A decentralised autonomous organisation (“DAO”) is an entity whose decentralised governance is encoded in a smart contract framework. Tracer DAO is one such DAO. Within Tracer DAO’s smart contract framework (both the DAO contract and the TCR token contract), you will find the Tracer DAO Participation Agreement.
Why are Participation Agreements relevant to DAOs?
DAO’s are a form of on-chain entity that allow an infinite number of participants (such as individuals, companies or other DAOs) to coordinate their efforts and resources transparently. Like traditional companies, DAOs have:
- Bank accounts (called “treasuries”);
- Formal governance (achieved by voting on “proposals”);
- Stakeholders who participate in that governance (usually referred to as “governance token holders”, in the context of Tracer DAO, these are holders of the TCR token); and
- The ability to engage third parties (called “service providers”).
DAOs often do not have “managers” or “directors” and are owned and controlled by their governance token holders. For this reason, DAOs are analogous to member-managed companies, which exist only in some jurisdictions. Nobody understands this analogy better than the team at OpenLaw who used a Delaware member-managed LLC to “wrap” a DAO, thereby creating The LAO, which is the first for-profit, limited liability, decentralised autonomous organisation. However, as a relatively new way of conducting business, leveraging relatively new technology, when a DAO is deployed on-chain it will not be recognised as an entity with legal personality or limited liability. Until such recognition, we are left with DAOs who do not operate as people within the eyes of the law. Currently, most legal minds interpret DAOs as unregistered organisations, unincorporated associations or general partnerships. These interpretations each lead to concerns that, amongst an organisation of potentially infinite parties, each individual party could be held personally liable for the debts of the organisation.
Development is underway in the international law arena, where the Coalition Of Automated Legal Applications (COALA) has been working on The DAO Model Law. The goal of the model law is to assist jurisdictions in crafting their own DAO laws, so as to recognise full or partial legal personality to DAOs. We have already seen signs of a shift in some jurisdictions, such as Wyoming and Malta, but we generally advise against holding your breach while waiting for legal and regulatory wheels to turn. In the case of Wyoming, the recently approved “DAO Bill”, recently approved by the Senate, allows DAOs to register themselves as LLCs and provides a framework for their formation and management. Otonomos’ most recent newsletter considers this framework and queries: “What does the DAO Bill add that contract law cannot provide?”
What is a Participation Agreement?
A Participation Agreement uses contract law to provide a framework for the formation and management of a DAO and govern the rights and obligations of each member of the DAO, including governance token holders and service providers. With respect to the Tracer DAO Participation Agreement, some important features of the Participation Agreement include:
- An explanation of Tracer DAO’s governance mechanism;
- DAO members releasing other DAO members from claims arising in connection with the Tracer project;
- DAO members waiving their claims against other DAO members;
- A limitation of liability for DAO members in relation to loss or damage arising under or in connection with the use of Tracer’s contracts; and
- In-built complaints and dispute resolution procedures for problems and disputes arising in connection with the Tracer project.
The limited liability status offered to companies allows those companies to better manage risk associated with civil claims which may arise between that entity and its various shareholders, employees, contractors and service providers. Similarly, Participation Agreements allow DAOs to better manage risk associated with civil claims which may arise between governance token holders and service providers of the DAO (ie, those parties impacted by the operations of the DAO).
How is the Participation Agreement signed?
A potential DAO member of Tracer DAO will digitally sign the Participation Agreement when they submit a transaction to the DAO contract on the Ethereum blockchain (eg, claiming TCR tokens) which includes the Participation Agreement. Each DAO member will be a party to the Participation Agreement.
The Tracer DAO Participation Agreement is not the first of its kind. It is inspired by the dxDAO Participation Agreement, published by Gnosis. A similar agreement was also used by the Ethfinex team for The Nectar DAO.
The path ahead.
Participation agreements are important in enabling DAOs to operate as sophisticated entities. The authorship of the Tracer DAO Participation Agreement contributes to an already rich DAO history and accords with Tracer DAO’s broader purpose: to provide strong foundations for future financial innovation. Tracer DAO will continue to evolve with the demands of both its members and the broader market. Its leadership and innovation will serve as a source of guidance for future DAOs.