Do you own cryptocurrency? Then you may have heard of something called a decentralized autonomous organization (DAO). A DAO is a digital organization without a centralized authority, whose members join online communities to make decisions, manage funds, and propose initiatives through voting systems – all done collectively. Most DAOs require that members purchase or acquire governance tokens to participate in the decision-making process.
Recent court cases have grappled with how to legally characterize DAOs, with several courts finding a DAO is a general partnership. Often, these lawsuits emerge from when things go wrong in a DAO. For example, in Samuels v. Lido Dao, 757 F. Supp. 3d 951, 960 (N.D. Cal. 2024), motion to certify appeal denied, No. 23-CV-06492-VC, 2025 WL 371797 (N.D. Cal. Feb. 3, 2025), an investor in cryptocurrency filed a class action against a DAO called Lido, claiming that the large institutional investors in Lido were liable for the investor’s losses because these institutional investors were members of a general partnership as a result of, among other things, the investors exercise of voting rights to guide the project’s direction. Lido moved to dismiss, arguing that it was not a legal entity, but was instead just autonomous software that ran without human management.
The court disagreed and found that Lido could be sued as a general partnership under California law because “Lido’s alleged actions are not those of an autonomous software program—they are the actions of an entity run by people.” The court cited the fact that Lido made decisions through token holder votes, maintained a treasury, and hired over 70 employees. The court further held that the plaintiff was not suing an autonomous “protocol,” but was instead suing the founders of Lido who deployed or created the DAO’s system. Similarly, in Sarcuni v. bZx DAO, 664 F. Supp. 3d 1100, 1115 (S.D. Cal. 2023), the court held that a plaintiff (who lost funds in a phishing attack) plausibly alleged that token holders in the DAO were general partners in the DAO because they participated in the DAO’s voting and governance and shared in profits.
These decisions suggest that the entities or individuals involved in deploying, heavily investing in, and/or governing the DAO will need to tread carefully since they may be held to the high standards of care and duties of loyalty and the risks, such as joint and several, and unlimited liability for all debts and obligations incurred by the partnership that come with being a general partner.
