Concept
The fiduciary obligations of members within a member-managed Decentralized Autonomous Organization structured as a Limited Liability Company (DAO LLC) represent a significant recalibration of traditional corporate governance principles. At its core, the inquiry into these duties moves beyond the established doctrines of corporate law and into a domain where legal frameworks are specifically being engineered to accommodate the novel operational realities of decentralized, blockchain-native entities. The central thesis is that in jurisdictions like Wyoming and Vermont, which have pioneered legislation for DAOs, the concept of fiduciary duty is not a fixed, immutable mandate but a highly malleable element, deliberately placed under the control of the organization’s architects.
In a conventional member-managed LLC, all members inherently owe fiduciary duties of loyalty and care to the company and to each other. These duties form the bedrock of trust and accountability, ensuring that members act in the best interests of the collective enterprise. However, the DAO LLC structure, particularly under the Wyoming statute, fundamentally alters this default arrangement.
The law explicitly permits the articles of organization or the operating agreement to define, limit, or even entirely eliminate these traditional fiduciary duties. This legislative design choice acknowledges that the mechanisms of a DAO ▴ such as transparent, on-chain voting and automated execution via smart contracts ▴ can serve as alternative methods for ensuring alignment and preventing misconduct, potentially rendering traditional fiduciary oversight redundant or even counterproductive.
In a DAO LLC, fiduciary duties are not assumed; they are explicitly defined or disclaimed by the foundational legal and smart contract code.
The implications of this are profound. For participants in a member-managed DAO LLC, the locus of trust shifts from the personal integrity of fellow members, as enforced by common law, to the verifiable logic of the underlying smart contracts and the explicit terms of the operating agreement. This framework empowers DAOs to architect their own systems of governance and accountability, tailored to their specific operational models.
A DAO focused on high-risk, experimental investments might, for instance, eliminate the duty of care to encourage bold decision-making, while a DAO managing community assets might codify a very strict and specific version of the duty of loyalty directly into its governing smart contracts. The essential understanding is that membership in a DAO LLC requires a new kind of diligence, one focused on scrutinizing the coded and written rules of the organization rather than relying on the default protections of corporate law.
The Jurisdictional Divergence
The approach to fiduciary duties in DAO LLCs is not uniform and depends heavily on the legal jurisdiction under which the DAO is formed. Wyoming and Vermont have emerged as the primary examples of states that have created specific legal wrappers for DAOs, and their approaches, while similar in their flexibility, have distinct nuances.
Wyoming the Expressive Contractual Approach
Wyoming’s DAO Supplement is arguably the most radical in its departure from traditional corporate norms. It establishes a legal environment where the operating agreement and smart contracts are the supreme governing documents. The statute explicitly states that unless otherwise provided, members of a DAO LLC have no fiduciary duties to the organization or to each other, save for the implied contractual covenant of good faith and fair dealing.
This default position is a complete inversion of standard LLC law. To ensure that members are aware of this, the law mandates that the articles of organization include a “Notice of Restrictions on Duties and Transfers,” which serves as a clear warning that the rights and obligations of members may differ significantly from those in a traditional LLC.
Vermont the Purpose-Driven Framework
Vermont’s legislation for Blockchain-Based LLCs (BBLLCs), while not using the “DAO” terminology as explicitly as Wyoming’s, provides a similar framework for creating legally recognized DAOs. The Vermont model places a strong emphasis on the operating agreement as the place to define the governance structure, including the duties of members. The dOrg operating agreement, a public example of a Vermont BBLLC, illustrates this by stating that “No Member will have any fiduciary duty to the Company for any contractor work done for the Company, unless the Members vote to approve such a fiduciary duty and the Member concerned consents to it.” This approach allows for a more granular and context-specific application of fiduciary duties, tying them to specific roles or tasks rather than applying them as a blanket obligation of membership.
Strategy
Strategically, the management of fiduciary duties within a member-managed DAO LLC is an exercise in risk allocation and operational design. The decision to modify, eliminate, or codify these duties is not merely a legal formality; it is a fundamental choice that shapes the organization’s culture, its risk profile, and its ability to attract and retain members. The primary strategic instrument for this is the operating agreement, which, in the context of a DAO, is often a hybrid of legal prose and smart contract code. The strategic objective is to create a system of governance that is both effective for the DAO’s purpose and transparent to its members.
Architecting Trust through Code and Contract
The core strategic decision for the founders of a DAO LLC is how to balance the flexibility offered by laws like Wyoming’s with the need to create a trustworthy and stable organization. Eliminating all fiduciary duties might maximize flexibility and appeal to members who are comfortable with high levels of risk and self-sovereignty. However, it could also deter more cautious participants and potentially open the door to opportunistic behavior that, while not technically a breach of a non-existent duty, could harm the DAO. A more nuanced strategy involves selectively disclaiming certain duties while codifying others in a way that is clear, verifiable, and aligned with the DAO’s mission.
The operating agreement of a DAO LLC functions as the primary strategic document for defining the precise contours of member accountability.
For example, a DAO that functions as a venture capital fund might eliminate the traditional duty of care to protect members from liability for high-risk investments that do not succeed. At the same time, it could implement a highly restrictive, algorithmically enforced version of the duty of loyalty, using smart contracts to prevent any member from personally benefiting from a deal the DAO is considering. This could involve, for instance, a smart contract that automatically blocks a member’s wallet from interacting with a project’s token sale if the DAO has voted to consider an investment in that project.
Comparative Approaches to Fiduciary Duty Design
The following table illustrates different strategic approaches to designing fiduciary duties in a member-managed DAO LLC, based on the organization’s primary purpose:
| DAO Purpose | Duty of Care Approach | Duty of Loyalty Approach | Strategic Rationale |
|---|---|---|---|
| Venture Capital / Investment | Eliminated or replaced with a “business judgment rule” on steroids, protecting good-faith decisions even if risky. | Strictly defined and algorithmically enforced to prevent self-dealing and front-running. | To encourage high-risk, high-reward decisions while maintaining the integrity of the investment process. |
| Grant-Giving / Public Goods Funding | Maintained as a duty to act with reasonable diligence in evaluating grant proposals. | Modified to allow for members to be affiliated with grant applicants, provided there is full disclosure and recusal from voting. | To ensure that community funds are allocated responsibly, while acknowledging that members are likely to be active participants in the ecosystem the DAO supports. |
| Protocol Governance | Focused on a duty to stay informed about proposals and to vote in a way that is consistent with the long-term health of the protocol. | A duty to not vote in a way that would directly and exclusively benefit the member at the expense of the protocol’s security or stability. | To balance the self-interest of token-holders with the collective need for a secure and functional protocol. |
- Full Disclaimer ▴ This strategy is most suitable for DAOs composed of highly sophisticated and risk-tolerant members who prioritize autonomy above all else. The operating agreement would explicitly state that no fiduciary duties exist, and members rely solely on the code and their own due diligence.
- Hybrid Model ▴ This is a more common and balanced approach. It involves disclaiming the broad, often ambiguous common law fiduciary duties and replacing them with a specific, narrowly tailored set of obligations defined in the operating agreement and enforced by smart contracts where possible.
- Codified Traditional Duties ▴ In this model, the DAO chooses to explicitly adopt the traditional duties of care and loyalty, perhaps with some modifications. This might be appropriate for a DAO that seeks to attract institutional capital or that operates in a more regulated space, where the familiarity of traditional legal standards is a strategic advantage.
Execution
The execution of a fiduciary duty framework in a member-managed DAO LLC is a matter of precise legal and technical drafting. The operating agreement is the primary vehicle for this, and its provisions must be clear, unambiguous, and, where possible, reflected in the logic of the DAO’s governing smart contracts. The sample operating agreement for a Wyoming DAO LLC provided by Northwest Registered Agent offers a clear illustration of how these principles are put into practice.
Drafting the Operating Agreement
The operating agreement must be meticulously crafted to reflect the chosen strategy for fiduciary duties. This involves more than simply stating that duties are eliminated; it requires a comprehensive approach that addresses various aspects of member conduct and liability.
Key Provisions in a DAO LLC Operating Agreement
- Notice of Restrictions ▴ As required by Wyoming law, the operating agreement should contain the explicit “Notice of Restrictions on Duties and Transfers.” This serves as a foundational element of informed consent, ensuring that all members are aware of the unique legal environment of the DAO.
- Disclaimer of Fiduciary Duties ▴ A specific clause should directly address fiduciary duties. The sample agreement, for instance, states ▴ “Pursuant Section 17-31-110 of the Supplement, no Member has any fiduciary duty to the DAO or to any other Member. Unless otherwise agreed among the Members, no Member has any duty to act.” This language is unequivocal and leaves no room for ambiguity.
- Covenant of Good Faith and Fair Dealing ▴ While fiduciary duties may be eliminated, the implied covenant of good faith and fair dealing typically remains. It is a best practice to acknowledge this in the operating agreement, as it sets a baseline standard of conduct and prevents parties from acting in a way that violates the spirit of their agreement, even if their actions do not breach a specific provision.
- Self-Dealing and Permitted Transactions ▴ To avoid uncertainty, the operating agreement should explicitly define the rules around self-dealing. It can create “safe harbor” provisions that allow for transactions between the DAO and its members, provided certain conditions are met, such as full disclosure and approval by disinterested members. The sample agreement includes a clause that protects such transactions from being voidable solely because of the member’s interest, as long as they are not entered into in bad faith.
Effective execution requires that the legal prose of the operating agreement and the automated logic of the smart contracts are in perfect alignment.
The Role of Smart Contracts in Enforcement
In a DAO, the execution of fiduciary principles is not limited to legal documents. Smart contracts can serve as a powerful tool for enforcing these rules in a transparent and automated way. This is a critical aspect of the “code is law” ethos that animates many DAOs.
Examples of Smart Contract-Based Enforcement
| Fiduciary Principle | Smart Contract Implementation | Effect |
|---|---|---|
| Duty of Loyalty (No Self-Dealing) | A smart contract that requires a member to stake a portion of their assets as a bond when proposing a transaction in which they have a personal interest. The bond is forfeited if the transaction is later found to be harmful to the DAO. | Creates a financial disincentive for proposing self-interested transactions that could damage the DAO. |
| Duty of Care (Informed Decision-Making) | A governance portal that only allows members to vote on a proposal after they have verifiably interacted with a set of educational materials or data related to the proposal. | Encourages members to be informed before participating in governance, thereby raising the overall quality of decision-making. |
| Duty of Confidentiality | While difficult to enforce on-chain, a DAO could use zero-knowledge proofs to allow members to vote on sensitive matters without revealing their individual votes, thereby protecting the confidentiality of the decision-making process. | Protects sensitive information while still allowing for collective governance. |
The integration of legal and technical execution is the hallmark of a well-designed DAO LLC. The operating agreement sets the legal framework, and the smart contracts provide the automated, transparent, and often immutable enforcement of that framework. This dual-layered approach to governance is what makes the DAO LLC a potentially powerful new tool for organizing collective action, but it also underscores the critical importance of careful, expert design in both the legal and technical domains.
References
- Krumm, Brian. “Comment on the Fiduciary-ness of Business Associations.” Transactions ▴ The Tennessee Journal of Business Law, vol. 24, 2023, pp. 277-283.
- Wright, Aaron, et al. “Operating Agreement of dOrg, LLC.” OpenLaw, 2025.
- Wyoming Legislature. “Wyoming Decentralized Autonomous Organization Supplement.” Wyoming Statutes, Title 17, Chapter 31, 2022.
- Northwest Registered Agent. “Operating Agreement for a Decentralized Autonomous Organization.” Northwest Registered Agent, 2023.
Reflection
The exploration of fiduciary duties within member-managed DAO LLCs ultimately leads to a fundamental question for any participant in these novel structures ▴ what is the basis of trust in this organization? The legal frameworks of Wyoming and Vermont provide a powerful toolkit for customizing the answer to that question. They allow for the replacement of traditional, interpersonal fiduciary obligations with a new set of assurances rooted in transparent, verifiable code and explicit, contractually defined rules. This shift does not eliminate the need for trust, but rather re-locates it.
Trust is no longer solely placed in the good character of fellow members, but in the integrity of the system itself ▴ the code, the contract, and the collective governance mechanisms they enable. As you consider your own involvement in or the design of a DAO, the critical task is to look beyond the surface of the technology and to scrutinize the architecture of trust that it has been built upon. Is it robust? Is it transparent?
And does it align with the strategic objectives and risk tolerance of all its members? The answers to these questions will define the true potential and resilience of any decentralized enterprise.
Glossary
Decentralized Autonomous Organization
Fiduciary Duty
Fiduciary Duties
Smart Contracts
Duty of Loyalty
Duty of Care
Fair Dealing
Good Faith
Smart Contract
Northwest Registered Agent
