A new Senate report proposed the government write DAOs into Australian legislation. But what are they?

A new Senate report proposed the government write DAOs into Australian legislation. But what are they?
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  • Australia wants to become a crypto superpower, but first its regulators need to embrace ‘decentralised autonomous organisations’ — or DAOs — a senate report suggests.
  • A DAO is a decentralised organisational governance model popularised by DeFi, where members can buy “governance tokens” to have a say in the decisions made by the group, and how it spends its money.
  • The fact that governments are even acknowledging the structure has offered experts hope, and should be considered a “lighthouse moment”, they say, as the structure becomes a natural next step for the crypto community.
  • Visit Business Insider Australia’s homepage for more stories.

Members of the crypto community and blockchain enthusiasts alike welcomed a new report handed down by a Senate committee on Thursday, which recommended the government introduce new legislation to establish a Decentralised Autonomous Organisation company structure.

The report signals a turning point for Australian regulators, who were slow to build guardrails fit for cryptocurrencies, and now acknowledge their “enormous” economic potential, as Australia strives to become a crypto superpower. 

Part of that, according to experts, would mean embracing DAOs as a company structure early, as they become the preferred governance structure for much of the crypto community. Now, regulators are listening.

If it were to be written into law, Australia would become the first country in the world to recognise DAOs at a federal level. Some experts say the Senate recommendation itself represents “a paradigm shift” worthy of celebration, at a time when most people — politicians and regulators included — don’t even know what they are. 

So, what is a DAO, and how do they work?

An essential prerequisite for understanding DAOs is a baseline understanding of how blockchain works. For those who need to do that first, you can head to this 2017 explainer.

The easiest way to think about a DAO is as a governance structure built on the blockchain, where the price of admission are tokens that buy you a say in the decisions made by the organisation. These are known as “governance tokens”. 

Unlike traditional companies, DAOs are decentralised, which means they aren’t beholden to the decisions made by any single person or group (like a CEO, or an executive board) and run on blockchain, where the rules of each organisation takes the form of code or ‘smart contracts’ for all to see.

These contracts are embedded transparently, and can’t be changed unless voted on by members of the DAO, with consensus reached in various ways depending on the organisation and its respective rules. But, generally, the weight of a member’s vote within a DAO is usually determined by the number of governance tokens they own, much as with shareholders and company stock. 

Joni Pirovich, founder and principal of Blockchain & Digital Assets Services + Law, told Business Insider Australia the de facto transparency that comes with a DAO structure has become a major drawing point for the groups and communities who have popularised it. 

The structure forces groups to be transparent about everything, Pirovich says, and could in future offer solutions to issues the business community has long struggled to solve, such as reliable sustainability reporting. 

“So you can start having green certificates for each of your token transactions to say whether [your DAO] is part of a sustainable supply chain or not,” Pirovich said.

“Through blockchain, we can start attaching these certificates to each token, also held in your digital wallet so that you get a sense that you’re supporting sustainable DAOs rather than non-sustainable ones.”

Each of these DAOs tend to have a treasury of their own, where access to tokens and all spending decisions are voted on as a group. So it probably comes as no surprise that the first meaningful application of the DAO structure was seen in the decentralised finance, or “DeFi” space. There, some of the bigger names to run with it have been Uniswap, Sushi Swap and Compound, among others.

But one of the most common misconceptions about DAOs is that their use has so far been limited to financial services.

“We’re now seeing them emerge in file storage, as well as gaming, where you’re empowering the players in the play-to-earn model, where it’s not just a centralised, corporate multinational gaming company that earns all the profits from the endgame items that are purchased. 

“If you have the DAO governance token, in Axie Infinity, or in Illuvium, what these DAO-based projects are trying to do is empower, economically, all of the game players with the profits of the worldwide game.”

George Samman, a blockchain and cryptocurrency adviser who has worked with the likes of KPMG in the space, takes the thought a step further. In a paper he wrote in 2020, Samman describes DAOs not as tools for ultra-capitalists, but instead as a solution for organisations with “coordination problems”, where “collective action” could actually work.

“By pooling funds and voting on fund allocation, stakeholders share the costs and incentivise coordination so the entire ecosystem benefits,” Sannam wrote in 2020. 

“DAOs are performing the biggest experiment in new forms of alternative governance. These experiments are not in the form of giant nation-states, but applied on a local community level,” he wrote. 

“This comes at a time where peak globalisation is in the rear-view window and the world is retreating to a more local model.”

It’s a sentiment shared by others, too. Adriana Belotti, a digital projects and community leader at tech consulting firm Prismatik and host of the “Blockchain Pro Podcast”, said DAOs are just a natural next step for swathes of the crypto community, who want to democratise more than just investing, and offer “solutions” to any number of the world’s problems.

“There’s a lot of people in the crypto community that are really focused on trying to solve problems created by capitalism,” Belotti told Business Insider Australia. “Or, you know, the imbalance of income.”

“I don’t think it’s an easy problem to solve. I don’t think we’re going to solve this in our lifetime. But there’s a lot of people that are looking into things with… DAOs, and there’s charitable coins, and things to help people with hunger and whatnot,” she said.

“People with real ideas can cause real impact with DAOs if people are given the opportunity to bypass traditional financial [structures], and just connect with people with similar minds that have means to support their idea.

“I think that is a fantastic step towards a better world.”

With lofty objectives come complex challenges. What are they?

Most notable among them are the liability risks taken on by DAO members — often, unknowingly — who in many cases are viewed in the eyes of the law as members of a “partnership”, and in others, a range of alternative corporate structures.

It’s something Liberal senator Andrew Bragg tried to address in a final report on crypto-assets handed down by the bipartisan Senate Select Committee on Financial Technology and Regulatory Technology last week.

Using UniSwap as an example, Pirovich explains the problem is that anyone holding governance tokens could be exposed to penalties for non-compliance issues if the DAO’s protocol, or “smart contract”, isn’t compliant with regulators like the US Securities and Exchange Commission.

“And that’s the reason we need limited liability,” Pirovich said. “Because you don’t know whether it’s everybody that holds a Uni token, or only the people that have used a Uni token to vote on a particular proposal, or people that hold the Uni token and are elected to governance councils.”

“There is no one DAO, or decentralised model of governance,” she said. “They’re not one for one. They all have their own unique ways of how they manage governance and their communities.”

“And that’s why we don’t know whether some are more appropriately a partnership, or an unincorporated joint venture, or an unincorporated association of persons,” she said. “It’s fluid, and they could be one or more of those things at any one time.”

While senator Bragg’s recommendation focused on offering clarity to DAOs, if legislated, the recommendation could bring with it some of the earliest material regulation of the governance structure, which has in the past been vulnerable to misconduct.

“The DAO”, an investor-directed venture capital fund and one of the earliest listed decentralised autonomous organisations, in 2016 saw its members exploit the organisation’s smart contract code and siphon off about a third of the organisation’s funds to a subsidiary account. It was delisted from all major crypto exchanges three months later, and is now defunct.

Australian regulators aren’t alone in trying to regulate DAOs, either. The US state of Wyoming in April passed world-first legislation that recognises DAOs as legal structures, formulating regulatory standards and practices for DAO-based projects. 

Pirovich suggests that even if Senator Bragg’s limited liability recommendation never ends up being legislated, its mention in the committee’s final report signals a turning point for governments and regulators, who at the very minimum are now aware they need to be thinking about the space.

“I think that it’s too big now for them not to be aware of what’s happening,” Pirovich said. “But I think that it comes down to finite resources. And to understand blockchain, you really do need to invest at least a couple of days to understand how blockchain works and how these DAOs [are doing] what they’re doing.” 

“You need to actually experiment with the technology, get a digital wallet, buy some tokens … and actually interact with the protocols. And the regulators neither have the resources or the time or the permission to do this kind of stuff,” she said.

“So, then they’ve got a lack of understanding and then a lack of ability to inform policymakers about the limits of the law. So it’s just a big, gaping hole at the moment that I think you need resources first, to try and fix it.”

“[Bragg’s recommendation is] the lighthouse moment that there needs to be resources allocated to this because it is the next big global structure that that many will start interacting with and using.”