In a major legal decision, a United States Judge in California directed that Decentralized Autonomous Organizations (DAOs) should be recognised as partners as stipulated by the state’s partner laws.
Accordingly, this new verdict supports that each DAO member becomes liable for the activities of other DAO members. For this ruling, US Judge Vince Chhabria used Lido Liquid Staking DAO as a focus.
In a nutshell, such “partners” overseeing the actions of DAOs are liable for outcomes within their projects. Significantly, Judge Chhabria’s recent ruling has implications for DAOs and decentralized governance in the crypto space.
Background Story
Lido DAO’s case began with Andrew Samuels, a crypto user who invested in the Protocol’s native tokens, $LDO, suing Lido DAO for his investment losses.
According to Samuels, the $LDO tokens were not registered with the United States Securities and Exchange Commission (SEC), hence the organization was liable for his lost funds.
For context, institutional investors in Lido DAO like Andreessen Horowitz, Paradigm Operations and Dragonfly Digital Management also qualify as general partners per the state law and are also liable for the organization’s actions.
Notably, Robot Ventures, another alleged institutional investor in the DAO was dismissed on grounds of lack of evidence. According to the California judge, Lido’s decentralization does not translate to exclusion from statutory responsibilities.
Implications for DAOs
The California ruling deeming DAO members liable partners under state laws significantly impacts the decentralized governance model.
“Under the ruling, any DAO participation (even posting in a forum) could be sufficient to hold DAO members liable for the actions of other members under general partnership laws,” said Miles Jennings, General counsel at Andreessen Horowitz in a post on X
By holding all members accountable for a DAO’s actions, this decision increases personal liability, discouraging participation from both individual contributors and institutional investors. Such liability risks may lead DAOs to restructure as formal entities like Limited Liability Companies to protect members, potentially compromising their decentralized nature.
Additionally, this ruling creates regulatory uncertainty that could stifle innovation in the Web3 space, as developers and investors might avoid DAOs due to legal risks. Ultimately, this case highlights the urgent need for clearer regulations to balance accountability with the decentralized ethos of DAOs.