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The Place Of Decentralized Autonomous Organizations – Contracts and Commercial Law



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THE BLOCKCHAIN DICTIONARY from Turkey’s Digital
Transformation Office defines decentralized autonomous
organizations (“DAOs”) as: “Autonomous
organizational structures and management processes in which
decisions are made jointly by all network participants where the
rules defined by blockchain protocols or smart contracts guide the
decisions of the participants and an automated managerial consensus
is established.”

The participants in DAOs can be deemed to be similar to
investors in a public company, where the tokens held by these
participants work as stock shares. Each governance token grants the
holder a voting right, thus the ability to take part in the
DAO’s management. Actions or transactions embedded in smart
contracts are automatically carried out following the consensus of
the participants’ majority. DAOs do not have a corporate body
taking part in the DAO’s management and every decision is made
via a voting process among the participants.

Even though their mechanism is quite clear, the question of
DAOs’ place in the legal system remains unanswered due to the
lack of legislation.

By analogy, DAOs may be associated with ordinary partnerships.
Under Turkish Law, ordinary partnership agreements are agreements
in which two or more persons undertake to combine their labor and
property to achieve a common goal. Similarly, all participants in
DAOs also share the same goal: achieving a common objective through
the DAO’s activities. The Turkish Code of Obligations
stipulates that the partners in ordinary partnerships are to share
all the earnings that belong to the company among themselves. DAOs,
on the other hand, may automatically use their earnings, if there
are any, for another collective cause, such as a charity donation,
which does not necessarily nor directly act to the benefit of the
participants. Another similarity between the two institutions is
that both ordinary partnerships and DAOs do not have legal
personalities.

However, in a broader sense, DAOs are much more venturesome
compared to ordinary partnerships. One point to think about is that
DAOs have a high risk of being attacked by malignant participants.
If the malignant participants’ number is enough to exceed the
consensus limit, they may exploit the system. Having said that,
such an act may not be wise since the DAO may stop benefiting the
malignant users if all the other participants leave the system
after the attack. Alternatively, the smart contract embedded within
the DAO may have errors in its code, as was the case in the
infamous “The DAO attack” which resulted in over USD 50
million being stolen in 2016.

One may think that DAOs could be deemed similar to commercial
companies. However, for the time being, (i) as DAOs are not legal
entities, and (ii) even though they resemble public companies as
stated above, since they lack the strict monitoring that public
companies are subject to, they cannot be considered to be
commercial companies as stated in the Turkish Commercial Code.

All in all, even though DAOs resemble ordinary partnerships, we
believe that these similarities will not be enough for the Turkish
judicial system to consider DAOs as ordinary partnerships unless
explicitly regulated. We further believe that explicitly
introducing DAOs to the legal system will be beneficial as, in
theory, they have great potential to gather like-minded people
together for the pursuit of their collective objective. Provided
that the code does not contain any errors, DAOs may well be used
for trustless crowdfunding or charity purposes. To illustrate, a
DAO may be established for the purpose of donating a sum of money,
as soon as the ex-ante money has been gathered by the participants.
Following the collection of the projected amount, the money/tokens
raised will be automatically transferred to the relevant
charity’s account.

The convenience of DAOs in crowdfunding is undeniable as any
person with an internet connection can easily join the fundraising.
However, unless DAOs are very well regulated, elimination of the
chance of their smart contracts being faulty or attacked is
near-impossible.

Originally published by TR Monitor.

© Kolcuoğlu Demirkan Koçaklı Attorneys at
Law 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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