LAO: An important step towards commercialization of DAO
Translator's Preface
This is an article published by OpenLaw on September 4, 2019. The article provides a detailed introduction and analysis of LAO (A For-Profit, Limited Liability Autonomous Organization), an evolutionary form of DAO. LAO allows DAO has achieved legal commercialization. As the author of the article said, LAO has built a bridge between the traditional business world and the blockchain world. Regardless of the degree of positive impact it will have on the DAO, on the Ethereum ecosystem, or on society, this is a very important experiment. Today (January 5, 2020), The LAO issued a newsletter, saying that the first batch of registered users will start the public offering at the end of February. Before looking forward to the grand public offering at the end of February, it is necessary for us to have a deep understanding of LAO.
The following is the original content:
Translation: Typto
Translation: Typto
OpenLaw is about to launch the first for-profit limited liability DAO called: LAO. LAO enables members to invest in new ventures on Ethereum and generate profits. DAOs are entering a new era.
LAO: For-profit limited liability autonomous organization
since2013The concept of a decentralized organization (DAO) has ignited the dreams of blockchain developers since it was first proposed in 2009. For many, these internet-native organizations represent the next step in the evolution of social and economic coordination, with blockchain technology and smart contracts simplifying voting, decision-making and the distribution of digital assets.
The concept of DAOs did not appear out of thin air; instead, these organizations were built upon a provenance of technological and legal innovation. The Romans devised various business entities, such as communal societies and communal societies, that enabled parties to share in the profits and losses of a business, while also providing limited liability. During the Middle Ages, the Italians created an early version of the limited partnership to finance maritime trade. Joint-stock companies emerged in England and the Netherlands in the 17th century, providing state-granted franchises to profitable enterprises engaged in production. The modern corporation took root in the United States in 1811, when New York allowed private groups to create their own corporate structures without extensive approval processes.
These legal innovations have helped to modernize the world, allowing the different incentives of individuals from different backgrounds to be unified into a business framework with a common purpose. They created a framework for financing new ventures, managing risk, and creating opportunities for profit, thereby driving innovation and wealth creation for generations.
For many, the power of DAOs comes from their ability to reduce transaction costs. As Ronald Coase wrote in his landmark 1937 article "the nature of the companyAs described in , when the costs of participating in market transactions are prohibitive, people show a natural tendency to organize into more or less formal institutions (associations, partnerships, corporations, corporations, or other types of organizations that economists call "firms"). Conducting a market transaction generally involves transaction costs, including the cost of finding another party to transact, the cost of negotiation, and all costs associated with ensuring that agreements are honored and, if necessary, enforced. As a result, bringing together different parties to engage in economically beneficial activities can sometimes become too complex to be effectively handled through the operation of markets.
While markets are often good at facilitating the rapid exchange of goods or services, they are less effective when economic activity requires extensive coordination and an ongoing relationship between two parties, or when a high degree of complexity or uncertainty is involved. When individuals deal with untrusted parties in the market, transaction costs increase, prompting people to organize activities through best-effort cooperative efforts.
Parties reduce transaction costs by forming organizations, organizations reduce the total number of acts to accomplish certain social or economic activities, they act as duplicate players in a market, and by formulating governance relationships among managers and other members of the firm Agreement, which reduces the costs of uncertainty, opportunism, and complexity.
The expectation of DAOs is that they can rely on smart contracts to control and coordinate certain actions and behaviors, allowing teams to function more efficiently. Through smart contracts, parties can automate operations related to organization and team operations, thereby reducing operating costs and improving internal management, while increasing the overall transparency of the organization.
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1. DAOs and their shortcomings
One of the first substantial experiments in using smart contracts to manage and coordinate economic activity was the decentralized organization (DAO). In early May 2016, The DAO immediately inspired the thoughts and imaginations of developers and technicians around the world after the launch of Ethereum. The DAO's goal is to run a venture capital fund (VC) operation in the field of encryption and decentralization. Decentralization of centralization reduces costs and theoretically gives investors more control and access.
In May 2016, some members of the Ethereum community announced the birth of The DAO, also known as "Genesis DAO". The DAO is built based on smart contracts on the Ethereum blockchain, and its code framework was developed by the Slock.It team in open source code, but members of the Ethereum community deployed it under the name "The DAO". The DAO has a creation period during which anyone can send Ether to a unique wallet address in exchange for 1 – 100 DAO tokens. The DAO achieved unexpected results during its founding phase, successfully raising 12.7 million ETH (valued at $150 million at the time), thus becoming the largest crowdfunding in history. If it is still running today, The DAO will manage more than $2 billion in assets.
Essentially, the platform allows anyone with a project to pitch their idea to the community and potentially receive funding from The DAO. Anyone with a DAO token can vote on proposals and then get rewarded when the project becomes profitable, and things started to improve as the funds became available.
Although The DAO can provide funds for potential projects in the Ethereum ecosystem, the DAO lacks a legal structure and conflicts with US securities laws. As the U.S. Securities and Exchange Commission (SEC)21(a) reportingAs stated in: The offering and sale of digital assets by "virtual" organizations must comply with the requirements of the federal securities laws.
In the case of The DAO, the SEC found that The DAO's tokens should be classified as securities and therefore must comply with federal securities laws. These tokens are offered by a core organization with the promise of making a profit, so unless exempted by a valid securities law, future DAOs attempting to offer profit opportunities to members will basically be required to register for offers and sales of such securities. Additionally, unless exempt, any tokens associated with an ownership interest in a for-profit DAO must be traded on a registered exchange to protect investors and ensure they receive proper disclosure. For this reason, the SEC reiterated that the law will not disappear just because organizations rely on blockchain technology.
The DAO has other lingering problems beyond the concerns expressed by the SEC. Due to a notorioustechnical flawsecondary titlequestion。
2. Next Generation DAOs
Despite these technical and legal challenges, DAOs have not been overshadowed, and in the past few years we have seen a large number of projects plan to build their decentralized organizations (DAOs), and many tools have emerged (fromAragonand other companies) to help these entities organize and manage more easily and simply. Additionally, developers are experimenting with new governance models and new bottom-up approaches to organizing social and economic activity.
Molochis such aEmerging blockchain-based governance models, which focuses its technical and game-theoretic design on coordinating charitable grants for Ethereum projects, and puts core governance into a vote-weighted multi-signature smart contract with a "ragequit" mechanism that allows members to opt out at any time and redeem equal in value to its voting rightsEscrow fundsProportion.
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Introduction to LAOs
In OpenLaw,We have been actively researchingThe significance of these tools, and their ability to create borderless, scalable online collaboration. These initial use cases highlight that so far DAOs have been deployed forCoordinate funding of digital assets, to fund public goods such as open source software, to strengthenPost-ICO Fund Management, and use the Ethereum smart contract to host and execute the governance results that bring together ether and ERC20 digital tokens.
However, the current model of DAOs is limited. According to current laws, DAOs that are only bound by smart contracts are limited in their ability to pool members' assets and generate profits. If DAOs are organized for profit, they (DAOs) run into issues with securities laws, limiting their application and ability to fund ecosystem development and deploy capital efficiently. Even when DAOs serve charitable or social purposes, they run into a legal gray area where members may be considered partners, making each member liable for the organization's activities.
Tools from OpenLaw, the world's first fully expressed Ricardian (Ricardian) contract system is a bridge between the traditional legal system and the Ethereum world. OpenLaw can be used to create binding legal agreements and bind them to the execution of one or more smart contracts, including smart contracts that create and manage tokens. In this way, any token and any smart contract running on Ethereum has the force of law.
With OpenLaw, a DAO can be set up as a traditional legal entity and can use binding legal agreements to transfer assets or perform other tasks, we have done this by launching our ownOpenLaw DAOfirst level title
Structure of The LAO
The LAO will provide a legal structure that will allow members not only to give grants, but also to invest in blockchain-based projects in exchange for tokenized shares or utility tokens. Regardless of whether a physical project or an Ethereum-based project, once submitted to the LAO, financing for its project can be obtained within a few days.
smart contractsmart contractto handle the mechanics related to voting, raising funds, and distributing raised funds. Such an entity would largely limit the liability of LAO members and help clarify their relationship, thereby avoiding difficult questions about the applicability of partnership law. This structure will also provide IRS straight-through tax processing for members of the Industrial Relations Office, so that the entity and those who hold a beneficial interest in the Industrial Relations Act do not have to pay taxes twice.
Members can purchase LAO's equity, and use voting mechanisms and tools similar to Moloch DAO to pool and distribute the equity proceeds to startups and other projects that need financing.
To comply with U.S. law, LAO membership benefits will be restricted and open only to accredited investors (although some argue that LAO membership benefits may not be securities). Also, the LAO will be composed of 10 founding members (to be announced soon), and other interested organizations or individuals can purchase the rights and interests in the LAO (possibly through public sales).
The creation and setup of The LAO can be simplified through OpenLaw's tools, all relevant legal documents from entity formation documents to member subscription agreements can be generated through OpenLaw agreement, which will adopt a complete corporate financial process and simplify its operation, while providing members Provide support for the U.S. legal system. Additionally, we will explore third-party oracle services such asChainLink) to verify LAO's certification status on-chain, thereby simplifying its admission process.
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Membership Application Process
LAO's investments in potential projects are based on Ether (or DAI ◈). LAO funds a project once members submit it and a majority of members (according to their voting weight) approve the financing.
This financing will be provided on a non-negotiable basis, and LAO will obtain a certain percentage of tokenized stocks or other ERC-20 tokens from the project party in exchange for the same amount of funds it invests in the project party.
To qualify for funding, projects need to submit an application and are asked to create a Delaware-based legal entity, which OpenLaw will provide with a standardized set of documents to simplify the process. If the project is at an advanced stage, OpenLaw will work with the project to ensure that the LAO can fund it in accordance with the project or entity's then-current legal structure.
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The role of OpenLaw
OpenLaw's role in the LAO creation and maintenance process is that of an administrator. OpenLaw will assist and meet any ongoing legal needs and maintain or improve any tools needed by the LAO. However, OpenLaw will not exercise any control over the LAO unless requested to do so by members of the LAO.
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Prospects for LAOs
The DAO paints a vision of the future of organization and funding, funding emerging projects through the wisdom of the crowd, and using smart contracts to automate key elements of the governance process.
There is a strong argument that if The DAO hadn't collapsed for technical or legal reasons, the ICO market boom would have been tempered (if necessary).
With LAO, experiments in automated governance and distribution of profit funds can resume, spurring innovation in areas such as real-time royalty and dividend payments, delegated voting rights markets, and other synthetic assets involving tokenized shares or utility tokens.
LAOs and similar structures will likely lead to the further development of secondary markets for LAO interests, either through private markets or public exchanges, which will drive the future of public venture capital funds.
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