In the end, though, the most intriguing question is not what DAOs might do for Wyoming. It’s whether they can be adopted on a large scale by state and local governments.
An article in the Legal Guild explains the system this way: “Jeff Bezos, as CEO, has controlling authority over executive decisions at Amazon. Imagine if, instead, all Amazon Prime account owners had this decision-making power and voted on whether Amazon would accept cryptocurrencies,” or could vote on some other high-level decision.
This latter system is the principle behind DAOs: Shareholders vote on everyday executive decisions made by the company, sometimes even bringing certain issues up for vote themselves. It’s a more direct form of corporatized democracy than comes from owning shares in, say, a publicly traded company or REIT, where votes only happen a few times per year about issues the hired executives have deemed important.
DAOs enforce this deal structure through web-based “smart contracts,” which are designed to implement decisions automatically. If certain conditions are coded into a contract and the conditions are met, the contract triggers a pre-agreed-upon action. Deployed through blockchains, these contracts manage a DAO’s internal structure and govern available funds.
This is becoming more common in “creative industries” and leisure activities. For example, DAOs can be used for sports betting: If two people want to bet on the Super Bowl but don’t trust one another to pay, they can establish a DAO to automate payments once the game is finished. Now DAO partnerships are seeping more broadly into the business world.
But the legal framework poses one early barrier to mass adoption. As Legal Guild notes, “a lawsuit naming a DAO as a defendant would likely stall immediately because of the difficulty of identifying a proper representative with standing to represent it.” This means that potentially everyone involved with the DAO would be personally liable. Conventional corporations (LLCs) avoid such problems by shielding individuals from personal liability, instead targeting lawsuits at a firm’s assets.
“There’s a lot in this space that falls into a region of uncertainty,” says Wyoming state Sen. Chris Rothfuss. He notes that Wyoming’s Legislature has closely tracked DAOs associated with cryptocurrency and blockchain development, and passed legislation formalizing cryptocurrency in 2019. “Nobody wants to raise capital to an elevator pitch that includes the line ‘I’m pretty sure this is legal,’” says Rothfuss.
Wyoming grants DAOs similar or equivalent protections to LLCs, creates regulations, and allows LLCs to incorporate as DAOs. A change to a smart contract would trigger an update to its articles of organization. Vermont and Tennessee have made similar rules.
The Wyoming law aims to establish a superior corporate structure to the standard LLC, which often involves an expensive, burdensome process for adding partners or changing company bylaws. The law aims to combine the best of both worlds, blending an LLC’s liability protection with a DAO’s flexibility.
A DAO called American CryptoFed, established in the summer of 2021 in Wyoming, became the first legally recognized DAO in America. However, the Securities and Exchange Commission halted its use of digital tokens, and the DAO recently terminated its plans to market them. Despite this, more than 350 DAOs now exist in the state.
The movement has its critics. Attorney Preston Byrne calls DAOs “cargo cult finance” and believes Wyoming’s law risks shielding DAOs from accountability for illegal behavior. Rothfuss counters that the Wyoming law dissolves a DAO upon a vote if it’s found to be conducting unlawful business or has been dormant for a year.
Now the innovation is leading some places to think about establishing DAO-run crypto municipalities. One such enterprise recently purchased 40 acres of land in Wyoming. According to the DAO’s podcast, token holders have certain rights to land (although not outright ownership). In Texas, a village called Montanoso is establishing a “neighborhood DAO”; among its goals is to override anti-development sentiments.
While these communities are somewhat esoteric, DAOs — and the larger apparatus of Web3 infrastructure they run on — can be applied to traditional city governance. A DAO-like organization called CityCoins creates cryptocurrency for some of the biggest ones. Users vote on which municipalities to work with, and if the plan gains sufficient support, a third of the proceeds are designated to the city. CityCoins have been adopted by Miami and New York City. In New York, proceeds go to the city’s “Mayor’s Fund,” although the program has struggled due to contradictory state licensing laws that discourage trading of the coin.
DAOs can be used for specific city functions. There may be less need for general funds to be distributed by a human treasurer when a DAO can do it automatically. If building permit applicants input the needed legal criteria for their parcel, a DAO could spit out the permit instantly, as opposed to the document spending weeks on the desk of an overworked planning staffer.
There are many other examples of how DAOs can be used, in a public or private context. As their usage continues to grow in numbers and complexity, it seems likely that more state and local governments will follow Wyoming’s lead in legalizing them.
This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.
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