LEGAL PERSPECTIVES: A Comparison Between Decentralized Autonomous Organizations (DAOs) and Limited Liability Companies (LLCs)

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(This post is written by Eve, a Kenyan blockchain lawyer. Email: [email protected])

Cryptocurrencies have gained more and more notoriety, mainly because investors can trade on decentralized platforms. In 2016, inspired by this digital transformation, a group of investors came up with the idea of ​​creating a Decentralized Autonomous Organization (DAO) that would automate decisions and facilitate virtual transactions.

Like a typical organization, the society is run by rules coded by a transparent computer program controlled by certain members of the organization and not regulated by any government.

A DAO is a new type of limited liability company (LLC) in the business world.

An LLC is a private company to which the owners are only liable for the debts of the company for the amount of share capital they have invested. Similar to traditional LLCs, a DAO is considered its legal entity, separate from its members. In this case, the organization has the same legal rights as a person, where, for example, it can conclude contracts.

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SEE ALSO: LEGAL PERSPECTIVES: Court Adoption of Cryptocurrencies – The Future of Fines, Bonds and Bail Payments

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Like an LLC where the business has an operating agreement that defines the ground rules of the business, a DAO effectively runs based on a set of regulations implemented when it was created. These can then be updated by organizational stakeholders or an algorithm over time.

Nevertheless, a DAO manages its actions through a series of “smart contacts”, like traditional legal contracts. The difference is that they are managed autonomously virtually without manual intervention. This autonomous function allows a DAO to operate outside the administrative structure of a conventional organization.

For LLCs, key members of the organization are responsible for making important decisions for the business. On the other hand, a DAO operates independently of its leading members, where none hold majority rule. Instead of hierarchical management, each member of a DAO is entitled to an equal share in making decisions about the operations of the company. Also, the administration may be handled by a computer program beyond the control of the members who created the organization. In any case, no member is mandated to take the decisions of a DAO.

Unlike an LLC, a DAO requires funding before becoming operational.

To join the organization, people buy tokens, thereby acquiring some ownership of the company while investing in it. Tokens also allow members to acquire voting rights and other decision-making capabilities.

Since the founding party can reach investors from all over the world without legal barriers, it can win considerable funding. Also, as mentioned above, DAOs are not controlled by any single entity. For this reason, these companies rely heavily on the initial training system which should be on carefully written code protected from any security risk before the system is deployed. Such a solid base will allow the proper functioning of a DAO.

DAOs can be tasked with doing anything from asset management, charity, fundraising, and building contracts.

For example, a DAO can receive donations globally and the members decide how to use the money.

In addition to allowing investors to pool funds, DAOs also give them the opportunity to invest in new start-ups and share the risks or gains from those investments. DAOs envision a society where all members have a voice regarding its operations, and most experts suggest this could be the next step in replacing traditional organizations.

Companies therefore need to familiarize themselves with technological changes that could impact the way they interact with their customers.

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RECOMMENDED READING: Cryptocurrencies in the Political Fold – Can Kenyan Politicians Legally Accept Crypto Campaign Donations?

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