Web 3.0 + Lawyer Engagement Agreements -Part I – Representing a DAO

Ready or not, Web 3.0 is going mainstream.  According to the Gartner Hype Cycle for Blockchain and Web3 published in July 2022, wider consumer and business adoption of Web 3.0 commercial applications like blockchain wallets, cryptocurrency, NFT games and smart contracts are on course to reach a tipping point in the next two to five years.

Which should be plenty of time for forward-looking lawyers to modify their engagement agreements to serve Web 3.0 clients.  In Part I of this post, we’ll focus on what terms lawyers should include in their agreements to satisfy ethics rules if they represent decentralized autonomous organizations (DAOs).  Part II of this Post covers acceptance of cryptocurrency or non-fungible tokens (NFTs) as payment.  Let’s go.

Representation of DAOs

A DAO stands for a decentralized autonomous organization which is member-owned communities without centralized leadership.  Described by the New York Times as a group chat with a bank account,  DAOs are run by the members through use of crypto-tokens, with financial transaction records and governing rules are maintained on the blockchain.

But if a DAO is comprised of a group of autonomous members, then who exactly is the client when a lawyer represents the DAO? Identifying the client is a key component of a retainer agreement with a corporate entity or organization as explained in The Legal ClauseIt – Retainer Agreements and Power Pacts for Lawyers.   Still, the legal status of DAOs as an entity is unclear: some lawyers suggest that a DAO would be treated like an unincorporated association or a partnership while in some states, DAOs can form an LLC. Given that the organizational structure of DAOs is still a work in progress, what does an engagement agreement with a DAO need to say?

Engagement Agreement Takeaways for DAOs:

If you’re retained by a DAO for legal work, first and foremost the agreement must make clear that you represent the entity, not each individual member. Otherwise you run the risk of having to answer to dozens of group members, or the prospect of multiple conflicts. Regardless of the DAO’s legal structure, you can cover yourself with this kind of legal representation agreement posted on GitHub that makes clear that the lawyer represents the organization and not individual members. As further or simpler clarification, a retainer agreement could state:

The Firm solely represents the DAO.  The representation does not create an attorney client relationship between the firm and the DAO members.

You could also track the language on legal representation from this Model  Law for DAOs which explains how DAOs go about retaining legal counsel for outside work. And for other ethics guidance on representation of DAOs and avoiding conflicts of interest, consult D.C. Bar Ethics Opinion 305 which provides guidance on representation of trade associations and unincorporated associations and addresses similar concerns that might arise in the  course of representing a DAO (by the way, if you need a good conflicts waiver clause, the Legal ClauseIt has that too!)

Want to update your engagement agreement to conform to modern conventions? Check out the Legal ClauseIt with clauses and phrases – on sale now! Or take a look at Part II of this post for accepting cryptocurrency payments.