DAOs are running crypto. Can they replace the corporation, too?

Decentralized structures like ConstitutionDAO are fast, simple to spin up, democratic and global. The problem is getting regulators to recognize them.

An illustration of 3D letters spelling "DAO"

DAO stands for "decentralized autonomous organization." Crypto advocates believe it can replace traditional forms of corporations.

Image: Christopher T. Fong/Protocol

Decentralized autonomous organizations are the way that much of the crypto industry is ostensibly organized today.

But some critics are asking whether these groups offer a new world of crypto coordination, or just a more risky way to do things that already exist in traditional finance.

Put more simply: Do DAOs work as promised?

DAOs enable people to form organizations with no central leaders in control, run on top of a cryptocurrency, for some collective purpose. They're often described as a way for people to avoid the hierarchical centralized systems in corporations or other large organizations.

They also offer transparency through the recording of transactions on a blockchain and are often run through rules enforced by a smart contract. They can be designed to be more loosely organized and easier to join than companies. (This also makes it easier for people to drift in and out.)

Jonesing for a DAO

DAOs aren’t new. Many large crypto protocols operate using DAOs to vote on the direction of their protocols. One of the earliest was The DAO, which fell victim five years ago to someone stealing one-third of the group's capital — some $50 million. That resulted in a hard fork of Ethereum into two blockchains.

Today DAOs are being used across a range of purposes, such as social groups, collector groups, investor groups, talent agencies, research groups and media organizations. There’s now an industry that provides services such as starting a DAO, providing tokens to DAO contributors, running DAO votes on proposals, handling disputes and managing DAO treasuries.

But can DAOs fund startups, replace crowdfunding campaigns or take the place of the trusty LLC? Advocates say that emerging tests of the model show it could bring more transparency and inclusiveness to businesses. Critics say that DAOs are not really doing much new, are often not legal and often rely on an assumption of never-ending growth to fuel themselves.

Crowdfunding is a popular use of DAOs. It also shows the many ways that DAOs can go wrong. People can spin up a DAO for virtually any financial goal — from buying a basketball team to trying to address climate change. ConstitutionDAO infamously raised over $40 million, lost its bid for a copy of the Constitution and descended into chaos.

The best-known crowdfunding sites, Indiegogo and Kickstarter, offer rewards, not equity. Others that rely on the SEC's Reg CF to do equity crowdfunding have to stay small and within the U.S. to adhere to regulations. Both of those models allow refunds if a project turns out to be a scam.

DAOs generally don't have such protections, but with DAOs people could "raise money from millions all over the world for a global cause like buying tracts of rainforest or cleaning up part of the ocean," said Adam Jackson, co-founder of Braintrust Network and a crypto investor. There are some legal questions with crowdfunding DAOs and challenges with trusting who is running the projects, he noted.

A printing of the United States Constitution on displayThe ConstitutionDAO bid on the first-edition printing of the Constitution at a Sotheby's auction. Photo: Alexi Rosenfeld/Getty Images

For startup investing, successful founders or investors can form their own DAOs to use for their angel investing where a small group votes on how to invest — and some of this is already happening, said David Pakman, managing partner at CoinFund. Groups like The LAO and MegaCartel have gotten into early-stage crypto deals.

But DAOs won't replace traditional venture capital, Pakman said. "Early-stage founders are looking for more than money, they want experience on their team to help them succeed, and I am not sure a DAO model does a good job of providing both capital and experience in growing companies," he said.

Social clubs hold the potential to enable coordinated action that wasn’t possible before, ConstitutionDAO notwithstanding, Jackson said. While he believes ConstitutionDAO was "doomed to fail," offline clubs are forming DAOs to invest as a group through a token., which Jackson has invested in, is one site used to do this. In the future, even your typical offline bake sales or charity fundraisers will use DAOs to raise money, Pakman predicted.

The DAO of social

The coordination and social elements of DAOs, often done in part on Discord, are a key part of DAOs. They lower the barrier to entry and facilitate decentralized decision-making. Or, as in the case of ConstitutionDAO, they help fuel the chaos.

The difference is that there’s ownership and a profit motive attached. It’s one thing if tokens are used for a social group to fundraise for some purpose. But will financial incentives become de facto required for social interactions? Friends with Benefits, the social club that uses tokens that must be purchased for everything from in-person events to editorial projects, is one experiment testing this out.

That said, DAOs are being created to generate profits in surprising new ways from online connections. Crypto gaming often requires the purchase of currencies or NFTs to participate. So Yield Guild Games, a DAO, lends NFTs to gamers to split in-game profits.

DAO Inc.?

DAOs could be another way to form LLCs, but can they really replace companies? Crypto-friendly Wyoming passed a law in July allowing people to create an LLC with a DAO that has an Ethereum address. If a conflict arises in a DAO, a judge in Wyoming could rule on a dispute. But this wouldn’t work if one of the parties is outside of Wyoming, Jackson said: That aspect of the law hasn’t been tested.

It’s not either/or. Some DAOs need to register as LLCs and have done so. The LAO is a Delaware-registered LLC that is “primarily administered via an online application (a 'DApp') and related smart contracts,” its website says. In other words, the DAO structure provides coordination and voting, but sits on top of the LLC structurally.

One group, CityDAO, purchased 40 acres of land in Wyoming under the law seeking to build a blockchain city. However, after Wyoming recognized another DAO, American CryptoFed, the SEC in November blocked the DAO’s token registration due to a “materially deficient and misleading registration form.” In other words, even if a state recognizes a DAO, it may still need SEC approval to register its tokens.

The best use of DAOs are when actions are transparent, typically through voting on the blockchain, with community treasuries held on chain and voting actions enforced on chain, Jackson said. One model for this is Governor Alpha, which is used by Compound and Uniswap, he said.

"These are fairly traditional capital structures, but on the blockchain," said Parker Thompson, a partner at TNT Ventures. DAOs have simpler share structures, with fewer or no share classes, and are able to manage decision-making using tokens rather than shareholder votes. But the concept of pooling capital for collective effort isn’t new, he argued.

The biggest challenge for DAOs may be their legal status, which is still unclear. "As with many 'innovations' in crypto, the primary novelty here seems to be ignoring laws," Thompson said.

That may mean that for some time, the DAO won’t replace the LLC: Instead, it will ride on top of that structure’s established protections. Expect a growth industry in legal advice for starting your DAO LLC.


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories