A California Court Ruling Exposes the Legal Vulnerabilities of Decentralized Autonomous Organizations

In a groundbreaking decision, a federal court in California ruled that the decentralized autonomous organization (DAO) Lido DAO could be classified as a general partnership under state law, making its members potentially liable for its decisions.

A California court has ruled that Lido DAO, the decentralized autonomous organization (DAO) governing the popular liquid staking protocol, could be classified as a general partnership under state law. This decision has raised concerns about the potential liability of DAO members.

The lawsuit against Lido DAO was filed by a group of investors led by Andrew Samuels. The investors claimed that Lido's native LDO tokens were sold to them as unregistered securities. Several venture capital firms, including Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management, were named as general partners in the case.

The court's analysis focused on whether Lido DAO met the definition of a general partnership under the California Uniform Partnership Act (UPA). The UPA defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit."

The court found that Lido DAO members met this definition. The DAO's purpose is to operate a liquid staking service, which generates profits in the form of staking rewards. Token holders participate in the DAO's decision-making and receive these rewards based on their token holdings.

"The evidence in this case demonstrates that the Lido token holders are co-owners of a business for profit and that they share in the profits, losses, and liabilities of the business," the court wrote. "The Court concludes that the Lido token holders are general partners in a partnership governed by the UPA."

This conclusion has significant implications for decentralized organizations. While DAOs are often designed to be decentralized and autonomous, this ruling suggests that they may still be subject to traditional legal frameworks.

If this decision is upheld, it could set a precedent for holding DAO members liable under partnership laws. This could, in turn, influence the structure, governance, and legal strategies of decentralized organizations in the future.