On March 9, Wyoming amended the Decentralized Autonomous Organizations (DAO) Supplement (Supplement), which permits decentralized autonomous organizations (DAOs) to incorporate and obtain legal status as limited liability companies under Wyoming’s Limited Liability Company Act. The most distinctive modification of the Supplement concerns the minimum threshold of a DAO’s overall membership that must participate in proposal voting for a proposal to be valid if passed. The Supplement now allows a DAO to establish its own definition of a quorum within its articles of organization. Stated differently, prior to amendment of the Supplement, Wyoming law required DAOs to engage in strict quorum-based voting, which, as discussed below in more detail, likely limited the number of governance models DAOs could employ.
What is a DAO? A DAO is a group of individuals organized around a mission that is autonomously coordinated through a set of self-executing rules encoded in smart contracts and deployed on blockchain. Unlike traditional, human-centric business structures, DAOs leverage smart contract technology to enable flat management and streamlined governance. This technology allows DAOs to mobilize capital to achieve a collective goal in a trustless, permissionless, and frictionless manner.
DAOs and Governance. In a traditional business, a top-down hierarchy exists. A corporation’s executives exclusively decide how the corporation is to be steered; the managers of the corporation administer the executives’ directions to the corporation’s nonexecutive employees; and the managers of the corporation expect the nonexecutive employees to implement the executives’ direction on the ground level. On the other hand, the governance functionality of a DAO is much more fluid. Inherent in a DAO, each member has an opportunity to influence the “steering” of the organization by issuing proposals to the collective DAO membership. For example, a member of a DAO dedicated to funding potential cures for cancer could propose that this DAO should also allocate a percentage of its treasury to fund potential cures for dementia. After a member presents a proposal, a vote ensues. Most DAOs facilitate proposal voting through token systems. In a “vote your shares” system, a member’s voting rights is proportional to the number of governance tokens (tokens native to the DAO upon creation) he or she owns.
Limitations on Use of Quorums in Proposal Voting. In a traditional business organization, requiring a quorum to validate corporate action is a necessary safeguard to neutralize underrepresented board action that could lead to loss of profits. Because a DAO is a dynamic entity, Wyoming likely realized its initial decision to require at least 50% of a DAO’s membership to participate in voting for a proposal to be valid could potentially stifle innovation. For example, it is simple for a DAO comprised of 10 members to consistently have at least five members participate in proposal voting. However, as a DAO scales in size, it may become increasingly difficult to meet a 50% quorum as the number of proposals submitted by members would proliferate in tandem, thereby increasing the amount of time each member must allocate to voting and decreasing efficiencies.
Our Take. To effectuate change in a traditional business, members must move in an intricate, lock-step manner. Conversely, a DAO is a fluid entity that, through proposal voting, could theoretically house many entities within a single legal framework. Wyoming’s recent amendment affords these entities an opportunity to redefine the quorum paradigm in this new age of digital companies.