The Problems with DAOs Nobody is Talking About

Imagine you are part of a global community of enthusiasts, united by a common cause, driven by shared values, and governed by democratic principles. Sounds exciting, right? That's the promise of Decentralized Autonomous Organizations (DAOs), the new web3 creatures changing how we think about organizations. 

Let's do a quick dive into this world. I'd like to walk you through a few benefits and pitfalls, some of my clients are trying to wrap their heads around.

1: What are DAOs, and why should you care?

A DAO is a type of organization represented by rules encoded as a computer program that is transparent, controlled by organization members and not influenced by a central government. Web3 enthusiasts argue that DAOs are the most effective way of establishing a digital company where all decisions are made through community voting, ensuring every member has a say.

Have you ever felt like you don't have a voice in the decisions made by the organizations you're part of? Have you wanted to roll out a new project in your business allowing community members to be more active in? Well, DAOs may eventually change that.

Do your own research as to the benefits of a DAO (consider using the search feature at my blog to dive deeper).

At the same time, also please appreciate some of the legal downsides that I'm seeing, right now, with DAOs.

2: The Dark Side of DAOs

As with any innovation, DAOs come with their own set of challenges. One major concern is web3 anonymity. How can you trust someone you've never met? How do you conduct due diligence on community members when you don't know their true identity?

And what happens when legal issues arise? Which venue and jurisdiction will apply when members are spread across the globe?

3: Show me the money!

Funding is another significant challenge for DAOs. Traditional venture capitalists are hesitant to invest in organizations where control is decentralized and the future success is in the hands of community members who may lack the necessary skills and experience. How would you feel if your investment was managed by a group of anonymous internet users? It's a concern that needs addressing. [I have a few ideas I'll share here or over in my LinkedIn newsletter to solve this problem.]

4: The Legal Quagmire

From a legal perspective, DAOs are akin to a vast, uncharted territory, riddled with potential pitfalls. One glaring concern is the challenge of ascertaining the identity and location of a wrongdoer. 

In traditional business structures, you know who you are dealing with. There are records, addresses, and identifiable information that can be used to hold someone accountable should things go awry--and in business they always do. But in a DAO, where anonymity reigns supreme, how do you pinpoint the culprit? After all, knowing a public digital wallet address is one thing. Knowing who is behind that wallet is another challenge in and of itself.

And let's talk about venue and jurisdiction. For the uninitiated, "venue" refers to the place where a case is heard, while "jurisdiction" is the authority given to a legal body to deal with and make decisions on legal matters within a particular geographic area or subject matter. In a DAO, when members are scattered across the globe, determining the appropriate venue and jurisdiction can be a nightmare.

Imagine this: you're part of a DAO, and a member from the other side of the world violates the rules. How do you take legal action? Which court has jurisdiction over a member who might be located thousands of miles away? The challenge of exerting jurisdiction over DAO members adds another layer of complexity to an already complicated landscape.

Conclusion: The Road Ahead

While the community-building and decision-making abilities of DAOs are undeniably powerful and innovative, we constantly remind our clients not to turn a blind eye to the legal challenges they present. As we step into this new era of web3, it's crucial for business owners, investors, and consumers to be fully aware of the potential pitfalls of these new business structures. 

Several questions we ask our clients to consider when thinking about using a DAO in their business include:

#1: Are you willing to embrace the chaos of a DAO for the sake of innovation?

#2: If so, do you need to establish clear rules and regulations to govern these digital utopias?

#3: Is creating a DAO in your state, region or country even legally possible?

#4: Is there a better, more established way to manage community decisions?

The future success of your DAO and business, depends on how you choose to answer these questions.

Mitch Jackson, Esq.

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