Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

What Is a Decentralized Autonomous Organization?

Author: Dan Brecher

Date: April 21, 2022

Key Contacts

Back
What Is a DAO (Decentralized Autonomous Organization)?

What if you could run a business without people? That’s one of the central ideas behind decentralized autonomous organizations (DAOs)…

What if you could run a business without people? That’s one of the central ideas behind decentralized autonomous organizations (DAOs). DAOs are internet-based entities that are governed by a community organized around a specific set of rules enforced on a blockchain. As the concept has matured, DAOs have gained traction and may even be poised to change how traditional corporations operate.

Key Features of a DAO

As an evolving technology, DAOs have been described in many different ways. According to the Securities and Exchange Commission, a DAO “is a term used to describe a ‘virtual’ organization embodied in computer code and executed on a distributed ledger or blockchain.” Meanwhile, the New York Times has characterized  DAOs as “a kind of digital co-op that uses cryptocurrency tokens to coordinate access, make payments and vote on group decisions.”

While the descriptions may vary, most agree that DAOs have several key features. To start, they are internet-native organizations that operate using smart contracts, which are typically enforced using blockchain. These self-enforcing smart contracts establish the rules by which the DAO is governed. Another distinguishing feature is that DAOs are owned and managed by a collective of members. While all DAOs share similar structures, they are currently being used to pursue a wide range of initiatives, including investment, charity, fundraising, borrowing, or buying NFTs. 

DAOs vs Traditional Corporations

DAOs differ from traditional corporations in several key areas. Below are a few examples:

  • Majority Rules: For a DAO to implement changes, all of its members must vote in favor of the changes. By comparison, a CEO or other executive may be the sole decision-maker for a corporation.
  • Democratic Governance: DAOs are self-governed by their community of members. This differs significantly from the top-down hierarchy of a typical company where executives and a board of directors largely call the shots.
  • Funding Is Digital: DAOs primarily raise funds via crowdfunding/issuing digital tokens. In contrast, corporations often issue securities, such as shares of stock.
  • Transparency: The operations of a DAO are embedded in code for everyone to see and are, thus, completely transparent. Operations are usually global and not tethered to any centralized governing body. Conversely, corporations generally keep their affairs private and are more likely to be domestic enterprises.

Based on the above, DAOs can have several advantages over traditional companies. From an investor’s perspective, they allow members to pool their funds, are more transparent, and are controlled by the stakeholders themselves.

DAOs are not without disadvantages. One of the most notable is that the legal structure for DAOs is still evolving. Additionally, given that the organization’s operations take place completely via blockchain technology, security flaws can cause significant concerns. Finally, while members of a DAO share the rewards, they also assume all the risks.

Launching a DAO

As Coin Telegraph explains, launching a DAO is usually a three-step process. The first step is creating the smart contract that will form the backbone of the DAO and dictate the rules by which it operates. Once the DAO is launched, the rules may only be changed in accordance with the organization’s governance system.

Once the smart contracts have been created, the DAO must decide how to raise funds and how to implement its governance structure. In most cases, the DAO sells tokens to raise funds, and token purchasers are granted voting rights. The final step is to deploy the DAO on the blockchain. Once launched, the DAO’s stakeholders determine its future. The organization’s creators generally have the same voting rights as other stakeholders.

Key Takeaway

DAOs have become more common in the past few years. While not every entrepreneur will be willing to launch a completely digital enterprise, DAOs illustrate how technology can be used to streamline the operations of all types of companies.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
Common Causes of Partnership Disputes and How to Resolve Them post image

Common Causes of Partnership Disputes and How to Resolve Them

Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]

Author: Christopher D. Warren

Link to post with title - "Common Causes of Partnership Disputes and How to Resolve Them"
President Trump's Termination of Member Gwynne Wilcox post image

President Trump's Termination of Member Gwynne Wilcox

On January 28, 2025, the Trump Administration terminated Gwynne Wilcox from her position as a Member of the National Labor Relations Board (NLRB or the Board). Gwynne Wilcox, a union side lawyer for Levy Ratner, was confirmed to the Board for an original term in 2021 and confirmed again for a successive five-year term expiring […]

Author: Matthew F. Mimnaugh

Link to post with title - "President Trump's Termination of Member Gwynne Wilcox"
How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide post image

How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide

Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]

Author: Christopher D. Warren

Link to post with title - "How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide"
Gross Lease vs. Net Lease: Understanding the Key Differences post image

Gross Lease vs. Net Lease: Understanding the Key Differences

Commercial leases can take a variety of forms, which is often confusing for both landlords and tenants. Understanding the different types, especially the gross lease structure, is important when selecting the lease that best suits your needs. One key distinction between lease types is how rent is calculated and paid. This article addresses the two […]

Author: Robert L. Baker, Jr.

Link to post with title - "Gross Lease vs. Net Lease: Understanding the Key Differences"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: