Author: Aiying; Source: AiYing Compliance
On November 19, 2024, a ruling from the Federal 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 regarded as a general partnership. This ruling not only denies 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 Aiying, a global compliance consultancy for Web3, we 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 explicitly state that although Lido DAO is named decentralized, its operational model aligns with the characteristics of a general partnership, where several entities collaborate for mutual benefits, thus creating certain legal relationships. Under California law, the formation of a partnership does not require a formal registration process; it only requires the existence of a common interest driven and corresponding collaborative actions. Therefore, the court found that the governance structure of Lido DAO and the recognizability of member roles make it fit 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 within the Web3 field, typically characterized by the absence of a central authority and governance by token holders collectively. Many DAOs attempt to evade traditional corporate law and partnership liability 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: a decentralized organizational model cannot simply become a tool to evade legal responsibility.
Decentralization is the core ideal of Web3, but the court's ruling points out that 'decentralization' in governance does not mean complete detachment from traditional legal frameworks. Members of Lido DAO, including those token holders who participate in voting, actually bear potential legal obligations. This ruling shows us that the path to realizing technological ideals still has to face the boundaries of real-world laws.
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 are recognized 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 token-holding institutions that actively participate in governance have transcended the identity of mere investors and have become co-managers of the partnership, thus bearing joint responsibility for Lido's overall actions.
The legal risk lies in the fact that the 'partners' of a DAO are not limited to the creators and core developers of the organization but may also include all members actively participating in governance. From a legal perspective, this means that the risks and responsibilities among DAO members significantly increase. If a DAO is regarded 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 reassess the consequences of participating in governance— even simple actions such as posting on community forums or participating in votes may be considered 'active participation,' thus embroiling them in complex legal disputes.
III. Legal Challenges and Opportunities in Decentralized Governance
This ruling undoubtedly impacts the decentralized governance of the entire Web3 field. Miles Jennings, the chief legal counsel of a16z, believes that the court's ruling 'deals a significant blow to decentralized governance,' as it means that even minimal governance participation may bring substantial legal liability. For developers and investors of Web3 projects, this undoubtedly increases operational and legal risks.
However, such challenges may also become an opportunity to promote internal change within the industry. How to find the best balance between decentralization and legal compliance in the design and operation of DAOs is a key issue that various projects must face in the future. 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 to the Web3 compliance field. Designing a governance framework that maintains decentralized characteristics while providing legal protection for participants is one of the most challenging topics in the compliance service sector 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 Impact and Development Direction of the Industry
This ruling may just be the beginning of a future wave of regulation. As Web3 technology gradually permeates multiple fields such as finance, gaming, and social media, traditional regulatory agencies' focus and control over decentralized organizations will also gradually strengthen. The Lido DAO case marks the transition of DAO governance from an experimental technological concept to a legal reality. In this process, regulatory clarity may be an important guarantee for the healthy development of DAOs.
For DAOs, one possible future direction may be to introduce 'legal wrappers,' which means providing legal exemptions for participants through the registration of legal entities beneath the surface of decentralization. This can meet the innovative needs of decentralization while legally reducing risks. We see that the future of Web3 may not solely pursue complete decentralization but rather pragmatically find a middle ground. Decentralized projects represented by Lido require more sophisticated legal advice and compliance support to ensure they can withstand the uncertainties brought by the ever-changing legal environment while continuing to innovate.
The fast-paced era requires more flexible legal solutions. Future DAOs may no longer be completely free utopias, but rather find a dynamic balance between ideals and reality. For all DAO participants, compliance and risk control will no longer be optional add-ons but critical issues related to the survival and demise of projects.
