DAO 3.0: The Harmony Framework
DAO Legal Structuring: A Jurisdiction-Neutral Playbook for 2025 and Beyond
Last updated
DAO Legal Structuring: A Jurisdiction-Neutral Playbook for 2025 and Beyond
Last updated
Date: February 5, 2025
Background: Decentralised Autonomous Organisations (DAOs) have transformed governance through blockchain-based decentralised decision-making and transparency. However, the explosive growth of DAOs has also exposed critical challenges, including undefined legal personality, potentially unlimited liability of its members, and difficulties in interacting with traditional legal systems. Efforts to integrate DAOs into existing legal frameworks have been fragmented and mostly jurisdiction-specific, often failing to address the global, cross-border nature of these organisations. As DAOs scale and diversify, the need for a robust, adaptable framework that aligns decentralisation with legal protection and operational efficiency has become increasingly evident.
Summary: Harmony Framework provides a methodical and adaptable approach to the legal structuring of decentralised organisations. At its core is the DAO-Specific Entity (DSE), a nonprofit legal structure that recognises token holders as members, provides default limited liability, and integrates corporate governance with existing on-chain governance. The framework introduces a layered design, with a single DSE at the Base Layer wrapping community and governance, and Operational Layer wrappers that offer modular solutions for risk isolation, asset management, and activity-specific operations. It ensures sufficient decentralisation through modularity, community-driven decision-making, and tailored governance mechanisms. The framework is jurisdiction-neutral, compatible with virtually any other structuring framework, and adaptable to DAOs of all sizes and types, enabling them to evolve into large-scale, cybernetic organisations. For simplicity, we’ve chosen to leave out certain legal complexities that would typically appear in a more formal legal paper.
Decentralised organisations are experiencing explosive growth. Each year, thousands of new DAOs are created, with almost all major blockchain protocols and on-chain services now governed by or involving a DAO to some extent. As of the end of 2024, DAOs have evolved remarkably—from emerging as a subcultural trend and innovative governance solution to becoming a legally recognised form of organisation in various countries around the globe.
This rapid expansion marks a fundamental shift in how we conceptualise and organise collective action. DAOs leverage blockchain technology to enable inclusivity, collaboration, contribution and decision-making through decentralised and transparent mechanisms challenging traditional hierarchical organisational structures. They represent a new paradigm where stakeholders have direct influence over an organisation’s direction through token-based governance mechanisms.
However, this evolution also brings forth new legal challenges. As DAOs operate across borders and jurisdictions, the lack of a unified legal framework creates risks and uncertainties for members and contributors. Questions arise regarding the identity and legal status of DAOs, personal liability of members, regulatory implications, and enforceability of DAO decisions within traditional legal systems.
Recognising these challenges, various countries have begun introducing legislation to accommodate the unique nature of DAOs. Legal practitioners are constantly working on DAO frameworks and structuring techniques, aiming to offer better protection, legitimacy and agility. Yet, integrating DAOs into legal frameworks is still in its early stages, requiring innovative approaches to ensure that the core principles of decentralisation and autonomy are preserved.
Transitioning Away from Legacy DAO Legal Models
From the moment it was introduced in 2013, first as Decentralised Autonomous Corporation (DAC)¹ and then as Decentralised Autonomous organisation (DAO),² this concept evolved from a mere technical structure governed exclusively by the code of smart contracts to a more complex entity. This was part of a shift of perception of crypto and its role in traditional systems as a whole. In this evolution, there has always been a traditional legal system on the other side. Understanding the stance of these two worlds toward each other is critical for grasping where we are now and what the future holds.
Initially, both worlds began from a position of denial. The crypto world proclaimed “code is law”³ and waged a sort of holy war against the traditional legal system, which it viewed as outdated. At the very least, early crypto communities embodied a spirit of freedom and positive anarchy rooted in the cypherpunk movement, which contributed to the aspiration for decentralisation, anonymity, and a departure from traditional state-controlled financial and legal systems. In response, the legal system denied the legitimacy of new crypto concepts, particularly DAOs, sometimes in a very hostile manner.
However, over time, both sides have shaped each other, leading to an understanding that the two worlds are irreversibly intertwined and influence one another. It has become clear that pragmatic cooperation is more powerful than denial. Decentralisation and permissionless smart-contracts exist and work well—and new laws and regulations have come to admit these facts. While “code is law” suggests that smart contracts execute exactly as written, without human interference, unexpected outcomes, or errors, and could potentially form the foundation for a Web3 legal system, it remains an appealing but incomplete concept.⁴ Traditional legal systems operate on principles of equity, justice, and intent, which sometimes necessitate interpreting or overriding the strict terms of a contract. It has also become clear that crypto must rely on traditional legal concepts to interact with the off-chain world.
Does that mean the traditional legal system has won and absorbed crypto? Not exactly.
As we’ve noted, both worlds influence each other. But to influence through cooperation, one party needs to accept the existence of the other party and the potential for transformation. This is where we are now. From here begins the most interesting part of the journey where blockchain, DeFi, tokenisation, AI, and DAOs are poised to transform everything from inside the traditional systems.
Web3 technologies are already changing the fabric of the traditional world. This is not a war; it is a progressive transformation. As the Bankless manifesto states: "We don't hate banks; we just don't need them anymore."⁵ Once one tries to make a payment in crypto, one realises how transparent, fast, and convenient payments can actually be. The same is applicable to many other spheres, including finance, digital identity, and particularly the legal profession and traditional legal forms.
Sometimes the system pushes back, as seen in the Tornado Cash case,⁶ protecting traditional institutions and the existing order of things. While the case itself may be political, it highlights the need to continue building and innovating to make progress irreversible, demonstrating to the system that it can no longer function without these novel products and concepts.⁷ When it comes to DAOs specifically, this evolution affects the legal models DAOs operate within.
Code is Law
The early concept of DAOs embraced the idea that their decentralised nature meant they did not require a legal framework or jurisdiction, operating under the assumption that no nation-state or legal body could claim authority over them. And while the conventional legal system struggled to respond with something more sensible than simply denying the existence of DAOs as a concept or form, the problem arose from another angle.
Without legal recognition, DAOs found themselves effectively excluded from traditional systems, unable to interact with the real, off-chain world. By analogy to a computer system, legal systems simply didn’t recognise DAOs as entities within their architecture. This lack of recognition meant DAOs could not own property, access banking systems, enter into contracts, protect intellectual property, or even legally engage contributors. As a result, DAOs faced significant barriers to performing the fundamental activities expected of any functional organisation.
In such a state, the divide between the two worlds only deepens, with some aspects of this disconnection going unnoticed by many. When DAOs fail to acknowledge and align with the legal system and the legal system does not recognise them in return, the system can and will turn hostile, – which eventually happened. Legal and regulatory actions targeting decentralised organisations began to occur more and more frequently, revealing essential legal problems in the DAO structures and exposing DAO members to potentially unlimited personal liability, ultimately forcing the on-chain world to seek compromises with existing legal frameworks
Partial Wrappers: DAO-Adjacent Structures and Functional Wrappers
In response to the above issues, the concept of a “DAO legal wrapper” emerged, giving rise to numerous corporate forms and structures designed to serve as legal wrappers,⁸ with ownerless foundations eventually becoming the most widespread DAO structure.⁹ This concept worked well and was embraced by many organisations, including Arbitrum, ENS and Maker DAO. Lawyers and practitioners devised multiple concepts and guidelines on how these types of structures may work within the DAO without harming decentralisation (see “Sufficient Decentralisation” by Marc Boiron,¹⁰ the Aurum-DAObox Framework,¹¹ the BORG concept by Delphi Labs,¹² dYdX has also offered the use of Guernsey Purpose Trusts, implementing such a structure for their own grants programs¹³).
The vast majority of such legal wrappers were actually “partial wrappers.” These entities had limited discretion and, rather than wrapping the entire DAO, were primarily used to wrap a restricted set of its functions, such as holding IP or other property, running a grant program, or managing contributors. A properly structured partial wrapper would also be legally subordinated to DAO governance, granting it a ‘final say,’ at least to a certain extent. In addition to serving as a unit with full legal capacity within the DAO ecosystem and enabling transactions with the off-chain world, a legal wrapper also provided a layer of protection, particularly for transactions conducted through the wrapper.
Comprehensive Organisations
Although partial wrappers addressed many of the operational needs of DAOs, the core challenges remained unresolved — unlimited liability of members and the lack of a clear legal identity. The issue of partial wrappers was that the core components of the DAO like community, governance, and often treasury were left outside of the wrapper, unprotected and legally undefined. This further raised questions about the relationship between the legal wrapper and its larger, unwrapped on-chain organisation.¹⁴
This backfired when traditional legal systems began to impose their interpretations: “If you are not willing to identify yourselves within existing legal concepts, we will decide who you are and choose the jurisdiction that suits us.” This resulted in extremely unfavourable outcomes for ‘entityless’ DAOs – those where the members and governance remained unwrapped, – as they were commonly recognised as general partnerships or unincorporated associations, potentially exposing DAO members and stakeholders to unlimited personal liability. Since potential attackers were now left to ‘choose’, they naturally opted for unfavourable jurisdictions and legal classifications that maximised risks and liabilities for DAOs.¹⁵
Another challenge is that DAOs are becoming more sophisticated and comprehensive as the number of contributors is rising and governance structures grow more complex. We will soon see the first truly large decentralised cybernetic organisations. The legal frameworks need to be adjusted again to accommodate the needs of new, complex DAOs and solve their identity problems without defeating decentralisation.
The concept of a full legal wrapper encompassing the entire DAO has been proposed by practitioners as a potential solution,¹⁶ but many DAOs have been hesitant to adopt such structures due to concerns about decentralisation, regulatory constraints, lack of court precedents, and limited understanding of how these wrappers functioned or should be deployed. Even among legal practitioners, there was debate about the feasibility and effectiveness of such wrappers, which further contributed to uncertainty and slowed adoption.¹⁷ ¹⁸
The evolution from the legacy model to DAO 3.0 reflects the ongoing negotiation between decentralisation and legal recognition. While DAOs aim to operate autonomously and globally, they cannot avoid the realities of a world governed by nation-states and legal jurisdictions. While legal recognition provides protection for the people involved and facilitates interaction with the off-chain world, it also brings compliance obligations and the risk of diluting decentralisation.
Therefore, we consider that the Generation 3 Legal Models should focus on balancing the “wants” of on-chain communities with the “needs” of traditional legal systems, without sacrificing decentralisation. Furthermore, as many existing concepts already offer effective tools for DAO structuring, new DAO frameworks should aim to harmonise their use and interoperability, providing a structured approach to their application and implementation.
We named this framework “Harmony” to capture its core mission: finding harmony between the on-chain and off-chain. The framework aims to enable Web3 organisations to operate effectively within traditional legal systems and regulatory frameworks without compromising their foundational principles, such as decentralisation, collective democracy, transparency, and permissionlessness (openness).
Beyond harmonisation, the framework introduces a cohesive and adaptable approach to the legal structuring of DAOs, regardless of their size and geography, offering compatibility with virtually any existing or emerging DAO structuring models and techniques.
Before moving forward, it is important to introduce a key concept: a DAO-Specific Entity (DSE). A DSE is a nonprofit legal entity that automatically recognises token holders as its members, based solely on their token holdings, and integrates its corporate governance with the on-chain governance of the organisation. By recognising token holders as members, a DSE can effectively “wrap” the community and stakeholders, providing them with default protection through limited corporate liability, entirely determined by token ownership.
Previously, we often referred to DAO-Specific Entities as “full wrappers” to distinguish them from “partial wrappers,” which are used to isolate or wrap specific assets, activities, or components of a DAO without encompassing the entire organisation and its core – community and governance.
In contrast, when a DSE (full wrapper) is deployed at the Base Layer, the DAO essentially transitions into that DSE, merging with it to form a single unified entity.
The Harmony Framework proposes organising a DAO into two distinct yet interconnected layers, each serving a specific purpose: the Base Layer and the Operational Layer. At the Base Layer, a DAO-Specific Entity is employed as the fundamental legal wrapper, essentially wrapping the DAO community and governance module. The DSE provides the DAO with legal recognition, grants members limited liability protection, and ensures that the DAO’s governance operates within a legally secure perimeter. The Operational Layer comprises additional (partial) legal wrappers designed to manage specific assets, activities, or risks. These wrappers are modular and deployed as needed to address the unique requirements of each particular DAO, such as asset segregation, high-risk activities, or sub-DAO operations.
In more complex decentralised organisations, multiple Operational Layer wrappers can be deployed to effectively manage and segregate different aspects of the DAO’s activities. These wrappers can isolate intellectual property, material assets, or specific operational functions, allowing designated DAO contributors to be legally put in charge and control of their respective areas while keeping them legally protected. This does not mean that a DAO cannot place its assets in the DSE—it can; however, it can also effectively segregate specific properties or asset classes for purposes such as protection, modularity, or discretionary management, among others.
In this set-up, high-risk activities can be separated from the DAO’s governance and core property, minimising liability exposure and ensuring greater organisational resilience. This method of asset and risk segregation reflects a well-established legal structuring approach used in traditional industries to safeguard assets and contain risks. Now, DAOs and Web3 collectives can achieve similar protections and operational clarity, enabling them to scale and navigate complex legal and operational environments effectively.
At the same time, it is essential to ensure that any segregation of material property or operations has a legitimate purpose, as well as clear economic rationale or practical justification. Without a substantive basis, such wrapping or segregation could be disregarded by courts or regulators in particular jurisdictions, potentially exposing the DAO and its members to unforeseen consequences, such as piercing the corporate veil,¹⁹ which, to be fair, occurs rather rarely in practice.²⁰
Since the DSE is always a nonprofit, all entities it owns directly or indirectly through subsidiary units are locked within its nonprofit perimeter. Within this structure, economic benefits and asset flows are restricted by the DSE’s nonprofit status, ensuring that even if subsidiary Operating Layer wrappers are commercial entities permitted to distribute dividends, those distributions cannot surpass the DSE and reach token holders. In these circumstances, it is natural for some organisations to seek avenues for conducting certain activities outside the nonprofit perimeter, like operations requiring no restrictions on distributions or commercial dealings (this aspect is discussed in more detail below).
The ability to create and replicate multiple Operational Layer wrappers enhances the flexibility and decentralisation of a DAO’s structure. Wrapping specific initiatives, sub-DAOs, committees, or other units within the ecosystem allows for targeted legal and operational organisation. This approach enables responsible members and contributors to take on clearly defined roles with legal authority over their respective areas while being shielded from personal liability and legal exposure through the protections provided by the wrapper. The DAO, on the other hand, can use this approach to structure asset flows and enhance legal controls over the relevant units as necessary.
Flexibility and modularity make the structure adjustable and scalable, empowering DAOs to grow efficiently, evolving into complex, cybernetic organisations without compromising on decentralisation, agility, or legal security.
Ability to admit token holders as members is the most important feature that a DAO-Specific Entity must have. And not only the ability to admit token holders as members, but to do so without doxxing ordinary members and requiring them to pass KYC/DD.²¹
Accordingly, the membership interest in a DSE must be trackable on-chain, via the token’s underlying blockchain network, making the decentralised ledger the primary source of information for member identification, ensuring highest level of transparency and security. This further allows for seamless updates to membership records and voting rights as token holdings change, eliminating the need for cumbersome off-chain processes.
To illustrate the importance of this aspect, let’s consider a registered Swiss association as a wrapper. It is a member-managed organisation, but we do not consider it a DSE because in order for token holders to become members, they must be identified and complete traditional onboarding. If the organisation is large enough, it would be impossible to admit even the majority of on-chain DAO as members, resulting in only fraction of token holders receiving limited liability protection and the control being vested only in those who decided to doxx and was formally admitted (with council able to reject members), which has adverse effects on the security and safety, and ultimately defeats the purpose of a DSE.
A DSE is typically a member-managed organisation, which means that it is managed directly by the members – token holders in our case, – with actions taken by the members in such capacity being considered actions by the DSE. Generally, in terms of management, all DSEs can be divided into two groups: those that require appointed management, and those that don’t.
Where a DSE has no appointed management, such as directors, officers, or managing members, no substantial controls are required as there is no one with significant authority and, consequently, no one requiring actual control. Appointing a manager with restricted authority to handle corporate actions, continuations, and reporting, as well as to sign contracts upon governance authorisation may be reasonable depending on circumstances.
For a DSE that has appointed management in place, it is advisable to develop a proper system of checks and balances to ensure that they are motivated to act in accordance with the delegated authority and governance procedures, and can be held accountable in the event of material violations or bad-faith acts.
Implementing effective checks and balances in a DAO legal wrapper has historically been a significant challenge. This difficulty stemmed from the lack of statute-defined legal status for DAO members within their wrappers, forcing legal practitioners to rely on complex legal engineering or makeshift solutions. Deploying a DAO-Specific Entity provides a practical solution, addressing this issue not only at the Base Layer but also across the Operational Layer wrappers deployed by the DAO.
At the Base Layer, the DSE grants token holders direct corporate governance rights rooted in statutory law, replacing the need for ad hoc legal constructs. This ensures DAO members have enforceable mechanisms to exercise control, such as immediate governance and even replacing appointed management if and when necessary.
At the Operational Layer, in terms of control, legal wrappers can be classified in two kinds:
1. Subordinated Wrappers
This includes entities or arrangements that have to be ultimately controlled by the DAO governance, for example, a holding wrapper. Now, instead of subordinating this wrapper to the DAO, i.e. “token holders” or “community” without legal identity, it can be subordinated to the DSE. This allows the DAO, acting through the DSE, to effectively enforce its decisions and take timely legal action, including to prevent bad actors or bad-faith activities.
To give an example, suppose a DAO wants to create an SPV for holding RWAs. It may choose to create an ownerless foundation, which would then incorporate subsidiary limited companies as SPVs.²² To subordinate the foundation to the DAO, its articles would usually include provisions granting the DAO some extent of oversight over the board or its appointment, or requiring DAO approval for specific material transactions. While this approach appears workable, issues can arise if bad actors on the board and supervisor of the foundation act against DAO instructions or in bad faith – such as attempting to usurp the powers or seize its property. In such cases, the DAO would need to invoke emergency procedures or take legal action against the foundation or management. However, this may prove challenging because the DAO itself lacks legal personality, which could allow bad actors to contest these procedures or the appointment of emergency DAO representatives.
In contrast, where the DAO operates as a DSE, it acts as an actual legal entity, eliminating the ability of bad actors to challenge its actions on grounds such as lack of legal personality or standing. This provides the DAO with a stronger position to enforce governance decisions and maintain oversight where necessary. Control can be established through various mechanisms, including granting the DAO (in this case, the DSE) the authority to appoint or remove managers. The DSE can also assume formal roles within the foundation, either directly or through subordinated entities, such as a supervisor, or hold emergency roles with dormant (sleeping) powers that activate under specified conditions.
2. Autonomous Wrappers
These are entities that operate within the DAO ecosystem but remain independent of the DAO in terms of control and decision-making, requiring no direct oversight. This category also includes wrappers formed by independent DAO contributors. By delegating specific authority or assets to an autonomous wrapper, the DAO enhances flexibility and inclusivity, while furthering decentralisation. Although independent wrappers are not directed by the DAO, they can be aligned with the DAO through the establishment of the wrapper’s purposes²³ or contractual relations.
Where more extensive legal checks and balances are required, the wrappers can incorporate additional legal controls, such as comprehensive corporate procedures, appointment of enforcers and protectors, employment of legal oracles, etc.
Lastly, an Operating Layer wrapper should be structured in alignment with the on-chain processes used by its management for decision-making and actions. Technical procedures and blockchain execution flows can and should be integrated directly into the wrapper’s governance where possible to ensure that the governance within the wrapper is enforceable both legally and technically. For instance, a grants sub-DAO could operate under a separate wrapper, with management roles tied to participation in the grants multi-signature wallet, and decisions adopted once the multisig confirms them with the required number of votes. Some existing DAO frameworks, like Metalex OS/BORG,²⁴ already propose integrated software-legal solutions for implementing various governance strategies within legal wrappers.
It is important that technical controls are always complemented by legal controls. Even when multisig members are technically required to obtain approval from guardians or protectors added to the multisig alongside actual management, the risk of bad actors remains. This is because control would ultimately rest in the hands of a small group of delegates. Therefore, the DAO must retain the ability to legally intervene if these appointed delegates act in bad faith – for example, by imposing fiduciary duties on them or implementing effective emergency procedures.
While the primary purpose of the Base-Layer wrapper is to wrap the DAO community and governance module, the question of whether the DSE should also wrap the DAO’s treasury and major assets must be assessed on a case-by-case basis. This is because the matter is complex in itself, and depends heavily on the circumstances and objectives of a particular DAO.
For instance, as DSEs are structured as a nonprofits, they cannot distribute assets among its members, potentially limiting the DAO’s flexibility regarding treasury use. On the other hand, leaving significant DAO assets, such as the treasury, unwrapped could perpetuate legal ambiguity: the unwrapped treasury and collective management efforts might be viewed as a separate co-existing arrangement, potentially qualifying as a general partnership or unincorporated association, potentially leading to adverse legal implications.
Given the above, we are confident that the treasury and significant DAO assets must be wrapped within an appropriate legal wrapper. However, the determination of whether this should be the Base Layer DSE or a Operating Layer wrapper(s), as well as the choice of its form, jurisdiction, and tax status (for/nonprofit), should be made on a case-by-case basis for each decentralised organisation.
DAO-Specific Entities are designed as nonprofits, meaning they cannot distribute profits to their members. Nonprofits can pay for things like salaries, contractor fees, and services, but profit-sharing is normally off the table. While this might create challenges for some organisations, it can work perfectly well for others. For example, in certain jurisdictions, controlled foreign company (CFC) rules may exempt participation in foreign nonprofits from reporting and taxes, making them a practical choice in this context.
Consequently, for those DAOs which require specific engagement in economic activities or making distributions among members, such activities or distributions could be structured through the relevant Operational Layer wrappers. As mentioned earlier, the framework enables the use of traditional business entities, like corporations, which adds even more options for structuring and provides broader flexibility.
Whatever setup is chosen, it is nonetheless important to carefully plan asset flows and distributions with both legal and tax considerations in mind to stay compliant and run efficiently. Furthermore, regulatory implications should be considered and assessed in each particular case, as discussed below.
The framework is designed not to create a centralised corporate structure for DAOs but to uphold decentralisation as a core principle of organisational design. It allows DAOs to integrate as many legal wrappers at the Operational Layer as needed to align their on-chain operations with off-chain legal and regulatory requirements.
Operational Layer wrappers can serve different roles and have varying levels of autonomy. Some, like holding entities, may remain subordinate to the DAO-Specific Entity to ensure immediate legal control. Others can operate as fully independent units within the DAO ecosystem, granting them maximum discretion and autonomy. This flexibility further allows independent actors to establish their own units within the ecosystem, promoting further decentralisation and incentivising participation.
Ultimately, the framework gives each DAO the tools to design its legal and operational structure to fit its unique needs. DAOs can decide which wrappers to use, how autonomous they should be, and the level of transparency and community oversight required. This flexibility provides DAOs with a versatile foundation for becoming legally sound yet sufficiently decentralised organisations.
The legal structure of a DAO must be substantive, not merely formal, to ensure effectiveness and credibility, and that it is not perceived as a fiction. This means the legal structure of a DAO should reflect its operational framework, without introducing substantial changes to the governance, operational, or decision-making processes unless required. The key components — such as the treasury, multisig wallets, and core committees — should be integrated into the legal framework in some way. If significant elements of the DAO remain outside the structure, the DAO risks continuing to function as a general partnership, with its legal wrappers seen as additional partners rather than a fully wrapped and cohesive entity.
At the same time, immutable protocols and smart contracts should remain outside the DAO’s legal structure to preserve their independence and uphold decentralisation. It is also a question whether such contracts can even be wrapped. For instance, the recent Tornado Cash case ruling²⁵ highlighted that immutable smart contracts do not constitute property or services, which actually makes sense. Accordingly, wrapping these contracts within the legal structure may provide no tangible benefits.
By focusing on substance over form, DAOs can create a legal framework that not only reflects their operations but also enhances their legitimacy and resilience.
The implementation of Harmony unlikely to negatively impact the DAO’s legal status, compliance, or governance token classification. The framework either preserves the status quo in certain aspects, such as DAO operations and decision-making, or enhances others, such as detaching economic rights from governance tokens.
By establishing a DSE, the DAO legally wraps its core components, such as community and governance, without altering their actual operation. In other words, without a formal legal structure, the DAO would function in the same way but without the legal protection and benefits offered by the framework.
Regulators and agencies apply the “substance over form” principle, meaning they focus on what an organisation or token actually does rather than how it is structured or positioned. With the implementation of Harmony, the substance of the DAO – how it functions and makes decisions – and the substance of the token – its core features and characteristics – remain intact. This is because the legal structure under Harmony is designed to mirror the DAO’s existing operations.
Since Harmony does not change the substance of the DAO or the token, its implementation is unlikely to introduce new risks or trigger adverse regulatory classifications. For example, some may argue that deploying a DSE formalises the existence of a common enterprise (the second prong under the Howey Test²⁶). However, this common enterprise already exists and functions the same way, regardless of whether the DSE is in place. The key difference is that a legally structured DAO provides its members with legal, financial, and tax protections that would otherwise be unavailable.
Deploying a DSE effectively transitions the DAO into a nonprofit organisation. In a nonprofit, there is no legally obligated party responsible for generating profits for members, and any distributions among members are prohibited. This removes members’ economic rights, formally detaching economic benefits from the governance token and ensuring that the token does not and cannot legally confer economic rights, such as revenue sharing, protocol fees, or profit distributions, thus strengthening its regulatory standing.
Another key effect of this transition is the conversion of ownership in the organisation into membership, which removes a major profit motive for acquiring the token. As a result, the governance token is more likely to be viewed as a membership unit rather than an investment asset. This also strengthens the argument that any potential purchaser of the token acquires it not for economic gain but rather for participation in a nonprofit initiative or personal engagement with the DAO. By structuring as a nonprofit, the DAO reinforces its positioning as a community-driven rather than profit-seeking entity.
Taking a narrower legal approach, one could argue that a security with features specific to shares is primarily defined by a combination of economic and governance rights, which essentially aligns with the ESMA’s recent guidelines²⁷. In a traditional corporate structure, a share grants not only voting rights but also an ownership stake in the company, along with rights to dividends, liquidation proceeds, and other financial benefits. However, a governance token that lacks an economic component offers neither ownership nor financial benefits, meaning it does not meet the defining characteristics of a share in the conventional legal sense. Harmony eliminates these features at the DSE level, further reinforcing this distinction.
In addition to being nonprofits, DSEs are typically member-managed organisations. This means that management authority is vested in all DAO members collectively, rather than being concentrated in the hands of appointed managers. While members may delegate certain powers to committees or sub-DAOs, there is no central actor legally required to drive profit for the organisation or maximise value for its members.
With no officers or directors responsible for managing the organisation or generating financial returns, it can further be argued that any benefits DAO members may receive, if any at all, are derived primarily from their own governance and managerial efforts, rather than from the efforts of others.
Although the DSE structure does not permit profit distributions, it is still possible to introduce mechanisms to reward those actively contributing to the organisation’s mission. However, these incentives must be designed in a way that does not reintroduce profit motives in the token design or attach economic benefits to the token by default.
For example, Operating Layer wrappers can be used to manage incentive mechanisms outside the DSE’s nonprofit perimeter. Any rewards should be linked to meaningful contributions, such as active participation, development efforts, or governance responsibilities, rather than passive token holding. Removal of information asymmetry, where there are internal “insiders” with preferential access to non-public information, can further eliminate investment-like dynamics where certain participants have privileged access to material non-public information.
It is unlikely that the Harmony Framework would adversely impact the legal status or classification of the DAO or its governance token. Furthermore, the framework incorporates baseline compliance safeguards, which can be further refined based on the specific needs and circumstances of each DAO.
Ultimately, unlike entrepreneurial or managerial efforts aimed at generating financial returns in a traditional business, mere improvements to a DAO’s legal structuring should not be considered a factor that increases token value or creates economic benefits for members.
At the Base Layer, the primary objective is to wrap the DAO members and governance within a DAO-Specific Entity. Unless specifically designed, we consider that a DAO should not deploy more than one DSE at the Base Layer to avoid conflicting member or governance structures. Where a DAO has multiple governance tokens, it can either implement a dual governance model within a single DSE or establish two parallel DSEs.
By utilising a DSE at the Base Layer, the DAO provides its members with protection against personal liability, as well as legal, regulatory, and tax exposure. The protection further spans over the DAO’s backers and contributors, who are often exposed as potential general partners in an entityless DAO.
Setting up the Base Layer should be a priority, as it effectively anchors the DAO’s legal structure and gives it legal personality. Some DSEs can also simplify the creation and management of these Operating Layer wrappers—for example, a DAO LLC may allow for the creation of series that can function as independent legal wrappers—giving the DAO greater flexibility to grow and adapt over time.
Currently, several DAO-Specific Entities are available for establishing a Base Layer structure. Unlike traditional legal entities, DSEs are explicitly designed to align with the decentralised and token-based membership models of DAOs. By recognising all token holders as members based solely on their token holdings, DSEs effectively merge with the DAOs, becoming a one single entity.
Note that the list of forms and jurisdictions below is not exhaustive, as jurisdictional research is not the focus of this work. Instead, we have focused on the options we consider most efficient for the stated purposes.
1. DAO LLC
Unlike traditional LLCs, a DAO LLC can admit as members all persons holding the DAO’s governance tokens, without having them to undergo onboarding, KYC and other legal formalities (except in case of officers and UBOs), granting the token holders direct governance rights and limited liability by default.
While DAO LLCs are available in a number of US states, unless the DAO already has, or wants to have, an established nexus within the US, we consider the Marshall Islands to be the most preferable choice of jurisdiction for this wrapper. There are a number of reasons for this, including ease of set-up and doing business, specialised DAO framework, which further states that tokens issued here shall not, in the most cases, be considered securities, superior flexibility in terms of governance and corporate procedures, and the ability to opt for nonprofit status.
In addition to that, a Marshall Islands DAO LLC²⁸ is able to create series. Simply put, each series is like a separate 'legal entity' with its own assets and liabilities, meaning that the liabilities of one series do not affect the other series or DAO LLC in general. This is important because series can be used as Operational Layer wrappers, including to segregate different assets, transactions, or even isolated high-risk activities from the DAO LLC and its property. Creating a series requires no state filing or fees, potentially driving the cost of setting up these operational wrappers to zero.
2. DUNA
Decentralised Autonomous Non-Profit Association (DUNA) is a relatively new specialised structure for DAOs recently introduced in Wyoming, USA,²⁹ which became available in July 2024. It combines elements of a traditional LLC with DAO-specific governance features. As with any association, DUNA is a membership-based organisation. However, as a DAO-Specific Entity, it can recognise token holders as its members based on their token holdings.
DUNA is a nonprofit by design, which is great in terms of mitigating tax risks and liabilities in the US, and is only available to those blockchain organisations that have not been incorporated in any other jurisdiction, which aligns with the foundational principles of this framework.
We consider DUNA an excellent choice for structuring the Base Layer in those DAOs that have an existing nexus (presence) in the US, and who are comfortable with strengthening it further through incorporation there, as this may have its implications.
3. RAK DAO Association (DARe)
DAO Association is a special form of company limited by guarantee, specifically designed to cater to decentralised organisations. This is a nonprofit entity exclusively available under the DAO Association Regime (DARe), recently introduced by the Ras Al Khaimah Digital Assets Oasis (RAK DAO)³⁰ in the United Arab Emirates.
This entity can issue tokens and engage in blockchain activities, but must ensure compliance with local regulatory requirements. The registration procedure implies submission of whitepaper and a short business plan for the entity, with an additional requirement for tokenomics and legal opinion in the event the association intends to issue a token. Additional screenings and security audits ensure validation and review of projects, making this wrapper form more exclusive and appealing. There is no minimal initial capital requirement for DAO Associations.
For larger DAOs, DARe supports the formation of Sub-DAOs to segregate assets, liabilities, projects, or investment objectives. A DAO can establish up to 10 Sub-DAOs, each operating with its own governance structure and purposes. Sub-DAOs are particularly advantageous for complex organisations, as they enable tailored governance and asset management while keeping resources and responsibilities distinct across projects.
We consider the RAK DAO Association to be one of the best options for structuring DAOs onshore, with the RAK DAO being the first Web3-focused free economic zone in the UAE.
4. DLT Foundation
The DLT Foundation,³¹ introduced by the Abu Dhabi Global Market (ADGM) under its DLT Foundations Regulations 2023, is a specialised legal structure designed for decentralised organisations. The structure can facilitate blockchain-based governance, hold and manage DAO assets, and engage in DAO-related activities. While its primary purposes are developing and facilitating blockchain technology or issuing tokens, the foundation’s objectives can extend further, provided they align with these core purposes.
A DLT Foundation does not have a default nonprofit status; however, the law permits restrictions on distributions to members to be incorporated into its charter. Additionally, the entity benefits from the zero-tax rate offered by the ADGM Free Zone. Registration involves submitting a legal opinion on the foundation’s charter and whitepaper, security audit, and making relevant disclosures. A minimum of two council members must be appointed to manage the entity.
Importantly, the DLT Regulations impose strict accountability measures, holding UBOs and persons with majority of actual or shadow voting rights personally liable for violations of applicable laws or requirements, including security breaches within its technology, which cannot be overridden or altered in the foundation’s charter.
At the Operational Layer, the DAO can employ one or more non-DSE legal wrappers. Wrappers at the Operational Layer are typically responsible for specific assets or operations involving the DAO and can serve various purposes, such as structuring committees or sub-DAOs, segregating assets, holding and managing IP, wrapping specific material transactions, or isolating high-risk activities.
There is no limit to the number or types of Operational Layer wrappers a DAO may have, and these can include various legal entities, including traditional corporate entities, as well as series of a DAO LLC or sub-DAOs of DAO Association if deployed at the Base Layer, and purpose trusts.
Where an Operational Layer entity functions as a subordinated wrapper, it is crucial to ensure that the DAO maintains an adequate level of ultimate control over it. For instance, Cayman Islands ownerless foundations provide the necessary flexibility to enable direct oversight and effective subordination to the DAO. In contrast, Swiss and Singapore ownerless foundations are specifically designed to preserve independence of the structure and operate under strict regulatory frameworks, which prohibit external entities, such as a DAO, from exerting direct control over their boards or influencing their decision-making processes.
Where the DAO has a Base-Layer structure, the issue of choosing the right legal wrapper in terms of form and jurisdiction becomes much more simple. Consequently, the Operational Layer wrappers can be in several ownership forms:
1. Ownerless Entities
Ownerless or orphan entities have no shareholders and are typically established for specific purposes. In our context, an example of this set-up would be an ownerless foundation and company limited by guarantee.
Among the ownerless entities, the Cayman Islands foundation is likely the most popular nonprofit wrapper structure, offering flexibility, simplicity of setup and operation, and its standing as a reputable jurisdiction. Other suitable jurisdictions for forming ownerless foundations include Panama, Seychelles, and the Bahamas, among others.
Companies limited by guarantee have historically been used by organisations requiring legal personality without the need for share capital. Instead of shareholders, these entities have guarantors, making the structure effectively ownerless. Such companies can be established in both onshore and offshore jurisdictions, including the UK, Ireland, Hong Kong, Cayman Islands, BVI, Bermuda, and Guernsey, among others.
There may be other forms of ownerless entities, such as unincorporated associations, but we believe they do not provide significant advantages over incorporated entities for use as Operating Layer wrappers and are therefore excluded from this review.
2. Traditional Entities
This category includes corporations, classic LLCs, and other corporate forms which require members or owners. Normally, such entities are not used as DAO wrappers; however, the Harmony Framework enables their use by allowing the DSE to become a member, either directly or through a subordinated unit, thus retaining ultimate control over the wrapper and fulfilling the requirement of having a member.
An additional use case for traditional entities would be formation of autonomous wrappers by various contributors to engage within the DAO ecosystem and partake in the development activities, whether under grant arrangements or otherwise.
3. Sub-DAOs and Divisions
Certain regulatory frameworks enable DAOs to create subdivisions and SPVs under a master structure without the need to form separate legal entities. These subdivisions, which operate with their own assets, liabilities, and management, can be established efficiently within the DAO’s legal wrapper.
For example, the RAK DAO DARe framework allows for the creation of up to 10 subDAOs within the primary legal structure, each with its own governance and purpose. Similarly, the Marshall Islands DAO LLC framework provides the option to create an unlimited number of series (functioning as segregated portfolios) that can be established through internal agreements, without additional state filings, fees, and lengthy compliance procedures. Both management and membership in such structures can be tracked and identified using blockchain-based mechanisms, such as multisig participation, unique tokens, or NFTs.
4. Segregated Portfolio Companies (SPC) or Protected Cell Companies (PCC)
Where the creation of divisions or sub-DAOs is not supported by a particular DSE, a segregated portfolio company (SPC) or protected cell company (PCC) can be established as a subsidiary structure to isolate specific activities or assets. This approach is particularly suitable for structured finance, tokenisation projects, and real-world asset (RWA) holdings, where it is essential to place each asset into a separate “legal container” to facilitate transfer, risk isolation, and effective management.
For example, the Cayman Islands allow for the establishment of SPCs with limited liability as a master structure, accompanied by an unlimited number of segregated portfolios. Each portfolio maintains its own assets and liabilities, ensuring they are completely segregated from the assets and liabilities of other series and SPC in general.³²
5. Purpose Trusts
Purpose trusts provide a unique and flexible legal structure that can serve as a partial wrapper for specific DAO activities, such as holding RWA, managing treasury assets, engaging in off-chain transactions, or administering grants programs. In essence, a purpose trust is an arrangement where a settlor transfers assets to trustees, who then manage them to achieve specific goals or purposes. Purpose trusts can operate without beneficiaries, although mixed-purpose and beneficiary trusts are also an option, with the DSE assuming the beneficiary role. Accordingly, purpose trusts can be well-suited for segregating DAO property and separating asset management from asset ownership.
A trust is not a legal entity in itself but rather an arrangement with ability to have its own separate assets and liabilities. In many jurisdictions, purpose trusts do not require state registration and are established as soon as property is transferred to the trustees, which makes the structure highly cost-effective and easy to replicate. However, we strongly recommend putting a comprehensive trust declaration in place to define clear governance procedures, property management rules, and, where necessary, mechanisms for subordination to the DAO.
Among purpose trusts, we consider the Guernsey purpose trust one of the best structuring solutions, offering advantages over other offshore trust jurisdictions, such as the Cayman Islands or British Virgin Islands, where trustees often need to include a licensed local trust company. In a Guernsey trust, DAO committee members or other appointed persons can serve as trustees and enforcers. Where required, the DSE or its subordinated wrapper can also take on an enforcer role. Additionally, Guernsey trusts offer tax benefits and increased anonymity for participants, making them an attractive choice for DAOs seeking to engage in off-chain activities without the need to establish additional legal entities. This structure enables the DAO to actively participate in trust governance, including appointing and removing trustees and enforcers, or, in certain circumstances, even dissolving the trust and reclaiming its assets.
As decentralised autonomous organisations (DAOs) continue to grow in scale and complexity, the need for robust legal and operational frameworks has become increasingly apparent. DAOs face unique challenges, including legal recognition, member liability, governance inefficiencies, and jurisdictional uncertainty. Addressing these challenges requires a flexible yet comprehensive approach that balances the core principles of decentralisation with practical needs for legal protection and recognition.
The Harmony Framework introduces a structured solution to these challenges by combining decentralisation with legally sound structures. The multi-layered design integrates a DAO-Specific Entity at the Base Layer to wrap governance and community, while Operational Layer wrappers provide flexibility to manage assets, activities, and risks. This approach creates a scalable, jurisdiction-neutral foundation for DAOs to grow, adapt, and operate effectively in a global context without compromising their decentralisation.
The Harmony Framework builds upon the pioneering work of innovators, industry advocates, legal practitioners, scholars, and organisations dedicated to advancing DAO structuring, governance, decentralisation, and the broader legal recognition of decentralised organisations.
We especially acknowledge the ongoing contributions of the following individuals and organisations, whose insights, works and efforts have significantly shaped the legal and practical foundations of this space (listed in alphabetical order): a16zcrypto, Bankless, Chris Brummer, Coala, David Kerr, Delphi Labs, dydx, European Crypto Initiative, Gabriel Shapiro, Jake Chervinsky, Jesse Walden, Marc Boiron, MetaLex, MiDAO, Miles Jennings, Paradigm, Rodrigo Seira, Variant Fund, and many more.
The Harmony Framework is provided for informational and educational purposes only. It does not constitute legal, financial, regulatory, tax, or professional advice. DAO structuring is complex, with many variables and nuances, so always seek guidance from a qualified professional tailored to your specific situation. The authors, publishers, and promoters of the Harmony Framework disclaim and assume no responsibility and liability for any actions taken or not taken based on its content.
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[21] – Except for managers and UBOs (typically, 25%+ token holders and controllers), as required under the law
[22] – Maker DAO forum. MIP58: RWA Foundations. Aug. 2021: In MIP58, a Cayman Islands foundation is used as a legal wrapper to manage RWAs for the Maker Protocol and act as a borrower. This foundation acts as the owner of the RWA-related Special Purpose Vehicles (SPVs) and ensures the assets are held in a compliant and structured manner. Maker Protocol can appoint, remove, or direct the foundation’s board members, enabling the DAO to retain indirect control [link]
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[24] – @MetaLeX_Labs. “MetaLeX OS – Under the Hood.” X (formerly Twitter), posted on December 10, 2024: The framework core (BORGcore) extends the SAFE protocol through Guards (transaction constraints) and Modules (functional extensions), enabling flexible and tailored governance structures. BORGcore operates in whitelist, blacklist, or unrestricted modes to manage transaction permissions.The framework includes several tools to support DAOs: OptimisticGrantImplant enable rate-limited grant disbursements; failSafe.sol enables automatic fund reversion to DAOs if required; LeXscroW, a non-custodial escrow system, facilitates conditional and automated transactions, such as DAO-to-BORG funding or token swaps; MetaVesT, a token vesting protocol, supports milestone-based or time-based releases. An example of use case is the creation of a DAO-adjacent GrantsBORG, which autonomously allocates funds within predefined limits, with DAO oversight for exceptions [link]
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Authors: and – legal practitioners, partners at , and co-founders of
