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Why We Incorporated Shipyard’s DAO in The Marshall Islands

On February 8, 2021, Shipyard became the first organization to legally incorporate a DAO in the Marshall Islands!

Written by

Mark Lurie

Published on

February 15, 2022

Clipper was developed by Shipyard Software but is governed by a DAO (decentralized autonomous organization). On February 8, 2022, we officially formed a legal entity for this DAO in the Republic of the Marshall Islands. We’re excited about the future of the Marshall Islands and expect many other DAOs to follow suit over the coming years.

See the announcement from Mark Lurie at DAODenver's keynote presentation during ETHDenver 2022.

Why We Incorporated Shipyard’s DAO

Because DAOs can be entirely governed on the blockchain, most have not created legal entities. However, DAOs that choose to incorporate within the current global regulatory framework are able to capitalize on two legal benefits — limited legal liability and corporate personhood. 

Rather than solely requiring courts, DAOs operate according to a set of governing rules that can be selectively or even entirely enforced by code. In particular, this means that digital assets may be held in shared wallets without relying on banks. However, because DAO members live in the real world, they still bear liability for anything the DAO does, and any damages for which the DAO might be sued. As DAOs continue to expand, DAO members have grown increasingly aware of the need for a corporate entity to limit liability. Indeed, limiting liability was the main reason corporations became popular in the 17th century. 

In addition, incorporation bestows Corporate Personhood on the DAO. This is a concept dating back to early guilds (Shrenis) in ancient India, through which craftsmen used to speak with one voice as a community. Today, it enables companies to survive beyond a leader’s death, pay taxes as one instead of as thousands of members, own property, sign contracts, open bank accounts, and employ people subject to local laws. It’s incredibly practical.

Shipyard’s DAO currently consists of a multisig wallet with several signers. Over time, we intend to slowly decentralize governance to the Shipyard community. Now that it’s incorporated, that can be done while protecting users. 

The Complexity of DAO Incorporation

Some aspects of DAOs map neatly to existing corporate forms, such as accounting and taxes. But incorporating a DAO is less straightforward than it might seem, mostly due to administrative hurdles. For instance, most jurisdictions require bylaws to be filed with the government in a particular format, but code isn’t written on paper and blockchain code may be unalterable. Also, many legal entities are required to track membership with a ledger of names, while DAOs typically track membership with tokens. 

Put simply, the existing laws that define legal entities never imagined the unique environment of the blockchain. As a result, incorporating a DAO is like fitting a round peg in a square hole. Without clarity, DAO members are left unsure whether they are really protected from liability. With clarity, DAOs should have no problem adhering to existing laws.

Favorable Jurisdictions to Incorporate 

Progressive-minded jurisdictions are already racing to become leaders in the DAO market, including certain places that have been used for convenience in recent years. Even so, the most widely known options only allow for incomplete methods for establishing token-holder based governance. More specifically:

  • US State of Wyoming - Wyoming made history by passing the first DAO LLC law in July 2021. However, this law has several drawbacks. First, it requires votes to meet a 50% quorum, which is impractical in most elections, and more so when it comes to DAO user votes. Second, it is not a sovereign nation and is subject to US federal laws and regulations, many of which are still unclear with respect to DAOs. Finally, all token network activity under Wyoming law is potentially treated as a sale of property and therefore subject to high taxation.
  • The Cayman Islands – The Caymans is a Civil Law country, with a vastly different legal system than Common Law countries like the US. It’s very complex to translate legal documents across these fundamentally different paradigms of law. Still, Cayman’s foundation law has been used by several DAOs. The problem is that it does not explicitly accommodate governance of the foundation by member voting. Instead, founders designate DAO members as the beneficiaries of the foundation and appoint directors who have a fiduciary duty to beneficiaries. Unfortunately, this fiduciary duty can be interpreted in many ways and may not match the expressed will of the beneficiaries. 
  • Panama – Panama is on the US’ Financial Action Task Force’s (FATF) list of jurisdictions under increased monitoring, making it an unfavorable place to incorporate. Even so, it has a flexible foundation law. Unfortunately, the foundation must have shareholders who ultimately maintain control over the foundation, which makes it ill-suited for DAOs working towards true decentralization.
  • Switzerland  –  The Switzerland Canton of Zug offers a foundation service. But the cost of formation is high (more than $75,000 US) and the setup process is lengthy (4-6 months). Further, the law’s treatment of DAOs is unclear and the Counsel exerts a great deal of control over the network and assets of the beneficiaries. Similar to the Cayman Islands, Swiss foundation law does not explicitly accommodate governance of the foundation by member voting.

After reviewing the above options, none seemed satisfactory. Paying $100K - $300K in legal fees for Caymans, Panama or Zug didn’t seem judicious. Cost aside, if we compromise on sovereignty, then what’s the point of incorporating at all? If we compromise on compliance, the rest of the world won’t respect the entity. If we compromise on clear DAO treatment, we can’t be sure the corporate veil won’t be pierced, exposing all members to liability.

So we looked beyond the common options. We named our company Shipyard Software because we see the DEXs we build as allegorical ships; once built, they sail off into the vast decentralized DeFi sea as self-contained vehicles for exploration and value creation. DAOs are also similar to ships in that they spend most of their time in international waters, beyond the direct purview of any sovereign nexus. So we began researching how ships incorporate, and learned that 20% of global shipping capacity is incorporated in the Republic of the Marshall Islands (“RMI”).

The Marshall Islands’ Strong Legal Positioning

The Republic of the Marshall Islands is a unique country with several key advantages:

  • Sovereign, internationally-recognized state 
  • Strong, respected judicial Institutions 
  • Stability as a Freely Associated State of the US 
  • Reliable, US-aligned banking and financial system
  • Fast-moving, adaptable legislative process that can keep up with evolving markets

Crucially, the RMI also strongly supports innovation. The country recently passed a law, an amendment to their Nonprofit Statute, that enables DAOs to incorporate as nonprofit LLCs with bylaws and membership that can be recorded on the blockchain. This fits all of our criteria.

With the RMI as a new option, we created a matrix to analyze our options: 

The RMI’s success in maritime entity registration highlights its capabilities and advantages, and proves it is capable of meeting the unique needs of specialized entities at scale. If 20% of the world’s shipping capacity has chosen to register with the RMI, there is reason to believe this nation can also become the preferred global domicile for DAOs.

On February 8, 2021, Shipyard Software incorporated the first DAO in the Marshall Islands, Admiralty LLC. This DAO will be the organizational entity governing Clipper on behalf of the community. As we at Shipyard Software develop future DEXs, they will also be governed by the DAO. 

In order to service blockchain-based projects across the world that wish to be legally recognized on the global stage, Shipyard partnered with RMI’s local government to create MIDAO. This non-profit is founded to simplify the incorporation process for DAOs in the RMI while ensuring full compliance. MIDAO helped steward Shipyard’s recent DAO incorporation process, and we expect many other organizations to follow in Shipyard’s wake.

Written by

Mark Lurie

Published on

February 15, 2022

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