Lido DAO Not Immune to Legal Liability, Court Rules: What Now?

• Lido DAO’s efforts to shrug off a securities case have fallen through.
• The Lido hit in court appears to be part of an emerging trend.
• Several experts believe it is time for DAOs to consider modifications to their structure.

First conceived in 2016, decentralized autonomous organizations (DAOs) have been crypto’s response to the question of how to direct the affairs of a decentralized protocol. As with every aspect of DeFi , proponents have long argued that DAOs should not be beholden to the same legal obligations as real-world companies. This view may, however, now be receiving pushback from the courts.

The latest domino to fall in the emerging trend appears to be Lido DAO, the DAO behind the leading Ethereum staking protocol.

“A Huge Blow To Decentralized Governance”

Lido DAO’s efforts to shrug off a securities case have fallen through. In December 2023, plaintiff Andrew Samuels sued Lido DAO and its VC investors in the US District Court for the Northern District of California to recover losses from investing in Lido’s native token, LDO. Samuels argues that Lido is a general partnership and not immune to suit under California law. At the same time, they contend that LDO is an unregistered securities offering.

A general partnership is an enterprise comprising two or more entities contributing resources. This business model sees partners sharing in the profits and losses. In general partnerships partners take on unlimited liability, including for the actions of their partners. VCs named as partners with Lido DAO in the securities lawsuit included Paradigm Operations, Andreessen Horowitz (a16z), Dragonfly Digital Management, and Robot Ventures.

Lido DAO filed to dismiss the securities lawsuit, including claims that it was a general partnership in July 2024. In a Monday, November 18 ruling , however, Judge Vince Chhabria of the United States District Court for the Northern District of California sided with the plaintiff, allowing the case to continue.

Judge Chhabria asserted that Samuels had sufficiently argued that Lido DAO’s relationship with its VC investors, excluding Robot Ventures, constituted a general partnership. The judge also noted that there had been little opposition to the plaintiff’s claim that LDO tokens constituted unregistered securities. He added that the plaintiff had sufficiently argued that Lido DAO and its institutional investors at least solicited the purchase of Lido tokens by pursuing exchange listings.

Reacting to the ruling, a16z General Counsel Miles Jennings decried it as “a huge blow to decentralized governance,” citing far-reaching implications for DAO participation.

"Today, a California judge dealt a huge blow to decentralized governance. 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," the lawyer lamented in an X post.

Despite the reactions following the Lido DAO decision, it is not an isolated ruling.

An Emerging Trend?

The argument that DAOs can be viewed as general partnerships has been accepted in at least two other lawsuits, all in the district of California. The first allowed hack victims to sue bZx DAO in March 2023. The second came in a September 2023 decision allowing a class action suit against Compound DAO.

The emerging trend of courts considering DAOs as general partnerships appears to put an end to the broad narrative that the entities can not be held to the same standards as traditional firms. It also threatens the continued viability of decentralized governance amid the potential liability risks to participants. 

So, what now for DAOs?

Legal Wrappers

Reacting to the Lido DAO lawsuit ruling, several crypto lawyers have argued that it is time for DAOs to establish legal wrappers. 

Legal wrappers refer to legally recognized entities that shield individual DAO participants from personal liability.

"Unfortunately all DAOs now need legal wrappers. I personally fought very hard to avoid this outcome but am now confident we tried our best before capitulation and the time has come to accept this at least until a legislative safe harbor of some kind," former Delphi Labs General Counsel Gabriel Shapiro wrote .

One such possible legal wrapper crypto lawyers are floating is DUNA, short for Decentralized Unincorporated Nonprofit Association. The concept of DUNA originates from a bill passed by the state of Wyoming in March 2024 that offers DAOs legal recognition while allowing them to enjoy the benefits of a limited liability company (LLC).

On the Flipside 

• The actual case against Lido has yet to start.
• Questionable and sometimes opportunistic seeming class action lawsuits over investor losses have become commonplace in crypto recently.

Why This Matters

Lido is the largest DeFi protocol by TVL, with over $30 billion. The recent ruling in the case against it raises questions about the continued viability of decentralized governance amid the potential liability risks to participants. 

Read this for more on Lido:
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