In some cases, you may have to read a text twice before you fully understand its content.
This happened to me in a recent blog post by the legal team at Andreessen Horowitz (a16z), one of the largest venture capital firms active in the cryptocurrency space. This text introduces Wyoming DUNA, a newly created legal entity type to serve the needs of decentralized autonomous organizations (DAOs).
At first glance, everything seems perfectly reasonable when it comes to DUNA (which stands for “Decentralized Unincorporated Nonprofit Association”). But please read it again carefully. As someone who is truly passionate about the principles of decentralization, I was offended. Where did this discomfort come from?
Before I answer that question, let me clarify two things:
First, I believe that DUNA is a great legal innovation. The US state of Wyoming is doing a great job in enacting laws that support the crypto industry in general and her DAO in particular. I think the DUNA structure is probably suitable for many project teams, so I wish them success.
Second, I acknowledge that there are factions within the crypto community with strong “anti-VC” sentiments, but I am not one of them. On the contrary, I believe that venture capital as a whole is a positive force in the crypto industry, and while some criticism is warranted, much of it is unfair or exaggerated. Companies like a16z are contributing to the growth of cryptocurrencies in a variety of ways. Investing other people's money in a volatile and fast-moving sector like cryptocurrencies is no easy feat, and we should applaud those who have the courage and vision to do so.
That aside, let me address my concerns about a16z's blog post.
According to a16z's own description, a16z intends to make DUNA the “industry standard for blockchain networks.” They intend to do so not only by providing operational support and educational materials, but also by making the adoption of the DUNA structure a “condition of investment” if necessary. In other words, if a good argument doesn't convince her DAO operator, perhaps the threat of withdrawing funding opportunities will.
This is incorrect.
Didn't we all sign up to the promise that we could build a new type of internet that would function independently of nation-states? And now a U.S.-based venture capital fund is saying, this isn't going to work, isn't it? I say no. Instead, we should all find all the “decentralized” activities waiting for it — Wyoming, USA?
Sorry to get emotional, but this feels a little too similar to neo-imperialism entering the world of cryptocurrencies.
But emotions aside, let's dissect a16z's claims. As you'll see below, none of this is particularly compelling unless you're a US-based VC.
A16z argues that the DAO needs a “legitimate presence.” They go on to claim that the failure to adopt an internte structure has limited the growth of blockchain networks, but no evidence is provided to support this claim.
Such blanket statements are useless and can be wrong in many situations. There are definitely some DAOs and blockchain networks that would benefit from adopting a traditional corporate structure, but not all. Imagine that Satoshi started Bitcoin (BTC) by forming a legal entity before releasing the Bitcoin code. Do you think we would be where we are today under this scenario? Certainly not.
The choice of legal structure should be based on an analysis of what you want to achieve. Stipulating a specific legal entity type before a thorough analysis of the project's requirements is putting the cart before the horse. DUNA may or may not solve the project team's problem, and there are many other better alternatives depending on the facts and circumstances of the case at hand.
Perhaps the authors' most surprising claim is that DUNA is good because it gives DAOs tax authority in the United States.
Wait, what? Did they really write that? As a PRO claim against DUNA?
For someone who has been involved in building international businesses, this sounds strange. Significant efforts are typically made to minimize the tax liability to the United States as much as possible. For his DAO members who are not US tax residents, it is hard for me to imagine how DUNA can improve their tax situation.
As the authors rightly point out, finding the optimal tax structure requires understanding the “individual facts and circumstances.” However, if one could generalize, I doubt that DUNA would even make it into the top 10 list of structural options unless the DAO is purely US-based.
By the way, I understand that from a tax perspective, DUNA could be a good structure for a16z. As a US corporation with significant stakes in many of his DAOs and networks, I can imagine that doing business with a US corporation greatly reduces tax risk. But frankly, this is primarily a tax issue for them to deal with. What is best for them should not dictate conditions for others.
The authors argue that many DAO members face significant liability risks because the legal status of DAOs is currently unclear. This is absolutely true, and it is a problem that needs to be resolved immediately. But it's not true. That said, corporate wrappers are the only way to address this issue.
One alternative is a set of private contracts between DAO members, for example as implemented in a project I founded. Q-protocol. This legal technique allows members to “opt out” of their local jurisdiction by “opting in” to privately agreed rules. Contrary to a16z's claims, such a structure is not “fanciful.” These have been proven in the “real world”.
Of course, there are limits to what can be sensibly structured via private contracts, but this applies to all structuring options.
Grouping DAOs under a single legal entity may be a “lazy” version of reducing liability risk, but it has its limitations as well, and having a legal entity eliminates all liability risk. It does not mean. At the end of the day, again, there is no substitute for analyzing each DAO.
There are other reasons why the desire to create a de facto standard corporate structure for DAOs is misguided.
First, the cryptocurrency landscape and the legal framework surrounding it are still evolving. It would be naive to believe that he has already found one optimal structure. As an industry, we will be better off if we continue to innovate and keep an open mind about legal structures. DUNA is great, but I'm surprised it's the ultimate form of DAO. Converging on one standard early is a surefire way to stifle innovation.
Second, jurisdictional diversity is a key element of decentralization. When designing networks with autonomy as a clearly defined goal, it is simply unwise to place the fate of those networks in the hands of particular legislators. Again, this is not an argument against her DUNA. I believe these are great additions to the tool set available to DAO and protocol designers. It should not be relied upon without alternatives.
DUNA is good, but let's take it for what it is. If you're building a DAO or decentralized network, it's one of many options. There is a world outside of the United States that already has many options today. But don't lose sight of what's most important. It's about code and community existing autonomously without a legal wrapper. People who sell a particular solution as the standard are wrong. Be careful with DAOs.