DECENTRALISED AUTONOMOUS ORGANISATIONS: The Future of Corporate Governance or an Illusion?

Abstract

A Decentralised Autonomous Organisation ('DAO') is a term used to describe a 'virtual' organisation embodied in computer code and executed on a distributed ledger or blockchain.

DAOs implement smart contract code to automate organisational governance and corporate decision-making tackling issues and operational systems inherent in traditional corporations.

Firstly, DAOs can be used by participants working together collaboratively outside of a traditional corporate form. Secondly, DAOs can also be used by a registered corporate entity to automate formal governance rules contained in corporate bylaws or imposed by law (Jentzsch, 2016).

Likened to a 'digital co-operative', a DAO's participant maintains direct real-time control of contributed funds and the DAO's governance rules are formalised, automated and enforced using smart contract code. A smart contract, i.e. a self-executing code on a blockchain, executes business logic when predetermined conditions are met i.e "if "x" occurs, then execute step "y" (Szabo, 1994). Smart contracts are designed to execute and monitor contractual conditions (such as payment terms and enforcement of legal agreements amongst other things). Arguably, smart contracts could lower various transactional costs and losses, minimise malicious and accidental occurrences, and also diminish the need for trusted intermediaries and centralised institutions such as central banks and reserves (Szabo, 1994).

Around the world, the legal status of DAOs remains the subject of active and vigorous debate and discussion. Some commentators suggest that DAOs are autonomous code and can operate independently of legal systems; others suggest that they must be owned or operated by humans or human created entities. Ultimately, how a DAO functions and its legal status will depend on many factors, including how the DAO's code is programmed and by whom, where, and for what purposes it is used (Jentzsch, 2016).

In terms of its potential as a substitute for corporate governance and working collaboratively outside of a traditional corporate form, the promise of DAOs is far from guaranteed and they are not without risk. However, DAOs are not an illusion because the technology is still in its ‘early days’. Until then, the development and testing of their vulnerabilities will greatly assist in how computational law and other emergent technology communities define, adopt and interact with DAOs.

Full text

DECENTRALISED AUTONOMOUS
ORGANISATIONS:
The Future of Corporate Governance or an Illusion?
Brian Sanya Mondoh *
Dr. Sara Adami-Johnson **
Matthew Green ***
Dr. Aris Georgopoulos ****
Brian Sanya Mondoh Attorney-at-Law at the Bar of Trinidad and Tobago, L.E.C Pg. Dip in Law (Hugh Wooding Law School, Trinidad),
Barrister of England and Wales (Lincoln’s Inn), LL.M (Distinction) (Nottingham Law School, UK), BPTC Pg. Dip Law (Nottingham Law
School, UK), LL.B (Hons) (Nottingham Law School, UK), B.A. Psychology (Daystar University, Kenya)
Dr. Sara Adami-Johnson (Ph.D) Attorney-at-Law at the State Bar of California, Ph.D in International Business Management (International
School of Management, France), LL.M (Antonin Scalia Law School, Mason University, USA), LL.M (Pallas Consortium of European
Universities), LL.B (University of Milan, Italy)
Matthew Green Solicitor of England and Wales, LPC (Distinction) (University of Law, UK), GDL (University of Law, UK), B.A. English and
History (University of Nottingham, UK)
Dr. Aris Georgopoulos (Ph.D) Attorney-at-Law at the Athens Bar, Asst. Professor of Law at the University of Nottingham, UK, Head of the
Research Unit for Strategic and Defence Procurement for Social Sustainability and Human Rights (Public Procurement Research Group -
PPRG, University of Nottingham, UK)

Abstract
“What things will be like, when, if ever, they have attained righteousness” 1
A Decentralised Autonomous Organisation (‘DAO’) is a term used to describe a ‘virtual’ organisation embodied in
computer code and executed on a distributed ledger or blockchain.2DAOs implement smart contract code (discussed
below) to automate organisational governance and corporate decision-making tackling issues and operational systems
inherent in traditional corporations.3
Firstly, DAOs can be used by participants working together collaboratively outside of a traditional corporate form.
Secondly, DAOs can also be used by a registered corporate entity to automate formal governance rules contained in
corporate bylaws or imposed by law (Jentzsch, 2016).
Likened to a ‘digital co-operative’, a DAO’s participant maintains direct real-time control of contributed funds and the
DAO’s governance rules are formalised, automated and enforced using smart contract code. A smart contract, i.e. a
self-executing code on a blockchain, executes business logic when predetermined conditions are met i.e “if “x” occurs, then
execute step “y” 4(Szabo, 1994).5Smart contracts are designed to execute and monitor contractual conditions (such as
payment terms and enforcement of legal agreements amongst other things). Arguably, smart contracts could lower various
transactional costs and losses, minimise malicious and accidental occurrences, and also diminish the need for trusted
intermediaries and centralised institutions such as central banks and reserves (Szabo, 1994).
Around the world, the legal status of DAOs remains the subject of active and vigorous debate and discussion. Some
commentators suggest that DAOs are autonomous code and can operate independently of legal systems; others suggest that
they must be owned or operated by humans or human created entities. Ultimately, how a DAO functions and its legal
status will depend on many factors, including how the DAO’s code is programmed and by whom, where, and for what
purposes it is used (Jentzsch, 2016).
5Nick Szabo, Smart Contracts, 1994 http://www.virtualschool.edu/mon/Economics/SmartContracts.html
4Stuart D. Levi and Alex B. Lipton, An Introduction to Smart Contracts and Their Potential and Inherent Limitations, Harvard
Law School Forum on Corporate Governance (May 2018)
https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limit
ations/#3
3Jentzsch, C. (2016). Decentralized autonomous organization to automate governance [White Paper].
2SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 81207 /
July 25, 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO,
https://www.sec.gov/litigation/investreport/34-81207.pdf
1“On Man’s Perfection in Righteousness” St Augustine
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Background
A Decentralised Autonomous Organisation (‘DAO’) is an entity, whereby rules and decision making are driven
by pre-dened protocols, which allows it to be decentralised and autonomous. To expand further, it is a
blockchain-based system that enables participants to coordinate and govern themselves toward a common goal
through self-executing smart contract codes deployed on a public blockchain (De Filippi & Hassan, 2016).6
DAO code is mostly created using the ‘Solidity’ programming language. Solidity is an object-oriented, high-level
language for implementing smart contracts running on the Ethereum Virtual Machine.7A contract in Solidity
is a collection of code (‘its functions’) and data (‘its state’) that resides at a specic address on the Ethereum
blockchain.8The contract denes the governance rules of the organisation and holds the group's treasury. Once
the contract is live on Ethereum, no one can change the rules except by a vote.9For context, there are other
smart contract languages, but those are beyond the scope of our publication.
The purported goal of DAOs is to successfully manage the assets under their control and to maximise their net
economic returns (Minn, 2019).10 DAOs are distributed and decentralised i.e. independent from a central
control or a single point of failure. DAOs are also tamper-resistant meaning they cannot be manipulated by any
single party without the consensus of the majority in the network.
As discussed below, Slock.it The DAO,11 was the rst implementation of a DAO-type entity to automate
organisational governance and decision making. The DAO’s whitepaper proposed innovative dynamics for
distributed crowdfunding and set out rules of governance upon which the code would function and enforce.
11 Christoph Jentzsch, Decentralized Autonomous Organization to Automate Governance Final Draft – Under Review,
https://download.slock.it/public/DAO/WhitePaper.pdf.
10 Minn Taeck, K. (2019), Towards Enhanced Oversight of “Self-Governing” Decentralized Autonomous Organizations:
Case Study of The DAO and Its Shortcomings
https://jipel.law.nyu.edu/wp-content/uploads/2020/01/Minn_Article.pdf
9Decentralized Autonomous Organizations: https://ethereum.org/en/dao/
8Geeks for Geeks, What is Smart Contract in Solidity?
https://www.geeksforgeeks.org/what-is-smart-contract-in-solidity/
7Introduction to Smart Contracts: https://docs.soliditylang.org/en/v0.8.14/introduction-to-smart-contracts.html, See:
https://docs.soliditylang.org/
6De Filippi, P., & Hassan, S. (2016). Blockchain technology as a regulatory technology: From code is law to law is
code.First Monday,21(12).https://doi.org/10.5210/fm.v21i12.7113
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DAOs rely on code to grant members the ability to control or direct the organisation’s assets either directly or
indirectly (Wright, 2021).12 Once deployed, the DAO becomes independent of its smart contract developers and
contains rules, which are embedded in code. The rules are self-executed independently of the will of the parties
(Wright, 2021). Each DAO is structured dierently, but usually, when joining a DAO, participants agree to the
protocols in place. The data that triggers execution of the smart contract can be internal to the blockchain
protocol or the smart contract can receive the data from an outside source.13 Smart contracts are not modiable
once deployed, and the outcome of their execution cannot be reversed. If anyone tries to do something that's not
covered by the rules and logic in the code, it will fail. In the event of an error, a register must be recreated, and
the smart contract must be run again.
It has been argued (Wright, 2021) that DAOs are just ‘Decentralised Organisations’ (‘DOs’) because they are not
fully autonomous. Most ‘DAOs’ are managed by distributed consensus—using smart contracts to aggregate the
votes or preferences of members and can be described as participatory DAOs. As a result, human intervention is
always needed to make decisions. In its truest form, a DAO ought to be entirely algorithmic and can be
described as an algorithmic DAO. In this way, the underlying smart contracts coordinate human activity and are
not dependent on human decision-making to technically operate (Wright, 2021).
Theoretically, DAOs can be architecturally decentralised with independent actors running dierent nodes, and
are geographically decentralised (situated in dierent jurisdictions), but they are logically centralised because the
rules set in the protocol will always be a point of centralisation (Voshmgir, 2019).14
Worth noting, there are computational lawyers involved in smart contract development and DAO legal
engineering, and have launched DAOs aimed at simplifying the legal structuring of DAOs15 based on the
philosophy of ‘code is law’ (Lessig, 1999).16
16 Lessig Lawrence, 'The New Chicago School' (1998) 27 JLS 661. This framework is also known as the 'New Chicago
School framework' or the 'pathetic dot theory'. Also, commentary suggests that the widespread deployment of rules
administered through self-executing smart contracts and decentralised (autonomous) organisations will lead to expansion
of a new subset of law, term Lex Cryptographia. See, Wright, Aaron and De Filippi, Primavera, Decentralized Blockchain
15 KaliDAO, https://app.kalidao.xyz/; See LexDAO, https://www.lexdao.coop/, The LAO, https://www.thelao.io/
14 Shermin Voshmgir, Tokenized Networks: What is a DAO?, BLOCKCHAINHUB (July 2019),
https://blockchainhub.net/dao-decentralized-autonomous-organization.
13 Henning Diedrich, Ethereum (2016); See Carla Reyes, If Rockefeller Were a Coder, 87 GEO. WASH. L. REV. 373
(2019).
12 Wright, A. Clinical Professor of Law at Benjamin N. Cardozo School of. (2021).The Rise of Decentralized Autonomous
Organizations: Opportunities and Challenges. Stanford Journal of Blockchain Law & Policy.
https://stanford-jblp.pubpub.org/pub/rise-of-daos
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Membership
A DAO has a certain set of members or shareholders, which with a pre-established majority quorum, for
example: 67% of members, have the right to spend the entity's funds and modify its code. The members
collectively decide on how the organisation should allocate its fund (Vitalik Buterin, 2013).17 DAO members
purchase ‘governance tokens’, which are native cryptocurrencies that are tied to a specic DAO’s project, and
the proceeds are then allocated to DAO’s treasury’s account (Schwinger, 2022).18 DAOs are ‘at’ organisations
with no formal delegation of power made to specic participants, nor is any participant crowned as having
superior powers.19 Ideally, participants enter and engage with co-equals to add equal (or similar) value to the
community (Lund, 2022).
Depending on members’ investment/stake in the project, DAOs provide them with protocol-based ownership
rights, which may include the right to access, manage, or transfer the DAO’s resources, services and membership.
Majority stakeholding can also be associated with specic privileges, in terms of utility, embedded in the code,
providing members with the opportunity to engage in an organisation's decision-making and governance
processes. The code also specically allows for prot sharing based on each participant’s stakeholding.
The global, borderless, permissionless nature of blockchain enables members to participate in a DAO regardless
of their physical location, background, or creed (Wright, 2021). Whilst the minimum membership numbers for
a DAO are unclear, the term ‘organisation’ is likely to refer to an entity comprising multiple (‘two or more’)
people acting towards a common goal rather than a legally registered organisation (De Filippi & Hassan, 2016).
19 Lund Dane, DAO Governance Primer: Flat DAOs
https://lund.mirror.xyz/Fe5BYyO5oMcVeXyXUK1iZX4QM-KVBc4azAG5jjU6ETM
18 Robert A. Schwinger, DAOs Enter the Spotlight,
https://www.law.com/newyorklawjournal/2022/03/21/daos-enter-the-spotlight/
17 Buterin, V. (2013). Ethereum whitepaper: A next-generation smart contract and decentralized application platform
[White Paper].
https://blockchainlab.com/pdf/Ethereum_white_paper-a_next_generation_smart_contract_and_decentralized_applicat
ion_platform-vitalik-buterin.pdf
Technology and the Rise of Lex Cryptographia (March 10, 2015). Available at SSRN:
https://ssrn.com/abstract=2580664 or http://dx.doi.org/10.2139/ssrn.2580664
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As we will discuss in depth below, for some DAOs legally wrapped as Delaware limited liability companies, the
maximum membership is capped at 99 members so as to comply with United States (‘U.S.’) Securities law
amongst other regulations.20 Interestingly, when Slock.it the DAO launched in May 2016, more than 10,000
people worldwide invested in the DAO.21
DAOs -v- Corporate Structure
DAOs seem to present anti-fragile and exible operational advantages, at least as compared to existing legal
organisational structures in that: membership can be attained at the click of a button in comparison to formal
appointment based on pre-dened roles,22 assets can be moved in a matter of seconds and in some instances,
there is no need to interact with third party intermediaries and institutions such as banks, there is no centralised
authority or top-down hierarchical governance structure and all transactions are memorialised on a blockchain
ledger.
A DAO is a dispersed and communal entity. Community members submit proposals to the group, and each
node can vote on each proposal (Daugherty & Lehot, 2021).23 Just like other blockchain-based applications,
DAOs are argued to exhibit a high degree of transparency and tamper-resiliency, quicker transactional
movement, while also avoiding protracted contested decision-making, deadlocks and fraudulent behaviour
(Wright, 2021).
A drawback is that DAOs are currently unconsidered substantively at law, with no consistent recognised legal
status in the U.K. as in other common law or civil law jurisdictions (Armstrong et al, 2019), which troubles
regulators and policy makers because it is not clear who bears legal rights and responsibilities.24 Consequently,
24 Dean Armstrong, Dan Hyde and Sam Thomas, Blockchain and Cryptocurrency:International Legal and Regulatory Challenges,
Bloomsbury Professional 2019;
https://www.bloomsburyprofessional.com/uk/blockchain-and-cryptocurrency-international-legal-and-regulatory-challe
nges-9781526508393/
23 Daugherty D.P. and Lehot L., DeFi and the DAO: How the Law Needs to Change to Accommodate Decentralized
Autonomous Organizations,
https://www.foley.com/en/insights/publications/2021/12/louis-lehot-defi-dao-how-law-needs-to-change
22 TalentDAO, NoDW #4: Decentralized Leadership, https://talentdao.substack.com/p/nodw-4-decentralized-leadership
21 Cade Metz, The Biggest Crowdfunding Project Ever—the DAO—Is Kind of a Mess, WIRED: BUS. (June 6, 2016),
https://www.wired.com/2016/06/biggest-crowdfunding-projectever-dao-mess.
20 The LAO, https://docs.thelao.io/membership.html
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DAOs are not an established and widely implemented form of business association (for example a DAO cannot
be registered at Companies House in England and Wales), making it dicult for DAOs to interact with other
entities imposing heightened personal risk on their members. Despite commentary suggesting that an
unincorporated DAO could be deemed by a court to comprise an unincorporated general partnership, no court
has made this nding yet (Brummer & Sierra, 2022).25
If courts or legislators were to construe DAOs as general partnerships, its participants are likely to owe each
other duciary duties as partners who may be held jointly and severally liable in the event legal proceedings are
brought against the DAO. As it is, the implied relationship between DAO members—is not that of a duciary,
but rather that participants stand on equal footing, therefore, no member of a DAO owes a duciary duty to the
organisation or any other member (Wright, 2021). Respectful and good-faith discussion should be the
cornerstone of any decision-making process. In addition, participants may join and exit (“rage quit”) a DAO at
any time as they have no loyalties to a particular DAO, unless the protocol or code has specic processes for
exiting or liquidating membership.
Legal Wrapping
It is worth noting that in the U.S., DAOs could be legally wrapped as Unincorporated Nonprot Associations
(abbreviated as ‘UNAs’) and Limited Cooperative Associations (abbreviated as ‘LCAs’). In July 2021, The State
of Wyoming enacted legislation26to control the creation and management of DAOs. In March 2022, Wyoming
amended the Decentralized Autonomous Organizations (DAO) Supplement (Supplement), which permits
DAOs to incorporate and obtain legal status as limited liability companies under Wyoming’s Limited Liability
Company Act.27 Supporters of the DAO Supplement believe it will not only protect DAOs from being sued as
27 SF0068 - Decentralized autonomous organizations-amendments; https://www.wyoleg.gov/Legislation/2022/SF0068
See, Troutman Pepper (May 2022), Wyoming Amends DAO Legislation Enabling DAOs to Dictate Quorum Threshold
on an Individual Basis
https://www.jdsupra.com/legalnews/wyoming-amends-dao-legislation-enabling-2457236/#:~:text=On%20March%209
%2C%20Wyoming%20amended,Wyoming's%20Limited%20Liability%20Company%20Act.
26 CHAPTER 29 - WYOMING LIMITED LIABILITY COMPANY ACT
https://sos.wyo.gov/Forms/WyoBiz/Wyoming_Limited_Liability_Company_Act_and_Close_LLC_Supplement.pdf
25 Brummer, Christopher J. and Seira, Rodrigo, Legal Wrappers and DAOs (May 30, 2022). Available at
SSRN:https://ssrn.com/abstract=4123737orhttp://dx.doi.org/10.2139/ssrn.4123737
Sarcuni et al v. bZx DAO et al. (S. D. Cal., 2 May 2022) filed in the US District Court for the Southern District of
California is the first to allege that a DAO is operating as an unincorporated partnership.
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general partnerships but also solidify the rights of DAOs as legal persons and provide clarity and structure to
many DAO projects.28
Under Wyoming DAO law, a DAO’s articles of organisation may dene the DAO as either member-managed or
algorithmically managed, and, if the articles are silent, the DAO defaults to a member-managed organisation.29
Notably, Wyoming DAO law requires that, for an algorithmically managed DAO, the underlying smart
contracts must be able to be updated, modied, or otherwise upgraded.30 Therefore, DAOs that take advantage
of being incorporated under Wyoming’s LLC law will maintain some modicum of centralisation and human
control.
Additionally, the DAO’s articles of organisation must be amended when the DAO’s smart contracts have been
updated or changed.31 In April 2022, Tennessee passed its own DAO legislation. Tennessee’s statute, however,
refers to the entity type as a “Decentralised Organisation,” or “DO.” (The omission of “autonomous” is likely a
nod to the reality of how most DAOs actually function.) ‘DO LLCs’ are also subject to Tennessee’s standard
LLC law (Teague 2022).32
Internationally, oshore entity structures like the Cayman Foundation Company and Guernsey Special Purpose
Trust also exist as legal wrappers for DAOs (Brummer & Sierra 2022). Despite sharing some common features,
DAOs dier dramatically from one another in terms of their purpose and operation, and as a result, particular
legal wrappers may make sense in one situation, but not others (Brummer & Sierra 2022).
32 Teague Jordan (June 2022), Starting a DAO in the USA? Steer Clear of DAO Legislation A Primer on DAO
Legislation in Multiple States, https://thedefiant.io/starting-a-dao-in-the-usa-steer-clear-of-dao-legislation/
31 Wy. Stat. § 17-31-107(a)(iii)
30 Wy. Stat. § 17-31-105(d)
29 Wy. Stat. § 17-31-104(e)
28 Dilendorf Law Firm (2021), Forming and Operating a Wyoming DAO LLC
https://dilendorf.com/wp-content/uploads/2021/06/Forming-and-operating-a-Wyoming-DAO-LLC.pdf
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Liability
In terms of liability for DAOs, the rst putative class action lawsuit Sarcuni et al. v bZx DAO et al. (S. D.
Cal. May 2, 2022) was led in the Southern District of California. This negligence action is based on the legal
theory that a DAO is a ‘general partnership’ exposing its members to joint and several liability for allegedly
failing to reasonably secure their Decentralised Finance (‘DeFi’) protocol (designed for tokenized trading on
margin and lending) resulting on the theft, by a hack, of $USD 55 million.33
The English High Court in Tulip Trading34 Limited v Bitcoin Association for BSV and others [2022]
EWCH 667 (Ch) considered liability by open-source cryptocurrency developers to cryptocurrency end-users.
The High Court held that the Defendants did not owe any duciary or tortious duties as alleged, because the
developers of the network software were a uctuating body of contributors without any organisation or
structure. Questions of partnership were not considered. However, it is suggested that liability will not be
imposed on DAO participants’ unless individual members undertake to act for or on behalf of another in
circumstances, which give rise to a relationship of trust and condence.35 The distinguishing obligation of a
duciary is the obligation of undivided loyalty, which will be evidenced through the intentions of contracting
parties and programmers (Allen & Brendish, 2022).36
Governance
Governance refers to the processes, rules and procedures relied upon to maintain the protocol (Finck, 2018).37
This encompasses actual protocol modication as well as the deliberation and decision-making processes
relevant to managing and coordinating an entire community towards the achievement of a common goal (Van
37 Finck, M. (2018). Blockchain Regulation and Governance in Europe. Cambridge: Cambridge University Press.
doi:10.1017/9781108609708
36 Allen Emma and Brendish Samantha, Don't lose your keys: Bitcoin developers do not have a duty to assist owners in
recovering lost cryptocurrency,
https://www.taylorwessing.com/en/insights-and-events/insights/2022/04/dqr-bitcoin-developers-do-not-have-a-duty-t
o-assist-owners-in-recovering-lost-cryptocurrency
35 Bristol and West Building Society v Mothew [1996] EWCA Civ 533
34 See Judgment: https://www.bailii.org/ew/cases/EWHC/Ch/2022/667.html
33 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, Putative Class Action Lawsuit Alleges DAO Members Are
Jointly and Severally Liable for a Cryptocurrency Hack;
https://www.skadden.com/insights/publications/2022/05/putative-class-action-lawsuit-alleges-dao-members
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Pelt et al, 2021).38 DAO governance comprises a mix of ‘on-chain and o-chain’ deliberations and decisions on
how the DAO should evolve and be administered (De Filippi & Loveluck, 2016).39
For on-chain governance, a decision is reached by the DAO’s coin (or DAO’s crypto) holders on the blockchain,
and the protocol adapts automatically to install the endorsed update. Miners exercise no agency. O-chain
governance is more complex as it refers to the processes around the protocol that contribute to its maintenance.
The actors involved in o-chain governance are, accordingly, more diverse as they include not only coin holders
and miners but also core developers and the wider community. Even if a collective or a coin vote leads to an
agreement, they lack the means to enact their decision; the true power still lies outside the protocol per se, i.e.,
with miners or validators (Petrowski, 2020).40
The DAO Exploit… ‘A Case of Fragile Code’
In 2016, The DAO, the early DAO-structure we mentioned, organised by Slock.it, was intended to allow
cryptocurrency investors to directly fund and manage new enterprises – all to be run on the Ethereum
blockchain (DuPont, 2017). The DAO was governed according to a majority vote by its investors, instead of
entrusting the entirety of the investors’ assets to a central manager who decides how to manage The DAO’s assets
(Jentzsch, 2016). The DAO was the largest crowdfunding event in history raising over $USD 150 million.
However, it was short-lived. The DAO was hacked through the exploitation of several vulnerabilities in its code.
This resulted in the syphoning of $USD 60 million and the remedy of last resort was to ‘hard fork’ (‘forcefully
split’) the Ethereum blockchain to restore the funds raised by the DAO and those taken by the attacker.
Commentary suggests that The DAO hack itself was entirely legitimate according to the smart contract code
(Zou, 2020).41 This was because The DAO had no terms and conditions or governing laws prohibiting such a
hack, which paradoxically meant that an attacker could transfer the funds without repercussions (Georgiev,
41 Mimi Zou, Code, and other Laws of Blockchain,Oxford J Legal Studies (2020) 40 (3): 645
40 Joe Petrowski, Polkadot Governance, https://polkadot.network/polkadot-governance/
39 Primavera De Filippi &Loveluck,B.(2016).The invisible politics of Bitcoin: Governance crisis of a decentralised
infrastructure.Internet Policy Review, 5(3),1–28.[Crossref],[Web of Science ®],[Google Scholar]
38 Rowan van Pelt, Slinger Jansen, Djuri Baars & Sietse Overbeek (2021) Defining Blockchain Governance: A
Framework for Analysis and Comparison, Information Systems Management, 38:1, 21-41, DOI:
10.1080/10580530.2020.1720046
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2016).42 A section of the community purported that any kind of hard fork was tantamount to an existential
system’s deceit, arguing that code is law (Lessig, 1999), along the lines of the dictum: ‘what is written in the code
is the rule of law to abide upon’, and that any eort to block the attacker would be morally wrong and against the
very spirit of decentralised autonomous organisations (DuPont, 2017).43
Surprisingly, the attacker wrote a letter to the community, supporting this very position of supreme algorithmic
authority and that he or she “rightfully claimed” Ether tokens by exploiting an embedded “feature” of The
DAO’s structure that was designed to “promote decentralisation”. Notwithstanding the diatribe, a hard fork
was initiated by the underlying blockchain and Ethereum Foundation in order to stop the attacker from
draining funds. The minority viewed this intervention as censorship, or proof that blockchain technology was
unable to live up to its idealistic promise of decentralisation, immutability and tamper resistance. Others,
however, argued that, despite such ideals, a hard fork was an obvious choice when a community was faced with
an existential nancial crisis of such kind (Vitalik Buterin, 2017). In the circumstances, decentralisation and
immutability should not promote a powerless stand against attackers, even in absence of a formal democratic
decision-making process for calling for the hard fork (Dupont, 2017).
The DAO exploit underscores the importance of implementing good and pragmatic governance
(Campbell-Verduyn et al 2017).44 Ideally, The DAO was supposed to represent a turning point in legal authority,
where code is law and that collaboration can be governed by algorithms (Jureta, 2021).45 Contrary to the
ideological underpinnings of code is law and of blockchain’s decentralised trust and immutability, the hard fork
retroactively invalidated transactions that were formally valid within code. In doing so, The DAO exploit
illustrates that autonomous entities can still produce less favourable outcomes from a “purist” perspective, and
just like traditional organisations, DAOs are unable to completely escape the risk of governance problems and
dispute resolution.
45 Jureta I., Limits of Decentralized Autonomous Organizations,
https://ivanjureta.com/limits-of-decentralized-autonomous-organizations-dao/
44 Campbell-Verduyn, M., Goguen, M., and Porter, T. (2017). Big data and algorithmic governance: The case of financial
practices. New Political Economy, 22(2): 219–36.
43 DuPont Q, Experiments in Algorithmic Governance: A history and ethnography of " The DAO, " a failed
Decentralized Autonomous Organization,
https://iqdupont.com/wp-content/uploads/2018/06/DuPont-Experiments_in_Algorithmic_Governance-2017.pdf
42 Hristo Georgiev, The Hack That Changed the Blockchain Perspective, MWR LABS (Aug. 11, 2016),
https://labs.mwrinfosecurity.com/blog/the-hack-that-changed-the-blockchain-perspective
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The DAO exploit also highlights that unguided and unchecked dispute resolution in such a nascent area of
technology, still mostly beyond the reach of legislated regulations, will most certainly result in unfair outcomes
and processes (Minn 2019). More recently, in April 2022, an attacker managed to exploit Beanstalk Farms’46
governance mechanism and sent funds to a wallet the attacker controlled. The attacker, in this case, took
advantage of the protocol’s security loopholes and gained possession of about 67%-79% voting power, which was
more than the ⅔ voting threshold, and approved corrupted system proposals. The attacker ed with over
$USD80 million in Ether (ETH) and 36 million in Beans (BEAN) from the protocol. Consequently, the
protocol lost all its Total Value Locked (‘TVL’), which was around $USD 180 million (Rajpalsinh 2022).
Unprecedented ‘Emergency’ Powers
On 19 June 2022, the Solana47 DeFi platform, Solend, through a majority, voted on an emergency governance
proposal to take over a whale’s48 account with an “extremely large margin position” so that the whale’s funds
could be withdrawn instead of automatically liquidated on the open market.
Contrary to principles of decentralisation, there was no language suggesting further options or strategies that
could be implemented; either take control or do nothing. Reports also suggested that participants were
incentivized with an ‘airdrop’49 for voting on the proposal with only one thought-out course of action.50 The
Solana community condemned the move, calling it the ‘opposite of what DeFi should be and outright illegal’.
The Solend team was forced to initiate a second governance proposal vote to invalidate the previously-approved
proposal and to nd another solution that did not involve forcibly taking over an account.
50 Wright, A. Liam. Solend pays users to vote on proposal to liquidate whale wallet OTC and avoid “bad debt”
https://cryptoslate.com/solend-pays-users-to-vote-on-proposal-to-liquidate-whale-wallet-otc-and-avoid-bad-debt/
49An airdrop involves sending coins or tokens to wallet addresses of active members of a blockchain community for free
or in return for a small service.
See; What is a Cryptocurrency Airdrop? https://www.investopedia.com/terms/a/airdrop-cryptocurrency.asp
48A whale refers to individuals or entities that hold large amounts of cryptocurrency. Whales hold enough cryptocurrency
that they have the potential to manipulate currency valuations.
https://www.investopedia.com/terms/b/bitcoin-whale.asp
47 Solana, https://solana.com/
46Beanstalk Farms Suffers $182M Loss in DeFi Governance Exploit
https://www.cryptotimes.io/beanstalk-farms-suffers-182m-loss-in-defi-governance-exploit/, See; Beanstalk Farms
Hacked: Total Damage is 182 million,
https://medium.com/uno-re/beanstalk-farms-hacked-total-damage-is-182-million-b699dd3e5c8
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Conclusion
Unsurprisingly, The DAO’s case exemplies that human intervention in certain circumstances is still required to
implement complex decisions that have a direct eect on the o-chain and physical environment and members’
livelihoods. Viewing DAO governance through a corporate governance lens helps explain the Ethereum
community’s choice to hard fork the Ethereum protocol after The DAO hack (Del Castillo, 2016).51
Nonetheless, research is still unclear as to whether algorithmic DAOs should be limited to simple decision rules,
and tough decisions reserved for community-wide ruling through participatory DAOs.
Commentary suggests that the technical conception of a DAO can be summarised as, “automation at the centre,
humans at the edges” (Vitalik Buterin, 2014).52 This invites the question; whether fully autonomous and solely
automated DAOs, without any human intervention, are actually desirable or if the concept of ‘autonomy’
should be interpreted in a broader sense so that human participation is called in to perform tasks that
automation is, at this juncture, unable to optimise, such as engaging in litigation or solving conicts that arise.
Given the nascent nature of DAOs and the uncertainties of their legal treatment in many jurisdictions, only time
will tell how these organisations will be regulated and dened and ultimately their success. However, the
promise of DAOs is far from guaranteed and they are not without risk.53 Until then, the development and
testing of their vulnerabilities greatly assists in how communities dene, adopt and interact with DAOs.
53 TalentDAO, NoDW#1, https://talentdao.substack.com/p/nodw-1
52 Buterin Vitalik; DAOs, DACs, DAs and More: An Incomplete Terminology Guide,
https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide/
51 Michael del Castillo, The Hard Fork: What’s About to Happen to Ethereum and the DAO, COINDESK (July 24,
2016), https://www.coindesk.com/hard-fork- ethereum-dao [https://perma.cc/7U9G-AN6X].
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Cases
1. Bristol and West Building Society v Mothew [1996] EWCA Civ 533
2. Sarcuni et al v. bZx DAO et al. (S. D. Cal., 2 May 2022)
3. Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWCH 667 (Ch)
https://www.bailii.org/ew/cases/EWHC/Ch/2022/667.html
Legislation
1. CHAPTER 29 - WYOMING LIMITED LIABILITY COMPANY ACT
https://sos.wyo.gov/Forms/WyoBiz/Wyoming_Limited_Liability_Company_Act_and_Close_LLC_Supplemen
t.pdf
2. SF0068 - Decentralized Autonomous Organizations-Amendments;
https://www.wyoleg.gov/Legislation/2022/SF0068
Reports
1. SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No.
81207 / July 25, 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:
The DAO, https://www.sec.gov/litigation/investreport/34-81207.pdf
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