Harmony TL;DR (A 5-Min Read)

Get the key takeaways of the Harmony Framework in just 5 minutes. Navigate to the full text for a deeper dive into DAO legal structuring

Introduction

DAOs have transformed collective action and governance, taking a big step toward true on-chain democracy. But as DAOs became more complex and exploded in popularity, they’ve hit some tough legal roadblocks, struggling to find their place within traditional legal systems.

The Harmony Framework aims to find the right balance (harmony) between the on-chain and off-chain, aligning the needs of decentralised organisations with the traditional legal systems, while preserving the core principles of decentralisation. 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.

In this framework, we aim to address the major challenges presently faced by the DAOs, such as undefined legal personality, absence of legal identity, unlimited member liability, tax implications, legal scalability, and limited cross-border applicability of existing DAO structuring techniques.

Framework Core

DAO-Specific Entities (DSEs)

The framework relies on a key concept: a DAO-Specific Entity (DSE). A DSE is a special form of nonprofit legal entity that:

• Recognises all token holders as members based solely on their token holdings with no member KYC/doxxing, thus effectively “wrapping” the community and governance within a legally-secure perimeter.

• Provides default limited liability to each member, grounded in corporate law, meaning that the token holders will no longer be personally liable for the DAO and its activities.

• Allows for an effective management of legal, tax and financial risks.

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, the DAO essentially transitions into that DSE, merging with it to form a single unified entity.

Organisation of Wrappers

Harmony proposes a methodical, modular system for giving DAOs a solid and scalable legal structure. Essentially, it proposes to organise the DAO wrappers into two layers:

1. Base Layer: A single DAO-Specific Entity deployed at the Base Layer wraps the DAO's core – community and governance. It forms the DAO’s legal identity, grants default limited liability protection to its members, and ensures that legal systems view the organisation as an entity separate from its members.

2. Operational Layer: This layer is comprised of additional (partial) legal wrappers operating alongside the DSE, designed to manage specific assets, activities, or risks. These wrappers are modular and deployed as needed to address the specific requirements of each particular DAO, such as holding and isolating assets, managing risks, forming sub-DAOs, committees, or structuring separate projects.

Oversimplified Illustration

The Operational Layer wrappers can be further divided into two categories: subordinate and autonomous wrappers:

• Subordinate wrappers include entities that have to be ultimately controlled by the DAO governance, like holding wrappers; now, instead of subordinating a wrapper to the DAO as “token holders” or “community” without legal identity, it can be subordinated to the DSE, providing a stronger position to enforce governance decisions and take timely legal action;

• Autonomous wrappers operate within the DAO ecosystem but remain independent of the DAO; by delegating specific authority or assets to autonomous wrappers, the DAO enhances flexibility and inclusivity, and advances its decentralisation.

Flexibility and modularity make the structure adjustable and scalable, empowering DAOs to grow efficiently, evolving into complex, cybernetic organisations that can navigate various legal environments with agility.

Example Structure with Multiple Operational Layer Wrappers In the scheme above: (a) to avoid appointing officers or managers within the DSE, the DAO Foundation can act as its administrator with limited authority; (b) the DAO may retain ultimate control over some wrappers, coordinate with others, or have no interaction with the third category whatsoever. Control refers to certain powers, like appointment of managers.

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. For example, Operating Layer wrappers can be used to manage incentive mechanisms outside the DSE’s nonprofit perimeter. At the same time, any rewards should be linked to meaningful contributions, such as active participation, development efforts, or governance responsibilities, rather than passive token holding.

Key Benefits

• Legal Identity: By deploying a DSE, the DAO acquires a distinctive legal identity and personhood separate from its members.

• Limited Liability: By becoming DSE members, token holders get default limited liability protection as soon as they acquire tokens, addressing the risks of personal liability and tax implications.

• Modular, Scalable Architecture: The proposed structure is modular and highly-scalable, capable of supporting DAOs of any sizes and facilitating their growth into comprehensive ecosystems and large cybernetic organisations.

• Intact Substance. The legal structure under Harmony is designed to reflect the DAO’s existing operations, without substantially altering its governance or how it actually functions.

• Legally Defined Protections: Unlike non-DSE structures, members can rely on legally defined corporate procedures to uphold and enforce governance decisions. This equips communities with effective legal tools to counter bad actors or hostile actions.

• Regulatory Safeguards. Harmony includes baseline safeguards to enhance a DAO’s regulatory standing, such as converting ownership into membership, legally detaching economic rights from tokens, and more.

• Jurisdiction Neutrality: Being jurisdiction-neutral design makes the framework suitable for any DAOs regardless of their jurisdictional geography.

Choice of Corporate Form

Base Layer

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. Some of the available options include:

• DAO LLC: An LLC form that is specifically designed for decentralised organisations. Presently, we consider Marshall Islands a go-for jurisdiction for setting-up the Base Layer structure in the form of DAO LLC.

• DUNA: A Wyoming (US) decentralised nonprofit association that is an ideal choice for any DAO that has a US nexus or wants to establish one.

• RAK DAO Association: A nonprofit association in Ras Al-Khaimah, a Web3-focused UAE free zone. A good choice for those looking to establish an onshore DSE structure.

• ADGM DLT Foundation: A specialised form of DAO foundation that is available in the ADGM Free Zone, UAE.

Operational Layer

Entities at the Operational Layer are typically responsible for specific DAO assets or DAO-related operations and can serve various purposes, such as structuring committees or sub-DAOs, segregating assets, holding and managing IP, wrapping specific material transactions, isolating high-risk activities, or structuring associated projects.

The Operational Layer is modular, with no limit to the number or types of wrappers a DAO may deploy. Having a DSE at the Base Layer strengthens subordination and control capabilities, making it easier to use traditional corporate forms—like corporations or exempted offshore companies—as subordinate wrappers.

Examples of Operational Layer wrappers include:

• Ownerless entities like foundations and companies limited by guarantee;

• Purpose trusts;

• Segregated portfolio companies;

• Protected cell companies;

• Series of DAO LLC (where DSE is a DAO LLC);

• Sub-DAOs (where DSE is a RAK DAO Association); and

• Traditional legal entities like corporations, LLCs, offshore exempted companies, etc.

Regulatory Wrap-Up

There’s no one-size-fits-all when it comes to regulations, especially across borders. However, we believe that implementing Harmony is unlikely to negatively impact a DAO’s legal status, compliance, or governance token classification. The framework preserves the status quo in areas like operations and decision-making while enhancing others, such as separating economic rights from governance tokens. Please see the full text to learn more.

Disclaimer

We’ll keep it short: this is not legal or financial advice. Every DAO is unique, and you should consult qualified professionals to figure out what’s right for your circumstances. The Harmony Framework is a tool, not a silver bullet. Use it wisely, stay compliant, and keep pushing the boundaries – legally.