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By Kevin Hylton
One of the most common skeptical reactions to the idea of blockchain technology becoming mainstream is that it can seem a bridge too far to envision a world where people organize around the world, without knowing each other, and make their own transactional decisions autonomously of each other.
This conundrum has led to the creation of a new type of organization that may well make that bridge passable.
A Decentralized Autonomous Organization (DAO) is “an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a central government,” according to Forbes.
Many business visionaries predict that DAOs may well be the breakthrough needed to provide the crucial framework needed for business to be conducted on the blockchain.
“DAOs will have an impact on how businesses are structured, and the way individuals lead and are recognized within companies,” writes Ryan Boder, entrepreneur leadership network contributor for Entrepreneur. “Ultimately, DAOs will provide a happier and healthier work environment for all those involved.”
At the same time, while DAOs are popular discussion topics at tech conferences and in crypto blogs, they are still shrouded in mystery to most people.
“Over the last year, DAOs have gotten a lot of buzz,” reported Fortune magazine in August 2022. “But most people outside of crypto still have a fuzzy idea at best of what DAOs actually do.”
Some of the leading legal experts in the field of blockchain technology are trying to change that by pointing to the significant promise of DAOs as a vehicle for bringing structure and discipline to businesses in innovative ways.
“Imagine if traditional business processes were codified into a new technology whereby people don’t need to have the same procedural requirements to make decisions,” said Andrew Bull, founding member of Bull Blockchain Law LLP, which helps clients navigate the complex and fast-changing regulations and technology surrounding blockchain and digital assets. “For example, multiple people wouldn’t necessarily have to meet in the same place to make business decisions, such as traditional corporate board meetings. A DAO brings in a technical solution that removes the need for those kinds of procedural settings, not only in function but also in terms of personnel.”
A practical example Bull cited by is “smart contracts” — a new kind of contractual agreement made possible by blockchain technology.
“One way to conceptualize smart contracts is to think of them as agreements that don’t need a third party to execute a contract and that are totally digital in nature,” he explained. “So if two people want to enter into a contract for the sale of a house, the seller could theoretically list his house via a smart contract on the blockchain and, so long as the buyer follows the terms and executes that contract on the blockchain, the transfer of ownership of the home can be legally executed.”
In addition to the obvious efficiency benefits that smart contracts can create, there is also the potential for reducing human error that is inevitable in the drafting and revision of agreements.
Moreover, Bull noted that DAOs provide the structure for those types of transactions to be applied to a wide range of agreements between two parties, either removing or redefining the role of third parties that are required to execute transactions in the traditional model on which we have relied for generations. This has widespread implications for lawyers and other legal professionals.
“DAOs really change the way we think about jurisdictions from a legal standpoint,” said Bull. “We have practical DAO implementation possibilities that exist in our industry today that allow for individuals who don’t know each other, from all over the world, to make collective decisions that are pretty limitless in application.”
For example, DAOs can provide the framework for individuals or institutions to raise, pool and collectively invest their resources without any third-party involvement. This raises a lot of serious questions around the liability associated with the use of the technology that facilitates the DAO, how the collective investment is organized and deployed, and the way that investment proceeds are distributed to the various participants.
“I would also say that decentralization is a double-edged sword,” said Bull. “There are massive benefits and potential applications for DAOs, which are all very exciting, but on the flip side there are definitely some inefficiencies to DAOs from an administrative standpoint. There are fairly complicated reasons for that but essentially the challenge is to decide how a DAO is going to carry out a collective decision, who is going to be tasked with that execution, and how is that work going to be overseen. It’s a complex thing to administer when you get down to the implementation level.”
Bull has extensive business, legal and academic experience specializing in blockchain. He is the author of “Blockchain Technology: Strategies for Compliance with Data Privacy Laws,” a comprehensive article published by LexisNexis Practical Guidance.
I had the privilege of interviewing Bull for a recent episode in the Data Privacy series of our “Practical Guidance Podcast,” where we invite experts to provide insights on timely issues for legal practitioners. Listen now or download the episode regarding Decentralized Autonomous Organizations (DAOs), one of the hottest forms of organization on the Blockchain.