The smart contract holds the key to the day-to-day functioning of the DAO. The smart contract contains the rules of the DAO, which mean no one person can change it — at least not without others noticing. Therefore, any changes to the organization needs to be voted on by all involved. This stands in sharp contrast to a traditional organization, where C-level executives and a Board of Directors make operational decisions. The DAO is aimed at empowering the grass roots.
For a DAO to be operational, it needs a basic set of rules that allow it to run, along with the funding that comes from tokens. The smart contract must be set up in a way that gives voting rights to all shareholders, and it must have strong security mechanisms.
The grassroots nature of a DAO means that they are suited for organizations that are moderate to small in size and have a clear common purpose. This is why fundraising is a common use of DAO. Everyone is presumably on board with the stated goal of why money is being raised.
DAOs are also very transparent, particularly when compared to traditional organizations. The fact that no one can alter the smart contract in secret is just one part of this transparency. The entire premise of the DAO strips out corporate bureaucracy and any temptation to secrecy.
The smart contract also serves to eliminate human error. The programmed nature of decision-making means there won’t be a human executive making a rushed decision in reaction to current events. It also can mitigate the ability of a human manager to give in to the temptation of corruption.
Finally, a DAO can be easy for people to access and be a part of. Its structure also protects the privacy of those who join. Therefore, if someone wants to support an initiative while retaining their anonymity, the DAO can allow them to do that.
Like any other entity, the DAO comes with its downsides. Foremost among them is liability exposure. While the law is still evolving, right now a DAO could be (without proper planning) considered a general partnership. In a GP, the owners can have their personal assets seized in any kind of lawsuit against the company. There is no legal wall put in place between one’s personal life (i.e., ownership of their house) and their business liability.
As a practical matter, a DAO can be difficult if an organization grows too large. The need to have every member participate in voting can slow down operations. And in the digital world, a lack of speed can be extremely damaging to an organization’s success.
There’s also something of a paradox within the DAO — in the interests of decentralizing all decision-making, operations can still become overly centralized. Why is that? Let’s consider a large company with several divisions in it. These divisions are authorized to make their own independent decisions on a daily basis, even if the C-suite executives and the Board have ultimate control. By eliminating all of this management, the DAO still implements its own central authority with the smart contract.
In short, whether the DAO really does meet its goal of decentralizing power will depend, in large part, on the structure and goals of each specific project.
A Miami DAO lawyer can advise clients on the right structure for their DAO and walk them through the tax and regulatory implications of the venture. Licensing requirements and SEC oversight will have to be reviewed. The objective is to put clients on a firm legal footing as they begin their project, and to then lead them through the changing legal world as events unfold.
Ari Good brings over twenty years of legal experience to the cryptocurrency industry. We understand how the law and regulations regarding cryptocurrency got to their current place, and we’re constantly staying on top of how it is changing.
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