Was Lido DAO Ruled a Partnership by Court? On Legal Challenges and Compliance Paths for Web3 Decentralized Governance
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Was Lido DAO Ruled a Partnership by Court? On Legal Challenges and Compliance Paths for Web3 Decentralized Governance
This ruling not only rejects Lido DAO's claim that its decentralized structure avoids legal liability, but also has profound implications for the compliance roadmap of the entire Web3 industry.
Navigating Web3 tides with focused insightsAuthor: Aiying艾盈, AiYing Compliance
On November 19, 2024, a ruling by the U.S. District Court for the Northern District of California sounded a legal alarm for Web3 decentralized autonomous organizations (DAOs). The court ruled that Lido DAO should be treated as a general partnership. This decision not only rejected Lido DAO's claim that its decentralized structure shields it from legal liability, but also has far-reaching implications for the compliance roadmap of the entire Web3 industry. As AiYing, a global Web3 compliance consultancy, we will analyze the risks and opportunities behind this case from legal, governance, and industry perspectives.
1. The Legal Identity Dilemma of DAOs: Decentralization Does Not Mean Immunity from Liability
One key point of the court’s ruling is that although Lido DAO operates under the banner of decentralization, its operational model exhibits characteristics of a general partnership—namely, multiple parties collaborating for shared benefit, thereby forming certain legal relationships. Under California law, a partnership does not require formal registration; it can be established simply through joint efforts driven by common interests. Therefore, the court found that the identifiable roles and governance mechanisms within Lido DAO meet the legal definition of a partnership.
This ruling sets a precedent for how “decentralization” is positioned within existing legal frameworks. Decentralized Autonomous Organizations (DAOs) are a key innovation in the Web3 space, typically characterized by the absence of central authority and collective governance by token holders. Many DAOs attempt to use this decentralized structure to circumvent traditional corporate or partnership laws, claiming they are not formal legal entities and that participants do not bear joint legal liability. However, this ruling sends a clear message: a decentralized organizational model cannot automatically serve as a shield against legal responsibility.
Decentralization remains a core ideal of Web3, but the court’s decision underscores that "decentralized" governance does not exempt an organization from traditional legal frameworks. Members of Lido DAO—including token holders who participate in voting—may bear potential legal obligations. This ruling reveals that the path to realizing technological ideals must still navigate real-world legal boundaries.
2. Key Participants in Lido DAO: Legal Risks of Being Treated as Partners
According to the court's ruling, institutions such as Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management were identified as “partners” in Lido DAO because they actively participated in governance and proposal voting. In other words, the court determined that these token-holding entities had moved beyond the role of passive investors and became co-operators of a partnership enterprise, thus bearing joint liability for Lido DAO’s overall activities.
The legal risk lies in the fact that DAO “partners” are not limited to founders or core developers—they may include any member who actively engages in governance. From a legal standpoint, this significantly increases the risk and liability among DAO members. If a DAO is classified as a general partnership, its partners become subject to unlimited personal liability for the organization’s debts and actions. In the case of Lido DAO, this ruling may prompt members to reevaluate the consequences of participating in governance—even seemingly minor actions like posting on community forums or casting votes could be interpreted as “active participation,” potentially drawing individuals into complex legal disputes.
3. Legal Challenges and Opportunities in Decentralized Governance
This ruling undoubtedly deals a blow to decentralized governance across the Web3 ecosystem. Miles Jennings, General Counsel at a16z, stated that the court’s decision “inflicts significant harm on decentralized governance,” as even minimal involvement in governance could now lead to substantial legal exposure. For Web3 project developers and investors alike, this significantly raises operational and legal risks.
Yet, such challenges may also catalyze internal transformation within the industry. The critical question facing all projects moving forward is how to strike the optimal balance between decentralization and legal compliance in their design and operations. This suggests that DAOs may need to gradually adopt hybrid governance models or reconsider their legal status—potentially registering as limited liability companies or other recognized legal entities—to limit participants’ liability exposure.
At the same time, this development opens new avenues for exploration in Web3 compliance. Designing governance frameworks that preserve decentralization while offering legal protection to participants is one of the most challenging tasks in the compliance field today and in the coming years. The future of DAOs may not lie in absolute decentralization, but rather in combining flexible organizational structures with appropriate legal identities to find the best intersection of innovation and compliance. At AiYing, we will continue to provide compliance pathway planning for Web3 enterprises, helping industry participants understand and manage complex legal risks.
4. Long-Term Industry Impact and Future Directions
This ruling may only mark the beginning of an emerging wave of regulatory scrutiny. As Web3 technology increasingly permeates finance, gaming, social media, and other sectors, traditional regulators are likely to intensify their focus on and oversight of decentralized organizations. The Lido DAO case signifies the transition of DAO governance from an experimental technical concept into a tangible legal reality. In this process, regulatory clarity may become essential to the healthy development of DAOs.
One possible future direction for DAOs is adopting a “legal wrapper”—maintaining a decentralized surface layer while establishing an underlying legal entity to provide legal protection and liability limitation for participants. This approach can satisfy the demand for innovation while reducing legal risk. We foresee that the future of Web3 may not lie in pursuing complete decentralization, but in pragmatically finding a middle ground. Projects like Lido will require more sophisticated legal counsel and compliance support to ensure that, even as they innovate continuously, they remain resilient against the uncertainties posed by an evolving legal landscape.
In this fast-moving era, more flexible legal solutions are needed. The DAO of the future may no longer be a fully unregulated utopia, but rather a dynamic equilibrium between idealism and reality. For all DAO participants, compliance and risk management will no longer be optional add-ons, but critical factors determining the survival and success of their projects.
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