Decentralized Autonomous Organizations

Mark Lurie:

Welcome to WTF, Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on and how it affects you and your portfolio. I'm your host, Mark Lurie. And as a caveat, nothing in this podcast is legal or investing advice. Today we're talking about DAOs with Adam Miller of MIDAO. Welcome Adam. Thanks for joining us.

Adam Miller:

Yeah, it's great to be here, Mark. Thank you.

Mark Lurie:

So over the past year, thousands of DAOs with millions of holders have grown to hold over $12 billion in assets. Everyone seems to be talking about them, but no one seems to agree on exactly what they are. That's an enormous amount of human energy and assets in a brand new thing. And it seems like this really matters to crypto traders in particular because most Web3 products they use and many tokens they hold are actually controlled by DAOs. So the value of people's portfolio very much depends on these DAOs, not to mention the potential impact they can have on society. So I'm really excited to talk about them and learn about them today. So why don't we start by understanding a little bit about you and what makes you such a compelling guide on this topic?

Adam Miller:

Yeah, that sounds good. Thanks Mark. So it's great to be here. And my crypto journey started very early on as you know because I got into Bitcoin in 2012 and convinced you and a few other lucky people that they should buy some.

Mark Lurie:

Yes, you did. You sold me my first two Bitcoin before I lost them in Mt. Gox.

Adam Miller:

Yeah, that's right. Probably for $200 or something, but I guess that doesn't matter now.

Mark Lurie:

It was $200. Exactly. So thank you for that.

Adam Miller:

And so I was into crypto early, but honestly it wasn't until a couple of years ago that I really saw the crypto light. And that was when I got exposed to Ethereum and everything happening in Ethereum ecosystem, all the dApps, all the DeFi. And just playing with MetaMask and various apps in my browser, I knew that this was the future of the internet and in a lot of ways, the future of humanity is blockchain, is crypto.

Adam Miller:

And I know we'll talk more about that later, but where that took me to was I started a consulting company doing consulting for DAOs. So I was helping people launch and operate DAOs especially looking at the technology side and helping them figure out what platforms they may want to use in running their DAO. And as you know, Mark, that's when we connected, reconnected and decided to instead work on MIDAO together. So I'm sure we'll get to talk a lot about MIDAO as well, but just a brief introduction is that MIDAO is helping DAOs set up legal entities, LLCs, in the first jurisdiction that truly respects the nature of DAOs, which is the Marshall Islands.

Mark Lurie:

That's right. And for those listening, Shipyard Software, my company, created the first DAO in the Marshall Islands, Admiralty, and Adam along with MIDAO helped us incorporate there. So Adam, you also have a little bit of background prior to DAO lens in the traditional markets. So can you just tell us a little bit about that and where you come from even beforehand?

Adam Miller:

Yeah, absolutely. So I've been an entrepreneur since I was a little kid. I was creating businesses in my imagination and writing up their financial models in Excel when I was like seven years old and Excel was really-

Mark Lurie:

That was like in the '90s or something. I hear you could IPO for $1 billion with nothing but that in the '90s.

Adam Miller:

I wish. I wanted to be like all those people that I saw in the news and on TV in the '90s who were starting internet companies and doing these amazing things. But as a 10 year old, 12 year old, I even wrote business plans, but unfortunately I wasn't one of those Sivans who was able to go public at 12 years old. But I did start my first company when I was 13, which was originally called a computer consulting company. Eventually that turned into internet consulting. I was helping businesses create their first website, get their first email accounts, set up their network infrastructure. I started to get into online marketing and search engine marketing when that took off later on.

Adam Miller:

So that was how I got started in entrepreneurship. I went to MIT, I studied economics there, but the whole time I was there, I was doing a lot of entrepreneurship on the side. And coming out of MIT, I decided that I wanted to build my own business instead of helping other people build businesses with technology. The first business I started was a web startup incubator and the incubator helped start... We raised some money, we helped start three companies. And as you know, one of those companies was called Abroad101, which is a review website for study abroad programs, and Mark was a co-founder of Abroad101.

Mark Lurie:

You have a lot of history.

Adam Miller:

We do. Yeah. And Abroad101 after about a year, I think Mark decided he did not want to run that company. And so I took over as the CEO. I dropped the incubator and ran Abroad101 for the next six or seven years until we sold it to one of our investors. After Abroad101, I spent six years in the [inaudible 00:05:53] world. So I went to work for Capital Group, which is a 90 plus year old leading global investment management firm in their innovation team called Emerging Technology. And we did end up doing some blockchain research and experimentation, some crypto stuff, but for the most part, I was looking at how we could innovate using all kinds of new technologies, AI, cybersecurity, blockchain included. And then that's what led me to eventually leaving that job and getting into crypto full time.

Mark Lurie:

Okay, great. Thank you. DAOs are so young. No one has been involved with them for more than a couple years. So it's like you're already a grandfather. Can we start just by like level setting on what's going on today? Like how many DAOs are there? How big is this thing and what is a DAO?

Adam Miller:

To me a DAO is an organization who's governing rules, you could think of them as the bylaws, can be set forth on the blockchain instead of imprinted documents and whose governance, so voting and related matters, can be executed in code on the blockchain rather than again, in emails and written documents. And I want to emphasize that with both of those two things I said can not are or is because most of the DAOs today are not yet doing anything on the blockchain. It's part of their vision and they want to decentralize, they want to use blockchain to make everything transparent and reliable and censorship resistant, but realistically, most DAOs today are Discord servers or communities of people that have been around for a while and then six months ago said, you know what, we're going to turn into a DAO. We got to figure out this DAO thing. And they might not actually be doing everything on the blockchain yet, but I don't see any reason not to call them a DAO.

Mark Lurie:

So that would imply... And Discord servers are kind of like Slack servers or group chat rooms. And so ultimately it sounds like in its broadest form, a DAO might be considered like a group of people with a shared vision in a chat room who want to do stuff on the blockchain. Is that like kind of the broadest practical definition that people throw around?

Adam Miller:

I would say so. I would say so.

Mark Lurie:

Okay.

Adam Miller:

Yep.

Mark Lurie:

And then in its most rigorous form, it's where the actual like laws of organizing, like bylaws of a company are actually on the blockchain as the kind of votes.

Adam Miller:

Exactly.

Mark Lurie:

Okay. Got it.

Adam Miller:

Yeah. Yep. And for a lot of DAOs, their money as well. So most DAOs will, again, eventually at least have a treasury on the blockchain. And so they control their money totally transparently and through the same governance process as well.

Mark Lurie:

Okay. Got it. And how big is this right now? Because there's lots of headlines, but that's pretty broad definition. So it's like a little confusing what this industry is.

Adam Miller:

Well, I'll just jump to the end state for a second, which is that DAOs are going to change everything about how we organize people and resources, everything from high school, chess clubs, up to international governments and everything in between, including companies, nonprofits, associations. Literally anyone who wants to organize people and resources let's say three to five years from now will be asking themselves, do I want to do it the old way or do I want to do it through a DAO? And so I looked up recently, according to one resource, there are something like 300 million companies in the world. Eventually there are going to be 300 million DAOs in the world, if not more.

Mark Lurie:

Okay. So big vision will unpack that and I'll play a little devil's advocate, but before I do, where are we now? Like I'm pulling up deepdao.io and it's saying like 12 billion in treasury, 2 million voters or governance token holders. Does that sound right for the state of the industry today?

Adam Miller:

I would say no. I think that DeepDAO is a really valuable resource, maybe the best for looking at the activity of established DAOs that they're aware of. But before our call, I decided to look on DeepDAO to see if any of the DAOs I'm a part of are on there and the first six that I checked are not on there. And I can guarantee you of the, let's say 200 DAOs that I've spoken to in the last couple months about MIDAO, almost none of them are on DeepDAO. They're startups, right? They're just getting going. Or again, there could be a community of 100,000 people all over the world and they've decided they're a DAO, but they're not on DeepDAO yet. So I think that DeepDAO is representative, but really there's a 10 to 100 times as much activity actually happening, especially at the startup stage of DAOs than is actually captured there in DeepDAO.

Mark Lurie:

Okay. So then presumably, DeepDAO is like looking at actual on-chain activity and that's how it's getting its statistics. But to your point earlier, the broader definition of DAO that's colloquially used is just like a bunch of people in a chat room who have a shared mission and aspire to be on the blockchain. And so when you say it like that, it makes sense that it would be much broader, but it also seems like it's a little bit of semantics, right? That's like a club. It's like how many clubs are there in the world? Well, there's a lot of clubs. And so if all those clubs said we're a DAO, then that redefines something that's already happening to a certain extent, which I guess is fine because that really hasn't had a label before. So we're labeling something. To what degree is it a relabeling something that's already happening versus movement that we should call like new DAOs?

Adam Miller:

My intuition is it's a movement. This is a revolution. What's happening with DAOs today, it's so early for sure, but this energy, we're just seeing the beginning of it. So I'm convinced that first of all, 2022 will be considered the year of the DAO when we look back on it and most of the action hasn't happened yet. I think in the next eight months, we're going to see a lot of Fortune 500 companies start DAOs to engage their customers and their communities. I think we're going to see 10 to 100 times as many organizations on DeepDAO because they've actually created their treasuries and they're doing governance on the blockchain, and a measurable number of people all over the world who are saying to their friends and their colleagues, "Hey, maybe we should turn this thing into a DAO."

Adam Miller:

And I would say like a key element of the DAO coming from a crypto perspective especially, others may have a different view is that they've got to try to do stuff on the blockchain, right? They've got to do stuff on the blockchain at least eventually. They have to use it for governance, treasury, bylaws, et cetera. Otherwise, maybe they haven't successfully become a DAO. Maybe they got close, maybe they call themselves one, but that's really the vision people need to be [crosstalk 00:13:11].

Mark Lurie:

Okay. So that's the bright line. That's your stake in the ground for what is a club and what is a DAO.

Adam Miller:

Yeah, exactly.

Mark Lurie:

And it sounds like that's a reasonably widely shared distinction as well. Is that fair?

Adam Miller:

At least in the crypto community, absolutely. But to be fair to some of the folks that I've spoken with over the last several months, there are lots of people from the traditional world of, let's say, cooperatives, who have a history dating back even thousands of years to native cultures that had things like DAOs like cooperatives that have been working on the challenges of how do we organize a much more decentralized group of people at scale to achieve goals together? And some of those people would say that those are DAOs, right? Even if they're not using blockchain because they're similar in so many other ways. So I'm not going to tell anyone you can't call it a DAO, but my view is that what really makes something a DAO at least from a crypto industry perspective is that they're doing things on-chain ahead.

Mark Lurie:

Okay. And that makes sense because one way to think about what's relabeling and what's new is what's the actual new thing? And the new thing to your point is like being cooperatives for a long time, but the new thing is putting these rules of engagement on the blockchain. Okay. For the purposes of our conversation, we'll stick with that. And so that raises the question, the perennial question like why is that actually useful? Like why do we care that the rules are on the blockchain?

Adam Miller:

It's a hard question sometimes because I think the technologists inside many of us in the crypto community, we can see a new technology capability and believe in the core of our being that it's going to change everything. And I think we're right. And that belief comes from a lot of experience and history and knowledge. And in the case of DAOs, that capability would be the ability to have a fully transparent and automated governance and treasury management system on the blockchain, right? And that alone to a lot of us is like, oh my God, like that takes, let's say the set of capabilities that businesses have had at their disposal throughout history and adds another layer to it. And it's like, of course people are going to take those new capabilities and combine them with all the old capabilities in new ways and create these amazing new beasts of business and of organizations. But I think that is pretty conceptual, right? I think it's important to get a little more specific.

Mark Lurie:

Yeah, it is very conceptual and that makes it hard because there's a couple ways to think about saying, why are DAOs important? One is like, well, here are the new things that it could create in the future that... And we don't even know what those are yet, right? It's like when Thomas Edison invented the light bulb, it's like he wouldn't think necessarily of all the changes that would imply, but he can imagine it's definitely going to open up a whole new set of things, right? Like we're not tied to working hours anymore. There's just a whole world of things. And those are conceptual. And so they're a little tough to discuss. So can we start by just digging into like the concrete and the now. Like let's say you were going to start a company with bylaws, or you were going to start a DAO. What's the pros and cons of that? And I have some thoughts on it, but I'm curious what yours are first.

Adam Miller:

The first place I would probably go is to start with your mental model of a traditional company. Let's say there are shareholders, there's a board, the board hires a CEO and the CEO hires everyone else. The simplest thing you could do with a DAO is just take the shareholders of that traditional company and instead give them tokens and allow them to use their tokens to vote instead of voting on paper. You already have what I would barely consider to be a DAO because now you have token holders electing the board instead of shareholders. And those tokens do give you new abilities.

Adam Miller:

The next place I want to go though that I think is really important because this is what we're seeing a lot in DAOs today is instead of replacing the shareholders with token holders, replace the board with token holders. So if you have a community of 10,000 people, all 10,000 people are effectively on the board, they get to decide who they want to hire and do they want to have a CEO or not? Do they want to have several committees that share power? And so that it's almost like having a giant board that just would've been impossible logistically to handle and manage before the blockchain.

Mark Lurie:

Why is that impractical demand? Is the reason that companies don't put many more decisions up for a shareholder vote because it's like logistically hard or because it's just less effective?

Adam Miller:

Especially most of the DAOs that we've seen so far, they're being started by people who want to try to do something more decentralized and with less hierarchy. So they don't want to put any one person in charge. They don't want to have a board that gets all the power. They feel like those are things that reduce engagement, make fewer people want to invest or contribute to the company. It would be a company that fewer people would want to work for. And so they look at that traditional structure and they say, you know what? We just don't want to do that. We want to save the rainforest, but we just don't want to do it through a traditional 501(c)(3) corporate structure. We want to do it in a way that everyone shares the power and the rights and potential upside even.

Adam Miller:

And so if you're approaching it from that view of like we just don't want to do it the old way. We want to do in much more of a community driven way. Well, now there's a structure that allows 10,000 people to effectively directly control a bank account basically, a treasury on the blockchain and directly control the governance of an organization in a way that only a board could do before. So that's the biggest use case today.

Mark Lurie:

Okay. And one other that I think a lot about is enforcement, right? Like today when we have contracts between each other, or we have bylaws, we form a company together and we have bylaws, we kind of like trust each other to actually go by the words of the agreement, but actually like the only thing keeping people in line to the agreements I guess is, one, their values, right? Their integrity, but two, the threats that like you'll sue if I violate them. And so it's kind of this like after the fact, it turns, it's like why do rules stick in bylaws of companies today? Because you might get sued if you don't do it. And the thing is that the reality of that is that no one likes suing. It's so expensive and it's so stressful that like it just doesn't happen.

Mark Lurie:

And so I guess what you have is like a bunch of people running around who have like power in companies and just often don't obey the rules and there's not much people can do. It's kind of like if I do a contract with Google and they commit to only using my data in a certain way, and then they just go ahead and use it in another way, or like Facebook, which happens, what am I going to do? Sue Facebook? I'm not realistically going to sue Facebook. And so we're just kind of like out of luck. And it strikes me that rules in the blockchain are interesting because when you put the rules in code, it's like they can't be violated. No, it's not enforcement by deterrence, it's enforcement by upfront constraints. And that seems really interesting because it actually makes me think that corporate governance could work a lot more smoothly and avoid a lot of stress.

Adam Miller:

Absolutely. And I think a lot of what you're talking about is part of the vision people originally had for smart contracts, right? Even before we really knew what smart contracts were or what they could do several years ago, I remember talking to people about this idea that, well, what if instead of having this 20 page document that we both signed and like you said, can only be enforced after the fact by suing someone, what if instead of that we could write our contract in code and it would be automatically enforced? How much better would that be for so many different situations, including the governance processes of a company.

Adam Miller:

So, yeah, I absolutely think that even if you want to run a company that's almost exactly the same as the structure that you would've used a traditional entity for, you might still benefit from DAO, from being a DAO, using DAO technology and concepts to make things more transparent, more enforced ahead of time through code. I absolutely think that eventually that's what a lot of people will do, but we'll also learn over time how effective is this new type of more decentralized, less hierarchical organizational structure now that it's possible to do it at scale. Maybe it is better in more are ways than we can imagine than the traditional corporate structure and people won't want to fit this new technology into the old mold.

Mark Lurie:

Yeah. Well, there's always been this idea of like paradigm shifts in science where you have two competing theories and like there might be a few reasons why one theory is better, but no one gives up the original theory until there's like a crisis that requires them to switch. And then once they do, they take advantage of a lot of the little things that actually are more efficient, more predictive about the new theory. And so it strikes me that DAOs in some ways are the same. It's like you need a strong reason to do it instead.

Mark Lurie:

And then there's like 100 incremental things which are actually just better and help it stick. Like you could have decisions made by 1,000 different people in the normal company, but it really isn't practical. It really just is much more practical with tokens. And so maybe there's a bunch of those things that... But each group needs one big thing in order to really understand why it might be worthwhile to be a DAO instead of doing something more traditional.

Adam Miller:

Yeah. And we should also think about the possibility of how DAOs can operate is much greater than how DAOs are operating today. A good example is that most DAOs today, if they do do their governance on the blockchain, it's basically everything comes down to a majority vote, right? Every proposal to spend money, every proposal to change anything meaningful comes down to some kind of majority vote and some kind of quorum. And I think we all have experienced many of us through our democracies and probably other experiences that people don't really want to vote and they don't really pay attention. Maybe sometimes it's more of a popularity contest than more of a rational contest. So I think what a lot of people are working on and what will be really exciting is when the underlying technology that is automating governance of a DAO can be much more nuanced and interesting in how it helps large groups of people make decisions and do things together than the current structure, which is just everybody votes on everything.

Mark Lurie:

Yeah. Yeah. Interesting. It makes me think about New England towns. So those listening may not know this, but in small New England towns, since colonial days prior to the American Revolutionary War, towns were complete direct democracy and they remain so. So if you go to a small New England town, they have a like town meeting in the high school and like everything's up for a vote. And it's entertaining, but hard to go every month or every quarter because everyone's allowed to talk for as long as they want and there's always some cooks and it's a little bit of a mess, but it works on a small scale. But like that's how America started and over time we implemented structures and best practices to figure out how to do governance at scale. And so like once you become a city, maybe it's not direct democracy anymore. Maybe you have a mayor. And then once you get to a state, maybe you have a governor. And so it strikes me that I guess we're just at the very early stages and it's sometimes sad because it's tough to be judged by the early stage.

Adam Miller:

Yeah. And my challenge to all of us is we've got to think really creatively about how we can find new ways of governing systems, right? This is about much more than just the technology. This is about, okay, several hundred years ago, we invented democracy and maybe it was direct democracy, and then a couple hundred years later, we figured out mayors and governors, and then we figured out X, Y, and Z. What did is that next, like you said, new paradigm in how we want to govern now that we know what's possible with the technology? Because when people were designing direct democracy, when they were designing mayors and governors, they knew that it was virtually impossible to have people constantly voting in a fully transparent way on any [crosstalk 00:27:23].

Mark Lurie:

Yeah, they didn't even have telegraphs yet much less like phones and Zoom.

Adam Miller:

Right. Exactly. And so now that you can do literally anything you can imagine doing with a token on a blockchain, you can do. I don't even think it's possible to imagine something that's completely impossible with this technology. So if you can imagine it, for the most part, you can do it. And so that's what people... Someone wrote me a message on LinkedIn the other day. They studied law, they studied politics. They've been in government their whole life. And they said, "Hey, has anyone thought about using DAOs to help run governments?" And of course, a lot of us have thought about that, but I haven't really seen a compelling experiment yet where someone has applied this technology to truly help a local or any kind of government run. Those are things we should all be thinking about. What's the next step in that regard?

Mark Lurie:

Yeah. Super interesting. In another 20 or 100 years, people may look back on crypto and blockchain in this phase and think less about Bitcoin and DeFi and more about DAOs and governance. Human organization is that from which all other things spring.

Adam Miller:

And it goes beyond humans though. Depending on how you like to look at the world, we have our machine intelligence as well. And whether that's autonomous drones or just automated information systems, now they have equal access to every element of these systems that humans have access to. And so I think what we haven't seen a lot of yet but we really will see soon is either DAOs that govern otherwise autonomous systems and autonomous systems, which you can think of as just being another smart contract somewhere on the blockchain that's more automated having a vote in what happens with the DAO. And so it won't be too long before it's already technologically feasible to have fully automated organization, right? And so as people start to combine that concept of fully automated with still engaging people at the right time in the right way, that opens up the possibilities even further than just how can humans organize themselves.

Mark Lurie:

So it would be... Just bear with me here. So it would be like you have the US and instead of giving each individual person a vote, you give each person a vote and each like Tesla autopilot a vote on gas taxes or something like that. And like the Teslas are programed to vote in a certain way always to like maximize gas tax. And so you see where things end out and probably that's not what we should do for the US because like people get votes but it might be useful in other business contexts.

Mark Lurie:

It's like an internal market that doesn't necessarily work on dollars and cents but on votes that can be apportioned. It's interesting. I'd have to sit and think to imagine. Okay. So can we get one level deeper though because we talk a lot about like this being new and smart contracts and like code's been around for a little while too. So like let's zero in on why the blockchain and smart contracts matter specifically for this governance.

Adam Miller:

You could imagine if in a world where there was no blockchain but we knew what we knew today, we might start a company that says, you know what, we're going to be the governance and treasury automation provider. We're going to allow you... And we're going to be like an Amazon though, right? We're a platform. You come onto our website and you set up your call it a DAO, call it whatever you want. You set up your DAO and we will hold votes for you, we will double-check the counts and we'll make it as transparent as we can. We'll hold your money for you. And if you want to set up rules as to what it takes the community voting to be able to spend the money, we'll make sure it follows those rules. And now you can have what is capability-wise very similar to a DAO.

Mark Lurie:

Yeah. Like escrow.com for company organizations.

Adam Miller:

Yeah, yeah. Right. Like escrow.com taken to another level. And I wouldn't be surprised actually if we do see things a little bit more like that from the centralized world of business, but the reason that it's so much more compelling to do this type of thing on a blockchain is that you don't have to trust someone like an Amazon with your entire company, right? Let's say you build the next Apple, but you're running on Amazon for your governance layer. I think that's something that most people don't want. What they want is to be able to know with certainty that whatever rules they set out ahead of time will be followed and that no one company or small group of companies or people can either cheat the system to benefit themselves or take advantage of you in some other way, whether it's price gouging or harvesting your data.

Adam Miller:

I think just the thought of running an organization in that kind of way is just too scary for most people to want to do if you have to have a trusted third party. And so that's where the value of blockchain and smart contracts come in is now we can do this in a way that doesn't require some company or person to be completely [crosstalk 00:33:06].

Mark Lurie:

I see. So basically you write up the code and you put it on the blockchain. The benefit of the blockchain is that the code's running on computers that are distributed. Like the codes run on 1,000 computers that all sync on the answer. And that way you can't go down, shut down, sue, or have to rely on any one of those computers because like they can't stop it or start it on their own like Napster.

Adam Miller:

Which reminds me too censorship resistance, which is one of the key features of blockchains for any application, which means by the way that you can't stop someone from using it. That's a really important feature for DAOs too. Maybe not in the short run if you're a bunch of US citizens and there's some business you want to run that is definitely not going to come a foul of our government here, but let's take the example of the Canadian truckers. If you haven't heard about the Canadian truckers, there were protests going on in Canada by truckers and without wanting to get into right or wrong, the Canadian government took away their bank accounts, blocked their bank accounts to try to stop them from protesting. And this was a real shock to a lot of people in the Western world because we think of the Canadian government as being a very liberal democracy.

Mark Lurie:

Yeah, I thought you were going to use Venezuela as an example or like Somali.

Adam Miller:

Yeah, it's a good point that you would think that because that's where it gets even more extreme. But even in Canada, some of these truckers were able to use cryptocurrency to continue to operate in some fashion. Even though they weren't allowed to turn that cryptocurrency into Canadian dollars because the government put a kibosh on that too, they could take their Bitcoin and pay it to a friend or a store owner to get whatever supplies they needed. Next time there's a Canadian trucker thing, they're going to form a DAO, right? If anyone in that community is aware of what's possible because now you can have the Canadian truckers organize an organization that itself can hold and spend money and take other action that all the truckers can join and they can operate something together that because it's on the blockchain will also be censorship resistant. So just like the Canadian government can't stop the Canadian truckers from spending their Bitcoin, the Canadian government cannot stop their Canadian truckers or anyone else from joining and participating in a DAO.

Mark Lurie:

Got it. Super interesting. So with that said, this is maybe a good segue into what you're doing at MIDAO because it can be useful to operate apart from governments, especially in certain contexts, but it's also useful to operate with governments. And just because members of DAOs can organize in a DAO, it doesn't mean they don't also live in the real world. They obviously do live in the real world. And so like they do have to deal with laws. So how do you bridge that gap?

Adam Miller:

Yeah, great question. So it's another thing that crypto people talk about a lot is to what extent do we want to be as subversive as possible with this technology and to what extent do we want to recognize that we're still living in the real world and whatever innovation we want to see happen has to happen in that context? And therefore let's play along with the rules of the real world while we work on this cool technology. And the same thing definitely applies to DAOs. So there are really two main features, traditional legal entities, which is to say traditional businesses, right? Normally someone starts a business and eventually they create a legal entity for that business. That's when the business gets a name and you can put incorporated, inc at the end or LLC at the end.

Adam Miller:

When they do that, they get two things. These two things are also really valuable for DAOs. And that's where MIDAO has come in and said, well, we want to create a way for DAOs to get these things too. That's what we're doing. One of them is called limited liability. So limited liability is a legal concept that says that first of all, if a group of people does something together as an organization and they do not have a legal entity, then anything that goes wrong, all of the members of that group can be held liable for the actions of the group and the other people in it. So like if we started an investment fund just the five of us and didn't have a legal entity, and then we accidentally ran afoul of SEC laws or we lost investors' money, we could all be sued for it. And it wouldn't matter if I made the decision or you made the decision, we could all be sued for it and lose everything.

Adam Miller:

What the liability shield of the legal entity does when you form a legal entity is it protects all the individuals from liability so that only the organization itself can be held liable. So just like if you think about your traditional job as an employee of a traditional company, even if you do something wrong, no one can sue you. They sue the company because the company did something wrong. So that's what limited liability is and that's what an LLC, for example, for MIDAO can provide for a DAO is that limited liability for its members. And if we didn't live in the legal system we lived in and you couldn't come after and sue people for anything you want, maybe you wouldn't need limited liability. But as long as we live in a world where you can get sued for almost anything your organization does unless you have a legal entity, DAOs are going to want to generally form legal entities.

Adam Miller:

The second thing that's really valuable that traditional companies get that DAOs will only get if they form legal entities too is called corporate personhood. And corporate personhood is generally speaking, the ability for a company to do all of the things in the world that a person could do. And those things are owning property, right? You want to own a house as a group of people, five people can just say, yeah, just put all five of us on it, right? If you want to really own it collectively, you want to form a legal entity and then buy it through that legal entity. Same with other types of property like intellectual property. If you want to own your DAO's logo as a group and have that protected by the law, you need to have that corporate personhood so that there is an entity that owns the logo rather than it just being the person who made the logo or the person that the logo was sent to.

Adam Miller:

It also allows you to enter into agreements. So if you want to enter into an agreement to hire someone or you want to enter into an agreement to partner with another firm or to invest in a company, or you want to sue someone or even exist to be sued and pay taxes if those are things you want to do. To do all this stuff, you have to have a legal entity and you have to have that corporate personhood. So those two things whether we like it or not are things that you need. If you want to have limited liability and you want to be able to enter into all those types of agreements and own property, you have to have a legal entity.

Mark Lurie:

Okay. So second one makes total sense. Like there's just a lot of practical things. You want to sign docs, you want to own real assets and you're organizing with other people, you got need corporate personhood. But you're telling me that like all these people in DAOs, like what do we say, $12 billion and like 1.7 million governance token holders, most of them are running around with no limited liability doing all their stuff with this $12 billion.

Adam Miller:

Yeah, that's right. Now, a lot of those DAOs have started to solve the legal entity challenge either with a modern solution like the MIDAO DAO LLC, or perhaps finagling a traditional corporate entity like a Delaware C-Corp in some way relation to their DAO to protect them from some things.

Mark Lurie:

Okay. But how come there aren't like insane lawsuits. Like I can't drive down the highway without seeing like a personal injury lawyer getting people to call if they have a neck brace on. And I feel like Elon Musk is sued every two minutes for what he tweets. Like one would think there would be a lot of lawsuits going on.

Adam Miller:

Well, for one thing, most of these DAOs were formed in the last year. So maybe they just haven't had enough time to like screw up in a large quantity and get sued by people or we haven't heard about it yet.

Mark Lurie:

That's terrifying.

Adam Miller:

So that's certainly one possibility. Yeah. Another thing is that people who are very legally savvy and had thought about these things before, there were solutions that could protect you as an individual, such as forming a legal entity for yourself and then having that legal entity participate in the DAO rather than you participating in the DAO directly. And so I know a number of people who created those legal entities to protect themselves so that everyone else in the DAO doesn't have that protection unless they do the same thing. So yeah, there is a lot of liability. And one of the biggest challenges I think for a lot of these DAOs that are already fairly established and have say tens or hundreds of millions of dollars or billions in their treasury is that when you form a legal entity, it can sometimes create a taxable event on all of that money where it gets a little complicated, but... Do you want me to go into it?

Mark Lurie:

Yeah, yeah. For a moment because some of these tax things can explain a surprising amount of activity and the way things work that you don't realize is really just because of tax event.

Adam Miller:

Okay, I'll keep it light. I'll keep it light. Let's say I gave Mark a Bitcoin in 2012 and he spent it yesterday just buying something, right? He would have to pay capital gains taxes at least in the United States and a lot of jurisdictions on $45,000, $40,000 of capital gains because using the Bitcoin is like selling it. Now let's say instead I had given Mark a Bitcoin into his DAO and Mark had started a DAO 10 years before DAOs existed, but Mark had started a DAO that had a legal entity and I gave it to the DAO. Now 10 years later, if that DAO is going to spend the Bitcoin, Mark's not going to be liable for the capital gains. The DAO is going to be liable for the capital gains.

Adam Miller:

And so you can see the difference between if a person either does a bunch of stuff, receives a bunch of crypto before they have a legal entity and then they create the legal entity. That's just like spending the money because you're giving it to the legal entity. And at that point in time, you have to pay a ton of taxes on it versus if you had given it to the legal entity at the start, then all of that capital gains takes place in the entity rather than in the people in that.

Mark Lurie:

Oh, I see. So potentially, there's $12 billion in DAOs. Hopefully some of them have legal entities, but if they don't, conceivably contributing that in some ways could in certain circumstances create a taxable then and cost a lot of money that-

Adam Miller:

For all of the people.

Mark Lurie:

Yeah, for all the individuals.

Adam Miller:

For all of the members, right? Not just like the person who set up the wallet, right? They could try to argue that, but all the members... Let's say there's 1,000 people sharing the governance rights over a DAO with $1 billion in the treasury and then they create their legal entity, each person may be held liable for one 1000th of the capital gains of that treasury since the crypto wasn't [crosstalk 00:44:45].

Mark Lurie:

That may be one of the reasons why more DAOs haven't already done this.

Adam Miller:

Yeah.

Mark Lurie:

So that's a great point. Interesting. Okay, cool. So I struggled with this. Shipyard recently incorporated a DAO, Admiralty. So I'm familiar with some of these things. We've been working through it, but can you take a moment and just like show what you do for that problem specifically?

Adam Miller:

Yeah, I'd be happy to show. Thanks for the opportunity. So MIDAO is a registered agent. And you may have heard of registered agents before, but if not, they are the company that sets up legal entities for other new companies, right? So there's a registered agent, many in Delaware who if you want to set up a Delaware C-Corp, which is a traditional company, they're the ones who do it for you. They maintain an address in Delaware for you. They help you with your annual filings, paying your fees, et cetera. MIDAO is doing the same thing, but for DAOs that want to form nonprofit LLCs in the Marshall Islands and soon for-profits as well, hopefully.

Adam Miller:

So we really take care of all of the paperwork, we facilitate the necessary KYC, we facilitate paying the right fees to the government, doing the annual filings so that hopefully we're providing you the DAO founder or you the DAO with a positive experience as you go ahead and set up your LLC legal entity in the Marshall Islands. And to be honest, it's not something you could really do yourself. Technically you could fly there and try to do it, but realistically, you need a registered agent for this kind of thing. And so that's what MIDAO is providing. So anyone who is thinking about starting a DAO, has started one recently, or even already is part of a DAO, please reach out to learn more about why a legal entity might be good for you and why the Marshall Islands, LLC in particular may be the best option.

Mark Lurie:

Yeah. Well, when is the Marshall Islands the best option and when is it not?

Adam Miller:

Sure. Awesome question. I love it.

Mark Lurie:

It's like it's your business or something.

Adam Miller:

Yeah, it's such a great chilling opportunity. If this was happening on Discord, I'd probably get kicked out of your Discord [crosstalk 00:47:08].

Mark Lurie:

No, I'm not going to invite you on to share your wisdom and not give you the opportunity to chill.

Adam Miller:

Thank you. Thank you. So there are a few problems that most jurisdictions in the world have that the Marshall Islands has solved. The first one of those problems is that with most jurisdictions in the world, you cannot track membership and governance on a blockchain, right? You got to have a paper trail. So each time someone buys a token, if you want that to represent them actually joining the organization, you'd have to sign a bunch of contracts and it's just not feasible to do. So there are a few jurisdictions, including a couple in the United States, Wyoming and Tennessee, that have solved that particular problem.

Adam Miller:

And the other thing that most jurisdictions around the world did not have that the Marshall Islands has solved for is most traditional legal entities require you to have a special group of people that take on extra liability for the company even though it's a limited liability shield. And those are going to be your directors, your board, your trustees, your officers like a president and a treasurer. And so of course, most DAOs, if you're in a DAO you know you don't have a president most likely. You don't have a treasurer. You don't have a board. It's antithetical to the way most people are running DAOs. And so you're not going to want to put someone in that position and no one's going to want to be in that position of taking on extra liability.

Adam Miller:

So those are a couple reasons why the Marshall Islands legal entity is uniquely innovative. And then another reason a lot of people come to us is because they don't want to be in the United States. So the question is which country's laws do you want to be under? And for a lot of people, they would prefer to be governed by the laws of the Marshall Islands and its regulators rather than the laws and regulators from the United States.

Adam Miller:

The other cool thing about the Marshall Islands is it has a long history of being a great corporate home for companies that want to use it as their legal jurisdiction. So over 20% of the world's shipping capacity is registered as companies in the Marshall Islands. There are almost 50 public companies that you would think are US-based companies because they're traded on the New York Stock Exchange or the NASDAQ. They're actually based with their legal home in the Marshall Islands. So the Marshall Islands has a long history now of being a forward-thinking, compelling place for any company to consider calling its legal home.

Mark Lurie:

Cool. Great show.

Adam Miller:

Thank you.

Mark Lurie:

And again, we at Shipyard did it after a long analysis. So appreciate your help with that. Okay. So we don't have a lot of time left, but we've talked a lot about legal and that's a really important thing. Like what makes DAOs new and how they interface with the real traditional world? There's a lot of other challenges happening with DAOs, right? If they're to realize the potential that I think you've articulated. We can't go into everything on one episode, but what are the other challenges you see DAOs having aside from this legal one?

Adam Miller:

I break down the common challenges that most DAOs are facing into three categories. One of the three is the legal set of challenges. The other two are technological and operational. So the technological challenge is it's easy for us to talk about bylaws and membership and governance taking place on the blockchain. It's actually pretty hard to implement and only in the past couple of years have we seen platforms emerge that have ready-made smart contracts, ready-made Web3 interfaces for interacting with those smart contracts, basically what I call DAO platforms that anyone can come to and say, oh yeah, I want to start my DAO and they'll give you your technology, right? They're all very new and they have a lot of work to do. It's one of the most interesting places in crypto right now, it's getting a lot of investment, but I've tried virtually every one of these platforms and they just have a ways to go until they can be considered flexible, reliable, and having a good user experience.

Adam Miller:

So that technology challenge, whether you're talking about the DAO platform or you're talking about the other technology tools like Web3-based documentation and task management and chat and all kinds of bots you may want to use in your chat, all of these things are really exciting and really fun as like a crypto native technologist to play with, but they're just not ready for most people in the world to use. So that's a big set of challenges and you'll either need a somewhat crypto native person, like some kind of consultant, right? Or you'll just have to be willing to spend a lot of time figuring out how to set up your DAO just like it probably took you a while and myself included to buy my first NFT when I was learning what an NFT was.

Adam Miller:

So there's the technology challenges and then the operational challenges are, I guess, related to some of the things we've talked about. It's how do you actually run your DAO day-to-day? So what kind of structure do you want to have? Something like a leadership team or a coordination team, or do you want to be totally flat? Are you going to have committees and what are those committees going to be? What are the rules going to be for like culture and values and day-to-day interactions and behavior between people in the DAO or between people in the DAO and the outside world? All the things that traditional companies have had a long time to solve these problems, right? And they have HR and they have finance and accounting and they have-

Mark Lurie:

Yeah, it's not like those magically go away just because you're like a bunch of people in a chat with a shared mission and rules in the blockchain. You still got to deal with humans.

Adam Miller:

Exactly. And the humans are going to... There's going to be drama, there's going to be disagreements, there's going to be team dynamics challenges. And so I think the difference is that DAOs haven't really figured out yet how they want to solve those problems, right? Most DAOs don't have HR. I've seen some that have ombuds people, which can be kind of similar and it's a good idea, but yeah, most DAOs just haven't solved those traditional operational challenges yet.

Mark Lurie:

Awesome. Well, Adam, thank you so much for joining us. The year of the DAO is ahead. So perhaps this is the first of many conversations on the topic. We have a lot to learn and a lot that probably hasn't even been discovered yet about DAOs. So thank you for joining us and sharing your wisdom. How can people follow you or learn more about you if they'd like to?

Adam Miller:

Sure. So first of all, for MIDAO, head to midao.org. That's M-I-D-A-O.org. For myself personally, you can find me on Twitter at @thethriller_, right? That much hated underscore, but that's what I got. And you can also find MIDAO on Twitter at @midaods, which stands for directory services. And from those few places, you can find everything else, our Discord and all the other information that you can imagine.

Mark Lurie:

Awesome. Well, thank you so much for joining us. We really appreciate it.

Adam Miller:

Yeah. Thanks for having me.

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