Aaron Wright, co-founder of OpenLaw and Professor at Cardozo Law, and Ross Campbell, SushiSwap core developer and LexDAO contributor, discuss the latest breakthroughs and legal implications in the burgeoning world of DAOs. Show highlights:

  • how Aaron and Ross fell down the crypto rabbit hole
  • whether a DAO, like Curve, could sue to protect its IP
  • when a governance token might be considered a security
  • who owns the copyright to a DAO
  • how SushiSwap handles its open-source licenses
  • why Ross views Uniswap’s business license as a good thing
  • what an DAO is and how the idea stems from Bitcoin
  • how Wyoming’s DAO law works
  • what makes a Wyoming DAO different from a DAO registered as a Delaware LLC
  • how an algorithmically managed DAO might work in the future
  • why Aaron thinks a DAO should not be allowed to be manager-managed
  • why wrapping a DAO into an LLC could be advantageous
  • the difference between private and public ordering

 

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Conjure: https://conjure.finance 

Episode Links

People

Ross Campbell

Aaron Wright

DAO Information

Basics:

Kain Warwick: DAO First Capital Formation

DAO Stats

Wyoming:

Delaware:

Curve IP: 

Uniswap V3

 

Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the July 13th, 2021 episode of Unchained.

My book, the “The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze,” is available for pre-order on Amazon, Barnes and Noble, or any of your favorite books stores. Go to bit.ly/cryptopians and pre-order today.

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Laura Shin:

Today’s topic is legal issues with DAOs. Here to discuss is Aaron Wright, co-founder of OpenLaw and professor at Cardoza law, and Ross Campbell, core developer SushiSwap and contributor at LexDAO and OpenLaw.

Before we dive into this very intellectually meaty episode, that has actually been a flashpoint for the crypto community over the last year or so, let’s start by having you each describe your experience in crypto and with crypto legal issues. Aaron, why don’t we start with you?

Aaron Wright:

I’m a professor at Cardozo Law. I fell down the Bitcoin rabbit hole very early, about 2011. Have a background in law and technology. Before joining Cardozo’s faculty, I started a company and sold it to a for-profit sister project to Wikipedia called Wikia. So I fell in love with open source technology. Fell in love with Bitcoin. I was fortunate enough to play a small role in helping to launch Ethereum. I co-authored a book on blockchain policy that Harvard published that a year or so ago. And then I’ve been building out some tech along with Ross and others called OpenLaw, which is trying to  bridge the gap between digital assets and traditional legal contracts. And that’s called OpenLaw. So that’s a bit my background.

Laura Shin: Ross, what about you?

Ross Campbell:

I started in crypto coming from a corporate legal background. My first real job out of school was as an associate attorney with a law firm called Andrews Kurth. That’s a whole nother story.

In terms of the canonical crypto rabbit hole, I think it started with me studying risk around ransomware attacks. And then I learned about Ethereum smart contracts. And then from that point, I actually fell into OpenLaw. I worked for ConsenSys for about two years on that project. I had the opportunity to also work with Aaron on the launch of The LAO, which I hope we cover on this call.

I generally have just been thinking about how smart contracts could be used for company formation, to improve deal flow, and transactional efficiency. And then, more recently, working with DeFi contracts with SushiSwap as a solidity developer. So that’s kinda my journey. It’s been led along the nose through curiosity and probably overwhelming professional FOMO. Very interesting work, I would say.

Laura Shin:

Why don’t we start with maybe one of the more recent, what I would call, kerfuffles, in crypto. This one involves Curve. Last month in the governance forum for Curve, which is an automated market maker, there was a governance member who asked whether the DeFi project should try to enforce its intellectual property in court. It specifically mentioned that Saddle Finance had been accused of copying Curve’s code wholesale. Although, by the way, some people did point out to me that I think Saddle’s code is in a different language, so it’s not like directly copy-pasted. And in the Curve forum, 67% of the 64 poll respondents said that they thought Curves should assert its IP rights against infringers. So what do you guys think of this proposal?

Aaron:

I think all of these issues, as lawyers or other folks that have been in and around the crypto space have prophesied for awhile, they eventually come to roost. Issues related to intellectual property, issues related to securities laws, issues related to liability, issues related to enforcing rights — it’s not surprising that as we see crypto continue to mature and continue to push into the mainstream, that these were beginning to come to fruition.

Related to the claim at hand, this is a vexing problem even outside of the crypto ecosystem — for all open-source. If you have open-source code and other people use it and they have the ability to create forks, to create modifications, and depending on the underlying license, that will really dictate whether or not they have the right and ability to do that.

What I think makes this story the most interesting though, is that it  goes to this route about DAOs and what Curve is as an organization. It’s a bit inchoate right now as to what Curve is legally. So they call themselves a DAO. Depending on which jurisdiction looks at it, let’s say the US or possibly another jurisdiction, it’s probably gonna be considered a partnership of some sort, and partnerships can enforce their rights. So if Curve wanted to do this, not advocating that they should or not, it opens up these interesting questions about how these online groups that likely will be considered partnerships in some sort of way can enforce their rights.

And there’s the second question of whether they should enforce the rights given that it’s an open-source project. Maybe what Saddle is doing is fair game or many folks that really believe in open-source technology would consider that to be fair game. Those are questions that are above  my ability to comment on. But I do think that they raise some really interesting challenges.

It’s not limited to Curve. We’ve seen this also open source licensing issues begin to emerge in the Uniswap ecosystem. We’ve also seen DAO related legal questions emerge in the Maker ecosystem. So some of these questions are really coming to fruition as the ecosystem continues to mature.

Ross Campbell:

I guess if I could append to that. I agree with Aaron that using legal tools, like IP enforcement rights, will force these DAOs, or these right now sort of loosely coordinating groups, to actually choose a legal identity.

I assume that there is some sort of a centralized group of developers. They might even have a a legal name — maybe Curve Labs. It might become more apparent how things are centralized in their system if they choose to use legal tools like enforcement rights. So it feels premature for a lot of these organizations, in my opinion, to make those hard choices. But they will be forced to.

The least we can do as crypto lawyers and people in the space is to provide templates, to make that a bit easier and more predictable. I don’t know if this is a good segue into Wyoming DAO and sort of statutory frameworks for having code based organizations and rights enforcements that are typical to traditional companies. I think we are trying to make it a bit easier. Once DAOs face these questions, they want to avail themselves of legal rights and off-chain enforcement. What is the least intrusive way to do that that’s still cypherpunk? It’s definitely something we’re watching. But I think things are a bit better now in that. I do think that they can achieve a legal identity and not lose their sense of an open organization.

Culturally, I think it’s also very problematic in that DAOs attract talent by being open-source champions. They’re very permeable, merit-based — you can rise in the ranks of DAOs by the work you do. And I think a lot of people that want to contribute to that and grow this economy on Ethereum, they are wary about people being protective about code because that can constrain  the growth of the system. So it’s very political as well.

I think I can see how Curve might want to kick this to the community and see how they wanna proceed on legal rights. We see that with Uniswap as well. And that seems like a way to have it both ways — that you can still monetize code and support talented coders. But you can also allow people to make it easier to use if there’s like community spirit there. That’s something I’m watching as well. Do we want to talk about Wyoming with the context here?

Laura Shin:

Not just yet, because there’s so much more I want to ask about Curve. First of all, it’s not clear exactly what entity would sue. But let’s say that Curve really was a true DAO, then is it possible for a DAO to sue. Can a DAO own IP?

Aaron Wright:

Yeah. Just to caveat it, I think a lot of this discussion will be very US centric. There may be different jurisdictions that view it differently. It gets too complex. So just for simplicity sake and for Ross’s sake, I know his roots at least legally are in the US, maybe we can constrain it to here.

From a US vantage point, Curve and possibly many other DAOs, presumably would be considered a partnership of some sort — if they’re viewed as a group of people that are working together to make some sort of profit. So I guess there’s a question as to whether or not all the Curve token holders are trying to make a profit. Let’s just assume that they are. At that point, they’d be considered an implied partnership.

Partnerships are a recognized entity. Partnerships can avail themselves of courts. So it’s conceivable, assuming somebody had the ability and agency to bring a cause of action, that Curve could walk into a US court and assert that. They probably wouldn’t. I don’t know a ton about the settlement team. I don’t know if they’re in the US. There’s lots of like nitty-gritty questions that lawyers would have to sort through about where to bring a cause of action, whether to bring a cause of action, whether they could enforce. But assuming that those issues were sorted out, I don’t see conceptually why they wouldn’t be able to enforce their rights, if they so chose.

Laura Shin:

If Curve then went that route, would that makes CRV or vCRV, it’s governance token, a security?

Aaron Wright:

So that’s an open question. This is one of the vexing questions around DAOs and some of the legal issues, is what is an interest in a DAO itself? Folks that have been around the crypto ecosystem for quite some time, this will bring back memories of questions about what a utility token was. Are they securities or not securities? … which are really fun conversations. I think we’ve gotten some clarity, not as much clarity as many folks would hope.

When it comes to DAOs, I think the answer is going to be, again, not surprisingly, it’s going to depend. There’s some interest in DAOs that likely would not be considered securities. They’d be considered either commodities or not really even representing potentially some sort of right in an entity. Then I think, depending on the structure of what the folks want to do together, and to the extent that there’s fees that are being distributed, or some profits that are being distributed, or other forms of distributions, those interests are likely going to be considered a securities.

There is a whole line of cases in the US that courts will lean back on involving partnerships and limited liability companies. Interest in partnership and limited liability companies can be considered either as securities or not securities, depending on whether or not there are folks that are in charge. If there’s a group of managers that are in charge, LLC and partnership interest are more likely to be considered securities. If there is not a manager in charge, then they’re less likely to be considered securities. But frankly, it’s a little bit of a gray area. It’s something that courts have sporadically addressed in narrow contexts. These are the types of questions that I think we’ll start to see navigate through US regulatory bodies, foreign regulatory bodies, and ultimately courts, just like we did with some of the token related questions from the days of token sales in 2016 to 2018.

Laura Shin:

From what you said earlier, when I asked you if it’s possible for a DAO to sue… but essentially if the goal of that token is to make a profit, then it does sound like then the tokens associated with Curve would be a security, right?

Aaron Wright:

It, again, depends. It’s going to depend on… Partnerships can make a profit. So if you have a partnership interest where there’s no manager, there’s folks that are actively participating, the information is freely available, then there’s arguments that can be made that those interests are not securities. That would be drawing on some of this case law and other folks that have looked at characterizing and classifying partnership interests. If there’s a manager, if there’s a board, if there’s more hierarchy, then it’s more likely to be considered a security.

The reason for that is the core fundamental purpose of securities laws. It’s about narrowing information asymmetries. Laura, if you were a manager of a company, you’re going to have all this information that you may not be sharing with other folks that are stakeholders, investors, or participants in that company. That’s what securities law is fundamentally are trying to target. How to get information that’s being held closely that could be important to other folks more widely available. So flatter structures, I think have a better shot, but these are very, unfortunately, nuanced questions, and that’s going to drive developers mad, but that’s in many ways  how the US approach to these questions has historically been applied and I imagine will continue to be applied for the foreseeable future.

Laura Shin:

Ross, you were going to add something.

Ross Campbell:

I was going to  go to this issue of management and what is actually providing value to token holders. If, in the Curve context, we see licensing and the defense of the licensed by the core team or centralized entity, that value creation by defending the license could be suggestive of securities. And I obviously don’t want to give a legal opinion on a podcast, but these are the trends we see in that if you hold an instrument and it’s expected to increase in value because of the efforts of others, that’s the fact pattern that applies to tokens like any other instrument or a ticket to an orange grove or something. These legal tools, like I said, can pose these sort of related legal problems in that you are identifying value streams that almost necessarily have to be centralized.

We are seeing, like I said, cool examples where the permissibility of a license and grants of a license are put to community vote. And in that sense, management of that sort of value source, the IP, is distributed in a more flat way. And I think that is helpful for teams to consider — not trying to retain the crown jewels in a core team because that can be suggestive of management. So another  interesting aspect of the law is that it gives and it takes. There’s always extra considerations, and this is why crypto law is becoming a robust profession. Probably it’s unanswerable questions that are context driven.

Laura Shin:

When I was researching this, I was like, wow, this is quite the rabbit hole within the rabbit hole.

One other thing I wanted to ask about was at the top of the contract source code for Curve, it says “License Copyright Curve.Fi 2021 All Rights Reserved.”

So who is it that has that copyright? Is that the DAO, or is it like maybe some LLC that represents the company behind Curve? Or is it individual devs? What does that say to you? And is that a typical thing for a DeFi project to do?

Ross Campbell:

Yearn Finance, the name of their token is Yearn.finance. It’s a hyperlink. I think that is a way to kick the can on responsibility, in a way. From the contract to deployer, to maybe people that are running a website and a product. But I think good practices, if there are legal entities associated with these things, is to put them in the privacy disclosures on the website itself. Those are the rabbit holes that they’re forcing us to follow to determine… if they say this is licensed and has restrictions — who’s going to enforce that? It seems like they didn’t quite have a name they want to associate at that point. I do think that’s typical in DeFi that they don’t want to think too much beforehand about the legal structure they want to apply.

They just know that they want to sort of plant that flag. There is a bit of digging involved in DeFi, I think we’re seeing.

Aaron Wright:

More on the copyright owner question. So in the US, again, a person or groups of persons, you can have more than one person that creates IP. The folks that create it, and once it’s fixed in a tangible form, which would mean it’s saved on a computer and there’s a of copyrightable work, which generally means something that’s has a modicum of creativity. That group of folks would be the copyright holders. With the license that you put together, assuming that all those initial creators are captured by curve.fi, that would vary those initial copyrights.

Copyright is a very complex part of the law as well. So there’s lots of questions that need to be answered, but that’s the general framework. So I’m assuming there was some group of software developers, either, one or more, that wrote the initial smart contracts and/or related software that helps power Curve. And those folks would own the copyright, but they may have varied it with an open-source license of some sort, which give people the rights to use it. And they’d have to assess, based on their ownership rights and that license, whether or not they have a cause of action that may be with the DAO itself, to the extent that the DAO has some rights in it. It could be with those individual developers to the extent that they retain some rights. Those are complex questions that would have to get sorted through by competent counsel.

Laura Shin:

One other thing about this, just to go back to the IP issues here. I saw somebody tweeting that if Curve were to try to go to court to enforce these, that Curve should then also be subject to money transmission laws. That requires projects or companies to go to every state to get a license. What’s your sense of whether or not that’s correct?

Aaron Wright:

That’s a whole nother body of law. But to the extent they want to be recognized or avail themselves to certain courts then it could open up a whole other can of worms. So even though they may have the right to do that, they may choose not to for other reasons. Possibly reasons related to what we were discussing before.

What are the interests in Curve? What should they be classified as? Questions related to AML and know your customer? That’s a very big issue when it comes to DeFi. It’s a very big issue when it comes to crypto. More generally, we’re seeing FATF get more involved and are beginning to meander towards clarifying goals related to that. It’s just a huge can of worms. So legal issues with DAOs, it is a rabbit hole of a rabbit hole like you described before, but there’s plenty of other rabbit holes that get opened up when you begin to dig into some of these projects and issues that they face.

Laura Shin:

And Ross, did you want to anything?

Ross Campbell:

I think what the legal system is still trying to get acquainted with is this idea of money robots. Developers can create a almost fully functioning exchange or market and not have any overhead and just walk away. Who is transmitting value in that case? Is it code, or is it the LP providers who are facilitating those markets? It’s so complicated that it feels really like a knee-jerk reaction to just say the people who have doxed themselves, usually developers, that we should just make them get all these licenses.

This is more an aspirational notion versus legal reality, which has precedent, is very structured, and requires research based on state by state. More the point, I think that the legal system is maybe trying to move too quickly in assumptions about responsibility and control. And that goes to this issue of not understanding how this technology really functions for markets. I would be reluctant to make any sort of firm opinion about money transmitter license requirements, but that seems like a misplaced regime, especially for what we see happening in the space with Curve and AMMS.

Laura Shin:

And Ross, actually, I just wanted to ask for Sushi, how do they do a copyright, if any?

Ross Campbell:

That’s an interesting issue, of course. For SushiSwap, at least what we consider core contracts, the SushiSwap organization on GitHub, that’s all MIT and more recently we’re using GPL licenses. So it’s open-source and free to modify. But we do have outside teams that we’ve funded with grants that have used licenses on their code. And that has been interesting in terms of unifying this idea of SushiSwap as a completely open-source exchange. BentoBox is a product that we’re using for our lending contracts. And there is some licensing involved with that. So that’s more of the SushiSwap perspective. Like you can have a plan among developer groups to open source the code and see where that goes. But sometimes you can’t put the toothpaste back in the tube if something’s already licensed in some ways, or you don’t necessarily hold the rights there. It can be difficult when expanding rapidly to coordinate a legal regime, which I’m sure anyone appreciates in a high growth startup, regardless of it being blockchain related. So we have good outside counsel.

Laura Shin:

Let’s now also talk about Uniswap because, and this directly relates to what happened with SushiSwap. Back in March when Uniswap launched its V3, it launched it under what’s called a business source license. Can you explain what that means and why this caused a little bit of a stir in the crypto community?

Ross Campbell:

So Uniswap released V3 under under the business licensing. The immediate reaction is what are you worried about in terms of release…

Laura Shin:

Ross, can you just define what that is for people who maybe don’t know.

Ross Campbell:

So it’s commercial with a plan to open source. In their system, I believe it’s a two year time period before it automatically converts to GPL. Then anyone can use and modify it. Right now, if I want to use any of the license code from Uniswap v3, I would have to get express permission from them or we’d have to have a commercial license. It’s a blend of open-source and commercial, I guess, if that’s helpful. And Aaron, you’re actually a professor for these things. So you probably have a better, more scholarly way to describe this, but for me, it’s open source, but with an immediate sort of pause.

Aaron Wright:

I think it’s super fascinating. I think it really hits at this core that that many developers are trying to balance when it comes to crypto or blockchain projects. They want at some point for the code to be managed by a whole bunch of stakeholders. I personally believe that’s a very healthy exercise to have a whole bunch of different folks that are maintaining it, managing it. I do strongly believe in the open-source ethos. Bu there are windows where that’s difficult to do. You need to have a dedicated team that’s focused on it to push it forward, to make sure the quality is high enough, and to make sure that you have the opportunity to test out the market. And so I think Uniswap was trying to blend those two competing ideas together and did a pretty good job doing that.

Obviously, with the looming fear of a roving band of Sushi fanatics that may decide to take some of that innovation and apply it into their ecosystem. I think it’s great. I don’t know who on the Uniswap team, if it was their outside counsel or their internal counsel, but I do think from my vantage point, it’s wonderful to see that form of innovation. I know that may bristle with some folks that are true open source believers and a little bit more religious in their approach. I think it’s a fair trade off overall. Like we want to incentivize teams to develop new things, to work on it, to feel incentivized, to do that, while at the same time, knowing that as it’s mature, once people feel secure about it, that stakeholders or other folks that are part of it that can begin to support and make sure that it’s operating and developing in a productive way.

Laura Shin:

Just to be totally clear for people who missed it, this is probably a direct response to what happened last summer when SushiSwap basically forked the code and then launched a liquidity mining scheme that involves Uniswap to get users from Uniswap over to SushiSwap. To my mind, this is pretty much their way of being like, let’s make sure that doesn’t happen again. But Ross, since you are part of the Sushi team, I just wondered, what’s your reaction to this move?

Ross Campbell:

To clarify, my earlier comments were not meant as criticism, but more to maybe help explain the reactions of the crypto industry as a  whole. I know there was a lot of criticism to licensing for Uniswap V3. Personally like I’m agnostic to what is going to make a Ethereum development sustainable and secure over the next decade. It’s a very, very, young industry. And there’s clearly different stakes at play with like open-source code that also controls financial assets. If Uniswap want to try and innovate and have it both ways, I don’t necessarily want to discourage that. I want to have more examples in the wild and have more boats in the water to test things out and see what developers really congregate around. It’s an open market. Some people see that as a moat, and that’s respectable for their tokenized community. Others might see that as a sort of challenge to growing Ethereum as a whole.

But like I said, it’s not clear to me what approach when’s the day or provides the most value to DEX users. Maybe that’s a lawyerly answer in and of itself, by having it both ways. I respect that they’re trying to protect their Uniswap community and product using what some might call lawfare, but I just see it as normal for any startup to do. And they are very open about being a startup. They have a Universal Navigation Inc., which I believe is a Delaware corporation. They’re based in York, they have a clear physical presence and offices.

They have a founder who has an identity and reputation at stake. As well as most of the developers are also doxed, as they say in the industry.

Sushi is trying to do maybe something different there by being a bit more impermeable for developers and allowing people to have their anonymity. So I think there’s definitely some competitive advantages to being fully sort of crypto-anarchist. But I don’t know if that’s necessarily what we need to have or over the course of the decade. I think we definitely appreciate that the licensing was a response to SushiSwap, the vampire attack. It was also is quite clear that there was migration tools provided to go from SushiSwap to Uniswap, very similar to how SushiSwap was launched to migrate from Uniswap to Sushi. So in my mind people see that as like negative competition, but for me, it’s like, yeah, let the best exchange win and let the best legal regime win. It’s all code that we’re trying to improve. So people are like creating moats and they’re open about it. And it’s obvious how we could change that moat through governance, which Uniswap has done. That seems interesting too so, yeah.

Laura Shin:

All right. So in a moment, we’re gonna discuss a little bit more about the Uniswap license issue, but first, a quick word from the sponsors who make the show possible.

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Laura Shin:

Back to my conversation with Aaron Wright and Ross Campbell.

So just out of curiosity for this license that Uniswap has its V3 code under. Since it lasts for two years, I just wondered, is that  effectually the time period in which anyone might actually want to use the code for business purposes? With the pace at which this technology is advancing, I thought this is going to cover all the potential competition.

Ross Campbell:

That’s like a hundred years in my mind of crypto. That’s several growth phases or something. So I think effectively you’re right. They see this as covering the concentrated liquidity idea as they’ve implemented it. Which is fine. I think it’s all arbitrary, but anything past maybe a couple months is probably like far in the future in a lot of crypto people’s minds.

Laura Shin:

I wonder just for this particular license, it’s not something I’m super familiar with, but is this something that has ever come up in court before? If someone were to fork the code and test this license, do we  have a sense of how the courts would decide?

Aaron Wright:

I don’t know if this is the singlular use case of that license — that’s hard to know if that came up from the Uniswap team, or maybe they leaned on another example that may have emerged somewhere else, some other form of precedent.

When it comes to questions around open source licenses, courts move very slow. So even widely used licenses, like Ross mentioned a couple before, like an MIT license or a GPL license, not many courts have addressed issues related to the validity of those licenses and the scope and questions related to it. At least in this instance, it’s not like this is a license that’s been well litigated, number one. At most, if it went to a court, I imagine courts would have to look at the sporadic cases involving open-source licenses to a) affirm that it’s enforceable and b) define the scope and boundaries related to it.

I think more practically, I imagine why the Uniswap team did this was not to walk into court at some point. I know that that’s in many ways, like not how non lawyers view it, but it’s just a little impediment. Whatever folks are thinking about possibly using that code, they may pause. And that pause may just give them enough time to to see if this idea works, which they obviously built and obviously put a lot of thought and time into it. Hopefully that gives them a little bit of space to grow the ecosystem or support the ecosystem in a way that they think is appropriate. Competition’s always good. I mean, I think in many ways, like what we’re seeing this dynamic between Sushi and Uniswap, outside of being very dramatic and entertaining in different ways, is also  one of the advantages and really one of the reasons why governance tokens are important.

I think the fact that Uniswap did have a vampire attack by Sushi, which introduced the token. I imagine that that fact probably weighed in the minds of the initial developers when thinking about that. I think it also points to the value of why tokens are important to rally people around a project and have them feel like they have a say and can actively participate in governance to improve the ecosystem. I think that’s healthy. I think even here, when we’re dealing with new updates, improvements, and enhancements, it’s reasonable for teams that come up with that to have like a little bit of breathing room to test it out before it gets immediately copied. I think that creates perverse incentives for innovation. If you want to optimize on that front, to say that a team that develops something shouldn’t be built to at least try it out, see if it works. At least get some recognition, if not more, for that. I think that that’s healthy and pretty reasonable.

Laura Shin:

All right. So now let’s talk about the Wyoming DAO law. What does this law do?

Aaron Wright:

So DAOs are really interesting as a concept. There’s different types of DAOs. DAOs have been in the Bitcoin and in particularly Ethereum  ecosystems for quite some time.

Just to give like a quick history lesson there, Dan Larimer of EOS fame, I think is credited with the first reference or article talking about DAOs. He fashioned them as a decentralized autonomous corporation. The notion was, how can we use Bitcoin, and an emerging project on Bitcoin called Colored Coins, at the time, to represent Bitcoin as a share of stock in a company? And he posited, and I think he’s right, that by doing that using blockchain technology to represent interests and organizations, we get a whole bunch of different efficiencies. The Ethereum ecosystem in particular  took Dan’s concepts. Vitalik and others ran with it, and it played a prominent role in the concept around the Ethereum whitepaper.

And there was a lot of use cases, but one was DAOs. The Ethereum ecosystem has been geeked out about DAOs for quite some time. And because of that, there have been lots of conversations about how can DAOs operate in the real world. So these conversations started way back even before Ethereum launched at events that MIT put together where we began to think about legal issues related to Bitcoin and blockchain technology more broadly. This notion emerged that one possible path forward would be to wrap a DAO in a limited liability company.

To use a limited liability company, which is a structure in the US that many businesses use, to account for certain risks that emerge when you mush people together and they try to do something productive. What the Wyoming DAO bill does is it extends Wyoming’s LLC act and enables you to create a DAO. It attempts and aspires to do that in a way that will work with what some developers want to do with DAOs.

It’s not and never was intended to be like a universal solution. Its intent is to provide legal recognition to this new emerging structure, where we’re seeing a lot of excitement around and a lot of folks that want to innovate around. And two, it was to align existing laws a little bit closer to how people are actually operating within these DAOs.

So one way that I like to think about a DAO, it’s like an online group with a bank account and lots of rules that are related to it. Under the existing law, as an example, if you form that and that group of people wanted to do something productive, like make a profit or build something or engage in some sort of commercial activity, it’d be considered a partnership, and you’d have to owe what lawyers call fiduciary duties to all the other members of the DAO. A fiduciary duties is a fancy legal word that basically means like a heightened responsibility. Like you owe more than you would other folks when you’re engaging with them.

But in my mind, that’s insane. Like imagine if you’re part of an online community and some pseudonymous person that you don’t know that you’re communicating with, you owe some heightened obligation to. That makes absolutely no sense, but that’s the way the laws are currently written.

Under the Wyoming bill, we softened that, and you’re permitted to do that from the US. We waived these fiduciary duties to the extent permitted by law. We addressed issues related to conflicts because it’s presumed, as Ross mentioned before, that DAOs would be more porous in nature — that people will go in and out. And we also streamlined the process. So you only have to really have one document instead of a handful of documents that are necessary today if you want to explore this structure. The idea is to legal recognition to align it with what we’re seeing right now with DAOs. And then also to hopefully over time lower the cost.

And that’s exciting. I think we’ve seen tremendous amounts of growth with DAOs. Whether that’s DeFi related protocol DAOs. Some of the investment DAOs that folks are forming, or more service-based DAOs, which are really interesting as well. And that’s exploded over the past year. It’s gone from about $10 million in assets in these DAOs in February 2020, to today depending on who’s counting, it’s either roughly a billion dollars or even more than that. And it’s gone from having thousands of people participate in these structures, to up to 200,000 people participating in these structures. It’s hard to get clear metrics on blockchain.

I think it’s admirable that Wyoming is taking the first step forward and trying to really tackle and recognize these entities. But there’s still a lot of work that needs to be done. There’s valid criticisms that came up even beforehand related to the bill and structure. Some of those issues were known beforehand, but were products of the political system, others emerged from comments. I think you’ll see this as a first step and then over time, with either additional legislation or additional amendments to clarify and make sure that it’s in a really good spot. I do think it is really a notable moment. Hats off to the folks in Wyoming for helping to push this forward.

Laura Shin:

And before this Wyoming Dao LLC law, there were other DAOs that were organized as Delaware LLCs. So what can a Wyoming LLC DAO do that a DAO organized as a Delaware LLC cannot do?

Aaron Wright:

So they’re very similar. The concept was if you wanted to put together a wrapped DAO, so you wanted to root a DAO in a legal entity, let’s say like a Delaware LLC. To do that today, you would have to, in all likelihood, pay a lawyer tens of thousands of dollars to put together a structure that would work for the project. It’s incredibly expensive. And that’s that’s not something most developers can afford. That’s not something that most developers, since they’re focused on software, actually are equipped to  manage the nuance related to it. Are there some folks that can, and that’s awesome. But most folks can’t do that. The idea was to set the default rules in a way that was a little bit closer to how people are actually operating, such that the costs over time can go down.

So you don’t have to pay lawyers tens of thousands of dollars to do something that is more and more routine. Not surprisingly, when lawyers saw that that occurred, they got grumpy. Lawyers like to take their cut out of lots of these projects and are not happy about that. But in reality, it shouldn’t cost tens of thousands of dollars to set up an entity. It shouldn’t cost tens of thousands of dollars to set up a DAO. And so this is a framework that enables that incentive structure and the cost related to it to eventually go down. But in many ways, it preserves that same spirit, which is using a limited liability company as a shell to defer to software based systems for governance and for member managed structures, to the extent that that applies for various different use cases.

The other thing that it is contemplated, although I do think the language will change. You can start to clarify which portions of your organization are going to be run by an algorithm — like which smart contracts are going to be used, which I think is important for the public to know if you’re going to be building and intend to aspire to build something that’s really meaningful. I think it’s nice to have a public identifier that people can refer to, like the smart contract address or some other public identifier of the code that you’re using. I think that’s a nice thing to have and an additional reasonable requirement that we put put in place. The other thing that you can do with the Wyoming law that you can’t do with Delaware is call yourself a DAO. I know some folks may not want to do that. I know it’s very subtle, but it’s a big deal. You know, lots of folks want to call themselves ABC DAO, they don’t want to call themselves ABC DAO, LLC. It just has a a different feel to it. So that’s another important difference as well.

Laura Shin:

Well, I actually wanted to ask about the algorithms. So as you mentioned, the Wyoming bill does mention these algorithmically managed DAOs quite a lot, but I don’t quite know what that means. Because if a DAO is managed by an algorithm rather than the members of the DAO, then how is that a DAO?

Aaron Wright:

So it contemplates two different things. By default, all the DAO’s are member managed. What that means is, by default, unless it’s varied by agreements, there’s not going to be a manager of some sort. I think that aligns with what we’re seeing with lots of DeFi projects. There’s not some central group or central persons that are in charge of it. Around the edges there might be a software development team. There may be folks that serve more administrative functions, but there’s not like a centralized leader. You can though, under the existing law, decide to elect to be an algorithmically run DAO. And I don’t think we’ve actually seen these forms of DAOs yet, but it’s something that’s been contemplated and theorized by legal scholars for quite some time.

Laura Shin:

What does that look like? Since we don’t have one yet, what’s an example?

Aaron Wright:

We have a couple of prototypical DAOs, which would be something like Bitcoin. So many folks have analogized that Bitcoin itself is a DAO or DAO-like structure, and they’ve gone through the mental exercise. How could a Bitcoin or Bitcoin like project get launched? And how could it get launched in a way that would align with US law? There’s a scholar from the University of Southern Florida, who theorized and put this together and thought about this exact question.

The way that he thought it could all get lined up would be… first, you form an entity that has members. So those members form it, they begin to develop it. And then they assign over into that entity, all the intellectual property related to the algorithm, and then they quit, they leave. At that point, you have a legal entity that only has an algorithm sitting at its core. And that fact was something that the legislators and other folks that provide a commentary wanted to account for. Whether that has manifested yet, or whether or not that’s a perfect analogy, it’s it’s too soon to tell. I wouldn’t be surprised if we see more and more structures over time that begin to resemble that. And because of that, that’s why it was put into the law.

Laura Shin:

Is there any group trying to create an algorithmically managed DAO?

Aaron Wright:

I think that there probably will be groups that try to create this. We saw groups try to create an algorithmically managed DAO or something that is pretty close to that, in Bitcoin. And that is something that folks wanted to account for. Bitcoin in many ways is an algorithmically managed out. It has a core software protocol that’s run, it’s operated, and you can participate in it, but the core governance is in the algorithm itself. So it’s a way to position that type of a project. One way to do that, and you possibly could do that today in Wyoming, using this legislation. Like if Satoshi didn’t want to be anonymous, if you want to set up something where you really are putting at the center of the organization, a set of software, you would have the ability to do that under the Wyoming DAO legislation today.

Laura Shin:

So in Bitcoin, what is the algorithm that manages Bitcoin? Is it the sha-256? Like what algorithm manages Bitcoin?

Aaron Wright

Proof of work — it’s the core software. It’s the entire package that you need to run. It’s more than proof of work. It’s the entire node and the software that’s dealing with validation. It’s a software that’s dealing with everything that manages Bitcoin. It’s a core group of software. So you could imagine that being owned by an entity and that entity having no members. And while that may seem like an odd construct, it’s something that’s accounted for in the law and something that we wanted to account for since a, we’re starting to see prototypical examples of it in things like Bitcoin and b, it was something that legal scholars in the US have contemplated. Since it takes some time to put together laws, it takes time to pass them, we wanted to make sure and do our best to try to future proof it in some sort of way.

If there’s some folks that don’t think that that future is going to come to pass, it doesn’t really matter. You are by default a member managed entity. You can decide who is going to be in charge of this operation. If that idea of an algorithmic DAO doesn’t fit for your project — no worries. It’s really no harm off your back. If, however, you want to explore something that’s a little bit more future-leaning, you have the ability to do that. And I think that that’s an important thing to  contemplate. Even beyond that, just to give a full picture, some of the language related to that piece is something that folks have flagged. And even before the law was passed, there was a handful of amendments that were hopefully going to get put into the original bill, but due to different reasons, including some issues related to Wyoming parliamentarian issues, those amendments look like they’re going to come in a second bill that hopefully will go through the appropriate committees and get presented to the Wyoming House and Senate.

Laura Shin:

And what are those?

Aaron Wright:

It’s just a cleanup bill. So it’ll clarify some of the language-related to designating yourself as either a member-managed entity or an algorithmically managed entity. It will clean up a couple of definitional issues that folks flagged, and then also clean up some other minor points that people have identified or provided feedback on since the bill was presented and proposed. It’s a process. Legislative process is not it’s not a one time thing and then the bill is done, particularly at the state level. There are usually opportunities to clean things up and tighten them and amend them. But it’s notable that we were able to get something there to, a, recognize DAOs and to, b, give people the ability hopefully to form these at much less cost than they would if they want to set something up in Delaware and, c, we’ve begun the conversation around this to start to have some of the productive conversations that I think are necessary to make sure that at least in the US we have the right approach here.

Laura Shin:

So for the manager-managed DAOs, which under this new law, you can’t have a manager-managed DAO. Some people were interpreting that to mean that a DAO could not be managed by a foundation, which is how some of the DAOs started out. So why is that?

Aaron Wright:

Why can’t they be managed by a manager? They could conceivably just decide to be an LLC at that point. I don’t think it’s contemplated that DAOs will have managers. So I was trying to account for  that reality,

Laura Shin:

But people are saying that a lot of DAOs do start out with a foundation managing. And so they’re saying this sort of like doesn’t account for that…

Aaron Wright

So they could form as an LLC. When they feel like there structure is in place, they could convert into a DAO, or they could designate themselves a DAO at that point in time.

Ross Campbell:

I don’t think that manager-managed really speaks to the use case of DAOs in that they are almost entirely about being flat and real-time with membership management. I can appreciate maybe DAOs that have managers might not be the best use case to design around or to promote. There are a lot of protocols that are bootstrapped by foundations, which are really core teams of developers. I don’t think a lot of these developers really thought carefully about making a DAO or the implications of token governance. Maybe things like Wyoming DAO billl or co-deference approaches, can make this fit simpler.

But there is an advantage though to conversion. Like Aaron said, that if you’re situated in a jurisdiction and they have an escape hatch into a more DAOified version, that seems like an immediate advantage. My idea with the DAO bill is, it’s a celebration of LLCs, which is like a celebration of maybe libertarian notions of how we should like own businesses together. If DAOs existed way back when, I assume we would have something like the DAO bill before we would try to do an LLC bill. I think anyone who’s exposed to this technology or has been in DAOs, they see like these are actual, like real systems versus a traditional company, which is whatever the government and your bank and all these other third parties can agree upon. It’s very much, I think in the train of the experiment that Wyoming had originally with LLCs and promoting something that’s more flexible.

I am also aligned with just automating lawyer’s out of a job. I think there’s probably too much histrionics about co-deference and how difficult that is. So I think it’s worthwhile to have agreements at the legislative level. As long as we can also promote private organizations that try to use operating agreements. There are templates for that.

My biggest pain points in terms of DAO, LLCs, and these sort of statutes, is how do we really celebrate smart contracts and digital currencies? And how do we remove the need to pay fiat to the state? How do we avoid the need to hire a registered agent that really just receives mail? That’s very alien to a DAO? Like noticing a DAO because like somebody sent some mail to it, that feels very archaic.

There’s aspects of company formation as a whole, that I think we’re leaning in here and I think it’s going to be an iterative process and a lot of sausage is involved with getting something passed. I think that’s probably why there’s controversy. I definitely think that lawyers, as our job, we’re meant to criticize, that’s almost like how we get our supper. But I think this criticism has been productive for Ethereum, in that as a culture, as a community, we’re very experimental and we are able to upgrade and fork and do things that are necessary. I’m optimistic on the normalizing impact of the DAO bill’s release.

Aaron Ross

That’s a good point Ross. I think it is that experimentation. One; it’s the validation, which is notable. It’s nice to be able to actually have an entity that’s recognizable. Going back to what we were talking about before, if Curve was organized as a wrapped DAO in some capacity, and there’s lots of reasons why they may not choose to be that, but there’s good reasons for them to do that. If they wanted to walk into court, that would be a lot easier for them to do that. If they wanted to get tax ID numbers and start paying taxes, they can normalize and actually grow to something that’s not on the backwaters of the internet, but really front and center and prominent mainstream. They have an avenue and a path to do that.

Beyond that, I think for existing structures, this may not work. Maybe you formed a private foundation before — converting into this may not work. But you can always start as a member managed entity, which could be a group of software developers that are managing some open source project or something else like that. Then you can convert that, you can amend your documents and decide to have that entirely run by an algorithm if you want. Or, once these amendments pass, you can have some sort of hybrid of the two and just articulate that. And I think that’s great. To Ross’s point about automation, what I’m hoping we do see is lawyers or other folks increasingly come up with standard off the shelf documents that teams can use so that they don’t need to pay a handful of crypto lawyers $60,000 or more than that to put together a DAO.

I think that that’s just wrong. And I don’t think that that’s the direction that we should be pushing towards. It should be just as easy to set up a DAO, if you want to, as it is to set up a company for venture capital financing or as it is to set up a small business — it shouldn’t cost tens of thousands of dollars to do that. And hopefully, this lowers the requirements to do that, and we can continue to see experimentation to make sure that the different forms and shapes and structures of DAOs that, I imagine we’ll see over the next couple of years increasingly are accounted for in different ways.

Laura Shin:

Kain Warwick of Synthetix wrote a great blog post on how DAOs should finance themselves. And in it, he wrote this description of a DAOs:

“DAOs also forego reliance on external courts of law. The DAO controls itself from the inputs of DAO members alone. It is by definition self-contained and need not rely on any external arbiter to determine control. Of course, there will always be the necessity of meta governance, but the DAO handles this through stakeholder inputs controlled by its own internal rules.”

What did you think of his description here?

Aaron Wright:

I think there’s a point to it. In many ways, he’s just describing private ordering, which at least in the US and in parts of Europe, there’s strong historical messages and support for that notion. The idea is that different parties can agree to order their affairs. If they’re deciding to order their affairs using code as opposed to legal agreements, I think that there’s a strong argument for that to happen. Unfortunately, law doesn’t disappear, governments don’t disappear, the course of impact that governments have doesn’t disappear, just because you self-proclaimed yourself, a DAO. And just because you’ve decided that stake holders have decisions. If the activity of what you’re doing is unlawful. If the activity hurts other people, you will be held accountable for it. We saw glimmers of this with the original DAO and its implosion. Fortunately because of the Ethereum hard fork and because of the fact that Ethereum ramped up in value after that fact, people were not wiped, but if they were wiped, I am sure that we would see one or more of those members enforce their rights in courts.

Even though there, the folks that put that together and said, hey, this is entirely run by code. It’s code as law in it’s purest sense. Many folks are cheering that on. In reality, something goes wrong, people get hurt, they get grumpy, they go to court, they have lawyers and people that are involved will be held accountable for it. Structures that don’t have a legal backing in some sort of way, they will likely be viewed as partnerships. And the way partnership law tends to work is that partners have to account to one another. If there’s some sort of damage in some sort of way, and their liability for any damage that’s been caused is not limited. So that means the deepest pocket is going to be responsible for it.

If some of the venture capital funds that have backed these projects want to participant in governance, if you know, folks that do have deep pockets, because they’ve acquired a number of digital assets over the years, want to participate in DAOs, they can definitely do it. And I’m sure that many of them will not run into issues, but there will be some that get knotted up in some nasty situation involving a DAO that isn’t organized, that doesn’t have any limited liability protection, and they’ll be on the hook for it. That’s gonna probably push more and more folks as they mature to begin to explore these types of structures.

Laura Shin:

Let’s flush that picture out a little bit more. Let’s say that there is a DAO more the way that Kain described it here, where they’re not an LLC and maybe let’s say there’s venture backing or it doesn’t have to be, it could be whatever. I imagine that for the foreseeable future, we are going to see this range of DAOs. Some will become LLCs and others will not. Let’s say that we have two, they’re doing the exact same thing, the same blow-up happens. It’s a parallel universe, like sliding doors or whatever. After the blow up, then what happens to the DAO that’s not an LLC and what happens to the DAO that is an LLC?

Aaron Wright:

Let’s say that there’s some damage that somebody can quantify it. Let’s just put numbers on it, a hundred million dollars in damage, which is not unheard of. The individual members, if it’s an implied partnership, would be responsible for making that party whole. And if one party was brought and ordered to make the damaged party whole, they can turn around and then seek an accounting from the other folks to get their money back. So it creates an incentive when you have a pure partnership to find the deepest pocket, to bring a cause of action against the partnership and that deep pocket to pay for it. And then to turn the partners internally so that they can deal with the internal accounting on who should fully pay for this. So it creates a huge mess.

If it was a legally wrapped entity and only any amounts that were contributed to that entity, in general with certain exceptions, would be at issue. The entity itself would only be responsible for the damage. You as an individual member, owner, or participant likely would only be responsible for your individual contributions to it. All your other assets are not put at risk. That’s a big difference. If you have a lot of assets, if you’re a mature player, if you’re a traditional player, you’re not going to likely want to participate with some of these DAO structures until you have the certainty of limitation of liability, until you have the certainty of legal recognition. So right now, as we see DeFi scaling up, it’s awesome. We can stay as an insular community, but if you believe in this vision, that blockchain technology, Ethereum, Bitcoin, at some point is the norm, it is mainstream, you cannot avoid the fact that traditional actors and players are going to need to participate and play around with these structures.

At some point it’s going to have to get sorted out. You’re going to need some of these protections, this legal recognition, in order to move forward. And that’s why it’s important. Because it’s not just going to be an insular bubble forever. At some point, the weight and gravitas of what’s happening in this ecosystem will become large enough that it’s going to have to pull in the rest of the world and it’s going to need some of these legal protections to do that. So I applaud Kain for pushing and taking what I call like the more wild west approach, but at the same time, unless you lay down the foundation with what’s happening in Wyoming and other places, if ETH and the crypto ecosystem is just gonna hit a wall, it’s not going to be able to get the adoption that I think many folks who are aspiring for it to achieve.

Ross Campbell:

I would say that there could be an intermediate step for Kain’s version of a DAO and maybe what corporate bodies should be. Adding a simple membership or constitution to the mix that at least makes it predictable how DAO members will treat each other in the case of disagreements, I think it is always a very positive step. We’re seeing open-sourcing of templates for that. There is this issue with private ordering through smart contracts, which smart contracts are like almost the end goal of private ordering, which is like true enforceability by agreements — code is law. But then private ordering still has externalities. The agreement I make with Aaron, I can’t say Aaron, you and I agree that nobody else can sue us based on what we’re doing together.

That’s not exactly how the law works. The law is a remedy system for the things people do that affect each other. However, smart contracts while they’re good for private ordering, DAO member to DAO member, the state provides these public ordering things like LLCs, where we can then coordinate with other people that aren’t in the DAO and try to reach some agreement about who holds the bag if there’s an issue. These are  tools and fictions, made-up things the state provides us so we can like actually coordinate and like make productive businesses without like losing our house every time. There is a reality that I think is very important addendum to Kain’s pure and very idealistic vision of DAOs. DAO members are human and what they decide to do on the blockchain will affect people off the blockchain. And we have to grapple with that reality, if we want mainstream adoption.

People are grappling with it by going full crypto anarchic and going private using tornado systems to hide value flows. But I can’t see that being the immediate adoption point that. That feels like it will always be an area for people to do maybe more censored businesses. But there’s more ordinary use cases for Ethereum, like fundraising for startups, that we want to make sure that it’s predictable who can get sued if we decide to do these things. Mostly just rephrasing what we just talked about, but I think it’s important to also understand that we shouldn’t rely entirely on smart contracts. We should try to define our relationships amongst each other as DAOs.

And then if we want to have a relationship with the public, we want to own businesses, or put up billboards and do cool stuff off-chain —  it’s very helpful to have a coordination mechanism with the public, like an LLC. So that’s where I see code as law and law as code converging. It’s a coordination technology ultimately, and trying to get people to not go full vigilante if they have a bad business deal, we want people to be civil. That’s ideally the goal of all of this, is that people cooperate.

Aaron Wright:

Part of cooperation is taking risks. That’s why the limitation of liability is so important. Right? So that’s one of the core innovations of a corporation, which folks like Sam Altman and others have commented that that may be the greatest innovation of all time.

It’s this legal innovation of creating a way for people to limit their liability just to the actions of what’s going on inside of an organization. That’s enabled so much human output, human creativity to meet its most efficient endpoint. And that’s what’s missing with DAOs right now, when they’re partnerships, you have unlimited liability when you participate in them. So that means you put your personal assets at stake for anything that’s going wrong in those groups. Being able to have DAOs that have a limitation of liability means that more folks can participate. Having DAOs that are legally recognized and you can call yourself that gives them an actual degree of validation, which means that they can interact, they can acquire land, they can start to move into areas that are outside of crypto, which is in the long run, going to be important. Being able to articulate that you’re going to have a part of your organization not managed by contracts, but by software — it’s subtle, but important.

There’s nothing precluding that, but having that clearly stated, I think is helpful and hopefully can resolve disputes. Beyond that, you can begin to interact with the real world, and that’s going to make regulators and other folks that are worried about crypto, understand this technology a thousand times better. So if the Uniswap wants to be a large, if not the largest exchange ever, how is it going to do that if it can’t interact in any way or talk in any way to the traditional world? They’re just going to be skeptical. They’re going to their backs up, and it’s not going to fulfill that vision. But maybe through these structures or some innovation on these structures, we can get to that point where we can really see crypto emerge and become the global force that many developers and advocates and other supporters really believe it can be. So we’re taking steps in that direction.

Laura Shin:

So we’ll have to see how all this pans out. I feel like we could have gone another hour to discuss the many, many other issues that pertain to the subject, but I’ll have to do that in another episode. So where can people learn more about each of you and your work?

Ross Campbell:

I’m @r_ross_campbell on Twitter.

Aaron Wright:

Twitter is a great place. If you’re interested in this intersection between legal agreements and smart contracts, check out OpenLaw.io.

Laura Shin:

Perfect. Thank you both so much for coming on Unchained.

Laura Shin:

Thanks so much for joining us today. To learn more about Aaron and Ross, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Mark Murdock. Thanks for listening.