Startup Legal Talks (16)
In the last episode, we introduced the disruptive advances of DAO, a decentralized organizational structure, so why hasn't this form of organization with so many advantages completely replaced the traditional corporate organizational structure? In this issue, we will talk about the shortcomings of the DAO form of organization, and a brief understanding of the legal provisions of the United States on the DAO form of organization.
I. Shortcomings of DAO
1. simple function
As we said in the last issue, Zhang San sold a document to Li Si, Li Si will pay Zhang San, this is a very clear instruction, it is easy to determine. But what the company wants to accomplish is not just these simple functions of one plus one equals two. For example, to let the sales manager to do a market research report, let the public relations department to deal with the company's recent encounter with the scandal, such as the technical team needs to work together to develop a new product, these are a lot of comprehensive analysis, teamwork, the final result is also very difficult to answer with YES / NO. For these functions, DAO is helpless.
2. Inefficiency
We say that DAO is a decentralized organization, then it is like the telephone operator problem, all the people and all the people to pull a phone line between, not as efficient as all the people are connected to the operator, and then by the operator to connect to other people. This is the common problem of all decentralized technologies, everything has to be agreed by all, or at least a majority vote, then the decision-making process will be very slow. The complexity of business, the fleeting nature of business opportunities, will require a strong business powerhouse to make the right decision at the right time, rather than a great opportunity in front of you, and everyone has to vote to go.
3. The tyranny of the majority
As mentioned earlier, because all decisions in a DAO are voted on by all and approved by a majority, this can easily lead to the tyranny of the majority. We can imagine that if everything in a company had to be voted on democratically, what would be lost is not only efficiency, but also the quality of the decisions. Wise decisions are not something most people can think of. The stone-cold ideas that can change the world are not understood by the world, or even strongly fought and opposed, on the day they are proposed by their advocates. You have to ask whether the eyes of the masses are discerning, or whether the truth is in the hands of a few. I dare not say in other aspects, but in the matter of corporate decision-making, I am a strong advocate of the latter. If all decisions are given to everyone in the company, then the consequences are unimaginable. Socrates was also cast to death by the tyranny of the majority.
4. Confidentiality of decisions
The confidentiality we are talking about here is not the disclosure of the decision after it is made, but the confidentiality before the decision is made. In fact, many major decisions cannot be known to many people during the discussion stage. There is a saying that "the benefits should not be few, and the plans should not be many." What does it mean? When allocating benefits, you can't let one person have exclusive access to them, but when making decisions, you can't let many people discuss them together. In the case of these mergers and acquisitions that I usually do, the probability is that only the CEO, CFO, CTO and the board of directors of the company know about it before the acquisition agreement is signed. If you let everyone in the company know early, the merger will have failed.
II. DAO Laws and Regulations
On April 21, 2021, the Wyoming State Legislature passed the DAO Act, which will take effect on July 1, 2021. The Wyoming law defines DAO as a kind of limited liability company, which applies to the Wyoming Limited Liability Company Act, and its articles of incorporation include smart contracts and operating agreements, etc., and the smart contracts have the most preferred effect. This established the legal status of DAOs in Wyoming. Tennessee became the second state to pass DAO legislation on April 6, 2022, and its law is not as well-defined as Wyoming's.
The introduction of DAO bills in both states is certainly a shot in the arm for the development of new forms of blockchain-based organizations. After all, there is no escaping the fact that DAOs exist and are active as a form of organization in people's economic activities and collaboration models. Wyoming and Tennessee wonder if they want to emulate Delaware's miracle in corporate law over the past hundred years or so, scrambling to make their entry in DAO legislation one after another. In the future, it is foreseeable that more and more startups in the form of DAO will be created in these two states like a mushroom, more and more capital forces will successively carry out DAO layout investment in these two states, and Wyoming and Tennessee will further become popular DAO registration places.
But there is a paradox here, we have been saying that one of the advantages of the emergence of DAO is that it allows DAO such corporate structure to break the legal boundaries, but why now DAO is still fighting for the recognition of the orthodox rule of law system? Seeing that DAO supporters are so excited about legislation in Wyoming and Tennessee recognizing DAOs, do we also see the lack of confidence in the minds of DAO supporters?
