Article reprint source: Aiying compliance
Author: Aiying; Source: AiYing Compliance
On November 19, 2024, a ruling by the United States District Court for the Northern District of California sounded a legal alarm for Web3's decentralized autonomous organizations (DAOs). 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 a far-reaching impact on the compliance roadmap of the entire Web3 industry. As a global compliance consultant for Web3, Ai Ying will analyze the risks and opportunities behind this incident for you from the perspectives of law, governance and industry.
1. The legal identity dilemma of DAO: Decentralization does not mean no responsibility
One of the key points of the court's ruling is that it clearly points out that although Lido DAO is named as decentralized, its operation mode meets the characteristics of a general partnership, that is, several entities collaborate for common interests, thus creating a certain legal relationship. Under California law, the formation of a partnership does not require a formal registration procedure, but only requires the existence of common interests and corresponding collaborative behavior. Therefore, the court believes that Lido DAO's governance mode and the identifiability of member roles make it meet the legal definition of a partnership.
This judgment sets a precedent for how "decentralization" is positioned in the legal framework. Decentralized Autonomous Organizations (DAOs) are an important innovation in the Web3 field, usually characterized by the absence of a central authority and joint governance by token holders. Many DAOs attempt to circumvent traditional corporate law and partnership liability through this decentralized structure, claiming that they are not formal legal entities and that there is no legal joint liability between participants. However, this judgment clearly sends a signal: decentralized organizational models cannot simply become a tool to circumvent legal liability.
Decentralization is the core ideal of Web3, but the court’s ruling points out that “decentralization” of governance does not mean that it can completely get rid of the traditional legal framework. Members of Lido DAO, including those token holders who participated in the vote, actually shoulder potential legal obligations. This ruling shows us that the path to achieving technological ideals still has to face realistic legal boundaries.
2. Lido DAO’s main participants: legal risks of partner status
According to the court’s ruling, Paradigm Operations, Andreessen Horowitz (a16z), Dragonfly Digital Management and other institutions were identified as “partners” of Lido DAO because they actively participated in Lido’s governance and proposal voting. In other words, the court determined that these institutions that hold tokens and actively participate in governance have gone beyond the status of mere investors and have become co-operators of the partnership, and therefore bear joint and several liability for Lido’s overall behavior.
The legal risk is that the "partners" of a DAO are not limited to the founders 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 have increased significantly. If a DAO is regarded as a general partnership, its partners will bear unlimited liability for the debts and actions of the organization. In the case of Lido DAO, this ruling may prompt DAO members to re-examine the consequences of participating in governance - even simple actions such as posting on community forums or participating in voting may be regarded as "active participation", thus involving complex legal disputes.
3. Legal Challenges and Opportunities of Decentralized Governance
This ruling has undoubtedly had an impact on the decentralized governance of the entire Web3 field. Miles Jennings, general counsel of a16z, believes that the court's ruling "dealt a huge blow to decentralized governance" because it means that even a small participation in governance may bring huge legal liabilities. For developers and investors in Web3 projects, this undoubtedly increases operational and legal risks.
However, such challenges may also become an opportunity to promote internal changes in the industry. How to find the best balance between decentralization and legal compliance in the design and operation of DAO is a key issue that all kinds of projects must face in the future. This means that decentralized autonomous organizations may need to gradually adopt a hybrid governance structure in the future, or reconsider their legal form, and may choose to register as a limited liability company or other form of legal entity to limit the liability risks of participants.
At the same time, this also brings new exploration directions to the field of Web3 compliance. How to design a governance framework that can maintain the decentralized characteristics and provide legal protection for participants is one of the most challenging topics in the field of compliance services at present and in the next few years. The future of DAO may not lie in complete decentralization, but in the combination of flexible organizational structure and legal identity to find the best combination of innovation and compliance. We at Ai Ying will continue to provide compliance path planning for Web3 companies to help industry practitioners understand and deal with complex legal risks.
4. Long-term impact on the industry and development direction
This ruling may just be the beginning of a wave of future regulation. As Web3 technology gradually penetrates into multiple fields such as finance, games, and social networking, traditional regulatory agencies will gradually strengthen their attention and control over decentralized organizations. The Lido DAO case marks the process of DAO governance moving from an experimental technical concept to a legal reality. In this process, regulatory clarity may be an important guarantee for the healthy development of DAOs.
For DAO, one of the future directions may be to introduce "legal packaging", that is, to provide legal exemptions for participants by registering legal entities under the surface of decentralization. This can not only meet the innovation needs of decentralization, but also reduce legal risks. We see that the future of Web3 may not blindly pursue complete decentralization, but find a more pragmatic middle way. Decentralized projects represented by Lido need more sophisticated legal counsel and compliance support to ensure that they can withstand the uncertainty brought by the changing legal environment while continuing to innovate.
The fast-paced era requires more flexible legal solutions. The future DAO may no longer be a completely free utopia, but a dynamic balance between ideals and reality. For all DAO participants, compliance and risk control will no longer be optional extras, but key issues related to the survival of the project.
