Decentralized Autonomous Organizations (DAOs), first introduced in 2016, have long been seen as the answer to how decentralized protocols can be governed. Advocates of DAOs have argued that they should not be subject to the same legal obligations as traditional companies. However, recent court rulings suggest that DAOs might not be as immune from legal accountability as once believed, and the latest case to highlight this trend involves Lido DAO, the organization behind the popular Ethereum staking protocol.
Lido DAO’s Legal Battle: A Blow to Decentralized Governance
In December 2023, Andrew Samuels filed a lawsuit against Lido DAO and its venture capital (VC) investors in the U.S. District Court for the Northern District of California. The lawsuit seeks to recover losses from Samuels’ investment in Lido’s native token, LDO. Samuels claims that Lido DAO is not a decentralized organization but rather a general partnership, making it susceptible to legal action under California law. Additionally, he argues that Lido’s token offering violated securities laws because the LDO token is an unregistered security.
A general partnership consists of two or more entities that contribute resources and share profits and losses, with partners taking on unlimited liability. In this case, several VC firms, including Paradigm Operations, Andreessen Horowitz (a16z), Dragonfly Digital Management, and Robot Ventures, were named as partners in the lawsuit.
In July 2024, Lido DAO filed a motion to dismiss the case, seeking to argue that it was not a general partnership and that it was immune from the lawsuit. However, on November 18, 2024, Judge Vince Chhabria ruled against Lido DAO, allowing the case to proceed. Judge Chhabria concluded that Samuels had made a sufficient case for Lido DAO’s relationship with its VC partners to be considered a general partnership. The ruling also emphasized that the plaintiff had presented a valid argument that LDO tokens could be classified as unregistered securities, and that Lido and its institutional investors had actively solicited the purchase of LDO tokens through efforts like exchange listings.
The ruling has raised alarm within the crypto community. Miles Jennings, General Counsel at Andreessen Horowitz, called the decision a "huge blow to decentralized governance," highlighting the potential far-reaching implications for the future of DAOs and decentralized finance (DeFi).
The Growing Trend of Courts Viewing DAOs as General Partnerships
This legal setback for Lido DAO is part of a broader trend of courts treating DAOs as general partnerships, a development that challenges the long-held belief that DAOs operate outside the scope of traditional corporate governance. In March 2023, a similar ruling allowed victims of a hack to sue bZx DAO, and in September 2023, a California court permitted a class-action lawsuit against Compound DAO.
The Lido DAO case further underscores this emerging pattern, suggesting that courts are increasingly inclined to treat DAOs as entities that can be held accountable under existing laws, rather than as untouchable decentralized structures. This shift in perspective raises concerns about the viability of decentralized governance and the risks of personal liability for participants in DAOs.
The Future of DAOs: Legal Wrappers and Limited Liability
In response to this legal uncertainty, many within the crypto legal community are suggesting that DAOs need to adopt legal "wrappers" to shield participants from personal liability. Legal wrappers are structures that provide DAOs with formal legal recognition while offering limited liability protections for individuals involved in the DAO.
One such legal wrapper being proposed is the Decentralized Unincorporated Nonprofit Association (DUNA), a concept introduced by a bill passed in Wyoming in March 2024. This bill gives DAOs legal recognition while still preserving the benefits of a limited liability company (LLC), which could help DAOs protect their members from personal risk.
Gabriel Shapiro, former General Counsel of Delphi Labs, echoed this sentiment, stating, “Unfortunately, all DAOs now need legal wrappers. I personally fought very hard to avoid this outcome but am now confident we tried our best before capitulation, and the time has come to accept this, at least until a legislative safe harbor of some kind is available.”
Conclusion: A Shift in the DAO Landscape
The Lido DAO lawsuit and the growing trend of courts viewing DAOs as general partnerships represent a critical moment in the evolution of decentralized governance. While DAOs were initially seen as entities beyond the reach of traditional legal structures, these recent developments indicate that courts may soon hold DAOs and their participants to the same standards as conventional business organizations.
As DAOs face increasing scrutiny, the concept of legal wrappers such as DUNA may offer a path forward for decentralized organizations to navigate legal challenges while maintaining their core principles of decentralization and limited liability. For now, the future of DAOs hangs in the balance, as the legal landscape continues to evolve and adapt to the complexities of decentralized finance.
November 2024, Cryptoniteuae