List of speakers
Erich (main speaker) - Legal
Mark - Operations
This is for informative purposes and is not legal advice. I am barred in a couple US jurisdictions but am not a Cayman lawyer – so there could potentially be detailed questions where I would need to defer to a discussion with Cayman counsel. If you’re listening in just for general interest and/or are looking for tips on legal wrappers for another DAO, please note it’s inadvisable to directly fork this given the intricacies at play, but I’d love to talk with you separately and see how I could help – I’ve already put a “form” version of the API3 bylaws in my open-source-law GitHub repo.
Generally, when you are looking to wrap a DAO or create a legal entity that is representative of the DAO or corresponds with it in some way, you want to do it in a manner that reflects the realities of what’s on chain without creating any dissonance between the two whenever possible. You should also plan for the future.
The API3 Foundation entity is first and foremost a legal wrapper – or, a backstop meant to represent legal personhood for the API3 DAO. While on-chain governance processes and parameters control, the meatspace Foundation is meant to harmonize the DAO code realities with the legal fiction realities of a real-world entity. It has no off-chain bank account, no officers, no shareholders, and no members.
The Foundation therefore has several functions. It provides a limited liability entity to encapsulate API3. That does a number of things but from people that are working directly on the protocol and also from the beneficiaries (token holders) that stake and govern the project, you want to create a sort of liability soaking layer. It’s a common practise in every industry where there’s a lot of value at stake and wide reaching ramifications.
Another function is to provide an identifiable, registered real-world entity to enter into legal agreements with other entities and persons (of which there are many involved with API3), while maintaining a flat structure and properly reflecting the DAO’s governance. The nature of API3 is bidirectional by bringing in API providers that serve real-world data but also bringing in dApps and web 3 users to use that data. For this, there needs to be an off-chain entity to give these data providers some security and let them know that there’s an identifiable off-chain counterparty, someone that they can contract with and something that they can analogize to their other meatspace agreements. Having an off-chain counterparty for legal agreements is essential in API3’s case - one conversation with a legacy data provider will drive that home.
So the question then becomes what type of entity you want to form, in which jurisdiction, etc. The founding squad received some advice last fall that a Cayman limited Foundation company would be a good fit, and I tend to agree. Before I jump into how the structure has been DAO-ified by the bylaw change, I will go into some of the particulars of the Cayman Foundation entity:
It can be memberless and doesn’t actually need individual or corporate members. It permits beneficiaries to be identified merely by a class of persons (i.e. API3 token stakers). There are no shareholders, so the directors can simply act on the direction of the DAO. This is ideal for a non-hierarchical organization. Under the statute, there is a type of individual called a beneficiary who can benefit from the actions of the Foundation. In a lot of jurisdictions, those beneficiaries need to be identified and sometimes even registered. There are a lot of barriers that just don’t work well with crypto. However, in the Cayman Islands, you can create a class of persons as beneficiaries and describe what kind of person would be a beneficiary under the Foundation. In our example, if you have API3 tokens that are staked or revocably contributed to the governance contract, you are a beneficiary of the Foundation.
It also allows for modification of operations and delegation of powers in the bylaws. It is very flexible and bylaws are private documents so they don’t need to be registered with the government agency.
If exempted, Cayman Foundations are tax-free at the entity level. This is good for reducing friction and sort of other overhead costs, lessening complications in general.
It is a familiar offshore jurisdiction for legacy companies (as I can attest from my law firm days). It is permissive towards digital assets but it’s not like a greylisted jurisdiction such as Malta. It does not require anyone to be in the jurisdiction physically except for a registered secretary (a corporate services company).
It doesn’t require a minimum capital or share requirement, and it can have any legal purpose - commercial, charitable, private or any combination. The memorandum and articles of association are extremely flexible in the governance structures permitted and indeed may (subject to some limitations) mirror the DAO governance, as API3 has done here (requiring the directors to action API3 DAO Resolutions).
Some DAOs utilizing a Cayman Foundation wrapper have the DAO as a single member and separate treasuries and assets – a structure which I’d refer to as an “instructive” wrapper. API3’s wrapper is direct – the Foundation entity directly corresponds to the DAO, there’s no separate off-chain treasury or account of the Foundation, and each staker of API3 tokens in the governance contract is a beneficiary of the Foundation. Also:
Any “revenue” (or, incoming tokens/other value to the DAO address), whether that’s dAPI fees or payments for the feed insurance mechanism, is burned in $API3 tokens rather than redistributed – this is more favorable for securities analyses and memberless/shareholderless structures
API3 tokens distributed to stakers are minted and apportioned without contravening article 9 section 1 of the bylaws – compensates for slashing risk and not a treasury asset pre-minting
Using bylaws to formalize DAO governance has the advantage of not needing to be filed with the Cayman Register (unlike the constitution) and can offer more flexibility through amendment over time as the DAO matures and evolves
Essential for beneficiaries to not have legal rights “against” the Foundation entity (so, better for stakers to be beneficiaries rather than members), or frivolous lawsuits would be trivial to file and hamper API3 and would be problematic from a securities perspective. This also introduces more liability protection for the beneficiary stakers.
Like mentioned before, the sort of legal change was adopting a special resolution to DAO-ify the governance. Without going into detail, the API3 Foundation Special Resolution allows you to enact a change without holding a formal meeting with directors. The ability to use a written resolution to do this is expressly submitted in the Foundation law. The attached bylaws are fully adapted by the Foundation and each holder of API3 tokens which are staked in the API3 DAO’s designated governance contract is a beneficiary for the purposes of the law and a beneficiary for the purposes of all the organizational documents of the Foundation. Beneficiaries have the ability to create DAO proposals and then vote upon binding proposals for the purposes of the Foundation, subject to any applicable thresholds or other parameters (governable on-chain parameters) set by the API3 DAO. The directors shall use the best efforts to implement and execute each DAO resolution.
Finally, there is no perfect entity wrapper. DAOs are a completely new frontier and launching an unstoppable governance contract that controls a deal of value is something special. There are unknowns on classification and global recognizance of the structure (as with just about everything surrounding DAOs). The ability to bind a foundation from a vote of beneficiaries is not expressly laid out in the Foundation’s law as this has only been a law for three to four years. There is a lot of emphasis on the flexibility and the ability to delegate and create different governance structures that kind of emphasizes that there is a good interpretation of that.
Could this Foundation be dissolved eventually? With the fully on-chain governance parameters and eventual ease of Airnode integrations through OIS, ChainAPI, and ossified subDAOs, I think that is absolutely a possibility. While the legal wrapper is hugely beneficial to dealings with API providers and other entities, the Foundation may be dissolved in time if the DAO chooses to do so or if the off-chain / on-chain can no longer be adequately harmonized, etc.
There are a lot of DAOs that think that’s best to not form any legal entity and not create that attack surface for a regulator. Everyone’s situation is different. Whatever is being built is different and fact specific. API3 with the Airnode is very compliance focused, built with the GDPR in mind, with sort of commercial viability, API providers preferences and needs. A lot of these factors lead to the decision to have a full wrapped legal entity for API3.
One of the reasons why the focus of API3 is focused on compliance is the use case. Bringing data on chain can have any source, i.e. government organizations, corporations, medium-sized businesses or exchanges. There is a lot of commonality and overlap in terms of compliance for these different organizational entities. Furthermore, it needs to be considered that a lot of them will be in different countries. If you want to transport the data that is their effective intellectual property and part of their core business, you have to make them happy in terms of compliance requirements as much as you possibly can and in as many areas as you can, geographically, legally and operationally. That is why API3 has the DAO legal integration, all the legal structures and GDPR, which is also why it complies with commercial data compliance effectively by allowing businesses to control their own compliance on chain due to Airnode’s transparency.
Bylaws of the API3 Foundation
Without going into great detail of the bylaws, the primary purposes of the foundation are to promote, support and advance open-source software development for everything that is plausibly related to what API3 is doing, expressly including each DAO resolution and other pertinent components. For furthering these purposes, the Foundation is granting assets.
The bylaws are not perfect and they are designed to affect all of the foregoing while still maintaining some familiarity with form bylaws for limited liability Cayman entities so as not to overburden any legal or regulatory interpretations.
You can read the full bylaws in the link below:
Will legal changes accompany the transition from the initial core team-operated DAO to the current authoritative DAO and will roles/responsibilities changes follow the potential legal changes? (Erich)
Yes, the legal change was the special resolution amending the Foundation constitutional documents and adopting the bylaws (which I am going through on this call) to expressly hardcode the authoritative DAO’s resolutions as instructive to the Foundation’s directors, where necessary for off-chain processes. As for roles/responsibilities changes the building goes on uninterrupted. Everyone that contributes is a contractor. Now you will see more detailed proposals for each cycle’s budget that requires grants from the DAO treasury.
What happens when a project builds on top of the API3 core-tech, what happens legally? (Erich)
It is all MIT licensed, a streamlined broadly used open source license. It can be used, modified by third parties, the caveat being that the creator retains no liability for it and provides it with no warranties. It’s the cleanest open source license in crypto. It’s part of fostering the network effects of the software and creating the ecosystem, ultimately getting as much data on chain through Airnodes as possible and as many dApps as possible using data through Airnodes.
What does the DAO look like 5 years from now? (Erich)
It is impossible to say. I would love to see it as decentralized, automated and mature as possible. As integrations scale up, things might look very different by then.
Why are exchange listing discussions so limited from a legal perspective? Is it productive for the DAO to pursue proposals that could be being worked on but are just undisclosed for legal purposes? (Erich)
They are limited for many reasons. You touch up on different very regulatory sensitive areas, such as securities and secondary market trading. If you are disclosing something it’s probably either confidential or speculative. The last thing any of the API3 contributors want to do is to create speculations. For more information, there is a thorough thread on the forum about this topic.
How are core team members distinguished within the authoritative DAO? What would the process be for joining the core team or is that concept inapplicable? (Erich)
It is inapplicable. At this point, anyone who is a contributor to the DAO is a recipient of a grant and they’re the same status. The DAO wrapped as the foundation disburses grants by team, such as operations, technical development and marketing. This will be done through proposals that request a certain amount for the grant disbursements to everyone that is working in the specific group while presenting all the objectives, past efforts and more details. Everyone who is receiving a grant either directly or by designee is a contractor in the foundation. There is no real core team, it’s just a matter of who is a grant recipient and what agreements come along with it, such as exposure to confidential information under NDA for providing certain services.
When do current contracts for core team members expire that were created before the authoritative DAO? (Erich, Mark)
Everyone has a terminable contract. There is no special guarantee for anyone that supported API3 before the authoritative DAO, thus there are former contributors that were already terminated. Whenever there is a consensus that there are members who are not providing the services within their proposal anymore, they can be terminated. As long as people contribute and add value to the project, their contract keeps running. These contracts are separate from token allocations because the latter are locked in smart contracts.