Author: Aiying, AiYing Compliance
On November 19, 2024, a ruling from the U.S. Northern District Court of California rang 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 denied Lido DAO's claim that its decentralized structure evades legal responsibilities but also has far-reaching implications for the compliance roadmap of the entire Web3 industry. As Aiying, a global compliance consultant 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 clearly indicate that although Lido DAO is named for its decentralization, its operational method conforms to the characteristics of a general partnership, that is, several entities collaborate for a common interest, thus generating a certain legal relationship. Under California law, the formation of a partnership does not require a formal registration process; it merely needs to exist with a common interest and corresponding collaborative behavior. Therefore, the court found that Lido DAO's governance methods and the recognizability of member roles made it fit the legal definition of a partnership.
This ruling sets a precedent for how "decentralization" can be positioned within a legal framework. Decentralized Autonomous Organizations (DAOs) are important innovations in the Web3 field, typically characterized by the absence of a central authority and governance by token holders. Many DAOs attempt to evade traditional corporate law 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 sends a signal: the decentralized organizational model cannot simply become a tool to evade legal responsibilities.
Decentralization is the core ideal of Web3, but the court ruling indicates that governance 'decentralization' does not mean complete escape 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 legal boundaries of reality.
II. The 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 engage in governance, have transcended the identity of mere investors and have become co-managers of the partnership, thus bearing joint liability 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 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 re-evaluate the consequences of participating in governance— even simple actions like posting on community forums or voting may be seen as "active participation," thereby involving them in complex legal disputes.
III. The Legal Challenges and Opportunities of Decentralized Governance
This ruling undoubtedly has a significant impact on decentralized governance across 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 could lead to substantial legal liabilities. 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 transformation within the industry. How DAOs can find the best balance between decentralization and legal compliance in their design and operation is a key issue that various 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 compliance in the Web3 field. How to design a governance framework that can maintain decentralization while providing legal protection for participants is one of the most challenging topics in the compliance services field in the present and the coming years. The future of DAO may not lie in complete decentralization, but in the combination of flexible organizational structure and legal identity, finding the best combination of innovation and compliance. We, Aiying, will continue to provide compliance path planning for Web3 enterprises, helping industry practitioners understand and respond to 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 various fields such as finance, gaming, and social networking, traditional regulatory agencies will also gradually strengthen their focus 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, clarity in regulation may be an important guarantee for the healthy development of DAOs.
For DAOs, one possible future direction may be to introduce 'legal packaging,' that is, to provide legal exemptions for participants through the registration of legal entities beneath the surface of decentralization. This can meet the innovative demand for decentralization while legally reducing risks. We see that the future of Web3 may not blindly pursue complete decentralization, but instead pragmatically find a middle ground. Decentralized projects represented by Lido require more sophisticated legal advice and compliance support to ensure that they can withstand the uncertainties brought by the constantly changing legal environment while continuing to innovate.
In an era of high rhythm, more flexible legal solutions are needed. The future of DAOs may not be a completely free utopia, but rather finding 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 that relate to the survival of the project.
