In recent years, the emergence of Decentralized Autonomous Organizations (DAOs) has revolutionized the way we think about organizational structures and decision-making processes.
DAOs are built on blockchain technology and aim to create decentralized communities where participants can collectively govern and manage various projects. As the concept gains momentum, the more we learn about different legal and regulatory challenges these decentralized organizations face.
Decentralized autonomous organizations (DAOs) still lack legal recognition and are often mistaken for general partnerships. Establishing a regulatory framework for DAOs is needed to provide necessary protections to the people involved. The absence of liability limitations for participants, can expose individuals to various legal risks and they could become liable with their personal assets.
With the increasing number of DAOs and blockchain projects in general, regulatory advancements are being made in this space. Several jurisdictions, including Wyoming, Tennessee, Utah, and the Marshall Islands, have made efforts to provide legal recognition to DAOs, but challenges persist.
Besides the unlimited liabilities issues, DAOs face other challenges such as protection of ownership, holding IP or holding an asset as an organization, entering into contracts, hiring professionals, etc.
Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.
Intellectual Property (IP) is safeguarded through the enforcement of Intellectual Property Rights (IPR), which are granted to inventors or creators. These rights provide exclusive control to the owner, allowing them to profit from their creation, assign or license it, and prevent others from benefiting without permission.
IP is protected by various legal mechanisms, such as patents, copyright, trademarks, industrial designs, geographical indications, and trade secrets. These mechanisms enable individuals to gain recognition and financial rewards for their inventions or creative works, promoting a conducive environment for innovation and creativity to thrive.
Intellectual property (IP) encompasses a wide range of intangible assets that hold immense value for businesses. In fact, intellectual property can often surpass the worth of a company's physical assets. It serves as a crucial element in establishing a competitive edge and is therefore vigorously safeguarded by its owners.
Different forms of intellectual property exist, each offering distinct benefits and protection. Here are some of the most common types:
Patents: Patents grant exclusive rights to inventors or creators, protecting their inventions. They provide legal protection against unauthorized use, ensuring that inventors have a monopoly over their innovations for a specific period.
Copyright: Copyright safeguards original creative works, such as literature, music, art, and films. It grants creators exclusive rights, preventing others from reproducing, distributing, or displaying their work without permission.
Trademarks: Trademarks are distinctive signs, symbols, or logos that help differentiate and identify products or services from one company to another. They play a crucial role in building brand recognition and consumer trust.
Trade Secrets: Trade secrets encompass confidential information, formulas, processes, or strategies that provide a competitive advantage. Unlike other forms of IP, trade secrets are not publicly disclosed and rely on maintaining their secrecy.
Industrial Designs: Industrial designs protect the visual aspects and aesthetic features of a product or object. They cover the unique shape, pattern, or ornamentation that contributes to the overall appearance of the product and differentiates it.
Geographical Indications: Geographical indications highlight the origin and quality associated with a specific geographical location. They indicate that certain products possess unique characteristics or reputations tied to their place of origin.
When it comes to determining the ownership, the overriding principle is that its creator, developer or inventor is the owner of the IP, unless specified otherwise. The IP owner can be either an individual or a recognized legal structure.
Decentralized Autonomous Organizations (DAOs) operate in a unique legal landscape that poses challenges when it comes to owning intellectual property (IP). Unlike traditional legal entities, DAOs are not officially recognized as such, which restricts their ability to function within existing legal structures.
The concept of decentralization, which lies at the core of DAOs, often contradicts the idea of having a centralized legal entity. Many proponents of DAOs believe that imposing a legal wrapper on these organizations goes against the principles of decentralization.
In terms of IP ownership, a DAO without a legal wrapper cannot hold IP because it lacks legal recognition. Without a recognized legal structure, the DAO lacks the capacity to enter into agreements or hold assets, including intellectual property.
On the other hand, if a DAO establishes a legal wrapper, it may be able to hold IP based on the applicable local laws. Having a legal entity allows the DAO to acquire and own assets, including intellectual property, within the boundaries defined by the jurisdiction.
However, determining IP ownership in DAOs can be complex even if there is a legal wrapper. In traditional companies, employees typically sign contracts stating that any creations they develop during their employment belong to the company. In the context of DAOs, regardless of whether a legal entity exists, this practice does not apply universally.
DAOs usually have active members and contributors who contribute with their skills and time, and in return they are rewarded in the DAO tokens or receive stable coin payment, but there is no “employment” contract in place that would determine the IP ownership. This raises the question whether the work produced as a contribution to the DAO, becomes intellectual property of the DAO, or its creator remains the IP owner. The lack of contractual clarity in this case may potentially become a serious issue for the DAO because, what happens if the DAO and the contributor fall out, and the contributor withdraws their consent from the DAO to use the work they created? Can we assume that any work rewarded with the token creates that contractual relationship? If it does, does the DAO then assume any other responsibilities it may have as an organization to contributors?
Moreover, in the case of IP infringement, determining responsibility within a DAO becomes challenging. Is it the individual contributors, the collective as a whole, or the legal entity (if it exists) that should be held accountable? This aspect raises concerns about liability and the absence of clear legal frameworks.
Another issue that arises in a DAO is deciding who would control what to do with the IPR. They may be required to take strategic decisions regarding assignment and licensing of the IPR and the steps to be taken in case of infringement. When it comes to deciding that, the community has control over the DAO assets and holds the decision making power. Thus, decisions regarding assignment, licenses or enforcement of the IPR can be put up for vote as proposals, with the members being required to vote on the proposals, impacting the utilization of the IPR owned by the DAO. But we need to ask ourselves, do we really need to ask for community vote approval in order to use the IP if there is no legal entity to protect it, and if there isn’t any IP protection being legally implemented.
A DAO with a recognized legal structure, which has a separate legal personality, having the ability to own and dispose property, can own IPR. It is similar to owning a real estate property or holding an asset, or even a digital asset or digital license. If the structure of the DAO allows it to hold tangible or intangible property, they can certainly own IPR.
The blockchain and Web3 community are built on the premise of collaboration, transparency, openness and accessibility. Many projects in the space have their source code and product details and roadmap publicly available on their website, GitHub and other community platforms. This allows anyone to come in and verify the code, ensure the project is not a scam or rugpull, and gives confidence to the investors that the project is legit and has a future.
Open-source code is freely available for utilization, adaptation, and distribution by anyone. It fosters collaboration, transparency, and the exchange of knowledge and breakthroughs. Open-source projects flourish through collective contributions and community-led development endeavors, aiming to create top-tier software accessible to all. Or at least, that’s what we hope they do.
The nature of the open-source code has caused several issues in the space in the past years. We’ve seen forks of thriving projects that resulted in their failure, or reputational damage. In the case of the Tornado cash open-source code, the developer is considered responsible for money laundering even though he may not have been directly involved in the illicit activities. Here we need to carefully consider, what prevails - the nature of the open-source code, or the assumed IP ownership of the creator. Can we see the creator responsible for illegal actions of those who used the available open-source code, that by nature doesn't give its creator any sort of control?
Intellectual property laws bestow upon creators and inventors exclusive rights to their innovations, including software code. These rights empower creators to govern the utilization, dissemination, and modification of their intellectual property, stimulating innovation and offering economic incentives, and most importantly - they offer legal protections for the creators and IP owners. But is this applicable in the case of open-source code that was created with the intention to allow anyone to use it freely?
An interesting case to look at is the Curve DAO. A contributor, a lawyer, reviewed the Curve DAO GitHub and realized that the project with over $7 billions worth treasury had the code fully available to anyone to copy and use it. Curve DAO by that time had several competitors that used their source code and just launched a copycat project under a different name.
The lawyer submitted a proposal to the DAO urging the community to improve its governance and protect their assets, however it was not as well received. The proposal had over 2000 views and sparked a debate whether a DAO should protect its IP, and if it does - would it go against its own very nature. Many members claimed that the code should stay available as forks help grow the space, while others argued that forks can directly damage the project financially and reputationally.
It is also worth considering: is it even fair, since the first project that built the code spent time and money to build the code and launch the project, and the next one just came in and replicated it like their own without attributing or reimbursing the initial creators.
However, this is not the first case. In 2020, SushiSwap forked UniSwap and performed the so-called Vampire Attack and basically drained UniSwap’s liquidity. UniSwap’s response to that was launching UniSwap V3 that came with the option to sue third parties for copyright infringement.
Smart contracts are essentially blockchain-based programs that execute predefined actions when specific conditions are met, operating on an "if/then" basis. By automating agreement execution without intermediaries, smart contracts provide certainty and transparency, minimizing the risk of manipulation or alteration.
In the realm of IP, smart contracts can be employed to enforce various agreements, including licensing arrangements and royalty distributions. For example, a smart contract can be designed to track the usage of copyrighted works and automatically allocate royalties to relevant parties based on predetermined terms.
However, leveraging smart contracts for IP protection presents certain challenges. Determining IP ownership can be intricate, and enforcing IP rights across different jurisdictions may prove difficult. Additionally, it is worth noting that smart contracts are not universally recognized as legally binding in the majority of jurisdictions.
Despite these challenges, smart contracts offer potential benefits for IP agreements. They enable the automation of real-time payment transfers to IP owners, streamlining the process. Moreover, embedding IP-related information directly into the smart contract can enhance security by providing an additional layer of protection.
While smart contracts hold promise in facilitating the creation and enforcement of IP agreements, careful consideration of legal implications and jurisdictional variations is crucial when incorporating them into IP protection strategies.
In the ever-evolving landscape of decentralized autonomous organizations (DAOs) and intellectual property (IP), a compelling paradox emerges. While DAOs embody the principles of decentralization and collaboration, IP protection relies on established legal frameworks and clearly defined ownership.
Open-source code, a vital aspect of DAOs, thrives on the principles of openness, collaboration, and accessibility. It enables the sharing of knowledge and supports innovation, fostering a vibrant community-driven development environment. Nevertheless, integrating IP protection into open-source projects poses unique challenges and defies its fundamentals; and poses the question whether we value the resources spent on creating that first code, and should we ignore the potential damages the project may suffer. Moreover, determining ownership of contributions and enforcing IP rights across jurisdictions can be complex, demanding innovative approaches and adaptable legal frameworks.
As the DAO ecosystem continues to evolve, it is essential to foster dialogue, collaboration, and legal innovation to address these challenges. Ultimately, the convergence of DAOs, IP, and open-source code represents a fascinating frontier of exploration. As we navigate this landscape, we have the opportunity to unlock new possibilities, redefine traditional notions of ownership and collaboration, and forge a path towards a more inclusive, innovative, and intellectually vibrant future.
Embrace the Rise of DAOs with me and embark on a journey into the intricate realms of DAOs, Web3, and decentralization. To delve deeper into this remarkable space, I invite you to listen to my podcast, DAO Today, where we passionately explore its inner workings, challenges, and potential. Tune in to engage with insightful discussions that navigate various aspects, with a particular focus on the legal and regulatory challenges shaping this industry. Listen now!
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