Limited Liability on the Internet
0xE557
December 31st, 2022

When Kali launched earlier this year, the goal was simple — crowdsource a DAO incorporator. Using MolochDAO as our codebase and LexDAO as our legal source, we designed Kali to be simple, efficient, and familiar, with templates co-created with other crypto lawyers.

Broadly, we observed a critical market need to install limited liability to the activities of DAOs and contributors, and are pleased to get recognition for this work from Paradigm and DAO Research Collective. This need is highlighted by attempts of regulators to strategically define the liability of DAO membership rather than DAOs getting to set such liability on their own terms. To this end, and from day 1, all of our code and legal docs are open source and iterative to the changing landscape of crypto law, and we continue to see this as core to our mission: We won’t build something we don’t believe in. If we succeed, the world changes. Any value extraction should be transparent and fair to the actual costs of computational law.

The Kali DAO framework remains unique in that code and legal deployment can be interlinked. A lot of time and money is lost over asking lawyers to understand and draft legal docs for DAOs, and on the other hand, asking coders to design DAOs around legal structures. A combined approach (Code + Law, or codeslaw) easily reconciles these differences and speaks to the similarity of the task as we consider legal engineering a growing profession for new organizations.

But this development was just the first step in establishing limited liability on the internet. Limited liability is the most significant power that the traditional legal system provides: without it, nobody can reasonably make products in a way that scales with customers online. For example, Bob might be willing to personally agree to design a website for a friend, but would be at significantly greater risk with hundreds of strangers doing an e-design business. This is why companies are synonymous with incorporation, and why incorporation needs to be internet-native to truly unlock its benefits for more people around the world. Governments provide the simple service of a public ledger and costs to publish and gain their protection of limited liability should be automated to the point of this benefit being akin to a right.

With the cryptocurrency bear market, DAOs are having their company moment. More DAOs are establishing legal entities, licensing their code, and marketing services to achieve sustainable revenue and grow beyond simply launching new tokens. This strategy has taken the form of contributor-level incorporation (solo LLCs), contractor-level incorporation (service companies that handle IRL for DAOs) and DAO incorporation (LLCs, Foundations and Trusts that are operated by and/or benefit the DAO itself).

DAOs ultimately realize the ambition of community-over-corporate ownership and the establishment of legal entities and companies often can be seen as opposed to such promise. But these thoughts miss the point and effectiveness of token incentives — the organizations with the greatest chance of success have established alignment between communities and companies that execute on product roadmaps through sharing DAO tokens, while each having their own lives, agendas and cap tables. The best DAOs in our estimation are not monolithic about code or structure, but achieve coordination through incentives, like Bitcoin and Ethereum. Notably, liability warps the incentives around coordinating new kinds of businesses on the internet. Strategic containment of legal risks with consideration of ownership of subdomains of a DAO has led to robust designs that are compatible with the corporate and decentralized aspects of building today.

Many have also called for DAOs themselves to receive legal recognition. The most promising attempts so far have been allowing DAOs to register LLCs. As we established the first DAO LLC in New York (2019), it is encouraging to see this approach ratified over the years and the templates expand — LLCs remain a comfortable extension to DAOs, as their internal governance, ownership, and taxation are flexible to what members decide, unlike other corporate forms. Some, however, have reasonably noted that DAO LLC laws seem misapplied at this stage of the technology — we tend to agree, for now, as we have yet to see a truly internet-native approach, and the benefits of using new rather than existing statutes remain to be seen as they have no established case law.

As it stands, Kali and our Wrappr LLC product are best poised to service the legal needs of DAOs while maximizing their unique operational benefits. We have built the largest DAO legal library with a range of contributors among developers and lawyers. As we firmly believe OS and price transparency are the norm we want to promote for the burgeoning legal industry around DAOs and cryptocurrencies, everything we use for LLCs is uploaded to Ethereum/IPFS, licensed to commons, and payable in Ether.

Wrappr LLC, our DAO LLC product, is now also truly international. While we started with a registration of our Master LLC in Delaware to create Wrappr sub-LLCs for users, then expanded to Wyoming, we have finalized this same product in Marshall Islands, allowing users to choose among the best LLC jurisdictions, on-or-offshore. In addition to the utility of fast, legible incorporation using Wrappr LLC NFTs, each supported jurisdiction also benefits from maximum composability — the terms of the underlying LLC operating agreements are tailored to on-chain organizations, and only use as much law as necessary to generate the key benefits of using legal entities while code automates the material coordination points.

Using the Series LLC laws in these jurisdictions, Kali is able to give legal status to DAOs as LLCs without requiring any paperwork. Local agents, filing fees and state taxes are covered through registering your Wrappr NFT with a key signature of the Master LLC agreement. Most conveniently, registration is complete the moment you or your DAO receives an NFT. 

With this approach, we believe we can expand and offer truly internet-native limited liability for businesses and communities. It simply is not affordable for the vast majority of the world to pursue business ideas and have the basic foundation of limited liability without something completely automated and accessible online.

As we consider DAO legal recognition a worthwhile project, long-term, we also call on the wider community to help us draft a DAO Law on Github.

To go far, we must rest our future on our community, including the governance and maintenance of Wrappr LLC as an internet good. Standardizing DAO LLCs into templates that work with real-time updates to legal systems, can law the unlawed, and are composable with both computational and legal approaches to organization will be the product of a DAO and not just our efforts.

What the y-combinator SAFE template enabled for fast and productive startup investing by removing the incompatibility of closed-source seed documents, Kali and Wrappr LLC will enable for limited liability by open sourcing incorporation forms and incentivizing contribution with work ownership in a DAO. Stay tuned.

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