Reading time: 3 minutes

As a blockchain-based platform, Ethereum is primarily used to execute smart contracts. It uses a digital currency and a specific programming language to enforce agreements between parties. Despite its peer-to-peer verification processes, a recent intrusion into The Decentralised Autonomous Organisation (DAO) by hackers reveals the high risks associated with this still relatively untested and unregulated platform. This article explores what the role of Decentralised Autonomous Organisations, the breach of the DAO and its legal implications.

What is a DAO?

The purpose of a DAO is to encode the rules of an organisation in a program, cutting out governing bodies and forming a structure, which as the name suggests, has decentralised control. The DAO in question (not the Ethereum platform but the particular organisation that was hacked) went live on 30 April 2016 and had successfully operated for two months without major issues. Surpassing the expectations of its founders, the fund, the highest value crowd funding exercise ever, was bankrolled by 11,000 members who raised a total of $150m between them. The DAO’s originated in Bitcoin and have since gone on to be established exclusively in Ethereum.

Broadly a DAO’s functions with smart contracts running the organisation, after which there is the first round of funding where people can acquire tokens entailing them to certain rights, in a process known as an initial coin offering.

These tokens are not equity shares, more resembling voting rights than ownership ones. This is understandable when viewed in the context that a DAO is typically not “owned” in the legal sense, rather simply a piece of Ethereum software.

Following this process, a DAO becomes operational and people have the opportunities to submit proposals to a DAO as to how money should be spent. The token holders then have the discretion to approve or reject these proposals.

The Breach of The DAO

While programmers were performing fixes on several vulnerabilities, a hacker exploited an operational fault that allowed them to siphon the tokens from the DAO to a separate “child DAO” designed to prevent the tokens retrieval by the parent DAO.

An unfortunate consequence of this child DAO following the same format as the parent was that the 28 day non-access funding period still applied. Within days, ether (unit of ethereum) to the value to $3.6m had been appropriated, with the currencies market price dropping 25%.

Legal Implications

Designed to work as individual agreements free from the influence of multiple external parties, smart contracts were never completely suited to a DAO, despite the ideals of its founders.

Due to its rapid growth and unregulated nature, the DAO’s very existence presented a myriad of legal red flags, with equally numerable financial regulations potentially breached inter-jurisdictionally by its existence. Both the creators and tokenholders likely had liabilities that neither party was fully aware of in what was near entirely uncharted legal territory

Key Takeaways

The incident brings to light the darker, deregulated side of blockchain not often seen behind its much-hyped prospects. That is not to say blockchain does not have enormous potential as a new technology, but neither should investors overlook the unique and often underexposed risks it entails. If you have a question, get in touch with our IT lawyers.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Anthony Lieu
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards