It is now hard to imagine blockchain without decentralised autonomous organisations (DAOs). They have revolutionised collective governance and helped the industry move markedly closer to genuine on-chain democracy.

Yet as DAOs become more complex and expand in scale, they increasingly collide with legal systems rooted in national jurisdictions and the concept of natural and legal persons.

In this article for ForkLog, blockchain lawyer and partner at Aurum Sergei Ostrovsky describes the legal crisis surrounding decentralised autonomous organisations and the transition to third-generation DAOs.

The legal crisis of DAOs

Many DAOs try to integrate into legal systems, but in most cases these are one-off efforts and fragmented structures. They do not solve fundamental legal problems such as the absence of identity and legal personality, and the unlimited liability of DAO members and contributors.

In early February 2025 the framework DAO 3.0: Harmony was released. It proposes a jurisdiction-neutral, modular and scalable architecture for decentralised organisations. Its purpose is to solve the problem of integrating DAOs into the legal system while preserving full decentralisation and flexibility, and to protect participants, contributors and assets from legal and financial risks.

Legally, DAOs are at an inflection point. Decentralised organisations are increasingly in regulators’ sights and the target of private and class-action lawsuits. Courts recognise DAOs without a full legal structure as partnerships, exposing each member, contributor and, in some cases, even investors to personal liability for all obligations of the organisation.

The latest notable precedent was the decision in Samuels v. Lido DAO. It confirmed that all members of a DAO, along with large institutional investors such as Paradigm, Andreessen Horowitz and Dragonfly, can be deemed partners in the legal sense. Such status imposes full liability for the entire organisation on each of them, giving private plaintiffs — the attacking side — a clear and comprehensible target for suing DAOs and recovering funds. Similar arguments were used in decisions in cases against bZx DAO and Ooki DAO, making this classification more the rule than the exception.

An important point is that the Lido DAO case effectively undercut the entityless DAO concept promoted by many lawyers, in which only certain elements and assets of the organisation are structured — for example through a foundation — while the community and governance remain in a legal vacuum.

Why current approaches do not work

Most existing legal models for DAOs fall into two categories, each with critical shortcomings:

1. Unstructured DAOs. These organisations lack any legal structure, leaving members, governance and assets entirely unprotected. In such cases, all actions and transactions of a DAO are not formalised and therefore are carried out directly and personally by members and contributors, who bear direct personal liability in every sense; governance and members’ decisions lack a legal basis.
2. Partially structured DAOs. Some organisations create legal entities — so‑called legal wrappers — to structure particular operations or assets, for example the treasury. This helps protect the DAO in the context of specific transactions conducted through such wrappers, but the organisation itself, including the community and governance, continues to operate without a legal foundation.

The absence of a legal structure, or its fragmentation, creates significant risks for DAOs:

• lack of legal personality. DAOs without a full legal structure are vulnerable to regulatory enforcement and lawsuits in which they are saddled with the most undesirable legal classifications and obligations under the law of the most “hostile” jurisdictions;
• personal liability for members. DAO members, signers of multisig wallets and participants in governance processes may be deemed partners, which entails full personal liability for them and makes the entire organisation an attractive and comprehensible target for regulators and potential plaintiffs;
• tax risks. Unstructured DAOs lack tax status and cannot manage or fulfil tax obligations. Moreover, the absence of structure can create personal tax risks for members and contributors;
• limited scalability. The absence or fragmentation of structure creates operational barriers that impede scalability and sustainable growth. New initiatives and lines of activity increase legal risks and uncertainty;
• governance risks. Without a legal basis a DAO cannot effectively enforce members’ decisions or defend itself in court, and the legitimacy of governance outcomes can be challenged;
• legal fragmentation. Most existing legal models focus on individual jurisdictions and piecemeal solutions, preventing the creation of a full, flexible and scalable architecture for global decentralised organisations and ecosystems.

A safe, modular and scalable legal architecture

Before turning to the architecture itself, we need one key concept: the DAO‑Specific Entity (DSE).

A DSE is a non-profit (or non‑commercial) organisation that:

• recognises all DAO participants as members solely by virtue of token ownership — without the need to pass KYC or disclose identity (other than ultimate beneficial owners). This places the core of the organisation — the community and governance — within a protected legal perimeter;
• guarantees limited liability, grounded in corporate law, for all DAO participants, eliminating the possibility of holding them personally liable for the organisation’s activities;
• enables effective management of legal, tax and financial obligations and risks.

It is important to distinguish a DSE as a full legal wrapper from partial wrappers. A partial wrapper is a legal entity used to ring‑fence or structure specific activities, assets or components of a DAO; it does not encompass the entire organisation, including its governance and community.

By contrast, deploying a DSE as a full wrapper means the DAO is fully integrated with this legal entity. The decentralised organisation and the DSE merge into a single legal person, after which the DAO’s core continues to exist in the form of the DSE.

Legal architecture

To make a DAO’s architecture modular, scalable and safe, legal wrappers should be split into two tiers or layers:

1. Base layer. Here the DSE is deployed as the DAO’s full legal wrapper. This layer’s task is to place the DAO’s governance and members inside a legally protected perimeter. The DSE gives the organisation legal identity and personality, grants members limited liability and ensures legal systems will treat the DAO as a distinct legal person separate from its members.
2. Operational layer. This layer comprises partial legal wrappers that complement the DSE and are used to manage specific assets, risks or operations. This is the modular layer: operating wrappers are created as needed and in any number, depending on a given organisation’s goals and needs.

This structure gives an organisation both safety and flexibility, helping a DAO preserve decentralisation, scale quickly and operate globally, including across different jurisdictions and legal systems. It suits DAOs of any size and type, allowing them to evolve into cybernetic organisations and large decentralised ecosystems.

Moreover, implementing this model meets all key objectives of legal structuring for DAOs and addresses the most critical risks. Among the principal advantages are:

• the DAO acquires legal personality and is legally distinct from its members;
• adverse legal classifications are avoided, such as treatment of a DAO as a partnership under the law of unfavourable jurisdictions;
• personal liability is eliminated for DAO members and contributors;
• financial and tax safety is ensured, with tax risks not shifted onto contributors;
• the DAO gains the ability to operate globally and in specific target jurisdictions — via operating wrappers;
• legal protection of governance processes, since both DAO members and the outcomes of their voting acquire a clear legal status that guarantees recognition of decisions and the ability to enforce them;
• scalability and adaptability, allowing the DAO to grow, develop and integrate additional structural elements as needed;
• jurisdictional flexibility — a broad toolkit to structure particular operations, units or even projects efficiently and relatively cost‑effectively, including in the most favourable jurisdictions and legal regimes.

Modularity and scalability

A distinct operational layer makes a DAO’s architecture modular, adaptive and scalable over the long term. It also enables effective risk management by isolating risks within specific wrappers, preventing spillover to members and core DAO assets.

All wrappers created at the operational layer fall into two categories:

• subordinated structures that must be controlled by the DAO in one form or another, such as holding units. Instead of subordinating such a structure to token‑holders or a community without legal status, it can be subordinated to the DSE, strengthening protection and ensuring enforcement of governance decisions;
• autonomous structures that operate within the DAO’s ecosystem but remain operationally independent. Such units can be created by members or by external contributors. By delegating certain powers or assets to these autonomous structures, a DAO improves its decentralisation, flexibility and inclusiveness.

A flexible, modular architecture enables DAOs to grow effectively and adapt with ease to any legal environment and a wide variety of conditions.

DAO assets

At the base layer the DAO deploys a DSE, which is a non‑profit organisation. This means that, except for payments for services and work performed, a DSE cannot distribute assets among its members — a point that must be considered in the architectural design.

The DAO’s treasury and key assets can be placed either within the DSE or in legal wrappers outside the non‑profit perimeter — that is, not as subsidiaries of the DSE. This makes the organisation more flexible and significantly broadens the ability to use assets and structure cash flows.

The organisation can still implement reward mechanisms for its members and contributors. However, such rewards are not recommended to be based on passive token ownership. Instead, they should be linked to contributions to the DAO’s activity: active participation, useful actions or the performance of governance functions.

Substance

A DAO’s legal structure must have substance — be real and substantive rather than merely formal — otherwise the construct may be deemed a sham and disregarded by courts. The legal architecture should therefore match the DAO’s real operating structure, without materially changing governance, operations and decision‑making (unless justified).

The treasury, core committees and multisig wallets should be integrated into the legal structure. If substantial elements of a DAO remain outside the legal structure, the organisation risks continuing to function as a partnership in which legal wrappers become new partners, rather than as a coherent legal structure.

Regulatory aspects

It is impossible to account for every regulatory nuance and devise a single universal solution. However, the proposed architecture includes a set of compliance tools that improve the organisation’s regulatory posture.

In several respects the DAO preserves the status quo — for example in operations and decision‑making. But the model introduces enhancements in the form of limited liability for members, the ability to isolate risks and the separation of financial rights from the token at law.

Choosing a corporate form and jurisdiction

Base layer

Today there are several types of DSE suitable for forming a DAO’s base layer. Unlike traditional legal entities, DSEs are special corporate forms designed specifically for decentralised organisations:

• DAO LLC — an LLC form adapted for DAOs. We consider the Marshall Islands the most optimal jurisdiction for creating a base‑layer organisation in the form of a DAO LLC;
• DUNA — a decentralised unincorporated non‑profit association in the state of Wyoming. This is a good DSE option for DAOs that have substance in the United States or wish to create or strengthen it;
• RAK DAO Association — a DAO association established in Ras Al Khaimah, UAE. RAK DAO is the first specialised Web3—free zone in the Emirates;
• ADGM DLT Foundation — a DAO foundation available in the ADGM free zone, UAE.

Certain DSEs may have no appointed management, such as directors or officers, avoiding additional points of centralisation in a DAO’s structure. In the absence of management, no further control mechanisms are required, as there is no one with significant powers and therefore no one to control. The organisation may nevertheless appoint a manager with limited powers to perform corporate actions and handle renewals and filings.

Where an organisation has management, appropriate controls — a system of checks and balances — should be established. This will ensure managers act within their powers and in the interests of the organisation, and can be held liable in the event of material breaches. It is important that controls be not only technical but also legal.

Each DSE type has its own features and nuances, so it is advisable to study them carefully and approach DAO structuring comprehensively, taking into account the operating architecture, core tasks and long‑term plans.

Operational layer

Wrappers at a DAO’s operational layer are deployed to manage specific assets and operations. They can be used for various purposes, such as structuring committees and sub‑DAOs, segregating assets, owning and managing IP and infrastructure, and isolating particular transactions, projects and related risks.

The operational layer is modular, with no limits on the number or forms of legal entities that may be used. The presence of a DSE at the base layer improves the subordination and control of operating wrappers, allowing classic legal forms — such as corporations or traditional offshore and onshore companies — to be used as subordinated wrappers. Consequently, the choice of operating wrappers is practically unlimited and may include:

• ownerless structures, such as a foundation and companies limited by guarantee;
• purpose trusts;
• segregated portfolio companies (SPCs);
• protected cell companies (PCCs);
• series DAO LLCs (if the base layer is a DAO LLC);
• sub‑DAOs (if the base layer is a RAK DAO Association);
• traditional legal entities (corporations, LLCs, offshore and onshore companies).

In conclusion

DAOs can no longer remain in a legal vacuum. Like any other organisation, they need a full legal structure capable of protecting their members and assets and integrating into the legal system.

The regulatory environment is evolving both around DAOs and the blockchain industry as a whole, demanding greater legal flexibility and adaptability from decentralised organisations. At the same time, it remains critical for DAOs to preserve a balance between compliance and decentralisation — achievable only by building a full, safe and scalable legal architecture.

The legal model described above enables DAOs to achieve these goals and move to a next‑generation architecture — DAO 3.0.