The Metaverse: Decentralized Autonomous Organizations (DAOs) – Fin Tech

In recent years, constructs that were traditionally the domain
of governments have found analogues in the metaverse. Bitcoin and
other cryptocurrencies are stand-ins for government-backed fiat
currency. Non-fungible tokens (NFTs) are stand-ins for
government-approved ownership titles. Smart contracts are stand-ins
for traditional contracts (which, while usually entered into by
private parties, are enforced by courts). The rise of decentralized
autonomous organizations (DAO), which are roughly analogous to
government-approved corporate entities, follow the same pattern.
This post explores DAOs, including what they are and how they
operate, as well as recent developments at the state level to
recognize them as legal corporate forms.

I. What Is a DAO?

As with corporations, DAOs are collections of individuals and
assets that are organized to accomplish goals. The DAO’s
individual constituents are typically owners of crypto coins (or
NFTs). When decisions need to be made, the DAO’s constituents
vote in a democratic fashion. This governance is
“decentralized” because there is no board of directors,
no CEO. It is as if each shareholder of a company could vote on
each and every of the entity’s actions. In most DAOs, ownership
of the crypto coin translates to voting power. For example, a DAO
could be organized such that each crypto coin is worth one vote, so
an individual with 100 coins would have twice the voting power as
an individual with 50 coins. As with crypto coins, voting is tied
to and recorded on a blockchain, and often the votes of each
individual constituent are known to the public by simply reviewing
activity on the blockchain. A DAO is “autonomous” because
it is powered by smart contracts that automatically execute to move
the organization toward its goals.

DAOs could have any number of goals. As an example, in 2021 a
group called the ConstitutionDAO claimed to have pooled $40 million
of (mostly) ethereum to buy a rare copy of the U.S. Constitution at
auction. The effort came up short (the winning bid was $43.2
million), and the DAO is now in the process of providing refunds to
constituents. (Bizarrely enough, the voting coin for this
defunct DAO is still actively traded.)

As a second example, the Decentraland metaverse is organized
as a DAO. Decentraland is a 3D virtual world where all assets
and property are represented by tradable NFTs. Each constituent of
Decentraland has a measure of Voting Power (VP) that is calculated based on their holdings of MANA, LAND
and NAME within the metaverse, and all of these assets have
associated crypto tokens. Decentraland’s voting formula favors
landholders: Each LAND parcel provides 2,000 VP, while each MANA
provides only one VP. What the community votes on runs the gamut:
requests for grants for property development, addition of new
wearables for users’ avatars, organizing land auctions and
sales fees. (View a list of current open votes.) One recent closed vote
asked whether a user’s virtual clothing shop should be added to
Decentraland’s “Points of Interest List.” (Four comments
later, the community voted it down: 1,396,512 VP to 23 VP.)

A completely decentralized system of governance does have
limitations, and many DAOs adopt a kind of hybrid model to account
for them. Organizations need to make many small decisions on a
daily basis, and it would be inefficient to hold a vote on
everything. For example, should the DAO really ask the collective
whether it should pay or push back on the server hosting bill? For
this reason, Decentraland has adopted hybrid governance. The
non-profit Decentraland Foundation handles the day-to-day tasks of
keeping a
metaverse running.

II. State Recognition of DAOs

Because DAOs organize individuals and capital, at least some
states are formally recognizing DAOs as corporate entities. In
early 2021, Wyoming amended its corporate code to
specifically acknowledge a DAO as a “DAO LLC.”
Wyoming’s amended law requires the that DAO LLC’s Articles
of Organization list the DAO’s operating smart contracts and a
statement of how the DAO will be managed by its constituents, as
well as other items. Wyoming also requires the DAO to list a
registered agent to identify whom should receive service of process
(e.g., notification of a filed complaint in court).

Wyoming is not alone. Vermont has also established a corporate form to accommodate DAOs:
“Blockchain-based Limited Liability Companies,” or
“BBLLCs.” Most recently, Tennessee passed legislation to establish DAO
LLCs.

In each of these jurisdictions, states are attempting to become
the “Delaware of DAOs.” By encouraging DAOs to register
in their state, the states attract cutting-edge technologies and,
of course, additional tax revenue.

As with crypto coins, NFTs and smart contracts, DAOs are just
beginning to receive traction. Because they provide a general
structure to accomplish goals and have already received states’
acceptance, we should expect to see more DAO initiatives in the
years to come.

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guide to the subject matter. Specialist advice should be sought
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