The missing legal layer for DAOs

A better path for decentralized governance is gaining traction across states and major crypto communities

by Miles Jennings and Aiden Slavin

As of this week, three states have officially enacted the relatively new “decentralized unincorporated nonprofit association” act — aka the DUNA. The DUNA provides legal status for decentralized organizations and limited liability protections for their members and administrators. By doing so, the DUNA gives these communities and builders the legal and structural certainty to build, govern, contract, and scale in the real world.

Wyoming was the first state to adopt the DUNA two years ago. [Notably, it was also the first state to adopt the unincorporated nonprofit association (UNA) and the first to adopt the limited liability company (LLC), which provided key protections and flexibility for business owners so they could unlock innovation. Think of the DUNA as a digital UNA optimized for the decentralized organizations building the future of the internet.]

Alabama signed the DUNA Act yesterday. And West Virginia just did too, with more states on the way. States have moved to the center of crypto policymaking, and this is forward-looking policymaking at its best: It embraces innovation, protects users, and empowers internet-native communities to compete with big tech incumbents. And it comes at a pivotal moment in the effort to make the U.S. the crypto capital of the world. As federal crypto market structure legislation moves closer to becoming law, builders need effective domestic legal structures.

Several prominent crypto organizations have also adopted the DUNA — including Uniswap Governance, Nouns DAO, Syndicate Network Collective, and more, with others coming.

But first, why does this matter?

Decentralized governance is essential to crypto’s future, and the DUNA provides a legal structure that fits decentralized organizations.

More specifically, DUNAs are legal entities that provide limited liability and other key protections to participants in a blockchain network, while allowing them to remain decentralized. Fundamentally, the DUNA enables blockchain networks to remain decentralized while complying with the law. It not only grants decentralized organizations like DAOs legal existence, but also allows them to:

• contract with regular businesses and appear in court;

• allows them to pay taxes; and

• equips them with key protections.

In short, the DUNA puts decentralized organizations on equal footing with other entity forms like corporations and the LLC.

Importantly, the DUNA allows decentralized organizations to innovate as blockchain networks, without forcing them into the top-down, centralized control structures of companies that depend on centralized management or hierarchies like officers and boards of directors. By contrast, the DUNA is the first and only legal structure to allow communities to govern the services they use, and leverage smart contracts to execute their decisions onchain.

The bigger picture here, however, is providing a more viable path for more decentralized networks and, therefore, builders of products and services within those networks. This is more important than ever — not just for the future of the crypto industry, but for countless other applications with crypto hidden/“blockchains inside” (like all things stablecoins and agent payments)… Especially in a time when technologies like AI and platforms are increasingly centralized.

Why decentralization matters: the big picture

“Decentralization” sounds like an ideology that only some kinds of people care about, but it actually impacts every one of us: Decentralization is at the heart of many issues dominating our conversations — whether it’s about who controls social media networks that influence our public discourse; who financial institutions choose to bank; who controls the AI tools increasingly dominating our world; and more.

This is because a handful of big corporations and platforms — all centralized — have monopoly-like power over the digital products and services we all use every day. And despite contributing to the very value those platforms provide to all their users (aka “network effects”), users don’t have a vote, choice, or any other way to control their destinies. All the value is extracted by big corporations; little value is left for users. (This is especially concerning for the creators and small businesses whose livelihoods depend on those platforms.)

But the reality is that, from an efficiency standpoint, centralization works — and it works very well. Much like gravity, centralization is a force that’s hard to resist: It allows companies to coordinate resources efficiently. It enables a single leader — or a couple of visionaries inside the same organization (like Steve Jobs and Jony Ive at Apple) — to more efficiently make decisions, sometimes resulting in better products. When an organization is centralized, it can move fast, take unilateral action, and reap the rewards. This is why centralization and consolidation are the norm today: See Big Banks, Big Tech, and so on.

By comparison, decentralization — transferring control and power to distributed groups — has been inefficient, at least until now. It’s like a rocket ship: To achieve lift-off, decentralization requires immense energy, effort, and engineering to overcome the natural order. But once a decentralized system achieves escape velocity, its cumulative network effects can be far more powerful than any centralized organization’s could be.

But breaking free requires a boost, and that’s why decentralization needs incentives.

Enter the DUNA. The problem the DUNA solves is that decentralized organizations haven’t had a legal structure that natively fits how they (vs. centralized companies) operate.

Decentralized organizations have been forced into ‘foundations’ until now

Foundations have long dominated organizational design in crypto. In crypto’s early days, many founders turned to nonprofit foundations out of a sincere belief that these entities would help foster decentralization. The foundations were meant to serve as neutral stewards of network resources, holding tokens and supporting ecosystem growth without direct commercial interests.

Foundations were intended to help crypto network builders differentiate their projects from ordinary companies, by promoting “credible neutrality” for long-term public benefit without explicit commercial interest. Foundations also provided a convenient solution to the regulatory challenge posed by control-based decentralization: Builders could diffuse ongoing development work via foundations so that no single management team could be seen as driving a blockchain network’s value.

In the best cases, foundations delivered on their promise: They diffused risk and fostered decentralization. Some foundations were a boon to the growth and development of the networks they supported, staffed by committed individuals doing difficult and incredibly valuable work under challenging constraints.

But in most cases, foundations created new problems — introducing opacity, increasing inefficiency, misaligning incentives, limiting growth, and entrenching centralization. (Nowhere has this been more on display than with offshore foundations: Prohibitive structuring costs and convoluted independence mandates meant that most startups could not realistically comply, and therefore forced several legitimate builders to move outside the United States.)

Regulatory dynamics and increasing market competition diverted the foundation model away from its original conception. Crypto founders abandoned, obscured, or otherwise removed involvement in the very networks they created. Increased competition further incentivized projects to look to foundations as a shortcut. Many foundations became convoluted workarounds to appear decentralized — something we’ve also called “decentralization theater” — rather than mechanisms for actually achieving decentralization.

With the United States moving towards legislative clarity, the separation and fiction of foundations is no longer necessary. A control-based framework encourages founders to relinquish control without forcing them to abandon or obscure their ongoing building. It also provides a less amorphous (and less abusable) definition of decentralization to build towards. With this pressure lifting, the industry can finally move beyond workarounds and toward structures better built for long-term sustainability, like the DUNA.

Foundations served a purpose. But they are no longer the best tool for what comes next. To be valuable, networks need to build products and services with market and user feedback.

The DUNA allows blockchain-based networks to do this while also protecting the individuals participating in them.

Benefits of the DUNA

Currently, decentralized organizations that fail to use a legal structure for their organization are:

• deprived of legal existence,

• face uncertainty and difficulty in meeting tax and reporting obligations, and

• exposed to potentially limitless liability.

Alarmingly, without a legal entity, decentralized organizations are being alleged to be just like general partnerships. This classification would be calamitous for DAO members, subjecting them to huge tax risk and potentially significant legal liability.

A lack of legal entity also threatens the privacy of DAO members. If foisted on DAOs, certain traditional legal structures not set up for the concept of distributed, decentralized coordination (and therefore, relatedly, privacy) could require that DAO members reveal their identities, compromising them in several ways.

The DUNA provides decentralized organizations with legal existence, enabling them to contract with third parties, open bank accounts, pay taxes, meet reporting requirements, and more. For founders, the DUNA can be helpful because:

• Being a “nonprofit” doesn’t constrain your business. It unleashes it. By statute, DUNAs can engage in for-profit activities. They can pay reasonable compensation to members for participation. With the DUNA, commercial viability and legal protection go hand in hand, allowing decentralized communities to create value for their members and others.

• Market structure legislation will reward you for doing this now. Decentralized governance is a core construct in the legislation moving through Congress. The DUNA is the legal structure purpose-built to formalize that governance in a way legislators and regulators can work with. It’s the only legal structure recognized for decentralized governance in current drafts of the CLARITY Act. Founders who adopt the DUNA today, rather than waiting, will have a demonstrated, defensible governance record when that legislation passes. Those who delay will be scrambling to retrofit a structure onto a network that’s already operating in legal ambiguity.

• Paying taxes is a feature, not a bug. Without a legal entity, a DAO rests under the sword of Damocles: The unresolved and potentially catastrophic question of tax. The DUNA gives any organization the legal capacity to pay taxes and meet informational reporting requirements in the United States. Bringing a DAO into the domestic tax framework resolves one of the biggest operational and member risk questions hanging over decentralized organizations today.

What a DUNA is and isn’t

While DUNAs are legal entities, they are not analogous to foundations in any meaningful sense. They are not an entity structure designed to house employees, pursue objectives, or “run” an ecosystem.

Instead, DUNAs are best understood as a legal representation of token-based governance (voting, treasury management, and community decision-making). A DUNA is only responsible for the discrete actions that token holders are empowered to take via token-based governance, and it only acts when token holders act. For example, if token holders control a system’s treasury and have the ability to make distributions, then proposals, votes, and onchain execution can be treated as decisions and actions of the DUNA.

DUNAs are not well-suited for running a business. Where token holders have no rights to alter a system, the DUNA has nothing to “decide” and nothing to “do”. Accordingly, a DUNA is not a legal representation of the blockchain network to which it may relate but over which it has no control. And it is not responsible for how the blockchain network functions day to day. A blockchain network continues to operate pursuant to its protocol rules, independent of the DUNA.

Take this example: If a small number of ETH holders deposited their ETH into a smart contract that enabled them to govern how such assets were used, and they adopted a DUNA structure for their organization, that DUNA would have nothing to do with and would be wholly separate from the Ethereum network. The DUNA would have no say in the operations of such a network and no ability to affect it.

But, because they have legal personhood, DUNAs are well-suited for protecting the interests of token holders and aligning incentives with builders and other third-party market participants. For instance, DUNAs can own any intellectual property associated with the blockchain network and enforce those rights on behalf of token holders.

If passed, crypto market structure legislation will help end the charade of foundations, and incentivize the creation of better decentralized governance systems: greater transparency, rules, openness, collective action (vs. traditional management officers or boards like in a company), independence from centralized control, and more.

But even if you’re not interested in crypto, or are tired of hearing about blockchains, decentralization matters: Whether it’s specific crypto-based technologies or some different form in the future, we are clearly starting to defy the gravity of centralization. We know how to build the rockets. Decentralized systems can achieve unprecedented levels of coordination and operational functionality, while realizing the full potential of network effects. And now, after decades and even centuries of fighting gravity, it’s finally possible to have new forms of governance and decentralized organizations at scale; robust, decentralized economies and business models for tokens; community-owned-and-operated networks and services that benefit users, including beyond crypto; and countless other innovations.

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Miles Jennings is Head of Policy & General Counsel for a16z crypto, where he advises the firm and its portfolio companies on decentralization, DAOs, governance, NFTs, and state and federal securities laws.

Aiden Slavin is Policy Partner for a16z crypto, supporting the advancement of the firm’s global web3 policy goals.

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Editor: Sonal Chokshi

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