calculated based on their MANA, LAND, and NAME holdings in the metaverse, and all of these assets have associated crypto tokens. Decentraland’s voting formula favors landowners: each plot of LAND provides 2,000 PV, while each MANA only provides one PV. Community votes run the gamut from applying for property development grants, adding new clothes for user avatars, running land auctions, and selling fees. (See a list of current open votes.) A recent closed vote asked whether a user’s virtual clothing store should be added to Decentraland’s “Points of Interest List.” (Four comments later, the community rejected it: 1,396,512 VP to 23 VP.)

A completely decentralized governance system has limitations, and many DAOs adopt some kind of hybrid model to account for this. Organizations have to make many small decisions on a daily basis, and it would be inefficient to vote on everything. For example, should the DAO really ask the collective whether to pay or postpone the server hosting bill? For this reason, Decentraland has adopted hybrid governance. The nonprofit Decentraland Foundation manages the day-to-day tasks of keeping a metaverse running.

II. State recognition of DAOs

Because DAOs organize individuals and capital, at least some states officially recognize DAOs as corporations. In early 2021, Wyoming changed its corporate code to specifically recognize a DAO as “DAO LLC”. Wyoming’s amended law requires the articles of association of DAO LLC to list the smart contracts for operating the DAO and a statement of how the DAO will be operated by its settlors, along with other items. Wyoming also requires the DAO to list a registered agent to identify who should receive procedural service (eg, notification of a complaint filed in court).

Wyoming is not alone. Vermont has also set up a form of business to accommodate DAOs: “Blockchain-based Limited Liability Companies” or “BBLCS”. More recently, Tennessee passed legislation to establish DAO LLCs.

In each of these jurisdictions, states are trying to become the “Delaware of DAOs.” By encouraging DAOs to register in their state, states attract advanced technology and, of course, additional tax revenue.

As with cryptocurrencies, NFTs, and smart contracts, DAOs are just beginning to gain traction. Because they provide a general structure for achieving the goals and have already received state acceptance, we should expect to see more DAO initiatives in the coming years.

About Charles D. Goolsby

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