Every incorporated organisation is governed by a set of rules and regulations. DAOs are not that different, they are organisations having a virtual presence whose decisions are made through electronically written codes or through a voting mechanism of the members. These rules are incorporated inside the smart contract. The concept of a DAO has all mechanisms and legalities of a traditional company, however, are only based on cryptographic codes on the blockchain and these codes are what enforces the decisions of the members of the DAO. These members can be compared to the shareholders of a traditional company that paths the way to various decisions and undertakings.
It is important to note that a DAO is governed through a self-enforcing open-source protocol which makes the system transparent and it is the smart contract of this protocol that regulates the decisions made by any members of the DAO. The members of the DAO are incentivised through tokens for creating the network safe and performing various tasks. DAOs helps in establishing trustless mechanism between members who are located in different jurisdictions and do not interact with each other as the decisions are taken through majority consensus. The application of the smart contract and consensus mechanism makes the DAO an incorruptible network an in turn given the legality, an organisation.
DAOs amount to various legal implications and the question remains as to how viable they are, considering the nascent stage of blockchain regulations and laws in various jurisdictions. DAOs are essentially having a virtual presence and are run by servers which may be present globally. When an act of default occurs or there is any breach of law or obligation, it may become difficult to determine which jurisdiction such a default occurred. The very fact that DAOs are run through electronic codes, it’s difficult to associate a legal status and personality to DAOs in some instances. A question may arise as to are they corporations, software-based organisation (as even a lot of cryptocurrency exchanges operate out of a software license). Then comes the crucial nature of lifting the corporate veil. To what extent shall it be possible considering the nature of the operability of a DAO. Most jurisdictions have provided corporates to be separate legal entities, and hence, in a modern legal system, the application of a DAO may not be that difficult. However, the structure of such organisations is what needs to be answered which may include whether they shall fall within a partnership structure or an incorporated company.
Such uncertainties remain whenever one brings up the topic of blockchain-based applications in the Indian context. With advancing economies, how far India is in the adoption of blockchain may be determined after assessing the introduction of blockchain and cryptocurrencies regulations.
“We shall be covering the legal functioning of DAOs in an upcoming article.”
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