Decentralized autonomous organizations (DAO) will likely consider implementing legal structures following the exploit of Solana-based decentralized finance (DeFi) lending protocol Mango Markets, according to Benjamin Bathgate, a partner at Canadian-based law firm McMillan LLP.
Bathgate, co-chair of the fraud law group at McMillan for over 15 years, said that “a whole bunch of issues are wrapped” into whether DAOs can make legal settlements. That’s partly because a majority don't have legal structures in place, he said.
“In many situations, the DAO is just a collection of users,” Bathgate, told CoinDesk TV’s “First Mover” on Friday. “It’s a community of users, perhaps with a core contributor doing the coding.”
Eisenberg appeared to have avoided civil liability after returning $67 million of the stolen funds and reaching an agreement with the Mango Markets DAO. However, Bathgate called the settlement “ill-advised” and one that was “doomed to fail from the beginning.” Eisenberg currently faces commodities fraud, commodities market manipulation and wire fraud charges.
Bathgate said the case against Eisenberg is also different and “unusual to some extent” because Eisenberg’s name was made public. In other exploits, a supposed bad actor isn’t as easy to find. However, because Eisenberg outed himself, “it does raise the question: If you’re doxxed are you going to make these arguments now in the court of law?’
Mango Labs, a Wyoming-based limited liability company that governs the Mango Market DAO, is seeking to claw back the remaining $47 million, arguing that the deal was made under duress. Bathgate, however, said it is unlikely Mango Labs’ settlement will hold up, and to that point may be a wake-up call for the DAO ecosystem.
“There's going to be a reality check because these kinds of settlements are not likely to be enforceable by the courts,” Bathgate said. He added that it may prompt wider conversations about the structures of DAOs, including whether “some form of LLC [or] limited liability structure” will be implemented.
However the lawsuit is decided, the important takeaway is that having an LLC can help a DAO bring a claim to court on behalf of its users.
“That's going to be one of the interesting approaches. Are we going to see more of that and that legal construct so that they can act on its [the DAO's] behalf and take steps on its behalf?” Bathgate said.
But that may not settle the issue entirely, Bathgate cautioned, because it raises questions for DAO community members about settlement law and a proper binding settlement.
“What constitutes agreement by the users?” Bathgate asked. “Does simply clicking on a vote for a proposal crafted by the principles of the DAO for settlement, does that mean you've agreed to it and are bound by those terms and conditions?”
Eisenberg’s lawyer, Brian Klein, didn't immediately respond to a request for comment.
UPDATE (Feb. 6, 20:01 UTC): Clarifies Bathgate's points about the lawsuit throughout.
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