DAOs in Financial Distress

Abstract

Abstract The enormous diversity in decentralized autonomous organization (DAO) ownership structures, governance models, and operational processes yields a spectrum of potential outcomes when DAOs meet bankruptcy. US bankruptcy law offers distressed businesses orderly rehabilitation or liquidation options but assumes conventional management and debtor–creditor frameworks. DAOs that are open to more traditional corporate-style operating structures may be able to access the bankruptcy system with some creativity and compromise. Conversely, DAOs that implement highly decentralized and automated governance models may find themselves unable to access or navigate the bankruptcy system voluntarily. This is due to bankruptcy’s heavily centralized and court-supervised process, which stands in tension with core DAO ideals. For such DAOs, bankruptcy might not be avoidable if their stakeholders commence involuntary proceedings. As decentralized models proliferate, understanding bankruptcy law’s application to DAOs is crucial for developing robust legal frameworks and policy responses to govern the rapidly evolving digital asset economy.