Wyoming built a home for DAOs, but they won’t come

Jun 30, 2021

Wyoming’s so-called “slack-jawed” DAO Supplement bill will soon go active July 2021. It grants decentralized autonomous organizations (“DAOs”) the opportunity to register as limited liability companies (“LLCs”) in the state. This bill is fitting for the “Cowboy State,” not only because its nickname evinces the “wild west” ethos around the emerging cryptoverse, but also because Wyoming first pioneered the LLC, a once novel business organization.

Perhaps even more fitting for this bill is that DAOs were also originally conceived of as DACs (decentralized autonomous corporations) since early cryptocurrency adopters realized that general corporate activities could be automated on the blockchain. However, DAC was broadened to the omnibus, DAO, because blockchain opens up a much wider world of human organization than one restricted to business applications. So too, should blockchain legislation similarly address a wide range of issues. However, because Wyoming’s bill is premised on fundamental misunderstandings of both the technology and industry around DAOs, its actual use will be just as limited as its scope.

DAOs

One of the most substantial innovations that blockchain brings is having programmable money since money is now digitally native. For example, developers can write certain code (“smart contracts”) that execute simple or complex tasks with cryptocurrencies on the Ethereum blockchain, which is the protocol where Ether and many other cryptocurrencies lie. Like a financial Rube Goldberg machine, users of the Ethereum blockchain who seek the financial services of these smart contracts merely have to send their cryptocurrency to them, then the contracts will automatically execute their predetermined functions using that cryptocurrency. These smart contracts can also function as a DAO, which are programs coded with rules that execute and/or automate organizational tasks.

Unlike any passive smart contract, DAOs are not entirely automatic—they require some human input. Members participate in DAOs by making managerial decisions regarding a pool of assets held by the DAO or with respect to interacting with other smart contacts. In other words, DAOs execute and automate human organizational activities like maintaining payrolls, accounting and dissolution, dispute resolution, holding votes on business decisions, and interacting with other blockchain-based entities. For example, members of a DAO maintaining a pool of interest-bearing cryptocurrencies can vote to employ the services of another DAO that is programmed to provide insurance services. The far future could see entire companies converting their management structures to a lean and efficient DAO. However, otherwise incorporated companies would currently face the threat of general partnership liability without further legislative clarity from states.

Critically, DAOs already govern most of the multi-billion dollar decentralized finance (“DeFi”) protocols, like Uniswap, Aave, and Curve. Many such DAOs, however, started as private foundations. Like companies “going public” after a period of maturation, many DeFi protocols opt to be initially managed by a private foundation before ceding management to the rest of the world through a permissionless DAO. DAOs are permissionless because anyone with an internet connection can buy a project’s governance token, which they use to vote on governance proposals or claim any profits the DAO generates. However, DAOs do not have to be profitable, they can serve as any type of decision-making organization. For example, anyone can create their own DAO on DAOHaus with the specifications to operate it as a club, distribute grants, govern a product, or provide other services.

In all, the novel functionality of DAOs makes the space ripe for informed legislation as the array of possible issues of first impression continues to rapidly expand.

Wyoming’s DAO LLC Bill

Wyoming’s legislators initially drafted this bill in part to ensure that DAOs do not face general partnership liability, but the bill’s issues will limit its actual use without further amendments. Indeed, the drafters recognized that this was only a transitory provision, stating that the “LLC statute may not be the best fit for DAOs,” so the legislators are “certainly not done yet.” Thankfully, Wyoming recognizes they are merely filling a pothole, rather than paving a new road. Below are three considerations that legislators and practitioners should acknowledge in attempting to amend or utilize Wyoming’s DAO bill.

First, the bill classifies all DAOs as being member-managed unless they opt to be “algorithmically managed.” 17-31-104(e). As a result, DAOs cannot be manager-managed—meaning that projects cannot be nurtured and grown by an initial foundation. This limitation is the equivalent of forcing a company to go public before finding its product/market fit or even before testing the locks on its doors. In effect, this bill would not protect DAOs when they are at their most vulnerable stages of development. On a technical level, most DAOs can only execute managerial functions when there is active human (i.e., member) involvement like voting on managerial decisions—code does not vote. These technical realities make it hard to imagine how any DAO could be “algorithmically managed” without the bill defining what that means, which it does not. Absent AI, management of “algorithmically managed” DAOs could be vested in passive smart contracts as complex as an excel spreadsheet macro. 17-31-109.

The crucial distinction between member-managed and “algorithmically managed” DAOs arises in 17-31-105(d), which requires “algorithmically managed” DAOs to be “updateable, modifiable, or otherwise upgradable.” However, the novel feature of blockchain is that its state is immutable. Accordingly, any updates, modifications, or upgrades to DAOs are usually administered by deploying entirely new smart contracts, which would also require amending the articles of organization to add the new contract address. 17-31-107(a)(iii). Relatedly, the bill will dissolve DAO LLCs if they have failed to approve any proposals or take any actions for one year. 17-31-114(iv). This provision is nothing but foreign to traditional LLCs and thus handicaps innovative DAO LLCs—projects should not have to take any actions if they are satisfied with their DAO’s performance.

Second, the DAO LLC must be registered with “DAO," "LAO," or "DAO LLC" in their name. 17-31-104(d). Although this nomenclature does exist in the DAO space (e.g., MakerDAO, Moloch DAO), its use is nevertheless dwarfed by most other platforms that opt for fanciful or descriptive names, rather than ones stating how they are managed (e.g., Aave, Uniswap, Compound). Thus, projects may be dissuaded by the limited branding under this bill.

Third, this bill requires DAOs to maintain a registered agent in Wyoming. 17-31-105(b). This seemingly minor rule may nevertheless hinder widespread use of this bill since it is neither needed nor wanted. DAOs fundamentally replace fiduciaries and responsible parties because all assets and liabilities exist on the blockchain. Moreover, the overwhelming majority of DAO members prefer to otherwise stay anonymous. Part of the ethos and marketing behind these DAOs is that they operate as borderless and internet-native. So, although having an in-state agent is Wyoming’s minimum price of limited liability, many DAOs will be turned off by the prospect of maintaining this redundant “meatspace” infrastructure.

Final Thoughts

As it stands, Wyoming’s bill creates more problems for DAOs than it solves since it was drafted with misunderstandings of both the technology and industry around DAOs. Subsequent legislation should incorporate innovative practices that the crypto-legal niche has already adopted. Notably, lawyers have crafted model code-deference agreements and even some DAOs have incorporated in Delaware with Series LLC, Ricardian contracts. Both practices ascribe specific legal meaning to specific code, such that the smart contracts governing their DAOs not only execute, but also evidence legal contracts. Nevertheless, until Wyoming amends this bill, any similar attempts at regulatory clarity will continue to be nothing more than unworkable vaporware optimized for hitting headlines rather than aiding innovation.

Thank you to James McCall, Kyle Tatich, Sierra Weingartner, Erich Dylus, and Raina Haque for your feedback.

About me:

Joshua is a proud cheesehead who studied at the University of Wisconsin, now a 2L at Wake Forest Law. He wrote a thesis on blockchain governance which led to his first job in the crypto industry, and now to his summer position in Crowell & Moring’s blockchain practice. His boyfriend Adam is in vet school and hates when Josh talks about blockchain.

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