Decentralised Autonomous Organisations: Governance, Dispute Resolution and Regulation

315 Pages Posted: 28 Nov 2021

See all articles by Alexandra Sims

Alexandra Sims

University of Auckland Business School

Date Written: May 31, 2021

Abstract

This thesis critically evaluates the governance, resolution of disputes and regulation of decentralised autonomous organisations (DAOs) through the lens of institutional cryptoeconomics (IC). DAOs, which use smart contracts, and therefore blockchain, are a new type of organisation, which can take many forms, including for-profit and not-for-profit. The primary data used in the thesis are the scholarly and grey literature triangulated with semi-structured interviews from founders and consultants for DAOs, people carrying out work for DAOs and regulators.

Governance is vital to DAOs. Given DAOs cannot act outside their rules and because their smart contracts may contain errors or unforeseen events may occur, rule changes are necessary if DAOs are to remain operational. Nor can DAOs act unless they are expressly authorised to do so by their smart contracts. Proposals for rule changes and actions, such as agreeing for work to be done for the DAO, are proposed and voted upon by DAO token holders. A key finding is the complex governance arrangements DAOs use to overcome the challenges of decentralised governance if any token holder can make proposals to the DAO. Those challenges include a lack of strategic oversight and the vetting of proposals. Voting on proposals also varies amongst DAOs. While some DAOs use a traditional one token–one voting scheme, others wary of concentrating power use a range of novel schemes, including reputation-based systems and conviction voting.

Despite the use of smart contracts, dispute resolution remains necessary. Traditional dispute resolution institutions are not fit for purpose for most disputes arising within DAOs and people dealing with DAOs. Instead DAOs can use dispute resolution services from emerging online third-party decentralised dispute resolution services (DDRSs). These DDRSs employ various innovative mechanisms, including allowing anyone to appeal a decision, not merely the parties themselves. In cases where the parties have agreed to using a DRRS, the thesis finds that DRRSs’ rulings should not be subject to judicial oversight because of the time and cost involved in court proceedings and the need for finality of decisions.

DAOs pose challenges for legal regulation: the default laws of partnership and unincorporated associations are an ill fit. The thesis examines the use of legal wrappers by DAOs. It also explores the attempts to incorporate DAOs into existing legal frameworks through amendments to legislation and the creation of sui generis legislation. The thesis finds that the United States’ limited liability company structures (LLCs) are the best fit for for-profit DAOs and registered unincorporated nonprofit associations for not-for-profit DAOs.

This thesis contributes to the literature by critically evaluating three interlinked themes through the lens of IC: DAO governance models, dispute resolution and legal structures for DAOs. It provides greater insight into DAOs as a nascent organisational form and recommendations for reform.

Keywords: Decentralised Autonomous Organisation, DAO, blockchain, DLT, governance, dispute resolution, regulation, decentralised governance

JEL Classification: D71, D74, K20, L20, L30, L50, N20

Suggested Citation

Sims, Alexandra, Decentralised Autonomous Organisations: Governance, Dispute Resolution and Regulation (May 31, 2021). Available at SSRN: https://ssrn.com/abstract=3971228 or http://dx.doi.org/10.2139/ssrn.3971228

Alexandra Sims (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

HOME PAGE: http://www.business.auckland.ac.nz/people/asim033

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