Author: Aiying; Source: AiYing Compliance
On November 19, 2024, a ruling by the U.S. District Court for the Northern District of California sounded the legal alarm for decentralized autonomous organizations (DAOs) in Web3. The court ruled that Lido DAO should be considered a general partnership. This ruling not only negates Lido DAO's claim that its decentralized structure avoids legal liability but also has far-reaching implications for the compliance roadmap of the entire Web3 industry. As a global compliance consultancy for Web3, Aiying will analyze the risks and opportunities behind this event from legal, governance, and industry perspectives.
I. The legal identity dilemma of DAOs: Decentralization does not equal no responsibility
One of the key points of the court's ruling is to clearly state that although Lido DAO is named decentralized, its operational methods align with the characteristics of a general partnership, where several parties collaborate for mutual benefit, thus creating certain legal relationships. Under California law, the formation of a partnership does not require formal registration procedures; it only requires the existence of common interests and corresponding collaborative behaviors. Therefore, the court concluded that Lido DAO's governance methods and the recognizability of member roles meet the legal definition of a partnership.
This ruling provides a precedent for how 'decentralization' can be positioned within a legal framework. Decentralized autonomous organizations (DAOs) are important innovations in the Web3 space, typically characterized by the absence of central authority and governance by token holders. Many DAOs attempt to evade traditional corporate laws and partnership liabilities through this decentralized structure, claiming they are not formal legal entities and that there is no legal joint liability among participants. However, this ruling clearly conveys a message: decentralized organizational models cannot simply become tools for evading legal responsibilities.
Decentralization is the core ideal of Web3, but the court's ruling indicates that 'decentralization' in governance does not mean completely escaping traditional legal frameworks. Members of Lido DAO, including those who participate in voting, actually bear potential legal obligations. This ruling shows us that the path to realizing technological ideals still faces the boundaries of reality in law.
II. Main participants of Lido DAO: Legal risks of partner status
According to the court's ruling, institutions such as Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management have been identified as 'partners' of Lido DAO because these institutions actively participated in Lido's governance and proposal voting. In other words, the court determined that these institutions, which hold tokens and actively participate in governance, have transcended the identity of mere investors and have become co-managers of a partnership, thereby bearing joint liability for Lido's overall actions.
The legal risk lies in the fact that the 'partners' of the DAO are not limited to the creators and core developers of the organization but may also include all members who actively participate in governance. From a legal perspective, this means that the risks and responsibilities among DAO members are significantly increased. If a DAO is viewed as a general partnership, its partners will bear unlimited liability for the organization's debts and actions. In the case of Lido DAO, this ruling may prompt DAO members to reevaluate the consequences of their participation in governance — even simple actions like posting on community forums or participating in votes may be regarded as 'active participation,' thus involving them in complex legal disputes.
III. Legal challenges and opportunities of decentralized governance
This ruling undoubtedly impacts the decentralized governance of the entire Web3 sector. Miles Jennings, the general counsel of a16z, believes that the court's ruling represents a significant blow to decentralized governance, as it implies that even minimal governance participation could entail substantial legal liability. This undoubtedly increases operational and legal risks for developers and investors in Web3 projects.
However, such challenges may also become an opportunity to promote internal changes within the industry. How DAOs find the best balance between decentralization and legal compliance in design and operation is a critical issue that all types of projects must face moving forward. This means that decentralized autonomous organizations may need to gradually adopt hybrid governance structures or reconsider their legal forms, possibly choosing to register as limited liability companies or other forms of legal entities to limit participants' liability risks.
At the same time, this also brings new exploration directions for the compliance field of Web3. Designing a governance framework that maintains decentralization while providing legal protection for participants is one of the most challenging topics in the compliance services field currently and in the coming years. The future of DAOs may not lie in complete decentralization but in a combination of flexible organizational structures and legal identities, finding the best intersection of innovation and compliance. We at Aiying will continue to provide compliance path planning for Web3 enterprises, helping industry practitioners understand and cope with complex legal risks.
IV. Long-term impacts on the industry and development direction
This ruling may just be the beginning of future regulatory waves. As Web3 technology gradually permeates various fields such as finance, gaming, and social networking, traditional regulatory agencies will also gradually strengthen their attention and control over decentralized organizations. The Lido DAO case marks the transition of DAO governance from an experimental technical concept to a legal reality. In this process, the clarity of regulation may be an important guarantee for the healthy development of DAOs.
For DAOs, one possible future direction may be to introduce 'legal wrappers', which involve providing legal exemptions to participants through registered legal entities beneath the surface of decentralization. This can satisfy the innovative demands of decentralization while legally reducing risks. We see that the future of Web3 may not solely pursue complete decentralization but may more pragmatically find a middle ground. Decentralized projects represented by Lido require more detailed legal advice and compliance support to ensure they can withstand the uncertainties brought by the constantly changing legal environment while continuing to innovate.
An era with a fast pace requires more flexible legal solutions; future DAOs may no longer be entirely free utopias but will find a dynamic balance between ideals and reality. For all DAO participants, compliance and risk control will no longer be optional but will become critical issues related to the survival of the project.