DAOs as Digital Nation-States
0x5362
May 30th, 2022

If you've worked in the DAO space for any length of time, the question of legal incorporation is bound to arise. It seems the reflex impulse to wrap a newly formed DAO in a legal wrapper to attain increased legitimacy or supposed legal protection. It sounds reasonable, but a careful unpacking of terms and concepts reveals deep confusion.

The dominant meme of DAOs as internet native businesses, while helpful, is insufficient. Not only are DAOs not legal businesses, but they can't be and retain the essence of what it means to be a DAO. In this paper, I will argue that DAOs are dramatically more than new forms of incorporation. 

I will attempt to do this by defining several fundamental legal categories, then the term DAO itself, and comparing them. After demonstrating the deep incompatibility of legal constructs and DAOs, we'll examine promising paths for how DAOs can leverage legal tools without being ruled by them. We'll conclude with a call for all DAO operators to imbibe the vision of our predecessors, the cypherpunks. 

Legal Categories

There's no "earth law," strictly speaking—only human organizations with varying degrees of ability to enforce their will on others. The most powerful of these entities are sovereign states. We'll lump the terms county, government, nation, sovereign state, and nation-state into the same bucket for this paper. These apex organizations possess monopolies on violence and coercion. They have militaries, currencies, and a body of land they control and can defend.

Within nations, there are legally recognized entities called persons. Legal persons come in two flavors: Human and nonhuman. Human persons are called natural persons and are real people. Nonhuman persons are called juridical persons and are things like businesses and corporations. Corporate persons, like natural persons, are 'right-and-duty bearing units.

All legal persons (human and nonhuman) have and must have a single legal home. This home base is called their domicile. In businesses, domicile is the country where a company is registered and by whom it's legally judged. A natural person's domicile is reflected in their citizenship and is inherited at birth but may change through a change in citizenship.

In addition to these fundamental categories, we have two legal institutions that fall slightly outside this structure. The first is international organizations. International organizations get formed when several governments agree to create a shared entity. Governments will do this if they need a treaty. These organizations' legitimacy rests on the shared recognition of several nations. Examples of these are organizations like the United Nations, NATO, and INTERPOL. 

Lastly, we have International Non-governmental Organizations (INGOs). These are "any internationally operating organization not established by inter-governmental agreement." They are independent of government involvement and, most importantly, possess no formal legal status. Examples of these include philopatric entities like Greenpeace and the Gates foundation. 

Defining DAO

Now that we've established some legal primitives, what are DAOs, and where do they fit? Vitalik Buterin defined a DAO as an entity with internal capital that has automation in the center and humans at the edges. I will be so bold as to suggest that the irreducibly complex DAO is a multi-signature wallet (miltisig). This definition may sound unsexy and reductionistic but consider the following. At the core of every DAO, no matter its size or governance is a digital wallet that releases funds based on predetermined voting thresholds. This fundamental mechanism does not change whether there are four signers or four billion leveraging token weighted voting. I believe this implementation-oriented definition remains faithful to and synonymous with Vitaliks' original formulation. There are several consequences to such a definition. We'll step through each one and test it for compatibility with our defined legal constructs.   

Decentralized

The code and community of a DAO are decentralized. No geographical requirements are necessary for participation. Just as a smart contract's code resides in no country, so may anyone join a DAO regardless of personal domicile or legal standing. Both the code and the community are distinct from any physical location. Legal organizations are the exact opposite. They and their participants are, by definition, limited by the terms of their host nation. It may be possible to have foreign participants, but their participation will be defined and qualified by their host nation.

Autonomous

DAOs are autonomous both in their formation and execution. No authority external to the DAO is necessary for its creation or operations. This autonomy means no registration, incorporation, or filing are required. It also means that no law enforcement, army, or courts are needed. Legal organizations don't possess this quality. They both exist and continue to live at the whim of the state. For a business to form, a nation must permit it, and it will exist only as long as that nation says it does. 

Pseudonymous

DAOs are pseudonymous. Anyone with an internet connection can join and participate. While not included in the DAO acronym, this property is a necessary consequence of the others. This idea may sound strange, but legal identities are state-issued. Once you remove the need for governments to issue those identities, you make pseudonymity a fundamental property of DAOs. This property is impossible within existing legal categories. Business ownership is KYC'd and mediated by the state. Again, all partners in legal business arrangements must do so through state-issued unique identifiers. Founders must operate through legal identity and their partners and customers in compliance with eaches jurisdiction. 

Is it possible for a DAO to be a legal entity given the above definitions? I hope it's clear that the DAO construct and existing legal categories are fundamentally at odds. Laws are nation-specific. DAOs are nation-agnostic. Legal entities ultimately rest on the threat of physical force. DAOs operate through the power of pure mathematics and cryptography. 

Does this mean that all DAOs attempting to leverage legal constructs are wrong? No. DAOs should and must leverage the law to maximum benefit. But we must make some careful distinctions and establish some structures for it to work.

DAOs Leveraging Law

A question naturally arises at this point because there are a seeming significant number of DAOs that are legally incorporated. In these cases, I will strongly argue that these entities are closer to organizations leveraging DAO tooling rather than pure DAOs. There's nothing wrong with that. But adding a multisig or cryptocurrency to a company doesn't make it a DAO. Any changes to an existing DAO that eliminate essential DAO properties also negate its identity as a DAO. Whether you have a DAO or a traditional business with a multisig is determined by governance and final settlement. Are there legal or KYC requirements for membership? Do agreements rest on legal contracts or smart contracts? The answer to these questions determines whether you have a business or DAO. 

So, how does a DAO legitimately leverage legal instruments? SubDAOs may offer an answer. SubDAOs are subgroups within a DAO that share a mission, incentive structures, and governance of their parent. SubDAOs can create and run legal entities in service to their parent DAOs without violating anything we have stated. The DAO proper can still retain all of the requisite DAO properties we have discussed while leveraging these specialized subunits. SubDAOs have uniquely distinguishing features; otherwise, they would be separate DAOs altogether.  

DAOs could own physical property and enter into contractual obligations through these subgroups. The DAO, strictly speaking, would not hold the physical asset, but SubDAO would, through appropriate legal instruments. Given this possibility, there still exists a need to ensure SubDAO compliance and support for DAO values as much as possible. 

SubDAO Compliance

How do we ensure that legally incorporated subDAOs act in compliance with the voice of the parent DAO and not flee with the assets? One idea is through on-chain insurance. This idea is similar to the one implemented by POS consensus networks, where any malicious actions have financial consequences. SubDAOs could lock assets that get slashed in the event of rogue behavior. A one million dollar asset could have comparable digital assets locked as a stake. 

In addition to financial assurances, the SubDAO operating agreement could include a majority rule clause mirroring the mechanics of a multisig. This setup would create financial and legal protections for the parent DAO and avoid the confusion associated with trying to "incorporate a DAO." These protections also apply to other trusted positions in a DAO not explicitly related to property ownership, including but not limited to admins controlling physical infrastructure, account owners of domain names, and web2 service accounts.

SubDAO Anonymity

Another measure we could take to promote DAO values is SubDAO pseudonymity. The idea here is that the identities of the subDAO members could be authenticated through a third-party identity provider service and yet remain unknown to one another and the parent DAO. The mechanism for this could be a nontransferable token attesting to both the owner's eligibility to participate in specific legal constructs and a pointer that maps to their identity behind the identity provider. Where does all this leave us?

Conclusion

It's not my intention to denigrate existing nation-states. I'm a patriot and have a deep love for my county. But freedom requires checks and balances, and it may be that DAOs are the only entities powerful enough to rebalance the scales of power in the 21st century. I'm also not denying personal liability or the need to take measures to protect one's self as a DAO operator through legal instruments or anonymity. 

I am emphatically asserting that we should not lose sight of the fact that DAOs are a product of a much larger apocalyptic vision birthed by the Cypherpunks, of which Satoshi Nakamoto was a product. That vision posits an arms race against authoritarian forces bent on absolute power and the elimination of privacy and freedom. Decentralization and DAOs are our weapons against this plan. Julian Assange, another prominent cypherpunk, paints an accurate analogy of the importance of this technology.

"..cryptography is the essential building block of independence for organizations on the Internet, just like armies are the essential building blocks of states..." - Julian Assange, 2012

The cypherpunks understood and saw the inevitability of authoritarian governments' demand for power. They will, and are already starting to, argue that all communication channels are exchanges and, therefore, subject to regulation. They will do the same for speech. If internet platform providers can censor speech, governments will require it. Owners of digital platforms must move them to decentralized infrastructure to prevent it.

"These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation... Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions." - The Crypto Anarchist Manifesto, 1992

Decentralization, like a parachute, is not essential until it is. We are running on borrowed time. Web3 is not a hobby; it's a call to arms, and we have everything to lose if we lose sight of this grander vision and become distracted by the mere financialization made possible by this technology. This movement is about freedom, self-sovereignty, and building equitable and metalegal hyperstructures for future generations. 

I encourage the reader to preorder Balaji Srinivasan's new book "The Network State: How To Start a New Country" to understand the scale and potential impact of what Web3 is making possible. 

Disclaimer: I'm a philosopher, not an attorney. Do your own research and consult legal counsel before making significant decisions. There are tremendous resources and thought leaders exploring the intersection of DAOs and law. See LexDAO, KaliDAO, OpenLaw, and DAO Entity Features & Entity Selection for deeper research and tools.

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