DAO Governance Could Change Following This Court Ruling

Members of bZx DAO considered a “general partnership” with liability ramifications

article-image

Source: Shutterstock / Maurice Norbert, modified by Blockworks

share

Judges of the United States District Court of Southern California have denied the motion to excuse governance token holders from bZx decentralized autonomous organization (DAO), claiming they are plausibly liable for the loss of $55 million in an exploit occurred in 2021.

Users demanded that bZx be held accountable for the lost funds after it was revealed that a bZx developer had fallen for a “phishing” scam that gave a hacker access to the protocol’s private keys.

After failing to return stolen funds, the court emphasized that DAO governance members fell under the arrangement of a “general partnership” and dismissed a motion against them. 

This means that despite not being the individual responsible for the attacks, the governing members of the DAO are all plausibly liable to each of the victims, making it possible that each and every token holder is responsible for the return of the lost funds. 

​​In a Twitter post, Adam Cochran, a managing partner at Cinneamhain Ventures said that “dismissing the motion does not mean the court decided that owning the token makes you 100% liable — yet. It just means they refused to take it off the table.”

“It means that they feel there is some grounds for the case that a DeFi app with a DAO structure could extend legal liability to anyone who simply holds the token in certain circumstances — and that argument merits more discussion in court,” Cochran said.

It is important to note that in the United States, by default, general partnerships imply that there is an equal amount of voting power, which is often not the case for DAOs, where different token holders have a very different amount of control over the protocol. 

Although partnership structures could benefit certain DAOs, Mel.eth, a pseudonymous DAO governance consultant, told Blockworks, not all DAOs are organized as such. And DAOs that are not structured like this should not be categorized inappropriately.

“The current framework of law isn’t coordinated enough to provide viable solutions and this fact will become increasingly obvious as we see increasingly misfit applications of outdated terminology and organizational strictures,” Mel said. “DAOs are not partnerships in my considered opinion, but a partnership structure might befit some DAOs.”

Updated March 30, 2023 at 9:59 am ET: A previous version of this story stated that Mel.eth was a contributor at Index Coop.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Templates (1).png

Research

Fully onchain gaming has historically struggled with player and developer onboarding. The development experience is subpar, and games are often less complex and "fun" when compared to traditional options. This makes it challenging to attract players, especially given the already difficult onboarding process for Web 2.5 games. However, with the launch of new fully onchain gaming tooling and frameworks, such as Argus' World Engine and Lattice's MUD, the sector might see new interest.

article-image

Roughly $1.1 billion has left the US spot funds since June 13 as BTC price is down more than 10% in past month

article-image

The Merge was meant to turn ETH into ultra-sound money, but it’s turning out more ultra-elastic these days

article-image

Plus, Ethereum is in the midst of its longest inflationary period so far — and it’s all blobs’ fault

article-image

It may be counterintuitive that a high amount of focus on a technology would lead to security risks — but it’s true

article-image

Structured products are common in traditional finance, but onchain options are scant

article-image

Plus, an update on the ether ETF front and an overview of this week’s economic calendar