The evolution of DAOs (Decentralized Autonomous Organizations) has posed interesting challenges to the traditional legal framework. In a legal system based on the legal personality of entities such as corporations, the introduction of decentralized models that operate through smart contracts and blockchain protocols has generated considerable debate about their liability and ability to be sued.
The case at hand, that of Lido DAO, perfectly exemplifies this problem. A California judge is in the position of determining whether an LLC (Limited Liability Company) designated by a DAO can appear in court proceedings as a representative of the DAO, or whether the lawsuit should be dismissed due to the decentralized organization’s lack of legal capacity. What is at stake is, in essence, whether a DAO can be considered a general partnership and, therefore, susceptible to being sued in jurisdictions where it is assigned legal responsibilities.
The legal personality of DAOs: a disputed fiction:
The general theory of companies in law allows us to grant legal personality to entities that, in essence, are groups of people who join forces in pursuit of a common objective. This legal fiction has been a fundamental pillar in the development of the modern economy, allowing companies and corporations to act as a unit before the law. However, in the case of DAOs, the very structure of these organizations conflicts with this traditional notion.
Throughout the more than five years that I have been studying the phenomenon of DAOs, I continue to be surprised by the number of challenges they present to the legal system. In particular, this case highlights the difficulty of fitting a DAO within existing legal categories. Lido DAO, as a DeFi (decentralized finance) platform, allows users to participate in Ethereum staking without the need to lock their ETH tokens. On April 3, 2024, a class action lawsuit was filed against Lido DAO, calling it a “general partnership” operating in the Ethereum staking business, and alleging that LDO tokens are securities that the DAO unlawfully offers to the public.
The DAO’s procedural strategy: a legal paradox:
So far, the legal conflict does not seem out of the ordinary. Several lawsuits have been filed against DAOs over the years, with varying results. What is truly fascinating about this case is the procedural strategy that Lido DAO adopts to defend itself against the lawsuit. Instead of accepting his appearance in court, the DAO adopts a “denial of capacity” stance. That is, it argues that a DAO, due to its decentralized nature and its existence as software code, cannot be sued because it does not have legal personality.
This defense raises a fundamental paradox: how can a DAO claim that it lacks legal standing to be sued, while at the same time participating in the judicial process through an LLC designated as a representative? This contradiction is precisely what is at issue in this case, and could set an important precedent for the legal future of DAOs.
Lido DAO has appointed Dolphin CL LLC to appear in court and file a motion to dismiss the lawsuit, citing “lack of standing to be sued.” However, this LLC does not act as a proxy or formal representative of the DAO. In fact, the Lido decision explicitly states that Dolphin CL LLC has no legal authority over the DAO nor does it officially represent its interests.
A comparative approach, SPAIN: How would other jurisdictions react?
At this point, it is worth reflecting on how a court in other jurisdictions, such as Spain, might face a similar case. Imagine, for example, a Spanish judge before a preliminary hearing in a lawsuit against a DAO. What would happen if a “singular agent” appointed by the DAO appeared to allege that “software cannot be sued”?
This situation would challenge the conventional understanding of the judge, who, accustomed to dealing with traditional legal entities, might have difficulty understanding how an organization that actively participates in the economy, carries out transactions and manages assets in a decentralized manner, can maintain that it has no legal responsibility. It would be interesting to see if the Spanish courts would adopt an approach similar to that of California, or if they would follow other criteria, perhaps influenced by the European legal framework.
Final reflections and edges to explore:
This case has many interesting aspects, from the application of the doctrine of in pari delicto to the consideration of the legal nature of the tokens and the transactions carried out by DAOs. The plaintiff, in this case, is a token holder, which introduces even more complexity to the dispute. To what extent can a token holder be considered an interested party in a lawsuit against a DAO? And, more importantly, how does this relationship affect the analysis of the DAO’s legal liability?
Finally, it is worth noting that this case will not only affect Lido DAO, but will set a precedent for all DAOs operating in the DeFi ecosystem. The resolution of this case could determine how DAOs are viewed by courts in the future, and whether they must adapt to new regulations governing their operations, or whether they will continue to operate on the margins of the traditional legal system.
