Decentralized Organizations — Another Round of Definitional Questions & Existential Crises

Recent events, namely the infrastructure bill saga and many thoughtful conversations that have followed, have me rethinking my stance on definitional issues that have existed in crypto from inception. A couple of years ago, I used to think that crypto had a definitions problem due to a lack of precision in terminology used by the space— both in the sense that no one used the same terms to refer to the same thing or people used the same terms to refer to different things (see token taxonomy issues). Compounding these definitional issues, crypto otherwise uses legacy terminology that has legal or regulatory ramifications, the impact of the optics of such uses being, at times, underappreciated in the space or just ignored because — and just to scapegoat, hubris and libertarianism are a heady combo (please direct all hate mail to @haxxor_birdman, which is 1000% not my alt). This has still led to some suboptimal situations, like the use of the term “swaps” as discussed by my LeXpunK compatriot here:

And the need to create firmness around definitions continues today (see @lex_node’s Digital Asset draft definition too):

Now, with the help of Congress and various state laws, we see what happens when the task of crafting definitions is outsourced. All these definitional disasters now under our belts, we can better appreciate the delicacies involved. It is hard to formulate definitions because by the nature of the exercise, structures that fall outside of the four corners of the definition do not meet that purity test. I loathe purity tests and think they have bad outcomes because they create incentives to become overly rigid or formulaic and may punish ingenuity that results in criteria not being met for a safe harbor. This is a quickly evolving space, it changes, morphs, and renders obsolete understandings of the characteristics of concepts or models that exist at a static point and time. On balance, there is clear danger in crafting overly broad, all-encompassing definitions that would allow for discretionary regulatory overreach in interpreting scope and applicability.

Why am I yammering on you ask to the extent you made it here? I may not be entirely happy with definitions that the crypto community has manifested but it is clear to me at this point that if we do not create structure, definitions and narratives, others will do so for us. This can be seen in the infrastructure bill debates and recent SEC regulatory action against Blockchain Credit Partners and the SEC actively touting a fraud case as the agency’s first DeFi enforcement action, a disingenuous characterization for a DINO (DeFi in name only) project. Definitions are hard to get right but failing to shape well-crafted definitions leaves the space vulnerable from a policy perspective, including the inability to push back on false narratives and poor outcomes.

One conversation currently at the forefront is how do we define a decentralized (autonomous) organization? That is, what are their defining characteristics?

Are these rhetorical questions? And by that I mean, questions that are not capable of a definitive answer — ones that can only spark a dialogue? I have felt at times that it is too difficult or too early to draw definitive lines here. However, as we try to actively shape law and policy, I see value in setting flexible baseline definitions that do not address every intricacy or facet, but provide a base to build upon. The answer must lie somewhere between Wyoming’s overly formulistic approach and the classic “I know porn when I see it”.

With all that said, I will give an attempt at a baseline definition, will put it up on GitHub, and welcome any feedback, improvement etc. but would suggest that this definition can be built upon by a non-exhaustive list of indicative features and characteristics (see Appendix for a start):

Decentralized organizations are cloud cooperatives with an enumerated mission, purpose or mandate, and have fluid affiliation or membership through participation.

Why arrive at this baseline definition?

1. Decentralized organizations are in their infancy, this definition hopefully allows for diversity in purpose, mission, and members — factors that will inevitably require structural and organizational tailoring based on the use case and goals of the organization.
2. A key component of the definition, from a policy perspective, is to focus on fluid membership by participation. Participation, by its nature gives a universal nexus for membership based on agency and affirmative acts (again, this is membership with fluid entries and exits) but must not, *in and of itself*, give rise to liability for the individual contributors. Imputed liability for the acts of a loose cooperative amounts to a non-sensical outcome when the individual contributor can and will otherwise be held liable for their specific acts and omissions (deployer liability). I will leave it to regulators to inevitably formulate additional theories of liability but those would not be based on imputed liability for acts of the collective but instead around the ability to “control” policy and decision-making, akin to c-suite liability or control stakes in deciding the outcome of a vote.

If the above sounds familiar, my goal is a definition that counters the narrative around the applicability of de facto general partnership principles to decentralized organizations and their contributors. General partnership by estoppel is a model that is better applied in the closely held context where a small static group of actors engages enterprise in a single jurisdiction. There is utility in moving beyond the boogeyman of unlimited liability for looking too hard at a DAO and pushing back at the appropriateness of applying partnership law as foregone conclusion given the lack of certain shared fundamental characteristics.

I throw this piece out in furtherance of the above goals and because there is an opportunity now if we are active. There are so many areas where legal friction can be reduced. Having sensible and workable definitions and daring to live in world where you, your mom and your cousins aren’t all broker-dealers, is low hanging fruit. There is power in creating our own narratives (one of them being that we never have to hear “wild west” again) and communally working to create and refine informed and tailored definitions feels like an increasingly essential building block for workable policies that address decentralized enterprises instead of ones that make the space illegal per se.

While I do not speak for LeXpunK, my goal is to contribute what I can to the conversation, hoping these efforts will spark broader debate and improvement on these ideas. LeXpunK is focused on DeFi advocacy through a number of avenues, each pursued in parallel. We can pursue formulating and advocating for the development of laws and policies that make sense but because that may be a long time horizon, efforts should be directed to formulating workable solutions out of existing law and structures and developing crypto native solutions (self-help and self-regulatory practices, opt in arbitration mechanisms, formulating industry “customs” and best practices). It is incumbent upon us all to be active in shaping narratives and advocating for smart policy outcomes.

Appendix — Thank you to all in LeXpunK who reviewed and provided comments and thoughtful feedback. What is evident from responses is both that the definition is very personal to those involved in the space and there is also such a broad diversity of views. I thought it would be helpful to include some of the additional thoughts received as our starting building blocks to expand the definition further:

Characteristics that embody the ethos of DAOs:

• People can participate at whatever level they like and no one needs to define their work agreement (ie you can be part of a DAO with an hour a week and generally the DAO will try to reward contributions proportionally).
• You can be members of multiple DAOs at once, often even competing ones, and mostly people don’t care as long as you create value.
• DAOs don’t care where value comes from. From an anon, another protocol, or the market, DAOs are generally open to all value contributed.

Things that are often true of DAOs:

An association of people, who:

• Do not have a single person or team that carries (some ratio of?) executive power
• Have interactions mediated by one or more associated smart contracts
• Have an articulated purpose, vision, or ideology
• Have fluid membership
• Membership based on participation, whether through contributions or active participation in governance and decision making(forums, use of governance tokens)

Relevant things that can be true of DAOs:

• Be formed for a number of purposes, including without limitation: to build protocols for deployment on the blockchain; collect funds for investment purposes; provide services for customers (such as DeFi services, mediation, etc.); conduct advocacy consistent with the purpose, vision, or ideology
• Be non-profit or for-profit
• May involve specialized membership or diverse membership
• May involve legal entities at one or more levels in the organization
• Involve governance tokens that are transferable or not, and involve different rights
• Have charter documents
• Be permissioned or permissionless
• Involve smart contracts in governance functions, though the degree may vary
• Have investment from VCs or other institutional investors or funded by broad community