Commentary-7

Participation rights in DAOs may take the form of tokenized governance powers, which may include the ability to propose, vote, and veto Proposals, as well as confer financial rights, which may include revenue and profit-sharing, bonding redemption rights, and service access rights, among others. Such participation rights and responsibilities, whether in the form of governance or financial powers, may be purchased, earned programmatically, granted through proposals, or distributed in any way defined in the DAO's By-Laws. The Model Law requires a DAO's software code, On-Chain Assets and transaction record to be publicly available and transparent to Members and Participants, so it does not impose a restriction on distributions, as with traditional non-profit companies or foundations. These 'non-distribution constraints' exist in such organizations to prevent fiduciaries and key employees siphoning valuable assets from the organization for personal gain, and to build trust in the organization's capacity to achieve their social, environmental or charitable purpose. The signaling function provided by the technological guarantees of a DAO, as well as the diverse mechanisms designed by Members to enter and exit a DAO, provide sufficient safeguards to dispense with the need for specific restrictions on distributions within a DAO.

In the traditional corporate form, governance and financial rights usually coincide, but this is not necessarily the case for DAOs. A DAO can delineate various governance and financial rights via its Token-based system and distinguish amongst its participants those Token-holders to whom governance powers have also been granted. This Model Law contemplates that only those persons holding governance rights should be considered Members of the DAO who determine the actions of the DAO, and thus hold a higher level of responsibility. An example of an important stakeholder in the DAO ecosystem who would not be classified as Members are persons who hold Tokens on centralized exchanges. In such situations, the user usually only has a claim on the centralized exchange, but doesn't have actual ownership of the Tokens, which is a prerequisite for membership. The lack of actual ownership of Tokens by users was well demonstrated in a dispute in 2020 over the Steemit platform.[^39] In March 2020, centralized exchanges, including Binance, Poloniex and Huobi, used user deposits of STEEM, the native Token of the Steemit blockchain, to help oust all of Steemit's nodes known as "witnesses" that secure the Steemit blockchain in favour of one single witness (node) controlled by Tron's founder Justin Sun. The move was heavily criticized within the blockchain ecosystem, which has arguably resulted in more hesitant usage of user deposits by centralized exchanges. However, the matter highlights the discrepancy between legal ownership, possession and lack of actual control by users over Token deposits in centralized exchanges, which, therefore, should not qualify as conferring membership rights.

This Article does not apply to Contentious Forks (Article 16 and commentary). Blockchains can undergo hard forks, as defined in Articles 3(13) and 16. As such, multiple blockchain forks can coexist and which fork to use is a consensus-driven process that must be achieved without a definitive source of authority determining the result. Because these replications can occur without affirmative action on the part of Participants, this Model Law does not contemplate that governance responsibilities should be automatically conferred to Members of a DAO involuntarily subject to a Hard Fork. As described in Chapter 5, there are several factors to be considered in the determination of the majority fork. Ultimately, individual participants and market aggregations decide which fork emerges as the authoritative counterparty in transactions. In this Model Law, Article 7(2)(b) requires a Token holder to make an affirmative action or acknowledgement to be considered a Member participating in a DAO, and therefore the involuntary doubling of Tokens and associated governance and financial participation rights that occurs during blockchain forks are exempted from this Article.[^40]

Similarly, this Model Law exempts Airdrops (Article 3(3)) from Article 7. Airdrops occur when a DAO distributes tokens to Public Address without knowledge or consent from the owner of the Public Address. Due to the nature of blockchains, a Public Address cannot block incoming transactions. As such, Airdrop distributions confer Tokens and associated participation rights on Persons involuntarily, and are therefore exempt from Article 7. This Model Law requires that Token holders voluntarily and affirmatively engage in an On-Chain interaction with a DAO (Article 7(2)(b)) to be considered a Member of a DAO. Recently, many governance token distributions have been organised as so-called "merkle airdrops" (or merkledrops), which require the user whose Public Address received the merkledrop to actively redeem the Tokens and pay any associated transaction fees. The definition of Airdrops (see Article 3(3)) used in this Model Law does not encompass merkledrops, for which users must affirmatively and voluntarily accept the merkledrop and the associated participation and governance rights.