Trust In DAOs  

 

As more use cases of Decentralized Autonomous Organizations (DAOs) circulate in the global news cycle, some readers are probably left wondering how to integrate one in their current corporate structure.

While I previously wrote about the Legal Basics of DAOs, here, an article which briefly mentioned existing legal entities that one can use to incorporate an off-chain DAO, this article explore a novel approach with the use of a trust, a vehicle first developed back in the 12th century.

As are the goals in using any other corporate form for legalizing a DAO, the purpose of incorporating a trust into the DAO implementation mix would be to limit liability, while also giving DAO members to opportunity to participate in strategic decision-making at an organization, without being a part of said organization.

In this proposed model, there are three major components: 1.) a trust is created that owns or has a majority share in a member-managed LLC, 2.) the unincorporated DAO’s members are billed as the trust’s beneficiaries, and 3.) the trustee, the individual in charge of the trust’s assets, acts on behalf of the beneficiaries in managing the LLC.

 

 

 

Most DAOs work in conjunction with a governance token for members to vote as a collective on certain strategic decisions concerning an organization. Depending on how the trust is formed (e.g., irrevocable trust, revocable trust, charitable trust, etc.), the trust documents can dictate that the trustee must act on behalf of the DAO’s members, with decisions stemming from votes used as evidence of what is in the best interest of DAO members. The LLC can then action such decisions through the trustee, who would be a managing member of the LLC. 

Thus, the actions of the DAO are limited to the equivalent of sentiment polling to be used by the trustee to act upon through the LLC, while the DAO members never action anything themselves. I.e., utilizing such a model adds a degree of separation between the DAO’s actions, and the results (whether profits or losses) of the LLC’s actions.

What are the benefits of the aforementioned model? As an unincorporated DAO lends itself to being labeled as a general partnership between the members (which comes with unlimited personal liability) making it so that the DAO takes no concrete steps in working together to make a profit means the DAO cannot be seen as a general partnership. Further, any increase in the value of the DAO’s token based on the efforts of the LLC would not be able to be pinned on the DAO itself, making it less likely for a regulatory body, like the US’s Securities and Commodities Exchange, to label the governance token as a security. This may be the additional appeal over simply wrapping a DAO in an existing LLC structure as a wrapped DAO’s governance token will more likely be viewed as a security in jurisdictions like the US, where an analysis under the Howey Test may show the governance token is likely an investment contract (pursuant to a litany of other observations, of course).

 

Authored by Anibal Suriel (Associate)

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