Sports Q&A: What is a DAO and how are they relevant to sport?
26 September 2022
Decentralised Autonomous Organisations (DAOs) are a creature of Web3. The theory goes that they are membership-led bodies, which can operate as decentralised corporations in the digital, blockchain-supported world, independent of real world regulation. The paradigm DAO is transparent and self-governing without outside government interference and no power held by any executive or management board. The reality is, currently, somewhat different (see further below).
Like the more ubiquitous but still developing world of NFTs (non fungible tokens) there has been a lot of chat about the deployment of DAOs in the sports sector. Indeed a number of sports related DAOs have already been established, some of which we'll mention below. Whether any of these can be described as a ”pure” DAO (ie consistent with the paradigm DAO, as described above) is however unlikely. There also appears to be increased blurring between NFTs with “utility”, fan tokens and DAOs.
Q. What is a DAO?
A. Notionally, DAOs are "decentralised" as they operate on blockchain (or another decentralised ledger technology), and are "autonomous" as they exist independently of any government endorsed corporate structure, such as a limited liability company or partnership. Whoever establishes a DAO sets the rules for the organisation. Those rules are enshrined on the blockchain and embedded in tokens that (depending on the rules set) allow the holders of those tokens to participate in whatever venture the DAO has been established to undertake. Smart contracts are used to automatically ‘govern’ key elements of the DAO’s activities, in theory doing away with the need for traditional management. However, depending on how sophisticated the activities of the DAO are, it’s very unlikely that all decisions of the DAO can be implemented via smart contract and the reality is that an additional layer of governance and management, albeit often facilitated through voting in which members/token holders are able to participate, will be required. Where votes are conducted ‘on chain’ a definitive record of such votes will be visible on the blockchain for all to see.
Tokens can, of course, also be sold/traded with sales recorded in the blockchain, acting as an immutable record of ownership. Given the anonymity of identity on the blockchain, identifying an actual individual as the holder of the token at any point in time, remains a potential issue for DAOs who want to understand or control/limit the make-up of their membership.
Q. Key challenges for DAOs
A. A key challenge for DAOs is that, in their ‘pure’ form, they currently have no legal personality and are not recognised as an entity in themselves, at least in all major jurisdictions. This results in practical difficulty in entering into contracts and means that members of DAOs don’t have the benefit of unlimited liability that comes with traditional corporate vehicles.
To do business in the real-world (and in particular to own any real-world property) most DAOs are therefore tied to a traditional company, owned by individual or corporate shareholders and with a board of directors. The ‘real world’ management and directors will be able to take direction from the DAO membership, acting in accordance with tokenholders’ votes, to the extent that this is consistent with the company’s constitution and compliant with company law. However, the board of directors will ultimately remain responsible for acting in the best interest of the company and not, of course, the directions of the DAO it is associated with. Companies must also comply with applicable law, meaning that it may not be able to implement the DAO’s directions, and the essence of the “pure” DAO is thereby eroded.
Q. Have there been any recent developments?
A. There has already been some regulatory reaction to address these issues – for example the Marshall Islands have recognised that DAOs can be registered as legal entities, and in Wyoming and the Caymen Islands there is the ability for DAOs to establish specific legal entities to operate through. This is not an easy topic and this Q&A is not the place for detailed analysis. The position will inevitably evolve, and it is likely to take considerable legal development to reach an ‘end point’ on DAOs. Indeed, the Law Commission has initiated a 15 month project to look into the legal status of DAOs in England & Wales.
Q. Examples of DAOs in sport
A. Turning to some examples of DAOs in sport:
- MotorDAO claims to be “the world’s first DAO making acquisitions in all forms of major league motorsports for fun and profit”;
- SailGP have partnered with NEAR with a view to enabling fans to participate in a DAO-owned SailGP team;
- A DAO owned W Series team, CortDAO is already up and racing; and
- In golf, LinksDAO claims to be building "a global community of golf enthusiasts in web3 reimagining the modern golf and leisure club".
We should say that Lewis Silkin has not advised these DAOs, and it may be that most of these initiatives could have achieved what they’ve set about to do through other means. Nevertheless, there can be benefits to being an early-adopter and sports that want to be at the cutting edge are likely to continue to explore how DAOs can be used, even in their current evolving state. As such, DAOs in one form or another look here to stay and as the technology, law and public understanding of DAOs develop they're likely to become a common presence in sport.