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Ep 12: DAO If You Do; DAO If You Don't
51 Plays1 year ago
Dive into the world of Decentralized Autonomous Organizations (DAOs) with Eugenio Reggianini (European Commission), Joni Pirovich (Blockchain and Digital Asset Lawyer), John Yarwood (Blockchain Strategy Consultant), and Steve Wink (Partner at Latham & Watkins LLP) unravel the complexities of DAOs. They compare these innovative entities to traditional organizations and delve into their unique regulatory landscapes. Joni discusses the current regulatory sentiment around DAOs, Eugenio focuses on community identity and governance, Steve navigates the legal challenges and liability issues, while John sheds light on the 'killswitch' concept in DAO crises. Join us for an insightful exploration into the evolving world of DAOs and their future regulation.
Find out more in our explainers at owlexplains.com
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Transcript
Introduction to the Special Episode
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny. I am Silvia Sanchez, Project Manager of Owl Explains, and I am super excited to share this special episode with you. This episode comes from one of the panels we recently hosted at the Avalanche Summit in Barcelona, our first in-person event as Owl Explains, in which we gathered many wise owls from all over the world, seeking to build a better internet. We hope you enjoy it as much as we did.
Panelist Introductions
00:00:36
Speaker
So before we kick off, why don't our amazing speakers introduce themselves really briefly, starting with Joni. You good? Yeah. Hi, Joni Pirovitch, a Melbourne-based lawyer specializing in Web 3, international tax lawyer by trade and working on data standards for DAOs.
00:00:56
Speaker
Thank you. Hi, my name is John Yarwood. I'm a member and an attorney for the Universal DeFi Holding Company, UDHC. I was previously deputy general counsel at the Maker Foundation and a financial regulation and litigation attorney by trade.
00:01:13
Speaker
Hello, everyone. My name is Eugenio Genini. I am actually representing the European Blockchain Association for Asia-Pacific. I have a past background working in legal, prime management and consulting. I work for different projects, corporations, and associations in the industry.
00:01:32
Speaker
Hi, I'm Steve Wink. I'm a partner at Latham and Watkins in New York, and I'm co-chair of our Global Digital Asset and Web 3 group. And my background is a securities regulatory lawyer, and that's kind of how I look at this space.
00:01:46
Speaker
Awesome, thank you. And my name is Silvia Sanchez, you've probably seen me around a lot. I am the project manager here at OWL Explains, and I'm super excited to be moderating such a diverse panel on DAOs.
Understanding DAOs
00:01:58
Speaker
So branch one of the Tree of Wisdom, which you've probably seen outside, and these are the five policy principles that we have designed here at OWL Explains, talks about understanding the technology. And we need to start with the basics to build a solid foundation.
00:02:12
Speaker
The first question is, especially for those who may be new or unfamiliar to the concept, could you briefly explain what a Dao is and how it differs from a traditional organization? Maybe Eugenio, you'd like to take this one? Okay. Well, to start and to put it in the most simplest way possible, let's say that
00:02:32
Speaker
DAO, the decentralized autonomous organization, represents a form of structure that can be accommodated for mainly three trades. The first one is the use of, of course, blockchain technology to transfer digital asset information between users. The second one is probably the way in which the structure operates. So the fact that different tasks for product and project management
00:03:01
Speaker
have been allocated in units from decentralized users. And the third one is probably of relating the use of decentralized governance rules in order to allow users to make decentralized operations and voteings. Awesome,
DAO Use Cases
00:03:19
Speaker
thank you. Would anybody like to add to that amazing definition? Oh, we're good.
00:03:25
Speaker
maybe just to play on it because there's many different uses of DOWs and so what started as Protocol DOWs or
00:03:38
Speaker
people coordinating together to oversee and govern how a software protocol is operating. We now see a lot of projects using and describing the term DAO. So you might have heard of investment clubs, social clubs.
00:03:56
Speaker
that there's many other different things impact DAOs. You can look up all of the different taxonomies for the different types of DAOs that you see. But despite the fact that they're using DAO, they may be a DAO in name only. And they probably have a company or an investment fund structure behind them. And they're complying with the company or the partnership or the existing legal regimes despite the use of DAO.
00:04:24
Speaker
I think it's great that in the first question, Joni's already pulled the curtain back on Dow's and the usage of the term.
Balancing Decentralization with Management
00:04:31
Speaker
But I would agree, there's a broad usage of the term, but at bottom, what Eugenie was describing was
00:04:39
Speaker
decentralized autonomous organization. You put the software out on the chain, people use and interact with the software, but it self-executes and it works on its own. It's decentralized technology and it's decentralized in a governance standpoint as well. So usually it's using some sort of utility token to represent that governance. And by interacting with the code, the code then self-executes through the smart contracts.
00:05:04
Speaker
When Joni's talking about things like Social Dows or Investment Club Dows, oftentimes there's not a lot of smart contracts self-executing anything based on the interaction with the users. It's the users are collectively organized in a decentralized fashion geographically
00:05:22
Speaker
maybe economically or many other ways, but then collectively are making decisions together in a governance fashion. But the software element, the autonomous element in the middle of the phrase, is not as active as maybe as intended when the Dow term was minted, so to speak.
00:05:42
Speaker
Very interesting. And following up what
Lifecycle of a DAO
00:05:44
Speaker
you just said, how can DOWs balance that need for decentralized decision making, but also making sure that they are leading effectively and having that optimum management? How do you reconcile those two forces? Maybe John or Steve, you want to take a stab at it? I think I can introduce the concept that we're getting out of here first. But first, I would be remiss if I didn't say to everyone in the room, Happy Star Wars Day.
00:06:11
Speaker
And as a collective who's into technology, I think we can understand, but also I want to point out that the original trilogy anyway is probably one of our best cultural touchstones on decentralized action to overcome centralized tyranny. So with that note, I think Dao's kind of
00:06:34
Speaker
The way I like to think about it, and my colleagues at the UDHC like to think about it, is there's an arc of compliant decentralization. So, very few DAOs start out as fully decentralized or autonomous in any way. Oftentimes, it's a small team of founders who come together to write code and develop the architecture of a protocol or a platform.
00:06:57
Speaker
and then ultimately along that line somewhere they need to scale so they seek funding and support and they start building a community so they can grow that and then along the way somewhere whether there's a long centralized
00:07:11
Speaker
spoke or it's short, they eventually release into the world the platform or protocol itself as a fully realized, decentralized, autonomous organization. However, that's not always the case. There have been examples in the past where someone just drops software and walks away.
00:07:31
Speaker
And if that happens, the decentralized arc, how it comes together, is from the very beginning. And that's an interesting case study. For instance, my history, the Maker Foundation and MakerDAO, it actually began without the software as a very decentralized group of people worldwide. You can still look up clips on YouTube or some of the calls
00:07:55
Speaker
where there were very long six-hour calls from people all over the world discussing how to build this protocol or platform. And then it became centralized and followed the arc that I described. But how
Legal Challenges for DAOs
00:08:07
Speaker
you manage that is a great question, and I think from a legal perspective and a regulatory perspective, it's something Stephen can really speak to. Well, the force is strong with this one, I think.
00:08:22
Speaker
There's been a lot of talk about wrappers around DAOs and legal structures because the issues that folks start facing after a while is OK. From a regulatory perspective, for example, how do you hold somebody responsible? Who do we go after if the protocol is doing something wrong? And then for the participants in the DAO,
00:08:51
Speaker
does that mean I have some exposure in some way? And that comes up in a number of ways. There could be tax implications if the Dow is taking in revenue of some kind. And then we've seen in the US with the UK Dow case that the CFTC was trying to hold some individual members of the Dow
00:09:21
Speaker
you know, responsible under partnership law, because there's a theory that, you know, people who are kind of working in concert for a business or a general partnership, whether it's formalized or not. And, you know, so the question is, you know, but, you know, who really is, is, is working in concert? You know, is it, is it, you know, if you own a governance token, are you liable?
00:09:46
Speaker
potentially as a partner in this doubt. But what if you don't vote? That's okay. Or what if you vote against a proposal that is deemed to be unlawful or something or takes in some revenue? Are you still liable? So there's lots of very difficult questions there. And the rappers sometimes can answer those questions. There's this Una, an
00:10:13
Speaker
this incorporated association concept in the US. There are, you know, the Wyoming Dow LLC type structure. And those structures may be useful in some cases for, you know, creating a taxpayer if you want to have, you know, somebody who can make the filings that need to be done. But then again, they're, they're sort of antithetical to the whole decentralization ethos. And, you know, it also, if there's a governance token,
00:10:42
Speaker
It certainly doesn't help keep Gary Gensler at bay, because the whole notion is that there's no enterprise that is creating the value in the token by having this DAO. But as soon as you create an entity, well, then there they go. That becomes the target. And they can say, well, that's the enterprise that's ultimately created the value. And under the Howey Test, that would potentially cause that token to be a security.
00:11:12
Speaker
lots of tensions in trying to organize this stuff under legal structures that currently exist. And I don't think there are any
Data Standards and DAO Legislation
00:11:21
Speaker
real good answers, but you have to, as you're pointing out, there's lots of different purposes. And so for those different purposes, there may be structures that we can use.
00:11:31
Speaker
Well, on the Star Wars theme, again, just to play off, I lead a data standards regulatory interoperability working group. And we go by the name of Millennium Falcon because of the role that that ship or that form of technology played in leading the rebellion. But story for another time. The data standards work that I am doing, I think, is relevant here because
00:11:59
Speaker
We're leveraging from the Dow Model Law that an organization called Koala launched in 2021. Koala stands for the Coalition of Automated Legal Applications. And that Dow Model Law was recently leveraged by Utah.
00:12:15
Speaker
And we've recently seen them enact the Utah LLD, the Limited Liability DAO, not an LLC. So a lot of the existing legislated DAO frameworks do treat a DAO as a specific form of LLC or a specific
00:12:34
Speaker
type of unincorporated not-for-profit association or an UNR, whereas with Utah we were able to work with their blockchain task force and convince them of the benefits of this DAO model law approach which recognises that these organisations are intended to be digital first and digitally native.
00:12:55
Speaker
not paper-based to write down the rules, have many lawyers and other people interpret the rules and apply them after the fact to resolve disputes or figure out how voting occurs. There's a lot of real-time compliance and efficiency benefits and transparency benefits that can be gained by having that certainty subject to smart contract code vulnerabilities of knowing how an organisation should operate and be governed.
00:13:24
Speaker
And we hope that more legislatures will take a leaf out of the Utah book. There are still political compromises that had to be made, so it's not perfect. But the data standards that we're building are actually a complement to what you see in the plain language law of the LLD.
00:13:46
Speaker
so that basically we've got that policymaking toolkit for DAOs to use those data standards, represent the information that the public, regulators, investor reporting all require us to see.
00:14:01
Speaker
Definitely,
The Kill Switch Debate
00:14:02
Speaker
thanks. And there's also talk about the kill switch, about halting the market in times of market distress. And I want to hear your thoughts. Do you think it's necessary right now or do we need to get more foundational first? And how does this apply to DAOs and the current regulatory landscape? Thoughts on that?
00:14:22
Speaker
I think I want to hear mostly what Eugenio has to say, because Europe has certainly taken a clear stance on a kill switch. But I think we also have to remember at first, for those who are a little bit more US heavy in their location or their markets or whatever,
00:14:41
Speaker
Kill switches, except for literally the end of the business day, are a relatively new thing in US markets. And that's with the advent of electronic markets and figuring out, oh, wait, we need to slow this down. We need to add throttles. We need to add a kill switch on an exchange. Those didn't happen until the last two decades, at best, after things like flash crashes started happening.
00:15:10
Speaker
regulators and the markets realize they needed to enact these things. I say that as a way of caution to regulators out there that we not impose technological requirements on things unless we figure out they're necessary in the markets we're regulating.
00:15:29
Speaker
Sorry, Eugenie, could you just speak a little bit closer to my... Yeah, absolutely. Okay, sorry. I would say that, yeah, definitely as you may all know, following the EU Data Act regulation, the institutions are discussing about this possibility, the Article 30, and I see
00:15:51
Speaker
At the end, it's a matter of evaluating and making a compromise, a balance between public interest needs that needs to be met in specific borderline situations, when even software needs to address those, to answer to those cases, and at the same time also addressing the need of the market to something which is
00:16:15
Speaker
naturally against the way in which the technology has been fought originally. So it really requires a trying to effort between the industry and the regulators, where both they have in mind on one side, the regulators have in mind specific cases under which those needs to happen.
00:16:36
Speaker
And at the other side, the industry should help the regulators to understand all the other ones in which this is not mandatory and this is not borderline, so there shouldn't be doubt. Just to kind of step back a little bit, I think of decentralization as more of a process than an end state. And so a lot of folks that build a new protocol
00:17:02
Speaker
You know, they're worried, okay, we can release this out into the wild as we get more decentralized and we get an active community. And we wanna have
Governance Structures in DAOs
00:17:10
Speaker
this, you know, kill switch or some ability to veto, you know, detrimental proposals. And of course, you know, as a securities lawyer, I think, oh my God, that's gonna create, you know, then if you have that control, then you're the enterprise that could be,
00:17:29
Speaker
identified in the Howie test. And so, you know, we try to narrow that as much as possible and say, okay, you know, only sort of, you know, what are the break glass in case of emergency times, you know, can you narrow that, you know, and, you know, and have the, you know, the community adopt a proposal, you know, specifically, you know, pointing
00:17:50
Speaker
some people or group that can exercise that in certain very limited situations. But those are the sorts of things
The Evolution of Decentralization
00:18:00
Speaker
that come up with these structures, these sort of governance structures. What do you do? And community participation is a real problem, right? That's a real challenge for a lot of these DAOs. And then trying to make sure that you have
00:18:17
Speaker
structures that are flexible enough to be able to accomplish what you need to accomplish to keep it going in times of low participation or maybe very high or these concerns about potential take over actions and the like, people working in concert and then these rage quit mechanisms to leave potentially if you need to.
00:18:45
Speaker
So lots of very fascinating issues that it leads to. Can I say one quick thing? I think that a kill switch, as is being discussed, is a blunt tool. And probably all the policymakers are able to grapple with at the moment, but I think that
00:19:06
Speaker
communities building this sort of technology are also capable of the thought of building in the functions and oracles and yes there are problems with oracles but to be informed based on known and anticipated risks and not shut down the protocol but perhaps slow it down or you know depending on what it's doing there are more innovative ways of protecting the the users or or whoever your stakeholders are that you're trying to protect
00:19:36
Speaker
than just a blunt kill switch that perhaps a centralized entity has got veto or powers to decide over. So I'm not a fan. I'm doing a lot of thinking about it and a lot more thinking about it. But I don't think that that's the silver bullet.
00:19:52
Speaker
I think that's right in that it definitely needs to be a nuanced process whereby communities and protocols and regulators have a conversation because as you kind of, I think, are getting at this blunt tool, because of the type of technologies and the way decentralized communities work together, the use of that blunt tool, unlike on the NYSE, could literally kill that protocol just because it's not up.
00:20:17
Speaker
And people stop using it and community goes away. And that's not, I think, what anyone wants in most cases. And then also a question comes to where do you put it in? How do you build it into the layers? Is it all the way to protocol layer or is it an application on top where there's access? And I was having a conversation earlier with someone
00:20:37
Speaker
And discussing that that like do you do you put these regulatory tools because we're working in a decentralized 24 seven global environment do you put them at the level of the protocol. After we decide this area should be regular regulated and there's a regulatory regime that we all agree applies.
00:20:55
Speaker
or someone who forces us to apply it. But do you put it at a UI level instead? And that's where you regulate things, and therefore that's where you put in a throttle or a kill switch to slow things or stop things momentarily that doesn't kill the protocol below that. So those are kind of considerations that I'm thinking through at the moment as well.
00:21:15
Speaker
In fact, I think that actually it's more correct to frame it in terms of thinking on how to empower supervision on decentralized operations. And this is like thinking very, very frankly, like a sort of a sports team. So there's not one feature, one move.
00:21:37
Speaker
There is off-chain data, there is on-chain data, and this data at the end needs to be reconciled for a specific purpose and software to be working. And how to effectively achieve this goal, you cannot achieve it just with one. It's a combination.
00:21:54
Speaker
Absolutely and I also liked why you said Steve about decentralization not being something stiff but something dynamic that evolves over time. Could you just very quickly
Regulation Advice and Closing Remarks
00:22:04
Speaker
talk about the arc of decentralization and how this pendulum has switched over time and maybe where do you see that it's going to be headed in the near future?
00:22:14
Speaker
Yeah, I mean, you know, it's I could have looking at the evolution of DAOs. I mean, I think maker is a really great example of, of, you know, something who's really very truly decentralized, I believe, and then, you know, breaking, you know, down into pieces, kind of sub DAOs in groups, and also utilizing different sort of structures for different activities, you know, you know, maybe it's a
00:22:41
Speaker
a Guernsey Trust for grant making activities or something else. We've seen this sort of very pure protocol layer
00:22:57
Speaker
boating mechanism, maybe something like a Uniswap or something like that, that's also very, very different than the sort of investment club like Dow's, as you mentioned. And this proliferation of other, they're really sort of replicating trans-fi structures and calling it a Dow. And I think that's problematic. I think it's problematic for the industry that we merge those concepts.
00:23:26
Speaker
rather than making sure people understand there's distinct differences and use cases. The problem there is that when you're doing something that's clearly regulated in the TradFi world, they tried back in 2017 to say, oh, yeah, we're a decentralized and autonomous organization. We don't exist anywhere.
00:23:53
Speaker
The SEC said, no, not so fast. That's not going to happen. And that's just true for all regulators. It's not just the SEC. So, you know, I think we've seen this evolution, you know, in many different directions. But I think we still have a long, long way to go to really figure out where, you know, and how to appropriately protect people who participate.
00:24:18
Speaker
and kind of do the right thing for the regulations and different jurisdictions. Awesome, thanks. And seeing that we only have one minute left, and also tying this back to branch four of our Tree of Web 3 wisdom, which is enacting context-appropriate regulations, specifically for DAOs, in 10 seconds or less, what do you say to policymakers looking into regulating the DAO ecosystem, just all in a nutshell?
00:24:45
Speaker
Well, I think do away with this rubbish, same activity, same risk, same outcome or same regulation. And instead we need the catchphrase of similar activity, similar risk, specialised regulation or specialised approach to achieve the same regulatory outcome. I know it's more of a mouthful, but I think that it is more fit for purpose. Very useful. John, 10 seconds. That's really fast.
00:25:13
Speaker
I think I would say to legislators, not regulators, but legislators, you need to look at the underlying nature of this activity, which is a decentralized group of people coming together who do not have the same preconceptions we have established in current law. And if you look at those concepts and those principles to write new laws about this,
00:25:37
Speaker
Sure, you can get to similar regulatory outcomes with all sorts of tools, but you have to understand that bottom nature first, or else you're going to get to the wrong ones. Okay, I would probably say following also what Yoni said in the past, thinking about the Koala model law. I mean, these are the kind of legal instrument which can help to set some principles like some bottom ground
00:26:05
Speaker
understanding in principles about what is needed for those organization to work in common terms. So I would recommend to international regulators to try to come up with similar solution to enforce that and to support their national countries in the adoption. I would just say that I have a wish or a hope that we regulate activities and not technology.
00:26:33
Speaker
Amazing. Thank you all so much. Thanks everybody.
00:26:41
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on Blockchain and Web3. That's all for now on Owl Explains. Until next time!