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Founding A DAO in Germany | Legal Advice

Legal advice on all aspects of establishing a DAO

The hype around DAOs (decentralized autonomous organizations) is growing. In the course of this, an increasing number of DAOs are being established in Germany. The range of areas of applications is diverse: Community DAOs, NFT DAOs, nonprofit DAOs, etc.

But what should initiators and committed persons keep in mind when founding a DAO?

What does a DAO need to be successfully established?

For a DAO to be successful and functional, the following four points are essential:

  1. The DAO needs a purpose as well as a community
    Any person seeking to found a DAO should first fundamentally ask themselves what purpose the DAO should serve. The more convincing the idea is, the more likely it is that many people will become involved in the DAO. It may therefore be advisable to build a large community in advance and promote the project.
     
  2. The DAO needs a functional voting system
    A flawless voting system is also required to establish a functional DAO. This is the only means by which members can steer the project or help shape its future. For this, the organization can either develop its own voting system or turn to third-party providers. Participants usually obtain the right to vote by purchasing one or more tokens of a DAO. The more tokens a person has, the more weight their voting right carries. At the same time, the DAO benefits from a large community. This is because the more people who have voting rights, the more decentralized and broadly distributed all the power is among the members of the DAO.
     
  3. The DAO requires a multisignature wallet
    In order to manage the DAO's assets, a certain cryptowallet is required. A multisignature wallet (MultiSig wallet) makes it possible to jointly control the crypto assets of an organization. This is achieved by requiring a specified number of approvals from individual members for each transaction from the DAO wallet. Thus, unlike a conventional wallet, the use of a MultiSig wallet ensures that no single person, for example, can dispose of all the organization's assets.
     
  4. The DAO needs a suitable membership structure
    On one hand, there is token-based membership. In principle, anyone who wishes to do so can acquire governance tokens. Owning the tokens gives the investor access rights to voting.

    There are also share-based DAOs. Potential members interested in the DAO must first submit an application to join the DAO and offer something in return, for example, something in the form of crypto assets or work. In return, they receive shares in the DAO when they join. Similar to tokens, these shares allot direct voting rights. Members also have the option to cancel their share and leave the DAO at any time. This system is often selected for projects in which members are required to have specialized expertise.

    In addition, there are often people who participate and join in discussions (e.g. in a Discord channel), but do not have voting rights themselves. These contributors can also have an important influence on the development of a DAO.

Who gets the codes to the MultiSig?

Code bearers for the MultiSig are often particularly committed members who first introduce themselves online and then stand for election. The election of MultiSig holders is usually one of the first votes in newly founded DAOs. If transactions must be signed by, for example, five holders, DAOs should choose at least eight MultiSig holders. This creates a cushion that helps the DAO retain acting capability in the event of illness or considerable time zone differences.

What is the technical implementation of founding a DAO?

On the technical level, founding a DAO is achieved by means of open source programs that provide the technical requirements for both proposals and voting. Coding a completely separate smart contract on your own is therefore not required. The best known examples of such programs are Aragon, DAOstack or Snapshot, among others.

A certain level of technical know-how is necessary to define the rules for the DAO as well as some technical settings. However, programming is not necessary because everything can be configured via a user interface within the respective program.

How much does founding a DAO cost?

The monetary costs of founding a DAO in Germany are relatively manageable. If one wants to establish a DAO on the Ethereum blockchain, for example, a fee of about 0.2 ETH is due to Binance. The time costs, on the other hand, are very intense. Keeping large communities informed and overseeing the many opinions and contributions can be considerably time consuming.

Legal issues with founding a DAO

In contrast to isolated efforts and the state of affairs in the USA, for example, a DAO does not represent a separate legal form in Germany. Insofar as legal questions currently exist, in particular with regard to the liability of the participants, a DAO is generally considered to be a civil law partnership - in which all partners are personally and unlimitedly liable.

This can be countered by cleverly designing the organization, so that, for example, the DAO is set up as an association (not entered in the register of associations). However, this solution also raises questions as soon as the DAO pursues economic purposes. In such cases, a trust solution can be the means of choice.

More than ever, however, the principle that "it depends" applies to the establishment of a DAO from a legal perspective. A separate legal form does not exist for DAOs; each enterprise must be individually evaluated and designed. Otherwise, token holders face liability.

WINHELLER supports your DAO foundation in Germany

Do you have questions regarding the founding of a DAO in Germany? Do you seek professional expertise regarding legal or tax issues in connection with your planned DAO project? Do not hesitate and come to us. Our experienced attorneys and tax advisors will work with you to develop the optimal strategy. Your contact persons are:

The best way to reach us is by e-mail (info@winheller.com) or by telephone (+49 69 76 75 77 80).

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