The self regulation of a DAO

Rule of code

The need for a regulation of Decentralized Autonomous Organizations (DAOs) is partially met through the providing of the rule-of-code principle, also known as "code-is-law" or "law code" which incorporates, on closer inspection, the very definition of smart contract.

And indeed, every blockchain-based organization needs a blockchain governance code, which should provide, as a minimum content, rules concerning the constitution of internal bodies, representative of token holders and possibly of different categories of stakeholders; decision-making processes; the rights and duties of participants; the duties of core developers; the rules of so-called hard fork proceedings; the activities of miners.

This content should be prepared by a representative group of experts and stakeholders.

Analyzing the issue more closely, it can be seen that if, on the one hand, there is indeed a desire for greater regulation of the organizations in question, considering it as an incentive for their establishment and participation on the basis of a fundamental principle of legal certainty, on the other hand, the idea has been put forward that the introduction of new rules could, on the contrary, constitute a disincentive for those seeking high flexibility and autonomy, also benefiting previous participants over new ones.

The issue, however, would lose its problematic connotation where one considers the comply-or-explain regime that characterizes corporate governance codes, among which the blockchain governance code may well rank.  In this sense, each organization could and should decide whether or not to adopt the code, giving notice of the choice to third parties, by appropriate means. According to some authors, for cryptocurrencies or exceptionally important organizations the self-regulatory code should be replaced with a binding regulation.

Once the typical content of the code has been identified, a further question arises, relating to its effectiveness, given also and precisely the organization's decision-making autonomy in this regard. On this point, it should be considered that

• it may be useful to provide incentives for those who adopt the code;
• it is important that said codes include, in particular, rules on the participation of token holders, so that they are incentivized, upstream, to adopt the code, downstream, to participate in the life of the entity;
• consideration should be given to erecting barriers to entry for newly established organizations.

Gap filling

That said, there is a main issue that would require further analysis, with reference to the internal regulation of the DAO and the contract on which it is based, given that it is a smart contract. We refer, in this sense, to the costs arising from the inflexibility of the programming code and the characteristics of the computer code. In particular,

• it is impossible for the code to provide the governance scheme entirely, without relying on general and standard clauses that can be used to fill any gaps (so-called gap filling mechanism);
• at the same time, the inclusion of general clauses such as the concept of contractual good faith can hardly be envisaged, precisely because of the difficulty of guaranteeing effectiveness to such broad concepts through the automatisms typical of smart contracts;
• the irreversibility of transactions makes it particularly difficult to correct any material errors, for example in entering the address of the recipient of a transaction, and thus restore the status quo prior to the transaction, unless the consent of the counterparty is reached, but this is net of the difficulties of cooperation inherent in the multiplicity of nodes involved.

References

• P. Hacker, Corporate Governance for Complex Cryptocurrencies ? A framework for Stability and Decision Making in Blockchain-Based Organizations, 2017, pp. 21-23-25.
• A. Wright, The rise of decentralized autonomous organizations: opportunities and challenges, in Blockchain & Procedural Law: Law & Justice in the Age of Disintermediation seminars, 2021, p. 171.