Decentralized Autonomous Organizations Face Legal Challenges: The Lido DAO Case Provokes Industry Reflection

On November 19, 2024, a ruling by the Federal Court for the Northern District of California triggered extensive discussions in the Web3 industry regarding the legal status of Decentralized Autonomous Organizations (DAOs). The court determined that Lido DAO should be regarded as a general partnership, a decision that not only refuted Lido DAO's claim that its decentralized structure could circumvent legal liabilities but also had far-reaching implications for the compliant development of the entire Web3 industry.

The Legal Identity Dilemma of DAO

The core of the court's judgment is to clearly point out that although Lido DAO is named in the name of decentralization, its operational mode actually conforms to the characteristics of a general partnership. Under the legal framework of California, the formation of a partnership does not require a formal registration process, as long as there are shared interests driving and corresponding collaborative actions. The court found that the governance method of Lido DAO and the recognizability of member roles make it conform to the legal definition of a partnership.

This ruling provides important reference for the positioning of "Decentralization" within the legal framework. Although Decentralized Autonomous Organizations are significant innovations in the Web3 space, this judgment clearly indicates that decentralized organizational models cannot simply be used as tools to evade legal responsibilities.

Legal Risks for Lido DAO Participants

In the court ruling, some well-known institutions were recognized as "partners" of Lido DAO due to their active participation in Lido's governance and proposal voting. This means that these institutions, which hold tokens and actively participate in governance, have transcended the role of mere investors and become co-operators of the partnership, and thus bear joint responsibility for Lido's overall actions.

This ruling greatly increases the risks and responsibilities among DAO members. If the DAO is considered a general partnership, its partners will bear unlimited liability for the organization's debts and actions. Even simple actions like posting on community forums or participating in votes could be seen as "active participation," potentially leading to complicated legal disputes.

Challenges and Opportunities of Decentralization Governance

The ruling undoubtedly has an impact on the decentralized governance in the Web3 space. Some industry insiders believe that this ruling means even minor participation in governance could lead to significant legal liability, which undoubtedly increases operational and legal risks for developers and investors in Web3 projects.

However, such challenges may also become opportunities to promote changes within the industry. In the design and operation of DAOs, how to find the best balance between decentralization and legal compliance has become a key issue that various projects must face. In the future, Decentralized Autonomous Organizations may need to gradually adopt hybrid governance structures or reconsider their legal forms, choosing to register as limited liability companies or other forms of legal entities to limit participants' liability risks.

Long-term Impact on the Industry

The Lido DAO case marks the transition of DAO governance from an experimental technological concept to a legal reality. As Web3 technology gradually permeates various fields such as finance, gaming, and social interactions, traditional regulatory agencies will also gradually strengthen their attention and control over decentralized organizations.

One possible future direction for DAOs may be to introduce "legal packaging," which means providing legal exemptions for participants by registering legal entities beneath the surface of decentralization. This can both meet the innovative demands of decentralization and reduce legal risks.

The future of Web3 may not solely pursue complete decentralization, but rather pragmatically seek a middle ground. Decentralized projects represented by Lido require more refined legal counsel and compliance support to ensure that while continuing to innovate, they can address the challenges posed by the constantly changing legal environment.

In this fast-paced era, future DAOs may seek a dynamic balance between ideals and reality. For all DAO participants, compliance and risk control will become key issues related to the survival and development of projects.