Scaling DAOs Through Fiduciary Duties

Authors

Alex Dolphin

Abstract

DAOs (Decentralized Autonomous Organizations) are a unique type of business organization due in large part to their directly democratic governance structure. Owners of DAOs, “tokenholders,” do not delegate control to a board or a general partner. Rather, tokenholders directly control a DAO and must approve every action that a DAO takes. Because tokenholders do not delegate control to an agent, the principal-agent problem is tempered in DAOs. The principal-agent problem is the basis for the fiduciary duties that govern traditional business organizations. These fiduciary duties are meant to prevent agents entrusted with power by their principals from self-dealing. Some have argued that the directly democratic structure of DAOs eliminates the need for fiduciary duties on the basis that there are no agents. The few jurisdictions that have created paths for direct incorporation as a DAO have found this argument persuasive. These jurisdictions allow DAOs to waive all fiduciary duties in their operating agreements.

But this approach to fiduciary duties in DAO governance is fundamentally flawed. Fiduciary duties are still needed in DAOs because DAO democracy is not pure democracy. Rather than following the rule of one tokenholder, one vote, DAOs generally follow the rule of one token, one vote. So, when a tokenholder has enough tokens to control a DAO, the principal-agent problem rears its ugly head. Here, the controlling tokenholder is the agent and the minority tokenholders are the principals. Due to low participation rates in DAOs, a tokenholder can more easily become a controller. The principal-agent problem can also exist in DAO governance when a tokenholder assigns its voting power to a delegate or when a DAO structurally centralizes power in a governance board. Because these principal-agent problems exist in DAOs, tokenholders need fiduciary duties as an ex post protection from self-dealing.

That said, the answer to these agency problems is not a skeuomorphic application of all corporate fiduciary duties to DAOs. Rather, a tailored approach to fiduciary duties is needed. This Note provides that approach in the form of a mandatory, yet limited, fiduciary duty governance system for DAOs. This proposed system would allow DAOs to waive the duty of care and the corporate opportunity doctrine in their operating agreements but would not allow DAOs to waive the duty of loyalty and a portion of the associated duty to act in good faith. It would also balance investor protections with innovation and provide the predictability necessary to attract more investors to DAOs. In turn, this tailored system would help DAOs in their quest to scale as a type of business organization and aid in the creation of a new, decentralized economy.

Rights

© 2023 Brigham Young University Law Review

Recommended Citation

Alex Dolphin, Scaling DAOs Through Fiduciary Duties, 48 BYU L. Rev. 977 (2023).
Available at: https://digitalcommons.law.byu.edu/lawreview/vol48/iss3/9