The ADGM recently released the proposal for a legislative framework for distributed ledger technology foundations (Consultation Paper), which considers distributed ledger technology (DLT) projects that look to use DLT for the issuance and trading of tokens using a variety of different structures such as unincorporated decentralized autonomous organizations (DAOs), foundations and companies limited by guarantee.
The aim of the paper is to prepare a new regime that caters to the specific needs and features of foundations that would be attractive to DLT projects and developers, with the intention of issuing the Distributed Ledger Technology Foundations Regulations 2023 (Proposed Regulations).
What are DLTs and DAOs
DLTs are platforms that use ledgers stored on separate but connected devices in a network format. Examples of DLT include Bitcoin, Ethereum, Polygon, etc.
DAOs are decentralized autonomous organizations, a type of governance structure built using blockchain technologies using a combination of voting and staking methodologies to allow a community of persons to make collective decisions in relation to a predetermined activity.
Different kinds of DAOs:
Common kinds of DAOs include the following:
- Basic DAO. Basic DAOs are the simplest. They are essentially a group of individuals who pool their resources and make decisions together. These decisions are made using a consensus mechanism, where members vote on proposals. Basic DAOs can be used for a variety of purposes, including investment funds, social clubs, and charity organizations. Examples of Basic DAOs would be DASH, Augur and MakerDAO.
- Investor DAOs. Investor DAOs are focused on investing in various assets, such as cryptocurrencies, stocks, or real estate. These DAOs are managed by a group of investors who pool their funds together to invest in various assets. The decision-making process is typically based on a voting system, where each member has an equal say. Examples of Investment DAOs would be BitDAO and DAOVerse.
- Service DAOs. Service DAOs provide a particular service or product. For example, for a software product. These DAOs typically generate revenue from the services provided, and the decision-making process is typically based on members' expertise. Examples of Service DAOs would be MetaFactory, Aladdin DAO and Yam DAO.
- Reputation DAOs. Reputation DAOs are based on a reputation system, where members earn points for contributions. These points are used to determine voting power. For example, a developer DAO could give more voting power to members who have contributed more code.
- Hybrid DAOs. Hybrid DAOs combine different types of DAOs. For example, a DAO could be both an investor and service DAO. These DAOs are becoming more common these days.
- Platform DAOs. Platform DAOs build a platform used by other DAOs. For example, developers could create a DAO to build a decentralised exchange (DEX) platform that other DAOs can use to trade crypto. The decision-making process is typically based on members' expertise and the needs of the DAO on the platform.
- Meta DAOs. Meta DAOs govern other DAOs - they are a DAO of DAOs. They typically have a smaller number of members, but a high level of expertise in governance.
Understandably, given the vast array of services and functions fulfilled by different kinds of DAOs, it has been challenging to find a singular structure that can work for all of them. This hasn’t stopped creative solutions using unincorporated DAO structures becoming more and more common, despite the numerous legal and litigation risks they pose.
As such, the ADGM’s proposal is not only revolutionary, but also necessary as DAOs grow increasingly more common.
Differences between traditional foundations and DLT Foundations
A traditional ADGM foundation is a legal entity with its own legal personality. A traditional foundation can hold assets in its own name on behalf of beneficiaries, and allows the founder to have more control over the foundation.
The Consultation Paper proposes a new legal form that can be used for DAOs, which is similar to a traditional ADGM foundation, but adapted to suit the governance and operational requirements of DAOs. The ADGM has taken these key features of a traditional foundation along with attractive features of a DAO (in terms of what the DAO seeks to achieve) to create the DLT Foundation. In essence, the DLT Foundation is an orphan entity, similar to a traditional foundation.
Traditional ADGM foundations tend to be opaque and private, offering great levels of confidentiality while still adhering to ADGM transparency requirements. Contrastingly, the DLT Foundation would allow greater flexibility to put in place transparent governance structures which are preferred by DAOs. In other words, it takes inspiration from DAOs, in which all tokenholders are entitled to vote and participate in the governance of the organizations. This differs to normal company structures, where it is often the board of directors and ultimately the shareholders who tend to make decisions relating to company governance.
While a typical foundation structure tends to be formed for specific activities, as is the convention in the UAE in which businesses are granted licences that allow them to carry out specific business activities, the DLT Foundations depart from this ideology. Instead, DLT Foundations are afforded more freedom in terms of their activity unless the founders decide to restrict such activities.