Now it is difficult to imagine blockchain without decentralized autonomous organizations (ДАО). They have revolutionized collective governance and helped the industry make significant progress towards true on-chain democracy

However, as DAOs become more complex and large-scale, they increasingly have to deal with legal systems that are based on national jurisdictions and the concept of persons – individuals and entities

In this article for ForkLog, Sergey Ostrovsky, a blockchain lawyer and partner at Arum, talks about the legal crisis in the field of decentralized organizations and the transition to third-generation DAOs

DAO Legal Crisis

Many DAOs are trying to integrate into legal systems, but in most cases, these are isolated attempts and fragmented structures. They are unable to solve fundamental legal problems, such as the lack of identity, legal personality, unlimited liability of participants and contributors to DAOs

In early February 2025, the DAO 3.0: Harmony framework was released, which offers a jurisdictionally neutral, modular, and scalable architecture for decentralized organizations. Its goal is to solve the problem of integrating DAOs into the legal system, allowing them to maintain full decentralization and flexibility, protect participants, contributors and assets from legal and financial risks

In legal terms, the DAO has reached a turning point. Decentralized organizations are increasingly coming to the attention of regulators and are becoming the target of private and class lawsuits. Courts recognize DAOs without a full-fledged legal structure as partnerships, which exposes each participant, contributor, and in some cases even investors to the risk of personal liability for all obligations of the organization.

The latest landmark precedent was the decision in the case of Samuels v. Lido DAO. It confirmed that all members of the DAO, along with major institutional investors such as Paradigm, Andreessen Horowitz and Dragonfly, can be considered partners in the legal sense. This status imposes on each of them full responsibility for the entire organization, which gives the private plaintiffs – the attacking party – a clear and understandable goal for prosecuting the DAO and recovering funds. Similar arguments have been used in litigation decisions against bZx DAO and Ooki DAO, making such qualifications the rule rather than the exception.

An important point is that the Lido DAO case actually refuted the concept of an unformalized DAO (entityless) promoted by many lawyers, in which only individual elements and assets of the organization are structured, for example, through the creation of a foundation, while the community and the governance remain in a legal vacuum

Why Current Approaches Don't Work

Most existing legal models of DAOs can be divided into two categories, each of which has critical flaws:

1. Unstructured DAOs: These organizations have no legal structure, leaving members, governance, and assets completely unprotected. In this case, all actions and transactions of the DAO are not formalized in any way, which means that they are performed directly and personally by the participants and contributors, who bear direct personal responsibility in all possible senses, and the governance and decisions of the members have no legal basis.
2. Partially structured DAOs. Some organizations create legal entities, so-called legal shells (legal wrappers), to structure individual transactions or assets, such as treasury (treasury). This helps the DAO to protect itself within the framework of specific transactions that are conducted through such shells, but the organization itself, including the community and the governance, continues to function without a legal basis

The lack of a legal structure or its fragmentation create significant risks for DAOs:

• lack of legal personality. DAOs without a full-fledged legal structure are vulnerable to regulatory enforcement and lawsuits, during which the most undesirable legal qualifications and obligations under the law of the most "hostile" jurisdictions are imposed on organizations;
• personal responsibility of the participants. Members of DAOs, participants in multisig wallets and governance processes can be recognized as partners, which entails full personal responsibility for them and makes the entire organization a profitable and understandable target for regulators and potential plaintiffs;
• tax risks. Unstructured DAOs have no tax status and cannot manage or meet tax liabilities. Moreover, the lack of structure can create personal tax risks for participants and contributors; Limited scalability. The absence or fragmentation of the structure creates operational barriers for the organization, hindering its scalability and sustainable growth. New initiatives and directions increase legal risks and uncertainty;
• Governance Risks. The absence of a legal basis deprives DAOs of the ability to effectively enforce the decisions of participants and defend themselves in court, and also gives grounds for challenging the legitimacy of decisions generally made by the governance;
• legal fragmentation. Most existing legal models focus on individual jurisdictions and point solutions, which does not allow for the creation of a full-fledged, flexible, and scalable architecture for global decentralized organizations and ecosystems.

Secure, Modular, and Scalable Legal Architecture

Before we get to the architecture itself, we need to introduce one key concept: the DAO-integrated shell (DAO-Specific Entity, DSE)

DSE is a non-profit (или некоммерческая) organization that:

• recognizes all DAO participants as members solely on the basis of token ownership – without the need to undergo KYC or disclose the identity (кроме the final бенефициаров). This element allows you to place the core of the organization — the community and the governance — inside a protected legal loop;
• guarantees limited liability based on corporate law for all members of the DAO, which excludes the possibility of bringing them to personal liability in connection with the activities of the organization;
• Allows you to effectively manage legal, tax and financial liabilities and risks

It is important to distinguish between DSEs as full legal shells (full wrapper) and partial shells (partial wrappers). A partial wrapper is a legal entity that is used to isolate or structure specific activities, assets, or components of a DAO and does not encompass the entire organization, including its governance and community

Deploying a DSE as a full shell, on the other hand, means that the DAO is fully integrated** with that legal entity. As a result, the decentralized organization and the DSE merge into one single legal entity, after which the core of the DAO continues to exist in the form of a DSE

Legal Architecture

To make the DAO architecture modular, scalable, and secure, we will need to divide (legal wrappers) legal shells into two tiers or layers:

1. Baseline. This is where the DSE unfolds as a complete legal shell (full legal wrapper) the DAO. The task of this level is to place the governance and the participants of the DAO in a legally protected perimeter. The DSE gives the organization a legal identity and legal personality, limited liability for participants, and ensures that legal systems treat the DAO as an independent legal entity separate from its members.
2. Operational Level. This layer includes partial legal shells (partial legal wrappers) that complement the DSE and are used to manage individual assets, risks, or operations. It is this level that is modular – operating shells are (wrappers) created as needed and in any quantity, depending on the goals and needs of a particular organization.

! Simplified illustration. Data: Sergey Ostrovsky This structure provides security and flexibility for the organization, helping DAOs to remain decentralized, scale rapidly, and operate globally, including across jurisdictions and legal systems. The framework is suitable for DAOs of all sizes and types, allowing them to grow and evolve into cybernetic organizations and large decentralized ecosystems

In addition, the implementation of this model makes it possible to cover all the key goals of the legal structuring of DAOs and address the most critical risks. Among the key advantages are the following:

• DAO acquires its own legal personality and is legally separated from the participants;
• negative legal qualifications are excluded, such as the recognition of a DAO as a partnership under the law of unfavorable jurisdictions;
• personal liability of DAO participants and contributors is excluded;
• financial and tax security is ensured, tax risks are not transferred to contributors;
• DAOs are able to function both globally and in specific target jurisdictions through the creation of (operating wrappers) operating shells;
• legal protection of governance processes, since both the participants of the DAO and the results of their voting receive a clear and understandable legal status, guaranteeing the recognition of their decisions and the possibility of legal enforcement; Scalability and adaptability, allowing DAOs to grow, evolve, and integrate additional building blocks as needed; jurisdictional flexibility – A DAO has a wide range of tools to structure individual operations, units, or even projects in an efficient and relatively cost-effective manner, including in the most favorable jurisdictions and legal regimes.

Modularity & Scalability

Having a separate operational layer makes the DAO architecture modular, adaptive, and scalable in the long term. In addition, the organization gets the opportunity to effectively manage risks and isolate them in separate shells, excluding the possibility of spreading them to participants and key assets of the DAO

All shells created at the operational level can be divided into two categories:

• subordinated structures in respect of which it is necessary to ensure the control of the DAO in one form or another: for example, holding units. Now, instead of subordinating such a DAO structure to token holders or a community that does not have a legal status, it can be subordinated to the DSE, which strengthens the protection and ensures the enforcement of the governance's decisions;
• autonomous structures that function in the DAO ecosystem but remain operationally independent of it. Such units can be created by both members of the organization and external contributors. By delegating individual powers or assets to such autonomous entities, the DAO improves its own decentralization, flexibility, and inclusivity

! A DAO architecture with an operational layer that includes subordinate and autonomous structures. Data: Sergey Ostrovsky.Flexible modular architecture allows DAOs to grow efficiently and easily adapt to any legal environment and completely different conditions.

DAO Assets

At the basic level of the DAO, the DSE is deployed, which is a non-profit organization. This means that, with the exception of payment for services and work performed, DSE cannot distribute assets to its members, a point that must be taken into account when designing the architecture

The treasury and key assets of the DAO can be placed both in the DSE and in the legal shells of (legal wrappers) that are outside the non-profit perimeter, i.e. are not subsidiaries of the DSE. This makes the organization more agile and significantly expands the ability to use assets and build cash flows

The organization can still implement reward mechanisms for its members and contributors. However, such rewards are not recommended to be based on passive ownership of the token. Instead, they should be associated with contributions to the DAO's activities, such as active participation, useful actions, or the performance of governance functions

Substances

The legal structure of a DAO must have a substantive (substance), that is, it must be real and meaningful, not formal, otherwise the construction may be recognized as fictitious and ignored by the courts. To do this, the legal architecture must be consistent with the actual operational structure of the DAO, without making significant changes to the governance, operations, and decision-making process (кроме cases where обоснованно).

Treasury, main committees, and multisig wallets should be integrated into the legal structure. If the essential elements of a DAO remain outside the legal structure, the organization runs the risk of continuing to function as a partnership in which the legal wrappers of the (legal wrappers) act as new partners, rather than as a coherent legal structure.

Regulatory aspects

Unfortunately, it is impossible to take into account all the regulatory nuances and create one universal solution. However, the proposed architecture includes a set of compliance tools to improve the regulatory position of the organization

For example, in a number of aspects, the DAO maintains the status quo, such as operational and decision-making. But the model also presents a number of reinforcements in the form of limited liability of members, the ability to isolate risks, and the separation of financial rights from the token at the legal level

Choice of Corporate Form and Jurisdiction

Baseline

To date, there are several types of DSE that are suitable for the formation of a basic level of DAO. Unlike traditional legal entities, a DSE is a special corporate form that is designed specifically for decentralized organizations:

• DAO LLC is a form of LLC adapted to a DAO. We consider the Marshall Islands to be the most optimal jurisdiction to establish a basic level of organization in the form of a DAO LLC; DUNA is a decentralized, unincorporated non-profit association in the state of Wyoming. This is a good DSE option for those DAOs that have a substance in the US or want to create or strengthen it;
• RAK DAO Association is a DAO association established in Ras Al Khaimah, UAE. RAK DAO is the first dedicated Web3 free zone in the Emirates;
• ADGM DLT Foundation is a DAO foundation available in the ADGM Free Zone, UAE.

A number of DSEs may not have a designated management, such as directors or officers, thus eliminating the emergence of additional points of centralization in the DAO structure. In the absence of management, there is no need to establish additional control, since there is no one with significant authority and therefore no one to control. At the same time, the organization may appoint a manager with limited authority to perform corporate actions, be responsible for renewals and reporting.

For those organizations that have management, it is necessary to establish adequate controls—a system of checks and balances. This will ensure that managers act within the authority and in the best interests of the organization, and can also be held accountable in the event of material violations. At the same time, it is important that the control is not only technical, but also legal

Each type of DSE has its own features and nuances, so it is recommended to carefully study them and approach the issue of structuring a DAO comprehensively, taking into account the operational architecture, main tasks and long-term plans.

Operational Level

Wrappers (wrappers) at the operational level of a DAO are deployed to manage specific assets and operations. They can be used for a variety of purposes, such as structuring committees and sub-DAOs, segregating assets, owning and managing IP and infrastructure, and isolating individual transactions, projects, and associated risks.

The operational level is modular, with no restrictions on the number and forms of legal entities that can be used. Having a DSE at a basic level improves the subordination of operational wrappers and control, allowing the use of classic forms of legal entities, such as corporations or traditional offshore and onshore companies, as subordinate wrappers (subordinated wrappers). Therefore, the choice of the form of surgical wrappers in our case is almost unlimited and can include:

Ownerless structures (ownerless structures), such as foundations and companies limited by warranty; Purpose Trusts;

• portfolio companies (Segregated Portfolio Companies, SPC); *Secure Cell Companies (Protected Cell Companies, PCC); DAO LLC Series (если the base layer is DAO LLC);
• sub-DAO (если base level is RAK DAO Association);
• traditional legal entities (корпорации, LLC, offshore and onshore компании).

In Conclusion

It can be stated that DAOs can no longer remain in a legal vacuum. Like any other organization, they need a full-fledged legal structure that can protect its members and assets, as well as integrate into the legal system

The regulatory environment is evolving around both DAOs and the blockchain industry as a whole, requiring decentralized organizations to be more flexible and adaptable in legal terms. At the same time, it remains critical for DAOs to maintain a balance between compliance and decentralization, which can only be achieved through the creation of a full-fledged, secure, and scalable legal architecture

The legal model described above allows DAOs to achieve these goals and move to a next-generation architecture, DAO 3.0.