We Are Borg
Continuing Our Exploring a Novel Corporate Form, Moving on to Existing Solutions (2/3)
In a Medium Post titled “Assimilating the BORG: A New Framework for CryptoLaw Entities” on April 20, 2023, Delphi Labs (Delphi) (authored primarily by their General Counsel, Gabriel Shapiro (lex_node) introduded a framework for a “Cybernetic Organization”, or “BORG.” The BORG, which combines the use of smart contracts and AI with traditional legal entities, aim to enhance state-chartered entities and address a purported misidentification and misapplication of the Decentralized Autonomous Organization (DAO) framework. In particular, the BORG concept is meant to clarify the distinction between truly decentralized DAOs (true DAOs) and those that are mislabeled as DAOs, which are often either expressly (in the case of formal entity structures, such as limited liability companies, which have been expanded under state law to encompass DAOs) or implicitly (in the case of ostensible DAOs who are burned by centralized control of one or a small cabal of participants) centralized and thus anathema to the underlying premise and promise of the DAO. Delphi believes that BORGs offer way to address these issues which is superior to current legal solutions. By introducing BORGs, the hope is to bridge the gap between “real-world” or traditional legal entities and and transient, polylithic, and mathematical associations.
This is a fascinating proposition, both as a practicing attorney and as a corporate law professor. So, in order to better understand the proposal, I have worked here to distill the excellent (but very long) original article into three shorter posts.
The post will look some of the existing legal solutions which have been applied to DAOs.
Full Entity “Wrappers”
Under a full wrap, a legal entity is formed (often a limited liability company (LLC)), which essentially becomes the DAO. DAO governance token holders are then all considered members and/or managers of that LLC, depending on the specifics of the formed entity. DAO governance votes are conceptualized as typical equity holder “actions by written consent” or similar, traditional legal actions.
Examples include the MetaCartel Ventures DAO and LexDAO.
These are often formed in jurisdictions which have passed laws to grant limited liability to DAO members under certain conditions. For example, Wyoming and Vermont have created “DAO Limited Liability Companies.”
A frequent criticism is that these laws are overly prescriptive and may run contrary to the “autonomous” part of “Decentralized Autonomous Organization.”
Partial Entity “Wrappers”
Under a partial wrap a legal entity is formed (often a foundation or trust company) to be the vehicle for executing all or substantially all of the DAO’s activities.
The entity's managers are required to seek advice from and be responsive to DAO governance. DAO token holders do not have the status of equity holders in or service providers to the legal entity but may be treated as beneficiaries with varying levels of legal rights.
Examples include the API3 Foundation and the Pocket Network Foundation.
Adjacent Entities
So-called “adjacent entities” are at least partially responsive to a protocol community or DAO, but are more independent or specialized than a wrapper entity. They come in various flavors:
Fully Independent and General-Purpose:
Examples include the Ethereum Foundation, Interchain Foundation, Zcash Foundation, and the Nouns Foundation.
Partially Independent and General-Purpose:
An example is the ENS Foundation.
Specialized:
Examples include MakerDAO’s various BVI- and Caymans-based trust entities and various Guernsey ‘purpose trusts’.
DAO Constitutions
Unincorporated DAOs typically adopt “Constitutions” to establish a set of guidelines, rules, or principles. They can help create a sense of structure and core values within the DAO and can establish a framework for dispute resolution, but there is limited jurisprudence regarding their interpretation and best practice.
DAO Agreements
As opposed to Constitutions, DAO participants can enter into more bespoke agreements. An example is the LeXpunK DAO Defense Protocol.
Conclusion
All these solutions have one thing in common: they are primarily legal or social.
Even when constraints are imposed, they are typically added to the legal entity’s charter documents, and the management is trusted to follow them. For entity-less approaches, agreements are entered into, and DAO members are trusted to honor, those covenants.
This stands in stark opposition to the transient, polylithic, and mathematical ethos of web3, founded on the basis of trustless, decentralized systems.