Beyond Code is Law: A Workshop on DAO Constitutions with Martin Schmidt and Kyle MacLean Smith

[Music] Just a quick round of introductions. My name is Martin. Uh I'm with a protocol called Q. Uh like the letter Q. Um website is Q.

org if you want to check it out. Uh and what the protocol does, it provides a governance framework that other protocols can build on, can use. So really a foundation layer um for other companies, protocols, organizations to build on. Pass it over to Kyle. I'm Kyle.

I'm a uh legal engineer at Lexau, one of the core contributors there. And legal engineers are people who uh are lawyers uh practicing or nonpracticing uh and also who write code. So we automate the law with code as legally is or code is law, code's law. Very nice. My name is Jordan Teague.

I am a legal engineer with Kyle at Lexa. Um, also the general counsel of the graph foundation if you're familiar with the graph protocol. Um, also have a law firm called the anti-firm. We specialize in crypto native project um, legal advice and maybe more relevant for this talk, one of the co-founders of KI and rapper which is a platform for Dows. So to get started I will um introduce a quick framework uh that helps you answer one question which is whether your DAO needs a constitution.

So we're really starting at the foundation layer not assuming that you do uh but really going into the depth of what is it that you want to do and what is a constitution for. Um those who've been around in crypto blockchain for a while um they you you might have heard of a paper that was written in 2017 which was called do you need a blockchain which went through a process of you know asking five I think or six questions and then coming up with answers to that question. So we're kind of uh doing a similar thing for dump constitution or trying to do that. Um I've developed the framework with my um colleague and friend Garrett. So shout out to him uh who can't make it today.

He's has booth duty but uh I'll walk you through it and also really interested in getting feedback you know either directly after this session or you know um whenever you can get in touch. So as I said five question the first one is very easy and don't worry I'll read it out to you. I'm not expecting you to read the small um writing on the screen. First question is uh does your DAO need to make decisions with a degree of discretion? Um meaning that you know you have this decision types um where some human input is needed.

So basically anything that cannot be coded and probably the answer for most Dows is a very clear yes. Um nevertheless I would encourage everyone to think deeply about what the decision types are. uh because many things that I see um that are in constitutions, you know, can be coded. So things that can be coded should be coded. Um at least that's that's my view.

Um but the discretionary types of decisions that cannot be coded, that might be a good um starting point for a constitution. Uh secondly, uh how are those decisions made? Who makes them? And there are cases where basically you have a bunch of core people that just make the decisions um on their own accord. If that is the case, there may not but um be much of a need for a constitution.

Um but typically those decisions are made by the community. So we have things like decision rules. Uh how are um decisions made in terms of quorum um majority requirements, you know, different levels of gravity of the decisions that have different decision rules. Um and if that is the case, a constitution D constitution is a good place um to write down to codify those types of rules. Uh thirdly, and I'm going to keep it short because Kyle is going to talk about that in more detail.

Um the question is can the scope of discretion of those decisions be defined? Um if the answer is no, that kind of makes it difficult and we'll go into details of why that is so. But if the answer is yes, um then you move on uh to the next question which I think is a uh one that's kind of tricky and one that many Dows tend to get wrong or not think about um sufficiently which is uh is there a mechanism to enforce DAO decisions. Uh the reason being rationale being that if you have a constitution that lays down the rules that's great. Uh but if those rules cannot be enforced, you know, the question is what is the constitution worth?

And you know, of course, there can be an argument that it's a kind of a social contract between the participants. It's an implicit social agreement. Um if everyone agrees, if everyone's friendly with each other, that's great. That's fine. That's efficient.

Uh but the very reason why you want the constitution in the first place is often that you want that for the bad times when people don't agree. We want to have guidelines that people can stick to. Um rules that people can stick to and that they know what they're getting into when things are not in consensus, not in agreement. Um so, uh enforcement of decisions is in my view a critical factor. Um it's tricky because how do you do that?

Um there is no one single answer. It can be things like veto rights. It can be things like um having to put up stake that can be slashed and that leads to an enforcement of the decisions. It can also mean some kind of dispute resolution mechanism. It can even mean going back to quote unquote old world traditional legal systems to fight it out.

Um whatever it is, think about it. If decisions cannot enforced cannot be enforced that makes it difficult, problematic and potentially you're even worse off having the constitution because people rely on it and then find that they can't. Last question and also that I will keep short because Jordan is going into much more detail on that is uh does your DAO have a legal rapper? Um, and if it does, you should think about how that relates to the constitution, if legal documents are maybe even a constitution. And at the very least, make sure that there is no conflict between um, what you have in the constitution and what's in the legal documents.

Um, and pretty much that's it. So, five questions and you come out with an answer. Um, it sounds simple. I know there is a lot of detail to go into on each of those. Uh but if you've answered those questions, uh you might come up with the answer that yes, you need a constitution and then it's about the details of how to construct it, how to draft it.

And K's going to talk about um one specific aspect of that. Uh yeah, so these are decision types in DAO constitutions. um code is law, binary really what we're talking about there in this discussion uh compared to discretionary which is more uh gradient gray area. So yeah so binary and that's yes or no. So if you can have a decision for the Dow that's true or false those types of left or right that's a great thing for onchain and one of the values of it as well is that we can stack those decisions.

So we can especially with oracles we can make them automated so we can have four or five different decisions even uh lined up one after the other but also even if not for instance one you might not think about uh as binary is did we hold quorum or did we not hold quorum and either we did or we didn't and if it's on a DAO that has quorum then onchain it's going to tell us whether or not we have quorum rather than in traditional organizations people have to uh sign that they held quorum and and there's a certain level of trust if everyone in the room is telling the truth and and such. Uh and then discretionary is yeah more that we can't actually say if for instance I don't know what's your favorite color I mean we won't really decide on a dial but we could potentially green blue yellow or something like that and um so on to next so yeah so I I mentioned it already that it's uh binary is automatable and discretionary it really isn't that automatable um perhaps with AI we can get there a little bit but still we probably want to review that AI. So even then when we can get computers to get more in the statistical methods which they're doing very impressive work these days um we probably don't want to rely on major dowo decisions for uh with with AI and yeah so um we want to definitely because discretion can go quite a give someone a lot of power for instance uh the whole benevolent dictator thing hopefully they're benevolent uh with Python I guess that worked out but still um why why have that risk when you know that we you don't want a certain amount of uh discretion already then it's important to narrow the scope and that really is what the constitution is supposed to do for the most part is to define where that scope is is narrowed and then also just say all this other stuff we can do that binary so it's going to be on chain have a look at that and there's uh a clause that we use in Lexile I think it's fairly common now which is uh Um well the concept is code difference and then what it does is it points to a particular ox address and that ox address is the source of truth. Uh so yeah so sometimes a really narrow scope well all else equal uh if we know that we can have the scope as narrow as possible then you have a narrow we can limit the um harm caused by a discretion or even just straight up confusion. Um if people know the bounds of discretion then they'll act within that a little bit better.

And yeah, we want it to be as close as possible to binary. Hopefully eventually the discretionary decision will have a binary um expression that we can then have fully on chain broad scope. We still have to have it somewhat broad especially when we want to work at the speed of business. So sometimes decisions have to be made in one or two days and um doesn't we don't have time to talk to the DAO or perhaps we can't talk to the DAO for uh business reasons. a competitor could buy the constitution out from under us for instance.

So, um, one thing in in Dows, at least the Dows I'm working on where broad scope is pretty good, is to have a, um, uh, a fund of like a thousand or 2,000 or something like that to quickly do something like co-host a event at E Denver. That's something that happened in Lexiley actually directly. We had someone say, "Hey, do you want to co-host?" And it was around that amount and you got a day to tell us. And so, um, working onchain code is law that was just too slow.

And so, but because we had this set up in our constitution, we could quickly uh make that decision and then of course the DAO down the road can decide to either remove those members if they were making bad decisions like that or keep them give them pat on the back and maybe a bonus or something like that. Um so basically, I mean this is a concept in in quite a few areas of life, but try to find the goldilocks and discretion. So, not too narrow because otherwise your DO members are going to be really restricted and nothing's going to happen and everyone's going to get really frustrated because they spend a lot of time and stuff and and it doesn't get done. Uh, but also not too broad because that's where we can have people um take control of the DAO and um adversely even if if there's enough discretionary power, they can do that. So, yeah, that's um on to Jordan.

Awesome. So, legal rappers. Um, you've decided that your DAO might need a legal rapper. Um, so we might need some sort of a written document. So, legal rappers is a topic that we could probably go into for hours on end um in and of itself.

And so, we probably don't have time to get into that now. Although, I know there are a lot of crypto lawyers in the house who would be glad to geek out over that um including myself. Um, though I will give you one freebie. DAO LLC's I don't feel like they're all they're cracked up to be. Um, and if you want to read my opinion on that, I wrote an article in the Defiant um, which you can look up um, as to why.

But, um, as Martin mentioned earlier, if you have a legal entity, often times there are going to be legal documents like bylaws or an operating agreement or in the case of say an unincorporated nonprofit association, some sort of a charter that you're already going to be drafting anyway. And so maybe this is actually where you memorialize all these things that we're talking about how the DAO is going to govern itself. Maybe you have a supplementary document, but you certainly want to make sure if you have multiple documents that they're not in conflict. And a word on that. I have seen a lot of constitutions, charters, operating agreements that do not defer to code like Kyle mentioned.

And you end up with situations like for instance, the smart contract can't enforce a quorum, but the operating agreement requires it. Um, that's insane. You don't want that situation. And so please make sure that if you want to defer to code on certain things that you actually do that in your um incorporation documents. Um but so if you're going to have a legal wrapper or you know you want a constitution.

Okay great. So now what um where do you put it? How do you enter into it as a DAO? Um obviously a cryptonative way would be ideal, right? You might think maybe NFTTS or putting it on IPFS where it's immutable.

So, wrapper, which we have a screenshot of on the screen, is one way that you can do this in a cryptonative way. Um, this is at wrapper.wtf. So, that's rapper without an e, wrap a p r.wtf.

And if you go on to wrapper, this is the homepage. And the third option, charter, will take you to a couple of pre-made templates. One is the Lex Punks um stateless charter, I think is what it's called, and then one by Orange Dow. These are great starting points if you don't know what you want to include in your charter. These are great examples, but you can deploy a charter right here on chain.

It'll be represented by an NFT that points to an IPFS file. So, this is great because first of all, it's immutable. No one can go change the rules of the game. They're right there. Um, they'll never change.

And second, you can send that NFT straight to your DAO smart contract if it supports NFTs to a DAO wallet if that's how you're set up on um something like um oh gosh, what's the there's some DAO platforms that run on wallets, but but in any case, you can send the NFT straight there. So there's no doubt this is the document that's attached to the DAO. Um, and if you think of cases like Ukida, I'm not suggesting that this would have necessarily changed the outcome, but um, in the UK case, there was no charter. There was no private ordering. And you do have to wonder what might have happened if the CFTC had stumbled upon something like a stateless charter that said, you know, we are not general partners.

We are um, acting in our own interest. Maybe it would have moved the needle, maybe not. Um, so rapper is a great way to do this in a cryptonative way. And if you go to the next screen, you can also mint your own custom constitution charter, whatever you want to call it. So if you come up with the rules of play and you want to mint them on chain, you can do it that way as well.

Questions? And we'll have more templates on the way. So check back in a month or two and yeah, we're continue to develop it out. Open law is a really important aspect of uh Lexile's purpose, mission, what have you. So yeah, maybe just to add to that small commercial break here at this spot.

So um rapper as of yesterday is also available on the Q network. So you can come to Q.org or you know um look at the network, look at what it does. Um then go to rapper and mint your NFT legal entity um actually on the Q network. Any questions?

Oh, yeah. Absolutely. Well, you know, so I think one of the big mistakes that I see is Dows running off to um exotic jurisdictions thinking that it's going to solve all of their problems. So, there are some really interesting entity types like the Cayman Islands Foundation Company. Um, you know, in some of these other island jurisdictions that can work really well for decentralized organizations.

But if you don't engage the right tax council, for instance, you might find out that that massive Dow treasury you have sitting in the Cayman Islands is actually controlled by a bunch of people sitting in the US and is subject to US tax. So that's just one small example of how yeah, you know, sometimes you can run off and do something that sounds like a good idea, but it's really not. Um, which is why obviously engaging a lawyer sooner than later is always a good idea. Another one I've seen is um people don't follow the constitution, they actually implement and perhaps they follow it initially, but then motorcycle naturally builds out. So it's not that they're doing anything wrong.

Uh but that it's a good idea to if you notice that there's behavior creep that you revisit your constitution and make sure that it's actually appropriate for the type of discretionary decisions you want to make. And then also you can al revisit and go well how many of these can we actually make binary and again sometimes it's not obvious if it's binary like that you've met quorum and then if it is then perhaps um build that out on chain if there isn't already a tool that that can provide that. Um, one other note is I think sometimes there's an assumption that these private ordering documents like a charter or constitution will protect you from everything and that's just simply not the case. I think, you know, they can do a good job um helping to clarify issues among the parties or maybe in the case of an operating agreement, they can help establish limited liability for breach of contract if you actually follow the formalities that are set up like Kyle mentioned, but they're not necessarily going to protect against all regulatory action or anything like that. So, I think you just have to temper your expectations with um what you're actually getting out of this.

And there is a lot of value, but it's just not going to protect you from everything. One small thing I would add is that u there needs to be very close alignment between um the legal side and the you know let's call it operational side. So um what I often see is that as long as as soon as lawyers get involved you know the people who are actually involved in the DAO contributors they kind of stack it back because they assume that you know legal will take care of everything. Um but but actually making sure that you know what you want in the first place. um what is it you know that you want to um govern I mean that's really the foundational step without that you know it's hard to take the second step so um also in discussions with with legal councils um and that that should also always be the case yeah unless you're um sizable enough to have a general counsel like the graph is with Jordan uh the lawyers are going to leave after it's all set up and then you're the one navigating that ship So they're not going to help you navigate it.

And if it's designed in a way that you can't do that well, then it's been poorly designed. And of course, you can modify the constitution. Constitution should be living documents. That was what I referenced that before. Another one a little bit tangental to constitutions, but still kind of important is determining or having this on chain or pardon me, just picking a say an LLC through the wrapper service.

That doesn't mean you're going to get a bank account. Um, so you might have to do a lot of work to have the bank account, but in the meantime, you have uh contractually at least limited your liability at the very least between each other. You've you've agreed to um uh indemnify and and such. Um, so how do you guys see this playing out like the next 5, 10 years? Is there going to be big corporations using these rappers or is it more like the instance where you said, "Oh, I want to organize an event at the Denver and it kind of stays small."

What's the the ceiling for this kind of these instruments? Oh yes. So that I mean this is more Yeah. Um Okay. So corporations are going to do CC Corp and there are some organizations one that recently released a product uh firm.

org and and that is focused on enterprise and they're more on the way they're focused on enterprise. It makes sense where our market is. And then yeah, small groups. Uh we really enjoy Tuna, which is trustless unincorporated nonprofit association non I mean think are you trying to have profit then that might not I mean obviously you got to it's got to be correct. But that one has uh very little reporting requirements.

And so it's if you're even if you're thinking about having a much more substantial organization but you're just starting out there's a handful of you. You have no idea if there's any traction or something like that. You can maybe think about your exploratory phase is don't even try to h have profit, just have it be a lab. And u then when you've kind of built that out that you want to do this um for the long haul, you can then hopefully you've saved up some capital and and then engage lawyers to have something that's more substantial. One thing that will benefit the overall industry is if we use these so they they become standards.

If there's only one or two random people here and there using them, then they're always going to be kind of exotic. But if we well for instance A16Z is pushing the UNAS the tunas uh and they've spent a lot of energy figuring out how um roadmaps on how to implement tunas and all that and that's in part so that we as a whole marketplace have this as a very common standard and and the courts are much more likely to uphold it if if it's something that is um say a broad coalition is um lobbying to to have this more uh uh clearly accepted by compliance and regulators and such. Uh have any of these made it to court yet? So you guys have these you're you're you know expecting people to use them. Have they actually been battle tested and someone has like stand like you know gone to court and actually used these or is this we're still not there yet?

Yeah, great question. So, I have a um pretty extensive litigation background and I can tell you it takes a long time for things to work their way through the courts. And so, I would say the answer is for for a lot of this, you know, especially when it comes to Dows, no, there's really not a lot of precedent, but there is plenty of precedent that things like operating agreements and charters for UNAS have value. And so, um to to answer you directly, no, not necessarily specifically with Dows. Um so that remains to be seen.

Yeah, I would I would also add that you know even if those have not yet been battle tested those structures um nevertheless often times you're better off having them than not having them because you know also for Dows it is true you know what is a DAO I mean has that been battle tested in courts? No. Um so having clarity around um agreements between members and legal structure is probably a good idea. And yeah there's that contract um liability that wouldn't you say Jordan that since it's in contract that particular subset of liability. Yeah.

Yeah. I mean, especially say if you're drafting an org doc for an LLC, you know, it can be helpful if you're actually complying with corporate formalities and doing everything right and you actually run your LLC properly. It can help you when it comes to things like contractual matters with third parties. So, and in other countries, uh, regulators work quite a bit with, um, early well early markets. I believe Q has been spending quite a bit of time with regulators and so there's a lot more confidence in those territories.

what's going to happen because there's been ongoing dialogue in the US. We might be able to have legislation that then we can have certainty that way and it doesn't have to go through the courts. Any more questions? No, you you've had three. That's enough, you know.

But okay, one more. What is it backing up as you know a class lawsuit versus an SEC enforcement or kind of how do these get looked at in front of the courts? How do they get there and and what do you want them for in those situations? Sure. So, it was a little hard to hear, but I think you said how does how do these make it to court?

How do these get litigated? Right. So, um well, usually there has to be a dispute, right? So, if you're talking about just a a lawsuit between private parties, maybe the DAO has a contract with another DAO or they've engaged a service provider or they're providing services and someone's not happy and so they file a lawsuit. If you're talking about regulatory enforcement, a regul a regulator has to be unhappy with something and they file an enforcement action.

So, things don't just make it into court because reasons. There's this doctrine called standing where there has to be an actual party with an actual problem actually about to suffer harm. Courts won't issue what we call advisory opinions. So you couldn't go into court and say please bless this DAO constitution. You'd have to actually have some sort of a problem or dispute between parties or um with regulator.

May maybe I can add to that from the European perspective. So with the Q protocol uh we have actually um gone to the regulator in Likenstein and in Germany so the Likenstein FMA German Bin and specifically ask them you know to have a look at the code and the constitution uh and both have said that they don't consider uh that to be a security based on the evidence that they're seeing um so I think it depends on the jurisdictions. I mean some regulators are more open than others and more um what's the word uh you know sort of have a higher level of commitment when making those statements. Um European regulators I think tend to be quite good. Uh so in both those cases we've you know gotten a positive approval um that it's not you know the native token Q is not a security.

Um and you know constitution can help uh because that's where the rules are written down. You know regulators tend to be much better at reading legal language than reading code. So um yeah that there there are ways to to you know gain confidence that what you're doing is not in conflict with any law or regulation. And a sign that these constitutions are working is that there is a lot less litigation. The parties can resolve inside the DAO.

They understand the rules and they will follow the rules when they have some kind of dispute and um without that it's possible they might go to litigation. So no news is good news in that sense. Any more questions? One more. Um, so I actually came in there as a bit late, so maybe you might have actually touched on this prior.

Um, but uh, is it actually safe to say that the DAO can have a diverse set of um, various anchor jurisdiction, you know, jurisdictions perhaps even that is across an international perspective. um let's say a DAO that actually works jurisdictionally within the Americas and then say Europe and then say parts of Africa, parts of actually East Asia, like how do you actually think about the the construction of that kind of constitution as a function of that? Yeah, I think we're going to have to cover that as a sidebar. That's that's a conversation to to be had over multiple coffees or beers or whatever you fancy, but we have lots of crypto lawyers in the house that would be happy to to talk to you about that. Multi-jurisdictional entities already exist.

Uh and yeah, I mean it is a process though and current setup but hopefully we can speed it up with two click Kelly. Uh yeah, I think here the same principle applies that you know just making things clear of already is a big step. Thank you. Thanks. Thank you.

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