We Are Borg?
Exploring a Novel Corporate Form, Beginning with the State (and future?) of DAOs (1/3)
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 delve into the original meaning of DAOs and how the concept has deviated into potential incoherence and legal risk.
What is a DAO?
A DAO is meant to be a self-governing, decentralized entity where decision-making powers are widely distributed among users, aligned through incentives. The DAOs rules must be coded into its software, which must be public, open-source, and always adhered to by the DAO itself.
This definition draws from the original vision of DAOs articulated in the Ethereum Whitepaper (maintained here), which emphasized the autonomy and decentralization of the form. Under this view, DAOs are more akin to robotics and cybernetics than to political, corporate, or social entities.
The utilization and understanding of the DAO has undergone significant change in the decade since its inital conception.
Delphi indicates three primary trends:
Complexity: DAOs have become increasingly complex, with both on-chain and off-chain architectures. They manage diverse token treasuries, invest in and launch other projects, acquire off-chain assets, hire service providers, and develop complex “Constitutions.” Consequently, DAOs now resemble integrated business enterprises, with much of their activity and value existing off-chain.
Security and Governance: Many DAOs have abandoned the security-focused, cypherpunk ethos while failing to adopt traditional governance practices. This leads to trust-maximizing structures, where stakeholders must have absolute faith in a small group of managers without any technological or legal protections against possible misuse of discretion.
Legal Attention: Legislators, regulators, and class-action attorneys have noticed the potential for misuse and conflicts of interest within DAOs. They are pushing for legislation, enforcement, and litigation to hold DAOs and their members accountable, often treating DAOs as unincorporated business entities.
So, today, the term “DAO” may be used to refer to any group using smart contracts or blockchains, or that is pro-crypto in some way. For instance, many “DAOs” are essentially venture capital funds, others are unincorporated software development or consulting firms. These DAOs often operate privately, run by small decision-making groups, and heavily rely on traditional social and legal structures.
At this point, public reporting companies, with their broad shareholder base and high transparency due to mandated disclosure filings, could be argued to be more decentralized and autonomous than many DAOs.
Defining Our Terms
Delphi suggests, and I am inclined to agree, that it is important that the term DAO should be reserved for organizations that are both decentralized and autonomous, in line with the original vision of DAOs, and should be clearly distinct from their more modern, centralized contemporaries, which are merely masquarading as DAOs.
Accordingly, Delphi suggests three laws for DAOs:
DAOs must operate under incorruptible rules implemented as publicly auditable open-source software.
DAOs cannot change their rules without the consent of stakeholders, which cannot violate law #1.
DAOs must protect their existence as long as such protection doesn't conflict with law #1 or law #2.
Additionally, DAOs should:
Be purely on-chain and must not own or hold off-chain property;
The economic incentives, consensus mechanisms, and consensus power in DAOs should be expressed exclusively on-chain;
DAOs should not depend on any single individual, company, or organization, and should only pay for their services by issuing their own digital assets; and any off-chain activities that could be associated with DAOs should be managed by DAO-adjacent entities.
This then begs the question - what options are available to DAOs and DAO members to deal with real-world problems and requirements? We will explore some of the existing legal solutions identified by Delphi and lex_node in the next post.