What is a DAO and a Discussion of its Legal Structure

Entrance

With the development of blockchain technology, new organizational models have emerged that go beyond classic company and association structures. The most notable of these are DAO (Decentralized Autonomous Organization) structures. DAOs are digital communities that govern themselves through smart contracts without the need for a central authority. Smart contracts are computer programs that can reliably and consistently execute transactions and agreements between anonymous parties, making backward change impossible.

DAOs are completely blockchain-based and decentralized structures that do not conform to the traditional understanding of corporate law. However, some countries or states have been pioneers in this area within their legal systems. Examples include the United States (Wyoming, Tennessee, Vermont), Germany, Switzerland, Malta, etc.

The concept of DAOs (Declaration of Ownership of Business) is not directly addressed in the Turkish legal system. However, it is possible to evaluate the legal nature of DAOs of the Turkish Code of Obligations (TBK) and the Turkish Commercial Code (TTK) .

I. What is DAO?

1. Definition

A DAO is a transparent and decentralized organization that operates through smart contracts coded on a blockchain and is governed by the votes of its participants. While traditional companies have bodies such as boards of directors, general assemblies, or managers, decision-making processes in DAOs are entirely based on digital voting mechanisms.

2. Key Features

Decentralization: Decisions are made by the votes of community members, not by a central authority.
Autonomy: The organization operates autonomously according to rules encoded in smart contracts.
Transparency: All transactions are recorded and accessible on the blockchain.
Token-Based Participation: DAO members participate in voting and revenue sharing in proportion to the amount of tokens they hold.

3. Differences from Traditional Buildings

DAOs differ from classic structures such as corporations, limited liability companies, or associations. Specifically:

They do not have a physical center.
They have no representatives or governing bodies.
Whether they acquire legal personality is debatable.

II. Evaluation of DAOs from the Perspective of the Turkish Code of Obligations

1. Contractual Nature

According to Article 1 of the Turkish Code of Obligations, a contract is established by the mutual declaration of will of the parties. DAO members, by participating in the system through smart contracts, are in fact becoming parties to a contract. This contract is not established in the form of a written document, but through codes on the blockchain.

2. Similarity to a General Partnership

The provisions on ordinary partnerships regulated in Article 620 and subsequent articles of the Turkish Code of Obligations are considered to be the closest model to DAO (Direct Association of Business).

PERSON COLLECTION: Two or more people, replacing the need for trust between individuals with blockchain technology. A community of people in a narrow or wide circle.

CAPITAL: The capital that can be contributed to a general partnership. The intangible asset and in-kind capital nature of a crypto asset. Different types of capital contribution for developers, creators, auditors, and members.

CONTRACTUAL BASIS: A general partnership requires a company agreement as a basis. The prospectus can be considered as a contractual basis. Even purchasing tokens signifies an intention to be bound by the contract.

COMMON PURPOSE: In a general partnership, individuals come together to achieve a common goal. There are differing views on whether this goal should be ideal or economic. A DAO (Direct Partnership for Investment) can be established for both ideal and economic purposes. Fundamentally, a DAO involves allocating the collected capital to specific projects, generating profits from these projects, and distributing them to the partners.

COLLABORATION (EFFORT): Requires active participation. DAO partners, through the DAO Tokens they receive in return for their investment, vote on projects funded by the DAO. The functioning of the DAO is ensured through the execution of these activities. Furthermore, DAO auditors participate in the operation by overseeing investments, and developers participate by technically working with the DAO's code.

Participants combine their labor and assets to achieve a common goal. The partnership does not acquire legal personality.
Similarly, in DAOs, members pool their financial contributions and voting rights. Therefore, in Turkish law, DAOs can be subject to the provisions of ordinary partnerships.

3. Responsibility

In a general partnership, partners are jointly and severally liable (Turkish Code of Obligations, Article 632). Similarly, in a DAO (Digital Investment Fund), participants can be held individually and collectively liable for any losses or debts incurred. This situation exposes those investing in DAOs to significant risks.

III. Evaluation of DAOs from the Perspective of the Turkish Commercial Code

1. Comparison of Company Types

According to the Turkish Commercial Code (TTK), a commercial company can only be established by drawing up a written contract and registering it in the commercial registry (TTK Articles 124, 339 et seq.). DAOs, however, are created on a blockchain and are not registered in any commercial registry. Therefore, a DAO cannot be considered a joint-stock or limited liability company

2. Capital Structure

In joint-stock and limited liability companies, capital is subject to certain principles. In DAOs (Digital Associations), however, capital is provided through crypto assets contributed by members. However, this contribution does not fully comply with the definitions of "cash capital" or "in-kind capital" in the Turkish Commercial Code.

3. Management and Decision Making

The Turkish Commercial Code (TTK) has a board of directors or a body of managers. In a Corporate Governance Organization (COO), however, management is provided through rules encoded in smart contracts. Therefore, the COO is quite different from the corporate governance model in the TTK.

4. The Legal Personality Issue

According to the Turkish Commercial Code (TTK), commercial companies acquire legal personality upon registration (TTK Article 125). Since DAOs (Department of International Businesses) are not registered, they lack legal personality under Turkish law. This creates significant uncertainty regarding lawsuits and legal transactions in which a DAO may be a party. In our opinion, while all members of a DAO are jointly and severally liable, it is necessary for a DAO member or a single person to be designated as a party on behalf of the DAO in legal matters and transactions. However, it would be incorrect to hold that person or persons entirely liable; they would only be in that position representing the DAO. Each member remains jointly and severally liable personally. We believe it is appropriate for a guarantor to be appointed for the establishment of a DAO and for this guarantor to be designated as a party in legal matters and transactions, or for a fully authorized lawyer to be empowered to handle legal matters and transactions on behalf of the DAO. However, as mentioned, we believe that the continuation of joint and several liability and the role of the guarantor/lawyer only in representation situations would somewhat alleviate the legal personality issue.

IV. Legal Issues of DAOs

1. Legal Entity Ambiguity

The lack of legal personality in DAOs (Digital Associations of Turkey) leads to issues of liability and representation. For example, if a DAO signs a contract, who will be a party to it? In this case, the personal liability of the members comes into play. Each member will be personally and jointly liable.

2. Protection of Investors

Since the rights of individuals investing through DAOs are not explicitly regulated in Turkish law, general provisions of the Turkish Code of Obligations (TBK) apply in case of grievances. However, these provisions may be insufficient in practice.

3. Taxation Issues

The taxation of profits earned through DAOs is also unclear. There are no specific regulations regarding DAOs in the Income Tax Law or the Corporate Tax Law.

V. Advantages and Risks of DAOs

1. Advantages

Transparency: All transactions are visible on the blockchain.
Decentralization: A democratic decision-making mechanism operates without being tied to a single leader.
Fast and low-cost transactions: No need for banks or brokerage firms.

2. Risks

Legal uncertainty: The lack of recognition of their legal personality increases the risk for investors.
Code vulnerabilities: Technical errors in smart contracts can lead to significant losses.
Lack of regulation: Legal loopholes facilitate the misuse of DAOs.

VI. Legal Debates and Future Perspectives

The lack of a clear definition of DAOs (Developing Partnerships) in Turkish law creates problems in practice. Under the Turkish Code of Obligations, ordinary partnerships , while under the Turkish Commercial Code, non-company structures . However, a specific legal regulation for DAOs is inevitable in the future.

In Europe and the US, some states have begun to grant limited legal personality to DAOs. In Türkiye, legislative changes are needed to bring DAOs into compliance with capital markets, investor rights, and company law.

1. USA – State of Wyoming

In 2021, Wyoming enacted the “DAO LLC” regulation. According to this regulation, DAOs can be established under the status of a limited liability company (LLC) . The governance rules of a DAO can be determined by smart contracts, which are considered part of the company's articles of incorporation. Participants benefit from limited liability.

Wyoming was the first jurisdiction to grant special legal personality to DAOs.

2. USA – Tennessee and Vermont

Tennessee: In 2022, similar to Wyoming, it allowed DAOs to be incorporated as LLCs.
Vermontintroduced regulations under the name "Blockchain-Based LLC." Structures similar to DAOs are now considered blockchain-based LLCs.

3. Malta

Malta, known as the "Blockchain Island," has begun recognizing blockchain-based organizations with the Malta Digital Innovation Authority Act . While it doesn't directly define DAOs, their legal existence is acknowledged within its technology regulatory framework

4. Switzerland

Switzerland stands out with its crypto and blockchain-friendly regulations. DAOs (Demand- Acquired Autonomous Organizations) are organized as associations (Verein) or foundations (Stiftung) , particularly in the “Crypto Valley” region of the Zug canton . There is no separate legal category for DAOs; however, thanks to the flexible application of existing structures, DAOs can acquire legal personality.

5. Germany

There is no specific law in Germany regarding DAOs (Development Agencies). However, DAOs can be partially legally protected by adapting to the form of an association (eingetragener Verein) or a company (GmbH)

6. United Kingdom

There are no specific regulations yet for DAOs. In the UK, DAOs are mostly considered under partnership or trust- like structures

The European Union has not granted direct legal personality to DAOs. However, the MiCA (Markets in Crypto-Assets Regulation) aims to bring DAOs under oversight as entities managing financial assets.

Marshall Islands: One of the pioneering island states to recognize DAOs as legal entities. The “DAO LLC” model has been developed.

Singapore: While not directly recognizing DAOs, it permits the establishment of DAO-like organizations within its corporate and foundation laws

Estonia: Thanks to its e-government infrastructure, it is one of the most flexible countries when it comes to the incorporation of DAOs (Development Agencies).

Conclusion

DAOs (Development Agencies) differ from classic company models due to the transparency and decentralization principles provided by blockchain technology. However, the legal personality, liability regime, and taxation of DAOs are unclear in Turkish law.

From the perspective of the Turkish Code of Obligations: DAOs (Direct Partnerships) are similar to ordinary partnership provisions.
From the perspective of the Turkish Commercial Code: DAOs (Digital Associations of Independent Businesses) are not considered companies because they lack registration and a governing body.

Therefore, a specific legal framework is needed for DAOs to operate effectively in Türkiye.

Utku Demiray (student)

#DAO, #TBK, #Turkey, ordinary partnership, law, TTK

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