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Why should I incorporate my DAO? In what geographic jurisdiction should I incorporate my DAO? What legal entity type should I choose?
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By
Leo Henkels
Decentralized Autonomous Organizations (DAOs) have emerged as one of the most transformative innovations in the blockchain and Web3 space. DAOs are redefining traditional governance models and business structures by leveraging the power of decentralization and collective decision-making. In this article, we will explore the historical development of DAOs, their evolution from basic to complex governance structures, and their potential to disrupt various industries and reshape global governance.
The concept of DAOs can be traced back to the early days of blockchain technology. In 2016, a group of developers created "The DAO," an ambitious project built on the Ethereum blockchain that aimed to create a decentralized venture capital fund. Despite its eventual failure due to a security vulnerability, The DAO paved the way for future experiments in decentralized governance.
As Isaac Valadez, a leading developer, investor, and thought leader in the ICP ecosystem, mentioned in the Just DAO It podcast hosted by Adam Miller, co-founder of MIDAO:
"I've been involved in governance for the DAO that runs the ICP protocol for over three years now. I've been involved as a known neuron, so I'm kind of like a delegate—I think they call it on other types of systems—where I vote, and people can choose to follow my votes. I was one of the earliest delegates there."
Early DAOs like The DAO and ICP's SNS DAO paved the way for revolutionary governance models that showcased the potential for decentralized decision-making and collective ownership in a trustless environment.
As the blockchain ecosystem matured, so did the complexity and sophistication of DAO governance structures. Early DAOs relied on simple voting mechanisms, such as one-token-one-vote or majority rule. However, these models often faced challenges related to voter apathy, centralization of power, and the "tyranny of the majority."
To address these issues, newer DAOs have adopted more nuanced governance models that blend traditional structures with decentralized mechanisms. For instance, some DAOs have implemented liquid democracy, allowing token holders to delegate their voting power to trusted representatives or experts. Others have experimented with quadratic voting, which aims to balance large token holders' influence with smaller stakeholders' preferences.
Isaac Valadez elaborated on the evolution of governance structures in the ICP ecosystem:
"To vote on the NNS (Network Nervous System), you have to stake tokens to create what they call a neuron. There's something—the maximum amount you can stake is eight years. There's a whole handle on Twitter, and stuff called the 'Eight-Year Gang,' and I have an eight-year neuron, for example, myself, just because I wanted to make one because I'm a dork.
You put a staking delay in, and it doesn't start the countdown; it only starts the countdown when you want to start dissolving the neuron. But it increases your voting power. So basically, I have an 8-year neuron. I'm never going to start to dissolve it, so it will just stay at eight years indefinitely. I don't plan on ever dissolving it. It increases my voting power, and it also increases my governance earning rewards."
This example illustrates how DAOs are incentivizing long-term commitment and aligning the interests of token holders with the organization's overall success.
As DAOs continue to evolve, we are witnessing the emergence of innovative governance models that blend the best of both worlds—the efficiency and expertise of traditional structures with the transparency and inclusivity of decentralized mechanisms.
One notable example is the Nouns DAO in the Ethereum ecosystem, which has implemented a unique governance model that balances decentralization with stability. As Adam Miller explained: "I'm thinking about, for example, Nouns DAOs in the Ethereum ecosystem, where you usually have some address with a veto right. It starts out as one person, which certainly does not sound very much like a DAO, but when you have two or three members, maybe it's important to make sure you can't have just two of those people run away with the DAO's money. So instead, you trust one person, and then when you're big enough, you hand over that veto right to three people, then five, and then maybe seven, or nine, or eleven people. It's kind of like having two layers, where you have the DAO, and then you have this almost like Security Council."
This hybrid approach allows Nouns DAO to maintain its core mission and values while benefiting from its community's collective intelligence and participation.
Another successful case study is MakerDAO, a decentralized finance (DeFi) protocol that pioneered decentralized governance in managing a stablecoin ecosystem.
MakerDAO's governance model empowers token holders to make critical decisions related to risk management, collateral types, and system upgrades. This has enabled MakerDAO to navigate complex economic conditions and maintain the stability of its stablecoin, DAI.
As DAOs mature and prove their effectiveness in various contexts, they can potentially disrupt traditional business models and governance structures globally. By enabling decentralized decision-making, aligning incentives, and fostering transparency, DAOs could revolutionize industries such as finance, healthcare, and government.
In finance, DAOs could democratize access to investment opportunities and create more equitable and resilient financial systems. As Isaac Valadez suggested:
"I would love to see things like—take the insurance industry, for example. I'm pretty sure I'm not alone when I say that I generally don't like that industry. I think most of the insurance companies out there are kind of scammy, and nobody really enjoys dealing with them. But you have to, right? It's an annoying thing. I don't think these insurance companies, out of the goodness of their heart, are going to further decentralize just for the sake of it. They don't care. They're fleecing people, and they love it. But somebody needs to go in there with a Web3 mindset and be like, 'Hey everybody, here's an insurance company that is definitely not hurting people and doing its part in being a fair actor, and you can know because of complicated cryptography.'"
In healthcare, DAOs could enable patient-centric models of care, where individuals have greater control over their health data and can collectively fund research and development efforts. Government functions, such as public goods provision and policy-making, could also be augmented by DAOs, leading to more participatory and accountable forms of governance.
The evolution of DAOs from simple voting mechanisms to sophisticated governance models represents a significant step forward in the quest for more decentralized, transparent, and inclusive organizations. As DAOs continue to mature and demonstrate their value across various industries, they have the potential to reshape global business and governance practices.
However, realizing this potential will require ongoing experimentation, collaboration, and education.
As Adam Miller noted: "I think one of the really challenging things about starting a DAO compared to a traditional company is like, if you're starting a traditional company and you ask for advice about how should I run this company, they'd probably say, 'Well, just do it the same way everyone does it so that you don't have to worry about that.' Just find a lawyer who does startups and let him structure everything for you, and that way, you can focus on building the product. I think one of the challenges of starting DAOs today is that you're building a product and trying to figure out how to start and lead a DAO. That's really challenging in a world where DAOs are so new."
As we navigate this uncharted territory, it is crucial to remain open to new ideas, learn from the successes and failures of early DAOs, and work towards building a more decentralized and equitable future. The journey of DAOs has only just begun, and the possibilities for transforming global governance and business models are fascinating.
