Proposal: Moving the Aragon project to a DAO 2.0 structure by decentralizing the Aragon Association and merging with the Aragon Network DAO

This proposal is based on the initiative of @mlphresearch
Proposal: Transfer the Aragon Project Funds to an Aragon DAO Governed by (Delegated) ANT - #3 by mlphresearch - but proposing an alternative structure.

Initiator:
Ronald_k is a Swiss qualified seasoned Web3/ FinTech-lawyer and tech-enthusiast working at a large business law firm in Zurich. Ronald_k represents many of the large layer 1 and layer 2 DLT-software protocols and DAO projects and helps them implement proper governance structures through decentralization.

Contact:
@Ronald_k

Summary:
Request the Aragon Association to accept ANT holders as members, adjust the articles of association for proper checks and balances, and merge the Aragon Association with the Aragon Network DAO.

Rationale:
The Aragon project is one of the first and leading projects that believed in decentralized autonomous organizations. In the first test phase, the Aragon Network DAO has been launched as a simple partnership under Swiss law based on the Aragon Network DAO Charter. Like other DAO 1.0 projects, the Aragon Association has decided not to wrap the Aragon Network DAO into a legal entity. After a successful test phase of the Aragon Network DAO, the community seems to desire that the Aragon Association is handing over the control over the main funds to the DAO to become more decentralized. This proposal addresses such desire and proposed a possible step-plan taking into account current market trends for DAOs 2.0 as well as legal and regulatory certainty.

Long- description:
Switzerland as a jurisdiction
The Aragon Association is a Swiss association established in Zug, Switzerland. Switzerland is a leading jurisdiction for Web3-projects because of technology-neutral laws and technology-friendly authorities. By having published guidance by authorities and the possibility to request no-action letters and rulings, Switzerland provides a lot of legal and regulatory clarity and allows to roll-out projects in a secure way.

Switzerland is a politically neutral country with strong checks and balances. Switzerland is one of the most decentralized and federalized countries in the world and therefore the most suitable jurisdiction for decentralized ecosystems.

Swiss associations
Associations, such as the Aragon Association, are legal entities under the Swiss Civil Code (article 60 et seq. CC) with limited liability that are governed by its members. An association cannot be owned by equity and all assets within an association belong to the association and leaving members have no rights in this regard.

The basic bodies of the association are (a) the members’ assembly (b) the board (governance council) (c) the auditors (if elected or required by law by reaching the threshold given by law). This is how currently the Aragon Association is set up.

Swiss association law provides great flexibility and only contains minimal mandatory legal provisions. The structure of the associations, the powers, the voting rights, as well as the type of members and bodies can be freely defined and thus can be adjusted to the needs of DAOs. This circumstance has led many DAOs to decide to move the DAO into a 2.0 Version by wrapping it into a Swiss association to gain legal certainty and secure the project’s long-term perspective.

Proposal:
The proposal provides a step-plan with multiple stages according to which the Aragon Association shall become fully decentralized and governed by the current Aragon Network DAO.

STEP 1 – Request to the Aragon Association:

The Aragon Association is currently a separate legal entity. The Aragon Network DAO has no power to vote on anything about the Aragon Association. As a first step, a vote by the Aragon Network DAO is required that request the Aragon Association to become more decentralized by accepting ANT holders as members of the association.

IF accepted by the Aragon Association

STEP 2 – revision of the articles of association:

The articles of association of the Aragon Association shall be fully revised to accommodate the needs of a modern DAO. The main pillars for decentralization are the following that can be incorporated in a draft of the articles of association for discussion and comment after STEP 1:

Membership:
All ANT holders shall become members of the Aragon Association with voting rights at the members’ assembly (the highest body in the association).

Option: to provide comfort to the founders of the project, the articles of association may set out that changing the purpose or dissolving the association during the next 5 years, requires next to the approval of the members’ assembly also the approval of the founding members. This provides comfort to the founders that the association will not be hijacked immediately after it has been opened to the ANT holders.
Bodies of the Association (naming of the bodies can be chosen freely):

The Aragon Association shall introduce the following bodies (committees) to decentralize the powers within the association:

  • Members assembly – the highest body within the association that is responsible for all matters not specifically defined in the articles of association; As a standard, all members (in the future consisting of ANT holders) have 1 vote, unless defined otherwise in the articles of association.

  • Option:
    o the members’ assembly can control the treasury of the association
    o Voting rights for ANT holders can be based on quadratic voting instead of 1 ANT 1 vote or 1 member 1 vote or based on any other mechanism.

  • Administrative committee (the current board – power is limited to administrative tasks such as organizing votes and filing documents to authorities).

  • Treasury committee – is responsible for managing the funds of the association if the control is not with the members’ assembly (see option above).

  • Membership committee – admission of new members, exclusion of existing members that act against the interests of the Aragon Association, and approval of changes to membership criteria;

  • Governance committee – provides an opinion on proposed changes to the articles of association and approves regulations of other committees;

  • Ethics committee - promotes transparency, accountability, and integrity within the association and shall use its best efforts to ensure honest and non-discriminatory conduct by the association, its members, and its bodies;

  • Technical committee – review all proposals, changes, updates, or patches to any technology developed or supported by the Aragon Association;

  • Grants & projects committee - designs and maintains the process for submitting, reviewing, and evaluating project applications and for the allocation of project grants.

  • Appointments committee - constitutes itself temporarily and is responsible for proposing candidates to be appointed to the other committees.

All members of the committees are elected by the members’ assembly. Alternatively, to balance the powers and not to overstress the members’ assembly, it is also possible that the members’ assembly only elects e.g. the members of the membership and the governance committee and the members of the other committees by the appointments committee that is constituted out of different members of the other committees depending for which committee a member must be elected (like an indirect democracy).

Example: The appointment committee for the appointment and dismissal of members of the administrative panel, the treasury panel, the technical panel, and the grants & projects panel could be made up as follows (only a proposal):
o two representatives of the governance committee;
o two representatives of the membership committee;
o two representatives of the ethics committee.

Selected other options (there are many more) that could be introduced into the articles:

  • higher majorities for changes of important matters in the articles of association by the members’ assembly and/or additional approval by the majority of a specific committee required e.g. to change the purpose of the association or to liquidate the association.

  • Allowing the different committee to create sub-committees e.g. in the form of guilds that are supervised by such committees. For example, the technical committee could introduce for each guild a sub-committee.

  • The funding of the development companies of Aragon such as Aragon labs can become subject to a vote by the members’ assembly i.e. the ANT token holders.

STEP 3 – request to the Aragon Association to adopt the adjusted articles of association and merge the Aragon Network DAO into the Aragon Association:

Vote to formally request the Aragon Association to adopt the proposed revised articles of association by Aragon Network DAO and to merge the Aragon Network DAO into the Aragon Association.

FAQ:

Most DAOs do not use a legal entity, as it is the intention to be fully decentralized. Why should Aragon use an association?

Initially, most of the DAOs have been set up without a legal wrapper (DAOs 1.0). Because of legal uncertainty and the likely joint and several liabilities of the participants in a DAO, there is a clear trend to merge DAOs into legal wrappers (examples Sushi Swap – in the process, YGG, HOPR, ReSource Network, Pyth, ENS Foundation, Flamingo DAO, etc.) Many leading projects have chosen the Swiss association, as it provides great flexibility in structuring and legal certainty. DAOs with legal wrappers are seen as Version 2.0. By self-choosing a jurisdiction and paying minimal taxes, the risk of being subject to various jurisdictions worldwide will also be mitigated.

If there is an association in Switzerland, does the DAO not run into a risk of the assets being frozen by the Swiss authorities?

No, authorities can only freeze the assets of an association if there is a legal ground. Such legal ground applies to all companies and not only to DAOs e.g. in case of money laundering or criminal actions. In all cases, the association can dispute a potential freeze in front of the courts. The checks and balances in Switzerland work very well and the likelihood of being subject to an unfavored treatment by authorities just because the association is operated by a DAO is very low/inexistent.

Why are you making this proposal?
I believe in decentralization. As a lawyer, I am keen to create structures that hold up from a legal and compliance perspective. My goal is to find solutions to combine the needs of DAOs with secure legal environments to allow the DAOs to flourish in the best possible way. I neither want to centralize the Aragon Network DAO nor overcomplicate things.

Who owns the IP rights and access credentials to online services?
The association and thus indirectly the members as the highest governing body. The ANT holders therefore have the final say in this regard.

FINALLY:

I know that the whole proposal may sound very complicated and is not appealing in the first instance, but when you look at the details, you will see the beauty of this structure and how well it fits to DAOs. Note that many ideas proposed in this proposal habe been tested in practice and are not experimental. To provide further explanations and to address all concerns, I am happy to hold an AMA session.

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Thanks for this proposal @ronald_k - Overall, I think the proposal could be improved by simplifying it and reducing it’s scope, with more of a focus on the Benefits of having the Aragon Association act as a legal wrapper for AN DAO and the Legal Risks you foresee in not doing so.

Should the Swiss tax authorities oppose to a mass transfer of funds from the AA to AN DAO or should the AA committee decide for whatever reason to not do a mass transfer of funds from the AA to AN DAO, I believe this proposal to let ANT holders control the AA will be the next best alternative. This said, irrespective of the potential mass fund transfer to AN DAO, I think letting ANT holders fully control the AA is critical for the continued decentralisation of the Aragon project. It’s the only way to give ANT holders a voice on all the assets and services controlled by the AA, including this forum, Discord, the aragon.org website and it’s subdomains and so forth.

I’d suggest removing each of these committees to simplify the proposal. The key point for me is that ANT holders would have the freedom to spin up or dissolve guilds under AN DAO as they see fit. I’m using the term Guilds here rather than Committees as that is in more in-line with the terminology used in DAOs to define groups of individuals working together with designated responsibilities. In short, however ANT holders choose to structure AN DAO, this can be mirrored in the AA articles with the main benefit of legal protection of community members under the shield of a limited liability entity. At least that is my understanding, can you please confirm?

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I raised this question elsewhere but this is a more appropriate thread for it:

It’s always good to have precedents to study and learn from. Are there any live examples of prominent/successful DAOs that use a Swiss association as a legal wrapper with all token holders as its members? I’m familiar with the discussion around custom legal wrappers for DAOs, perhaps the most widely publicized example being the Wyoming DAO law. I’ve heard of examples here and there, incl. the ones that you mention in the OP, but I’m not aware of a mass tendency of prominent DAOs taking the route of making all token holders members of a single legal entity. What I am seeing, though, is DAOs handling their treasury operations and major software upgrades through on-chain governance without legal incorporation, while having a diverse range of DAO contributors that handle legal and tax compliance in the context of their specific focus area and respective teams.

EDIT: You write that “Many leading projects have chosen the Swiss association…” Perhaps you can provide examples of leading DAOs that have implemented the model being proposed here?

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Came across these draft articles from MME which could also be relevant for this proposal: https://fs.hubspotusercontent00.net/hubfs/4431201/200511_MME_DAA.pdf

And more general info on Swiss DAAs: Decentralized Autonomous Association (DAA)

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ENS is often cited as one of the more successful DAOs. Worth noting they also have a Cayman Islands based foundation, referenced in their charter/constitution;

Why have a legal entity?

Having a legal entity that represents the DAO in the “real world” is valuable for a number of reasons:

** It provides limited liability to DAO participants for the actions of the DAO. Without a legal entity, participants may be individually held liable for anything the DAO as a whole does.*

** It is capable of complying with taxation requirements - without a legal entity, DAO participants may be held liable for a proportion of the DAO’s income, even if they are not able to access these funds.*

** It is capable of entering into contracts with other “real world” entities, of holding assets (including IP rights), and so forth.*

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Yes, many DAOs involve a Foundation alongside other types of traditional organizations (e.g. LLCs) that provide services to the DAO and/or house various DAO contributors. However, the examples that are of most interest in the context of the current thread are those in which all token holders are made members of the legal wrapper and the DAO treasury is managed from within that entity via delegated token voting. As far as I can tell, that’s not what the ENS Foundation is doing. Hence also the question I proposed in my previous comment.

Do you agree that such an entity is beneficial and needed for the Aragon project to be able to engage suppliers the AN DAO can’t engage with and for legal and tax liability protection of ANT holders?

And if yes, do you think having such an entity under the control of ANT holders is preferable to one outside of their control?

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For certain functions, it may very well be. In the context of the various proposals on how to structure and allocate functions between different parts of the Aragon DAO moving forward, to the degree that it’s possible, it would be ideal if the community is presented with the relevant facts and a basic assessment of the risks involved in choosing one structure over others. If the best path forward is indeed the one proposed here, then I’m sure the community will recognize it as such.

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Dear @mlphresearch. Many projects are now moving to Switzerland for an association. As most of them are still in the structuring phase, I cannot post names. Sushi Swap for example has voted on Switzerland (Sushi Legal Structure - Proposals - SushiSwap). Already published in the commercial register (zeifx.ch) are for example DAO of ReSource network or HOPR. As a lawyer I always see trends at an early stage because I will be involved in the structuring before something becomes public.

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You are right. There are many option from very cetralized ones to fully decentralized ones. I recommend to start slowly with the shift into decentralization e.g. first, the ANT holders become members and govern the treasury (subject to vet by a compliance committee) and later the power of the governance committee (board/executive body) will be further distributed.

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A foundation is not decentralised. It is governed by a deed but managed by a few people that usually self-elect themselves (cooption). Foundations bear the risk that they diverge from the community interests without giving the community a say (bet example Tezos in 2018). Thus associations have become more popular as you can include the DAO as the highest body with a final say on everything.

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I’m sorry, I’m still confused whether these are examples of DAOs where all token holders have been made members of the Swiss Association which thereby serves as a legal wrapper for the DAO and its members as a whole (the structure proposed in the OP), or whether the Association is simply handling specific functions for the respective DAOs which may involve a variety of contributors, both legally organized and unorganized, in different jurisdictions?

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If you would like to change/clarify your proposal in any way, it would be ideal if you finalize everything by around May 20-23. The current objective is to get the different options included in an early June vote which would provide the DAO with a general direction and thus help in planning next steps.

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Thank you for clarifying. I used “Foundation” generically but it’s good to know the specific benefits that the association model provides over other types of organization under Swiss law.

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ReSource DAO and HOPR allow both token holders to become members if they fulfil the membership criteria. They are not at that stage, however, where they have opened the association for the toke holders. It is foreseen in the articles and just a matter of time.

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The proposal is more an outline of what is possible. I am not sure whether the community is already at a stage to render a decision. Likely more information/iteration on the possible structures is required. To kick-off, it may make sense to just propose to (A) make the ANT holders members of the Aaragon Association, (B) create a treasury sub-dao in the Aragon Association (treasury committee as a separate body in the association) and (C) allow the ANT holders to form the treasury sub-dao. By this, all monetary flows are governed/controlled by the treasury committee i.e. the ANT holders. To avoid any miss-use by the ANT holders, there can still be a compliance committee elected also by the ANT holders that has a veto right if a funding is not in line with the purpose of the Aragon Association.

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Got it. Whichever structure you consider optimal as a starting point can be considered as the high-level objective of the current proposal and, as such, included in the June vote as an option. The vote will allow token holders to signal their preference based on the information that’s available at the time. In the final version of the other proposal, I will also include an adaptation of what you’ve described as a possible add-on to the on-chain DAO.

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I think this makes sense as a starting point and to include this option for ANT holders to vote on. Are you planning to amend the proposal to this? The option needs to be crystal clear what ANT holders are voting on together with its benefits and limitations.