MIP-17 DAO restructuring & Housekeeping

DAO restructuring & Housekeeping

Authors
Dao Core contributors

Summary
This proposal seeks to propose a restructuring of the DAO and formalise the relationships between the corporate entities that currently form part of the DAO. It also proposes that the DAO forms several new entities that will carry out different functions to ensure the smooth operation of the DAO.

Lastly, the proposal seeks to give a development company a mandate to carry out day to day operations for the DAO’s benefit. The existing DAO operations are intended to continue through this new structure and will not be adversely affected by the restructuring.

Abstract
DAOs are not yet recognised as legal persons in most jurisdictions in the world. In jurisdictions where they are recognised as legal persons, the structures available are not ideal, as they fail to be sufficiently decentralized. There are, however, multiple ways to facilitate the corporate structuring of a DAO, which bridges the gap between the digital and traditional world and thereby preserve decentralization to the greatest extent possible. The chosen structure must provide options for the DAO to operate efficiently in accordance with its purpose as well as make sure that token holders’ rights are preserved in a legal environment. As the DAO has various day to day operations that require management by external entities, it is important to structure the DAO entities and division of tasks in an effective way that does not compromise security or decentralization. Below follows an explanation of how we envisage to (re)structure the DAO going forward.

  • Formation of Purpose Trust (“$MC Purpose Trust”)*
    A trust is a fiduciary relationship in which one party, known as a settlor, gives another party, the trustee, legal title to hold certain property (including assets) for and on behalf of the beneficiaries. A purpose trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose(s). This relationship is governed by a trust deed. The $MC Purpose Trust will have as its purpose to hold all the shares of MCL and MCDAO Ltd (see more details on both entities below) for and on behalf of the DAO, and therefore by extension the $MC token holders. [The trustee will be subject to fiduciary obligations set out in the trust deed, requiring that they act pursuant to the purposes of the DAO, and in accordance with DAO governance].

  • Merit Circle Limited (“MCL”)
    All shares of MCL will be held by the DAO through the $MC Purpose Trust. MCL has to date been the DAO’s main contracted software development company. It has successfully bootstrapped the DAO on behalf of the early stakeholders and the current token holders. It raised 4.5M USD in seed budget for this. About 3.4M USD of this budget has not been used yet. MCL also holds several investments for and behalf of the DAO. This proposal seeks to transfer that remaining budget back to the DAO, so that the DAO can engage a new software development company ‘Orange Pill Ltd’, who in turn will act as the new software developer contractor for the DAO. The funds will be transferred to separate all SPV/Admin company tasks from development tasks. This is advantageous from a regulatory and tax perspective and will avoid direct future conflict of interests.

  • Form a new Admin/SPV company in the Bahamas called ‘MCDAO Ltd.’ (“MDL.”)
    MCDAO Ltd. will act as an Administrative company and an SPV (Special Purpose Vehicle) for the DAO. As a legal entity it can open accounts on behalf of the DAO and hold assets on behalf of the DAO (such as tokens, equity and IP). Equally as for MCL, the shares in MCDAO Ltd. will be held by the $MC Purpose Trust for and on behalf of the DAO.

  • Orange Pill Ltd (“OPL”)
    This proposal further seeks to contract OPL; a new software development company that seeks to be tasked with the main software development work for the DAO (a job that MCL has fulfilled to date). Examples of other development companies contracted by the DAO are DEPT Agency (currently assisting on the creation of the Marketplace). Through an agreement entered into between the MCDAO Ltd (for and on behalf of the DAO) and OPL, the author proposes that the DAO initially grants 3.4M USD in development budget to OPL. It is proposed that a 4-year development contract is entered into setting out the rights and expectation in respect of the appointment. We would propose that the DAO has the right to terminate this contract at its discretion at any time, subject to a 2 months notice period. It shall be provided that on termination any unused funds must be returned to the DAO. OPL. can apply for a new grant with the DAO should the budget have been spent. Given the current burn rate, it is envisaged that the proposed budget will last a maximum of 2 years. OPL can also pre-emptively apply for additional grants when an extra budget is required for specific projects. Any new budget or contract alteration which increases the DAO’s obligations must be approved by the DAO through governance. Orange Pill Ltd is governed by what has become known as Merit Circles main development team (‘MeritLtd’). They will form the board of directors and are responsible for the day to day decisions. OPL is wholly owned by the team and will not hold any of the DAOs assets, different from MCL and MDL. OPL will be a completely independent entity.


Figure 1, Merit DAO (corporate) structure.

Solid lines represent ownership in the visual above (figure 1). All contracts are signed for- and on behalf of the DAO. However, the DAO can only directly control crypto assets, through the wallets that are held by the distributed and selected multi signatories. The other assets are controlled by the ltd for and on behalf of the DAO. The effective control of the assets by tokenholders is exercised through the Trust, it is however different from the direct control.

The dotted lines represent cooperations or agreements. Contractors can use as many sub-contractors as they want. As any normal company could. A contractor could therefor be contracted directly by the DAO (through MCL or MDL) or by a contractor, or both. For example, OPL could also contract DEPT or vice versa. The responsibility and risk of a contract always lies with the contracting party, in accordance with the existing legal context a contact is signed.

Most contributors work without a contract for the DAO. Either out of personal interest or because of the incentives in place. It is however also possible for individuals, other DAOs, web3 partners and funds to enter into contract agreements with the DAO.

  • R&D and Operational costs mandate DAO
    The DAO will receive a mandate to spend on operational costs and R&D costs under 100K USD per item. An item is one invoice for a specific expense tied to a service/product or one assignment/contract of multiple invoices. Examples of operational costs are PR/Marketing, legal, audits and account costs (corporations, legal, exchanges, banks etc.). When costs of an amount exceeding 100K USD for one item are deemed necessary, the DAO needs to get approval from the community through governance. For instance, for bigger R&D investments, development projects or big PR/Marketing campaigns. MCDAO Ltd or OPL or any of them in cooperation with DAO Core Contributors will be responsible for selecting which costs are necessary and they will be responsible for negotiating contracts on behalf of the DAO.

  • R&D stealth mode
    The DAO will receive a mandate to start bigger R&D projects without governance permission when it perceives a competitive advantage to operating in stealth mode (e.g. projects that involve development of products concerning intellectual property). The budget will be up to an amount of 1M USD and a maximum time of six months. After this budget ceiling or time period has been crossed, a proposal needs to be issued. After the proposal has been issued, the community can retroactively choose if they ratify the decision and/or if the R&D project will be continued. If it votes against it, the project will be dropped. The expenses cannot be clawed back in the case the community does not agree, as these costs will have already been incurred. MCDAO Ltd or OPLrange Pill ltd or any of them in cooperation with DAO Core Contributors will be responsible for selecting which costs are necessary and will be responsible for negotiating contracts on behalf of the DAO. They should aspire as much as possible to structure stealth modes projects in a way that work done in phase 1 (pre-proposal) does not completely rely on phase 2 and 3 being finished, to mitigate costs damages in case of a subsequent “no” vote.

  • Social handles and accounts under management of contractor
    The DAO will permit OPL to handle their official social handles and social channels. OPL will be requested to handle all relevant accounts (as there may be from time to time) on behalf of the DAO. It has the permission to use these accounts in collaboration with other DAO contributors to produce content on behalf of the DAO. Furthermore, they shall manage and structure the channels on behalf of the DAO.

This includes, but is not limited to, the following handles and accounts:

  • Official Merit Circle DAO Twitter account
  • Official Merit Circle DAO Forum account
  • Official Merit Circle DAO Discord channel
  • Official Merit Circle DAO Telegram channel
  • Official Merit Circle DAO Snapshot page
  • Official Merit Circle DAO Medium Page
  • Official Merit Circle DAO Substack page

The DAO will at all times retain full ownership of all accounts. It can at any time revoke the permission to use all or any of these accounts. It may also give the permission to additional parties to use the accounts in a specific way. This will be subject to DAO governance.

Motivation
For the DAO to be an effective organization, it needs to have the same possibilities as other organizations have when they operate in the “physical world”. At the same time, it needs a structure that is aligned with the “metaverse world”, where code reigns and token holders decide. With this new structure, both of those goals are in our view satisfied to the best possible extent, considering the current / lack of legislation concerning DAOs.

Furthermore, the DAO needs to be operationally flexible. This can be done through strategically contracting parties to outsource certain day to day DAO operations and granting mandates to these parties. This will allow the DAO to be more efficient, effective and flexible in day to day operations - similar to the investment mandate that was given to the investment committee through MIP-2.

Budget

  • On-going budget DAO operational costs and R&D spending
  • There is no additional budget required for the development entity, as the funds are transferred back from Merit Circle Limited to the DAO, before being granted to OPL via the newly formed MCDAO Ltd.

Rationale
Won’t giving control to critical infrastructure make the DAO less decentralized?
Ultimately it is still the DAO who will decide which parties are contracted for the various different tasks the DAO community wants to see performed. If the DAO community is not satisfied, or thinks the tasks are better managed by a different party, they can change it (the contract with OPL will include a right for the DAO to terminate without cause and without incurring additional liability, subject to a 2 months’ termination notice). Ultimately the absolute power still lies with the DAO. On the other hand, the operational benefits of outsourcing tasks to specialized operators are significant. It should lead to more effective execution and less operational overhead for the DAO (i.e. putting an increased amount of smaller decisions through votes).

Why is OPL taking various tasks from Merit Circle Limited?
The organization is growing and so is the need for a division between different operational arms. OPL will operate as a completely independent entity from the DAO. By structuring in this manner, the DAO becomes better positioned to align to current and future rules and regulations. It also allows the DAO to have a larger operational reach.

If the DAO grants operational budget to OPL, why isn’t OPL bearing all costs?
Orange Pill Ltd is mainly bearing the costs for the payroll of the main development team and all the operational costs for the main development team. This covers a large portion of the current expenses that are made on behalf of the DAO. It could in theory also bear all the other direct costs for the DAO itself, but this would mean a much larger budget is needed. Moreover, this would create suboptimal optics from a regulatory perspective and from a DAO decentralization/power perspective. The DAO is an independent entity with its own revenue and costs, it should bear its own costs if it wants to be an independent entity. For this it makes sense to bear the costs made on a “DAO-level”. Over time, the DAO should grow increasingly decentralized and have many contractors. As a robust and healthy decentralized organization, it should not depend on any one of these contractors for its continuity and sustainability.

Why a second SPV/Admin company in the Bahamas?
From a regulatory perspective, this gives the DAO a better framework. Both Gibraltar and Bahamas are progressive jurisdictions when it comes to crypto regulations. By having a foot on the ground in both jurisdictions, the DAO maintains more operational flexibility and optionality. It also strengthens the position that the DAO is a borderless organization that is primarily located in the Metaverse. By implementing the proposed structure, the DAO structure becomes more distributed and decentralized. After all, as a DAO we fundamentally believe in an interconnected world without borders. Lastly, the Bahamian company will become the main SPV/Admin company, as it is set up specifically for this purpose. It is therefore more tailored to the task. As a DAO we will always strive to work with regulators; we believe in a future where the legal world will map onto the world of code. And where ultimately, the world of code, will provide a lot of the current legal framework.

Is this the governance overhaul that has been mentioned?
No, a separate proposal and supporting documents are currently being worked on by DAO Core Contributors for the governance overhaul. These will be shared here as soon as they are finalized. These will however tie into the currently proposed(corporate) DAO structure.

Copyright
Copyright and related rights waived via Creative Commons CCO.

5 Likes

What is the purpose of this recommendation to suggest reorganizing the DAO? How does it help MC holders?

Thanks for the proposal and the work so far in bringing the DAO to this point. It’s immensly exiting to see us reaching this point.

I will vote YES! with an effing big smile on my face!

1 Like

Based on the comments received on this proposal so far (both here and other forums), we understand that certain elements of the proposal might be difficult to understand fully. We will therefore attempt to make some clarifications in simpler terms in light of several questions received so far. Hopefully this will also make the initial post more understandable upon a second read-through.

What is the purpose of this restructuring and how does it help MC holders?
To answer this in a satisfactory manner, it might be helpful to provide short info on how the structure is today, before explaining why this is an improvement for the DAO and the token holders.

The DAO is a decentralized organization that is not incorporated under any particular jurisdiction (incorporated through code). As it is not considered a legal person, it is difficult to engage with off-chain activities and may also find it cumbersome to engage in certain day-to-day operations within the crypto sphere, i.e. also within certain core activities of the DAO’s business (could be in in connection with investments, development of products etc.). A solution so far has been to conduct certain activities through the bootstrapping entity in cooperation with the DAO. The DAO currently does not directly hold the equity of Merit Circle Ltd., and thereby nor the assets of Merit Circle Ltd.

Through the proposed restructuring, the DAO will remain the same decentralized organization that it is currently - important to highlight that there is no change in this respect, but will now become the owners of the operating companies through the purpose trust.

By setting up a purpose trust, the DAO will more easily be able to solve certain issues and retain increased control in relation with its day-to-day operations and general engagement in off-chain activities (gaining more flexibility). The DAO’s operating companies will be owned through this purpose trust for and on behalf of the DAO. This will, in practice, enable the companies to be run in accordance with the DAOs wishes.

As the purpose trust does hold assets directly on behalf of the DAO, this restructuring should thus imply that the DAO itself obtains more direct control over its operations and assets/rights, which in turn provides the token holders with increased control. The shares in Merit Circle Ltd. and MCDAO Ltd (the new Bahamas entity) will be fully owned by the trustees who will own the assets for and on behalf of the DAO through the purpose trust (its ‘extended arm’). And therefore – to make it clear in light of questions asked – no team members or anyone else but the DAO, through the purpose trust, may benefit from any dividends from either of these two entities (or other potential entities held by the purpose trust in the future).

Why separate the operational/development activities from activities relating to holding assets?
Orange Pill Ltd (“OPL”) is intended to be an entity that will lay outside of the DAO structure. It will act as a contractor to the DAO, taking over the operational/development originally carried out by Merit Circle Ltd. OPL will not hold any assets on behalf of the DAO – these will all be allocated to the DAO structure itself (the DAO and the operating entities held through the purpose trust). The DAO will also be able to terminate the agreement with OPL at any time in the future, subject to a 2 months’ notice period.

The rationale for separating the entities actively carrying out operational/development activities (OPL) and those mainly holding assets (MCDAO Ltd. and Merit Circle Ltd.) is, amongst other things, that the entities conducting operational activities interact with third parties and are in practice more prone to risk of liability, litigation etc. In order to mitigate external risks to the DAO’s treasury/assets as much as possible, the intention is therefore to keep these separated from these operational risks.

The new MCDAO Ltd., to be incorporated in the Bahamas, has the benefit that it, in comparison to Merit Circle Ltd., currently has no potential legacy (historical) issues. Therefore, the DAO is provided with increased flexibility as to which entity it wishes to use to hold certain assets (now has a ‘fresh’ entity to choose from as well).

Why could the DAO be in need to carry out R&D in a stealth mode?
The proposal refers to providing the DAO with a mandate to operate in stealth mode with a budget limit for certain R&D projects. When developing new technology and products, there is always a risk that competitors may wish to exploit any leak of information regarding research and development. If the DAO needs to seek approval each time it wishes to develop a product, with elaborate disclosure of the product and ideas, the DAO may lose its competitive advantage and risk losing the potential future rights to the relevant intellectual property and technology.

Although the DAO will always seek to be as transparent as possible to its stakeholders, we believe that this is one rare occasion where less transparency at an initial stage may prove to have the best outcome for the stakeholders.

Having transparency around the structure of the DAO is on the other hand important for us, as we want the various stakeholders to have confidence and understanding in the way the DAO operates. We hope that this, read in conjunction with the initial post, answers most of your questions and concerns. Please feel free to ask further questions – we are happy to respond.

Hello and thanks for proposal!

Of course only lawyers can judge that with full understanding - I’m definitely not the one. Nevertheless as I see it is supported by @DAOCoreContributors by default it should get green light - I’m here because I trust core team. Still some questions:

  1. Costs. We need to have at least order of magnitude estimation to decide. Costs to establish this structure, annual costs to maintain it.
  2. Risks. I was ICO investor of Tezos in 2017 and remember the nightmare because of just one mad guy which was put to wrong position with signature rights. Great multibillion project was almost dead, and even though it finally recovered it lost most of traction. So for each entity on schema I would like to see:
  • Assets it formally (legally) owns

  • Who has signature rights

  • What happens if these guys with signature rights make malicious actions - how we can protect DAO and its funds. And bus factor - what happens if the guy with signature is unavailable.

Thanks a lot !

3 Likes

Henlo,

Thanks for the proposal and clarification!

Honey Barrel
Vanquisher of non-Frens
The Freefolk Fellowship

honey-with-wooden-barrel-vectors

1 Like

Greetings, and thank you for the new proposal.

I’ll let the lawyer people battle the majority of this one out, but I do agree with needing a mandate to build some things in a stealthy manner. I don’t want to see our value leak out and get taken away by other parties. Good to see.

You have the support of the Ascending Galactic Federation with a “YES”.

Signed,

Erik von Pumpson
Admiral of the MC Enterprise
Ascending Galactic Federation

Hi Timour,

Many thanks for the good questions. Please see below our responses to each of your questions.

  1. Costs. We need to have at least order of magnitude estimation to decide. Costs to establish this structure, annual costs to maintain it.

The costs to set up the planned structure are estimated to be approximately USD 20k. The DAO’s costs to maintain and operate a structure in this format going forward are estimated to be approximately USD 10k per year.

  1. Risks. I was ICO investor of Tezos in 2017 and remember the nightmare because of just one mad guy which was put to wrong position with signature rights. Great multibillion project was almost dead, and even though it finally recovered it lost most of traction. So for each entity on schema I would like to see:
  • Assets it formally (legally) owns

The treasury reports reflect the assets constituting part of the DAO’s treasury from time to time. Please see further details in our monthly treasury reports (a new report, as of 30 June 2022, will be made available within the next week). All shares in the two entities MCDAO Ltd. and Merit Circle Ltd (and indirectly all assets held by those entities from time to time) will be owned through the purpose trust for and on behalf of the DAO.

  • Who has signature rights

The multi-signature signers will, in the same manner as they are currently, continue to play the key role in the DAO’s activities, i.e. controlling the DAO’s crypto assets on behalf of the DAO (nothing structurally changing here). Additionally, the directors of the two entities will have signature rights. As mentioned in our post above, the structure will in practice enable the companies to be run in accordance with the DAO’s wishes.

  • What happens if these guys with signature rights make malicious actions - how we can protect DAO and its funds. And bus factor - what happens if the guy with signature is unavailable.

The risk for malicious actions is sought to be mitigated by requiring several signatories (4-7 and 2-3 multisig wallets pursuant to MIP-2 as examples). The multisigs may be replaced by the DAO and the directors may formally be replaced by the trustees in the purpose trust acting on behalf of the DAO.

We hope the above answers your questions. Let us know if anything remains unclear.

1 Like

Thanks a lot for the answers. As I see costs are more or less zero and risks seems not be changed compared to current structure. Means no objections from my side.

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