If you want to start a DAO, it's essential to think about its legal structure from the beginning. Having a proper legal system allows you to avoid any liability being put upon DAO members', protect the DAO treasury, and implement DAO governance. We call this proper legal system a DAO Legal Wrapper.
Among the most popular countries for DAO incorporation are Switzerland, the US (Wyoming), Panama, Marshall Islands, Cayman Islands, Singapore, and Liechtenstein. This article will talk specifically about the Cayman Islands as an option to incorporate a DAO.
The benefits of incorporating a DAO in the Cayman Islands
The Caymans Islands are one of the popular jurisdictions to create a Legal Wrapper for DAO for the following reasons:
- The country adopted special regulations for VASP (Virtual Assets Service Providers): this means that there are specific rules for working with virtual assets, and companies know what they need to prepare for;
- The flexibility of the common law system: Caymanian corporate legislation is largely based on American and English law, which makes it quite universal in its application and operation around the world);
- Low cost: it is at least two times cheaper to set up a DAO foundation in the Cayman Islands, compared to continental foundations (Switzerland, Singapore, Liechtenstein); also, there are no mandatory minimum contributions that can affect the cost;
- Speed: it usually takes as little as 1-2 months to create a foundation.
Foundation as a legal form for DAO
One of the common legal forms of DAO wrappers are trusts and a foundation is one type of trust. Trusts–and foundations in particular–are a good option for wrapping a DAO because the concept of DAO implies that there are no centralized owners (shareholders) and all important decisions in DAO must be made by the community. The Cayman Islands have developed legislation on trusts, and the law on foundations was adopted in 2017, which makes Cayman Islands a popular destination to register a foundation for a DAO.
How does the foundation work as a DAO Legal Wrapper?
Foundation is a type of trust that was created so that trustees could manage certain people's assets for the benefit of others. This is very complimentary to the concept of DAO, which includes:
- DAO founders (foundation founders) who launch a smart contract and organize the initial issuance of tokens;
- DAO members (foundation beneficiaries) who are the tokenholders and deposit their own virtual assets in the foundation treasury to participate in the development of DAO;
- DAO managers (board of directors/foundation council) are elected by the founders and make decisions in the interests of the DAO members;
- DAO guardian (foundation supervisor) is a trustee who ensures that DAO managers do not go against the will of DAO members in the decision-making process.
How is decentralized governance organized in a foundation?
One of the goals of a DAO is to organize decentralized governance. This means that founders and investors and the team, protocol validators, product users, and other tokenholders play important roles in the DAO. They can influence the decisions about changes in the rules of operation of the smart contract, the management of treasury assets, the blockchain product, or protocol development strategy.
The procedure for voting of DAO members, counting of votes, implementation of decisions by DAO managers, as well as the participation of a DAO guardian in this process, are reflected in the DAO constitution and must be properly implemented in the bylaws of the foundation so that these rules become legally binding for all DAO members.
How to implement DAO members’ engagement in a foundation
Usually, tokenholders who have received the right to vote in the DAO are considered DAO members. Each DAO independently determines the procedure for granting voting rights to tokenholders:
- In some DAOs, tokenholders must stake their own tokens in DeFi.
- Other DAOs provide the issuance of a separate type of governance token.
- In the third type of DAOs, only DAO protocol validators can be DAO members.
Each DAO maintains a register of its members, which must be synchronized with the register of foundation beneficiaries. In the case of a Cayman Islands foundation, the register is maintained privately, which provides flexibility and scalability for the DAO itself.
Instead of conclusions
A Caymanian foundation is a popular form of Legal Wrapper for DAO due to the flexibility of legislation, the definite rules for working with virtual assets in the Cayman Islands, and the speed of its creation and optimal budgets.
To learn more about this option and see how Legal Nodes could help you choose the best option for your Web3 project, request a demo with one of the Legal Nodes experts.
Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.
Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.