Lido DAO Ruling Highlights Legal Risks for Decentralized Organizations

By stressing the dangers of running without official legal systems, this ruling sets a major legal precedent for DAOs and their members.

A United States District Court for the Northern District of California has found Lido DAO to operate under state law as a general partnership, making its members potentially liable for the company’s activities.

The matter arose from an investor lawsuit alleging that Lido DAO’s LDO token issuance qualifies as unregistered securities. While Lido DAO maintained that it was not a legal entity and did not directly sell tokens, the court found that its selling and advertising of tokens via crypto exchanges constituted a securities transaction.

The California court’s decision to classify Lido DAO as a general partnership highlights the legal risks associated with decentralized autonomous organizations (DAOs) and their members. This ruling emphasizes that governance involvement and operational benefits may expose members to liability, despite the distributed and decentralized nature of DAOs.

The court also rejected Lido DAO’s argument that its distributed nature disqualified it from falling under partnership rules. This decision could have broader implications for other distributed organizations, particularly those engaging in the tokenization of assets without clear legal compliance.

This decision adds to the increasing legal scrutiny faced by distributed organizations. Authorities are closely monitoring the operations and member liability of such entities, especially those involved in tokenized asset offerings.

While decentralization aims to spread responsibility among participants and insulate them from direct liability, this legal development shows that it may not fully protect individuals or organizations engaged in a DAO. As a result, DAOs must evaluate their structures and ensure compliance with applicable laws to mitigate potential legal risks.

Despite these challenges, interoperability and innovation continue to advance in the broader blockchain ecosystem. CNF recently reported on GMX-Solana integrating Chainlink’s Data Streams to enhance trade transparency and accuracy on Solana’s derivative platform.

Additionally, Lido DAO has integrated Chainlink’s CCIP to enable direct ETH staking from Layer-2 networks without requiring a bridge to Ethereum’s mainnet. At the time of writing, LDO tokens were trading at around $1.17, down 1.44% over the last 24 hours, with a market cap of less than $1.2 billion.