Thinking | 18 July 2022

World Economic Forum issues white paper on decentralised autonomous organisations

By John Bassilios

Decentralised autonomous organisations are disrupting existing industry sectors and challenging current systems of governance. In collaboration with the Wharton Blockchain and Digital Asset Project, the World Economic Forum has released a white paper on decentralised autonomous organisations to serve as a foundation for policymakers and senior business leaders in understanding the DAO ecosystem.

The DAO market

The first functional DAO, known as ‘The DAO’, was created in 2016. In its first few weeks, it raised US$150 million in ether to create an organisation investment into blockchain projects. However, this success was short-lived as The DAO collapsed after a bug in its code was exploited to appropriate a large portion of the committed assets.

Despite the initial setback, DAOs have grown in popularity. According to analytics service DeepDAO, in 2021 the total value of DAO treasuries surged from US$400 million to US$16 billion. The number of DAO participants also increased 130 times from 13,000 to 1.6 million. This growth has seen DAOs leveraged to make investments, build networks around common interests and even advance the ESG agenda. The increasing prevalence and versatility of DAOs means it is crucial for policymakers to develop an understanding of the ecosystem.

What are DAOs?

DAO is a general term for a group that uses blockchains, digital assets and related technologies to direct resources, coordinate activities and make decisions.

DAOs can be best understood by contrast to traditional hierarchically managed entities such as governments, religious institutions, and corporations. These entities are managed centrally and often opaquely, with decisions made from the top. By contrast, DAOs empower token holders to propose ideas, vote on them and enact them, thereby encouraging token holders to work collaboratively towards their shared goals. Votes of token holders can then be automatically executed on the blockchain.

DAOs are often launched by peers coordinating on communications platforms like Discord, Telegram and Twitter. Creators collaborate to determine the purpose, governance structure and rollout plan. Once these matters are settled, the creators can encode their rules into smart contracts, which ultimately bind the group to its decisions before issuing tokens to the market.

While many have been established as investment vehicles, a large number have also been established for other purposes. For instance, DAOs such as GitcoinDAO and EduDAO were established for philanthropic purposes, and Yacht Club and Bored Ape were established as networking platforms for token holders.

With the uptake of DAOs, a host of providers have emerged to offer token services, voting management, treasury oversight, risk management, growth products, community platforms and legal services to assist in the management of DAOs post-launch.

Evaluation of the DAO structure

Although DAOs are nascent, the advantages of establishing a DAO are clear:

  • the decentralised voting system addresses the limitations of centralised governance and democratises management of the DAO in contrast with traditionally managed institutions;
  • the use of blockchain technology allows the DAO to execute actions quickly and transparently while allowing endless customisation of the DAO to suit its goals;
  • DAOs can be directed to a wide variety of aims such as investment and networking as well as prosocial goals such as ESG; and
  • by virtue of their token holder voting system and use of the blockchain ledger, DAOs offer participants trust in the decision-making mechanism.

Yet, despite market growth and considerable advantages, DAOs remain subject to a number of risks:

  • DAOs receive inconsistent regulatory treatment between jurisdictions, particularly in respect of legal personhood, which makes taxation and liability of DAOs uncertain;
  • the voting mechanism – which relies on token holder participation – carries a risk of low voter turnout, and voter fatigue can stall decision-making;
  • information asymmetry can exist between a DAO’s creators and token holders, and renders token holders vulnerable to fraud;
  • the anonymity of participants can be an obstacle to policing financial crime and legal recourse;
  • as DAOs are hosted on the blockchain, they are vulnerable to the same cybersecurity threats and therefore carry a risk of financial loss; and
  • lack of DAO contributor information or reputable on-chain credentialling can create issues of accountability.

What does this mean?

In the Australian context, the legal status and laws applying to DAOs remain untested. Considering the growing participation and capital invested in DAOs, as well as the risk of allowing DAOs to operate unregulated, this white paper should inform policymakers in their eventual consideration of DAOs in the domestic legal context.

This article was written with the assistance of Adam Nguyen Mahoney, Seasonal Clerk.

Contact

John Bassilios

John Bassilios

Partner, Fintech and Blockchain Lead

John has broad experience in financial services, funds management, blockchain, corporate and corporate law.

You might be also interested in...

Financial Services | 4 Jul 2022

‘Miner extractable value’ in DeFi markets: Bank for International Settlements releases update

The Bank for International Settlements has released an update on ‘miner extractable value’ by intermediaries for cryptocurrency and DeFi transactions.

Fintech | 18 Jul 2022

IOSCO’s Fintech Task Force releases crypto roadmap for 2022-2023

IOSCO recently established a Fintech Task Force to develop, oversee, deliver and implement IOSCO’s regulatory agenda for fintech and crypto-assets.