Author: Aiying; Source: AiYing Compliance

On November 19, 2024, a ruling from the U.S. District Court for the Northern District of California sounded a legal alarm for decentralized autonomous organizations (DAOs) in Web3. The court ruled that Lido DAO should be regarded as a general partnership. This ruling not only negates Lido DAO's claim that its decentralized structure avoids legal liability but also has far-reaching implications for the compliance roadmap of the entire Web3 industry. As AiYing, a global compliance consultancy for Web3, we will analyze the risks and opportunities behind this event from legal, governance, and industry perspectives.

I. The Legal Identity Dilemma of DAOs: Decentralization Does Not Equal No Responsibility

One of the key points of the court's ruling is the clear indication that although Lido DAO is named decentralized, its operational characteristics align with those of a general partnership, where several entities collaborate for mutual benefit, thus creating certain legal relationships. Under California law, the formation of a partnership does not require a formal registration process; it only requires the existence of a common interest and corresponding collaborative actions. Therefore, the court found that Lido DAO's governance structure and the recognizability of its members' roles make it fit the legal definition of a partnership.

This ruling sets a precedent for how "decentralization" can be positioned within a legal framework. Decentralized autonomous organizations (DAOs) are significant innovations in the Web3 space, typically characterized by the absence of a central authority and governance by token holders. Many DAOs attempt to evade traditional corporate law and partnership liabilities through this decentralized structure, claiming they are not formal legal entities and that there is no legal joint liability among participants. However, this ruling clearly sends a message: decentralized organizational models cannot simply be tools for evading legal responsibilities.

Decentralization is the core ideal of Web3, but the court's ruling indicates that governance's "decentralization" does not mean complete escape from traditional legal frameworks. Members of Lido DAO, including those who participate in voting, actually bear potential legal obligations. This ruling shows us that the path to realizing technological ideals still faces the boundaries of reality in law.

II. Key Participants of Lido DAO: Legal Risks of Partner Status

According to the court's ruling, institutions such as Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management have been identified as "partners" of Lido DAO because these institutions actively participated in Lido's governance and proposal voting. In other words, the court determined that these token-holding institutions that actively engage in governance have transcended the role of mere investors and have become co-managers of the partnership, thus bearing joint liability for Lido's overall actions.

The legal risk lies in the fact that the DAO's "partners" are not limited to the organization's creators and core developers but may also include all members who actively participate in governance. From a legal perspective, this means that the risks and responsibilities among DAO members significantly increase. If a DAO is viewed as a general partnership, its partners will bear unlimited liability for the organization's debts and actions. In the case of Lido DAO, this ruling may prompt DAO members to reassess the consequences of participating in governance—where even simple actions like posting in community forums or voting may be seen as "active participation," potentially entangling them in complex legal disputes.

III. Legal Challenges and Opportunities in Decentralized Governance

This ruling undoubtedly impacts decentralized governance across the entire Web3 field. Miles Jennings, the general counsel of a16z, believes that the court's ruling "deals a significant blow to decentralized governance," as it means that even minor governance participation could lead to substantial legal liabilities. For developers and investors in Web3 projects, this undoubtedly increases operational and legal risks.

However, such challenges may also become opportunities for promoting internal change within the industry. How DAOs can find the best balance between decentralization and legal compliance in their design and operation is a key issue that various projects must face moving forward. This means that decentralized autonomous organizations may need to gradually adopt hybrid governance structures or reconsider their legal forms, possibly opting to register as limited liability companies or other forms of legal entities to limit participants' liability risks.

At the same time, this also brings new exploration directions for the Web3 compliance field. Designing a governance framework that maintains decentralized characteristics while providing legal protection for participants is one of the most challenging topics in the compliance services sector currently and in the coming years. The future of DAOs may not lie in complete decentralization but in the combination of flexible organizational structures and legal identities, finding the best intersection of innovation and compliance. We at AiYing will continue to provide compliance pathway planning for Web3 enterprises, helping industry practitioners understand and address complex legal risks.

IV. Long-term Impact and Development Direction for the Industry

This ruling may just be the beginning of a future wave of regulation. As Web3 technology gradually penetrates various fields such as finance, gaming, and social networking, traditional regulatory agencies' attention and control over decentralized organizations will also gradually strengthen. The Lido DAO case marks the transition of DAO governance from an experimental technological concept to a legal reality. In this process, regulatory clarity may be an important guarantee for the healthy development of DAOs.

For DAOs, one possible future direction is to introduce "legal wrapping," which means providing legal exemptions for participants through the registration of legal entities beneath the surface of decentralization. This can meet the innovative demands of decentralization while legally reducing risks. We see that the future of Web3 may not solely pursue complete decentralization but rather pragmatically find a middle ground. Decentralized projects represented by Lido will require more refined legal advice and compliance support to ensure that they can withstand the uncertainties brought by the ever-changing legal environment while continuing to innovate.

In a fast-paced era, more flexible legal solutions are needed. The future DAOs may no longer be completely free utopias but will find a dynamic balance between ideals and reality. For all DAO participants, compliance and risk control will no longer be optional add-ons but key issues that relate to the survival and death of projects.

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