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Legal Framework of Wyoming DAO LLCs

Due to the rapidly growing number and diversity of decentralized autonomous organizations (DAOs) as novel organizational forms, both the participants and developers of these organizations and third parties or stakeholders such as consumers, the market, and government agencies have developed a need for legal certainty in dealing with these organizations. 

At this point, Wyoming DAO LLCs have emerged as the first structure in which DAOs have been given a legal framework and recognized as formal legal entities. Although Wyoming DAO LLC is regulated in terms of formation, management, organizational structure, and dissolution, their current legal framework does not cover most of the legal issues DAOs face. To assess the overall readiness of current legal framework, the compatibility of this framework with the natural and technical elements of DAOs, and the sustainability of the framework will be discussed in this article.

The formation, governance, and organizational structure of Wyoming DAO LLCs are governed by the Decentralized Autonomous Organization Supplement (the DAO Supplement), which applies only to DAOs organized under the Wyoming Limited Liability Company Act (the Act).1 Therefore, the Act and authority granted to the Secretary of State under the Act apply to all DAO LLCs in Wyoming to the extent they do not conflict with the provisions of the DAO Supplement.

Formation of Wyoming DAO LLC 

According to the DAO Supplement, a DAO LLC is a limited liability company whose articles of association include a statement that the company is a DAO. In addition to a new formation, an existing LLC may also be converted to a DAO by amending the articles of the organization to include the same statement.2 The way DAO is described under the DAO Supplement could be problematic because it allows registration as DAO LLC regardless of whether its statement is true according to the actual use of DAOs and whether they meet the core elements of DAOs.

The main reason why the LLC structure is preferred for the corporate structure of DAOs is to "pierce the digital veil" of DAOs at the risk of being recognized as general partnerships and to eliminate the personal and unlimited liability of all participants involved. The difficulty of enforcing legal obligations against decentralized autonomous organizations is another motive for preferring the current legal structure.

Any person may incorporate DAO LLC with one or more members by signing and submitting articles of organization to the secretary of state for filing. The person forming the DAO need not be a member of the organization. A DAO may be incorporated and operated like any other LLC for any lawful purpose, regardless of whether it is for profit.3

The registered name of a DAO must include wording or an abbreviation that clarifies its status as a decentralized, autonomous organization, specifically "DAO", "LAO" or "DAO LLC".4 Although the application already exists (e.g., MakerDAO), it is relatively rare compared to most platforms that choose unique names (e.g., Aave, Uniswap).

Each DAO LLC must have a registered agent, an individual or entity located in the State of Wyoming, that serves as the contact person for the Secretary of State. There are many unanswered questions regarding the liability and duties of a registered agent in connection with DAO LLCs, as there is no further explanation in the DAO Supplement. Since DAOs conceivably have a fully distributed, perhaps even autonomous, structure, their only point of contact with the State of Wyoming appears to be this registered agent. This strategic position of registered agents places a heavy burden on them in record-keeping and maintaining interaction between DAO LLC and the Secretary of State. Therefore, many DAOs may have concerns given the onerous need to keep this physical infrastructure.

The provisions governing the dissolution of DAO LLCs also have an unambiguous adverse effect on the liability and responsibilities of the registered agents of DAO LLCs. As noted in the following sections, there are certain triggering events in the DAO Supplement as to when a DAO must be dissolved by law. This requirement raises the critical question of who has to determine whether one of the events has occurred, as this may be the registered agent's responsibility.

Articles of Organization

The articles of organization of a Wyoming DAO LLC must include a "Notice of Restrictions on Duties and Transfers" stating that the DAO Supplement, underlying smart contracts, articles, and operating agreement, if any, of a DAO define, limit, or eliminate fiduciary duties and may restrict the transfer of ownership interests, withdrawal, or resignation from the DAO, return of capital contributions, and dissolution of the DAO.5

In addition, the articles of the organization must include a publicly available identifier of all smart contracts used directly to manage, facilitate, or operate the DAO.6 One could argue that this requirement reflects the gravitation towards a standard policy of disclosure and transparency for DAO LLCs. While one of the most attractive features of traditional LLCs in Wyoming is the privacy orientation of the Wyoming Corporate Transparency Act, there appears to be a paradigm shift away from the privacy orientation of the traditional LLC. While there is ongoing debate as to whether or not this was the right policy decision due to security and privacy concerns, the primary focus of the legislature is to place the burden on individuals to understand what this smart contract means and how it works.

In the legislature's view, the only way to accomplish this seems to require companies to disclose the identity of smart contracts in their articles of organization. The result of this requirement is that if the DAO LLCs do not meet the requirement mentioned above after formation, the filing will most likely be invalid. Therefore, such DAO LLC will not have legal recognition in the State of Wyoming.

Another requirement for DAO LLCs is that the articles of organization must be amended accordingly if the DAO's smart contracts have been updated or amended.7 Given the frequency with which the underlying code of a typical blockchain-based DAO changes, this requirement may be an overwhelming obligation for DAO LLCs in the long run.

Management of Wyoming DAO LLC

The DAO's articles of organization may define DAO as either a member-managed or algorithmically managed, and if the articles are silent, DAO defaults to being a member-managed organization.8 Since this is the case, unlike traditional LLCs, DAO LLCs cannot be formed as manager-managed. In a member-managed DAO, similar to a member-managed LLC, specific enumerated individuals are responsible for the maintenance and management of the organization. 

There are many misinterpretations regarding algorithmically managed DAO LLCs, because the term "algorithmically managed" is not defined in the DAO Supplement. From a technical perspective, most DAOs can only perform management operations when active members are involved, such as the governance token holders of a DAO, who vote on specific governance proposals. Moreover, when DAO members vote in favor of a proposal, it does not mean that the algorithms are voting and, therefore, the DAO is algorithmically managed. Without the intervention of artificial intelligence, this type of corporate structure does not fit the current form of DAOs. To avoid misinterpretations related to this structure, an explanatory definition of the concept should be included in the DAO Supplement.

An algorithmically managed DAO LLC can only be created if the underlying smart contracts can be updated, modified, or otherwise upgraded. This requirement seems to limit the freedom to use any smart contract in algorithmically managed DAO LLCs while indicating that they must be upgradeable. It is also not clear who is responsible for upgrading the underlying smart contracts in the case of algorithmically managed DAO LLCs.

The management of a DAO LLC is the responsibility of the members if it is member-managed, or the smart contract if it is algorithmically managed, unless the articles of organization or operating agreement provide otherwise.9 The term "algorithmically managed" is not precise enough and can be misleading, as there are many variations of human-AI interaction that the current legal framework does not cover. Moreover, algorithms can occur in any process, therefore, building a legal framework around a polysemantic and circular term is far from ideal.

Organizational Structure of Wyoming DAO LLC

In a member-managed DAO, membership interests are calculated by dividing a member's contribution of digital assets to DAO by the total amount of digital assets contributed to DAO at the time of the vote. If members do not contribute digital assets to the organization to become a member, each member owns one membership interest and has one vote.10 This structure makes it more likely that each member of DAO will have an equal vote on fundamental issues such as the dissolution of DAO, regardless of whether they have contributed digital assets. However, given the variety of governance structures adopted by DAOs, it seems unlikely that this structure will be agile enough to be applied in most cases.

Regarding decision-making at DAO LLC, DAO Supplement defines the quorum as the minimum requirement for the sum of membership interests participating in a vote to be valid and as the majority of members in default. DAO Supplement further describes the majority of members as the affirmative vote of more than 50% of the participating membership interests in a vote in which a quorum of members participates.11 In this case, requiring DAO more than 50% of participating member interests to establish such a quorum could be a significant problem for many DAOs. Given that in some DAOs, DAO governance participation is typically low, this default rule requires a paradigm shift in what constitutes a quorum. How about defining the quorum paradigm by when they participate rather than who participates? Since many DAOs publish a proposal in their voting protocol and give their members a limited time to vote, the members who voted during that limited time could be considered a quorum.

Dissolution of Wyoming DAO LLC

If the DAO LLC fails to approve any proposals or take any actions for one year, the organization must file a notice of dissolution in the form prescribed by the Secretary of State.12 Although the legislation's primary purpose is to eliminate inactive and dormant DAOs and claim liability protection, this can be a stress point for the developing DAOs.

The Secretary of State can dissolve a DAO LLC if the DAO LLC no longer serves a legitimate purpose.13 Because deciding whether a DAO LLC is no longer lawful is a fact-finding task, it is argued that this authority should rest with the courts. Besides, because ideal DAOs are decentralized, making decisions based on information without the need for a central decision-maker and hierarchical management, the possibility of dissolution by a centralized authority fundamentally conflicts with the true nature of a DAO.

Concluding Remarks

Wyoming DAO LLCs and its regulations provide some legal certainties, such as whether DAOs can be shielded from general partnership liability. However, based on the considerations above, the current legal framework of Wyoming DAO LLC cannot adequately address the challenges associated with DAOs. Therefore, we argue that the legal framework under the Act and its DAO Supplement needs to be amended to deal with the legal concerns brought to us by the novel and unique organizational form of DAOs. 

DAOs are unique in their way, and therefore it is a challenge to fit DAOs into the traditional forms of corporations. Tailoring the traditional LLC structure to the needs of a legal framework for DAOs and forcing DAOs into compliance with frameworks created for the traditional corporate structure does not seem practical for a spectrum of DAOs under the current version of the DAO Supplement. 

The numerus clausus of corporate forms under the Act should be expanded to create harmony between technology and law. The current structures do not seem to encompass a solution to the niche characteristics and technology that DAOs bring. To accomplish this task, legislators should consider creating digital persons as separate category of legal entities when creating a legal framework for DAOs.

Although approaches at the national or state level, as in Wyoming, are encouraging, there should be a global and standardized solution that includes a minimum liability standard and a framework for international cooperation, information sharing, and transnational enforcement to address the cross-border challenge effectively.

[1] Decentralized Autonomous Organization Supplement, Article 17-31-103 (a), https://www.wyoleg.gov/Legislation/2021/SF0038

[2] Decentralized Autonomous Organization Supplement, Article 17-31-104 (a), https://www.wyoleg.gov/Legislation/2021/SF0038

[3] Decentralized Autonomous Organization Supplement, Article 17-31-105 (c), https://www.wyoleg.gov/Legislation/2021/SF0038

[4] Decentralized Autonomous Organization Supplement, Article 17-31-104 (d), https://www.wyoleg.gov/Legislation/2021/SF0038

[5] Decentralized Autonomous Organization Supplement, Article 17-31-104 (c), https://www.wyoleg.gov/Legislation/2021/SF0038

[6] Decentralized Autonomous Organization Supplement, Article 17-31-106 (b), https://www.wyoleg.gov/Legislation/2021/SF0038

[7] Decentralized Autonomous Organization Supplement, Article 17-31-107 (a) (iii), https://www.wyoleg.gov/Legislation/2021/SF0038

[8] Decentralized Autonomous Organization Supplement, Article 17-31-104 (e), https://www.wyoleg.gov/Legislation/2021/SF0038

[9] Decentralized Autonomous Organization Supplement, Article 17-31-109, https://www.wyoleg.gov/Legislation/2021/SF0038

[10] Decentralized Autonomous Organization Supplement, Article 17-31-111 (a)(i) and (a)(ii), https://www.wyoleg.gov/Legislation/2021/SF0038

[11] Decentralized Autonomous Organization Supplement, Article 17-31-102 (a)(v), https://www.wyoleg.gov/Legislation/2021/SF0038

[12] Decentralized Autonomous Organization Supplement, Article 17-31-114 (a)(iv), https://www.wyoleg.gov/Legislation/2021/SF0038

[13] Decentralized Autonomous Organization Supplement, Article 17-31-114 (a)(v), https://www.wyoleg.gov/Legislation/2021/SF0038