Creating a Decentralized Autonomous Organization (DAO) can be a fun and interesting way to manage a project or community. On WAX, you can find a few different available tools to help you with this process. Years ago EOSDAC created the dacfactory which is a set of smart contracts with all the basics for creating a DAO, govern, do proposals and much more. They have been using it to operate their Block Producer DAO since 2018 on multiple chains.
Now you also have WAXDAO.io, which is a nice service that makes the whole process easier and more streamlined. You don't need to learn how to set up the smart contracts and how to deploy them. This process of setting up your DAO through WAXDAO.io will be explained in another article.
In this article, I hope you will learn what a DAO is, or what it can be. And some of the risks associated with being a member of a DAO.
What is a DAO?
A simplified explanation of a DAO is
With the use of Blockchain and smart contracts to distribute decision-making power from a select few leaders to the entire participating community. Proposals are submitted and then voted on either by chosen custodians or the whole community. These voted proposals become the chosen tasks or projects for the entire DAO, similar to how a leadership or board makes decisions for a company.
A DAO, when governing a project, enhances transparency and trust in the process, mostly through the strength of blockchain. Blockchain enables us to rely on its historical records for an accurate account of the DAO's activities and events. Certain well-known blockchains used for DAOs carry high transaction costs, making it impractical to conduct all voting and proposal processes directly on-chain. Instead, an additional layer is often added ontop of the blockchain for these functions. Despite this, account verification is still necessary before voting. Yet, with platforms like WAX and their resource model, You can manage all DAO governance directly on the blockchain.
To manage a DAO, rules are often establish the code itself, which everyone and everything within the DAO must adhere to. These rules can be how election, voting, proposals etc work. It can also go into more details on what and how the DAO operates and it's code of conduct. This guarantees to all users that the operations will run as per the DAO's established guidelines. And these codes of conduct can be used to evaluate the approved proposals to ensure they follow the DAOs rules.
A DAO is a great method to manage any decentralized entity, be it a company, organization, community, or even another blockchain. However, one potential downside is that it could slow down the decision-making process compared to a centralized system. Generally, the more DAO participants required for a vote, the longer the process takes.
The process of joining a DAO varies, as each one has its own specific rules and guidelines. Typically, it requires owning a Non-Fungible Token (NFT) or Fungible Token (FT), which allows you to participate in their governance process, vote for the elected council, and on each proposal. These NFT's or FT's might just be held in your account, or they need to be staked. Staking usually means you send them to a smart contract, where they are held. In return of that you are granted with voting rights or some other perk.
Most DAOs often possess some type of treasury for funding proposals, but this isn't mandatory. They can simply serve as a transparent and trustworthy mechanism for decision-making. This can be their own Token, or it might be some other cryptocurrency (FT) that they accumulated from sales, donations or some other way.
What are the risks of being in a DAO?
A prevalent misunderstanding in the decentralized community is the notion that a DAO is exempt from laws and regulations. This is far from the truth... When you're part of a DAO, the responsibility for any actions taken by the DAO falls on the individual members, not the DAO as a whole.
CFTC in US ruled that the OOKI DAO had to pay a fine, and to permanently shut down their website. - Link to source
A Federal Judge in California denied a series of motions attempting to excuse members of a DAO (bZX) from liability in a novel class action lawsuit filed against the DAO. That means by simply owning the token of the DAO, you could be at risk of any legal actions taken against that DAO... - Link to source
What seem to happen in the eyes of the law, is that since a DAO is not seen as a legal entity in most places in the world. It automagically falls back to be seen as a type of unregistered entity, where the members are liable for all actions. That also means, that anyone with a claim against a DAO, can legally go after one member in the DAO, in whatever jurisdiction that person is living in.
Meaning, if you are part of a DAO, and live in Germany, you are liable to german laws, and anyone can take you to court for DAO actions under the laws in Germany. And it's up to you to get support from the other members in your organization.
The above is an assumption, based on talks, presentations, videos and articles that I've digested. And some of the later rulings against DAOs is verifyign this perspective. However, I am not a lawyer and the above could be incorrect. However, in Sweden, the above statement seem to be correct... We won't know for sure until there is a case with a verdict in your jurisdiction.
Another risk is the voting power
Because a DAO depends on the voting strength of its community for decision-making, and these votes are often procured in the open market, it's possible for someone with sufficient motivation to amass a significant stake in the DAO and thus influence its decisions.
This risk can be tempered through strategic voting system design, which considers and addresses this potentiality. Interestingly, the chance of this happening could even be beneficial to the DAO, depending on the big player's intentions and the DAO's purpose. It's all about balancing the risks and potential benefits.
How do you mitigate the risk for individuals in a DAO?
From what I understand, the most viable method is to establish a legal entity behind the DAO. This procedure may not be simple or straightforward, but it's crucial for member protection.
A handful of locations globally offer legal entities specifically for DAOs, while in other places you may need to set up a more conventional type of company.
DAOs often register in places like Liechtenstein foundations, Wyoming DAO LLCs, Marshall Islands DAO LLCs, Panama foundations, Swiss foundations, or Cayman Islands foundations. However, some opt for the traditional route and establish an LLC overseen by the DAO's elected custodians.
I can't endorse one over another as the choice depends on the DAO's purpose: whether it's for-profit or non-profit, its intended use, and where your operations are based. You can learn more with a bit of online research.
With an increasing number of law firms specializing in this area, you can find professional help in various parts of the world. A good starting point is the article: The Best Entities and Countries for DAO Registration in 2023.
If you know other ways, or want to discuss this please comment below, tag me on Twitter or jump into my telegram chat.
Should your DAO use WAXDAO, dacfactory or your own solution?
Wheter your should use WAXDAO, dacfactory or build your own contracts really depends on the purpose, skillset and idea of your DAO.
The dacfactory was last updated few years ago, it comes with a set of smart contracts and a basic UI. These smart contracts are everything you need to set up a DAO. On top of the contracts in the dacfactory, they have continued to work on these tools for alienworlds, and these contracts are also available to use. If your team possesses the necessary coding skills and can invest the time to develop and maintain a frontend for these tools, it's an excellent system. The AlienWorlds syndicates utilize these contracts for managing planet governance. To learn more about this, you can visit my AW DAO tracker at: https://alienw.com
Many teams might lack the time or expertise to set up their own contracts. This is where tools provided by WAXDAO.io come in handy. They simplify and demystify the process, making it much easier to engage with. This is why my next article will focus on this tool, outlining the process of setting up your own DAO.
However, keep in mind that if you choose to use the WAXDAO.io set of tools and UI instead of creating your own, you'll be relying on Mike's ongoing support and development. If he decides to halt support or dissapears for some unknown reason, it might affect your DAOs onchain ability. But as long as the contracts are live, all you need is a new UI to interact with them, which someone in your, or another DAO can build. In that situation, it would be as if Mike never left.
I personally wouldn't be overly concerned about this risk. The DAO's history remains intact, and should such a scenario occur, you could begin a migration process. This is a low-risk situation, and even if support ended, things would likely continue to function, although potentially with some assistance required from your end.
Some of the DAOs operating on WAX
There are many DAOs on WAX, some are almost as old as the chain itself. However I won't list them all, but instead list some of the relevant ones at the time of writing this article.
The AlienWorlds Syndicates - The 6 planets are managing a treasury of TLM, which are used to build out the AlienWorlds ecosystem. Any planet tokenholder can vote for 2 candidates, and each week the top 5 are elected to govern that planet. - https://alienw.com/
WAXAPES - WAX Ape Rave Club is a PFP NFT Collection is somewhat of a satirical collections which is based on the BAYC. If you hold an APE you get portions of the secondary market sales. - https://waxdao.io/v2/daos/waxapes
WAXBULLS - WAX Bulls Swag Club is a PFP NFT collection. Every month, the DAO decides what to do with the treasury built up by the sales on the secondary market. - https://waxdao.io/v2/daos/waxbullsclub
NeonSpace - Neon Space is building a community through their livestreams and NFT collections. Their DAO allows members to vote on developments for the Neon Space NFTs - https://waxdao.io/v2/daos/neonspace
Summary
Creating a Decentralized Autonomous Organization (DAO) on the WAX blockchain can be a fun initiative. You have excellent tools for account management, members, and DAO management. However, be aware that by being a member of a DAO, you potentially expose yourself to legal risks for the DAO's actions. The best way to mitigate this risk is to seek help from lawyers who understand your field, and you'll likely want to set up a legal entity behind that DAO.
For most DAOs, this legal impact is probably rather small, but it would definitely be unfortunate if it happened to you.
If you want to discuss this in any way, jump onto Twitter or Telegram and reach out to me. And if you don't want to wait for my article on how to set your DAO up on waxdao.io, you can start by reading this FAQ.