DAO Liability After Lido: Why Your "Decentralized" Organization Needs a Legal Wrapper

By Chanté Eliaszadeh | February 15, 2025

The fantasy died on a Tuesday morning in federal court.

On January 14, 2025, Judge Vince Chhabria denied Lido DAO's motion to dismiss in Samuels v. Lido DAO¹, ruling that token holders and venture capital firms could face unlimited personal liability as general partners in an unincorporated partnership. Within hours, prominent VCs—Paradigm, Andreessen Horowitz, Dragonfly Capital—were named as defendants facing potential liability for the entire $25 billion protocol's obligations.

The message was unmistakable: "decentralization" is not a liability shield. Code is not law. And your DAO governance token might be a one-way ticket to personal bankruptcy.

If you're operating a DAO in 2025 without a legal entity wrapper, you're playing Russian roulette with your personal assets. Here's why the Lido decision changes everything—and what you need to do about it immediately.

The Lido Wake-Up Call

The Samuels case centers on allegations that Lido DAO operated as a liquid staking protocol without proper registration, causing investor losses when staked ETH became illiquid during the 2024 market downturn. But the legal theory that survived dismissal has nothing to do with securities law or DeFi regulation.

Instead, plaintiffs invoked the oldest business law in the books: partnership liability under the Uniform Partnership Act².

The court's reasoning was devastating in its simplicity:

1. Joint Control: DAO token holders vote collectively on protocol parameters, treasury allocation, and operational decisions
2. Profit Sharing: Token holders receive governance rights and economic benefits from protocol fees
3. No Formal Entity: Lido DAO operates as an unincorporated association without limited liability protection

Under partnership law dating back centuries, these three factors create a general partnership by default—even without formal partnership agreements or intent. And in a general partnership, every partner faces unlimited personal liability for partnership obligations.

For Lido's token holders, this means personal exposure to the full $25 billion in total value locked. For the venture capital firms that bankrolled the protocol, it means their multi-billion-dollar funds face direct liability claims.

The implications extend far beyond one case. Over 12,000 DAOs collectively control more than $150 billion in assets³. The vast majority operate without legal entity structures. Samuels just painted targets on all of them.

Partnership Law's Brutal Reality

Most DAO founders assume limited liability is the default. It's not.

Under the Uniform Partnership Act (adopted in 49 states), a partnership is the default business structure for any "association of two or more persons to carry on as co-owners a business for profit"⁴. No paperwork required. No formal agreement necessary. If you act like partners, you are partners—with all the catastrophic consequences that entails.

What unlimited liability actually means:

• Personal assets at risk: Your home, savings, retirement accounts—all fair game for partnership creditors
• Joint and several liability: Creditors can pursue any single partner for 100% of partnership debts (yes, even if you hold 0.01% of governance tokens)
• Ongoing exposure: Liability continues even after you sell your tokens, for obligations incurred while you were a partner
• Tax nightmares: Partnerships create pass-through taxation, potentially triggering tax obligations on phantom income you never received

The Lido VCs thought their limited partnership fund structures would shield them. The court disagreed, finding that active participation in DAO governance—voting on proposals, providing advisory support, promoting the protocol—created direct partnership liability regardless of corporate structures upstream.

Translation: Hiding behind a Delaware LP or Cayman fund won't save you if you're exercising meaningful control over DAO operations.

The Three Liability Triggers

Courts applying partnership law to DAOs look for three specific factors. Understanding these triggers is critical to assessing your current risk profile.

1. Joint Control Over Operations

Partnership liability arises when multiple parties exercise collective control over business operations. For DAOs, this means:

• Governance token voting on protocol parameters
• Treasury spending approvals
• Smart contract upgrade authorizations
• Operational decisions (partnerships, hiring, marketing)

The Samuels court found that Lido's governance process—where token holders vote on proposals affecting protocol operations—satisfied the control requirement. Critically, the court rejected the argument that technical decentralization (smart contract automation) negates legal control. If token holders can vote to change the code, they control the business.

2. Profit Sharing Arrangements

Partnerships exist to pursue profit, and profit sharing among participants creates partnership status. For DAOs, courts examine:

• Protocol fee distribution mechanisms
• Governance token value appreciation tied to protocol success
• Staking rewards or yield generation
• Treasury distributions to token holders

You don't need formal profit distributions. The Samuels court found that token holders' economic interest in protocol success—their tokens increase in value as the protocol grows—constitutes profit sharing for partnership purposes.

3. Absence of Limited Liability Entity

This is the critical factor: partnership liability is the default unless you affirmatively create a limited liability structure.

Operating as an unincorporated association, DAO, or "decentralized protocol" provides zero liability protection. Neither does:

• Calling yourself "decentralized"
• Operating through smart contracts
• Having no formal organizational documents
• Distributing control among many participants

The law doesn't care about your technical architecture or governance philosophy. Without a recognized legal entity providing limited liability, courts default to partnership treatment.

The "Code is Law" Fantasy is Dead

For years, crypto builders operated under a convenient fiction: if everything runs on smart contracts, traditional legal rules don't apply. Decentralization would shield participants from legal liability. "Code is law" would replace messy human legal systems.

Samuels demolished this fantasy.

Judge Chhabria's opinion makes clear: Technical decentralization does not override legal classification. Smart contract automation does not eliminate human control. And "we're just a protocol" is not a defense to partnership liability.

The court reasoned that allowing DAOs to escape partnership liability simply by executing decisions through code would create a massive loophole—enabling any business to evade liability by automating operations. Partnership law focuses on who makes decisions and who benefits economically, not the technical implementation mechanism.

This reasoning will extend beyond partnership law. Securities regulators, tax authorities, and tort claimants will all apply the same logic: decentralization is an operational characteristic, not a legal status. Your smart contracts don't change who's liable when something goes wrong.

The only way to limit liability is through recognized legal entity structures that affirmatively provide liability protection. Which brings us to the solutions.

2025's Legal Wrapper Options

The good news: legal technology has finally caught up to blockchain innovation. Multiple jurisdictions now offer entity structures specifically designed for DAOs, providing limited liability while preserving decentralized governance.

Wyoming DAO LLC

Wyoming pioneered DAO-specific legislation in 2021 with the Decentralized Autonomous Organization Supplement⁵, creating the DAO LLC as a recognized limited liability entity. Since then, 12 additional states have adopted similar frameworks.

How it works:

• File Articles of Organization designating the entity as a DAO LLC
• Adopt operating agreement defining governance mechanisms (on-chain or hybrid)
• Maintain registered agent in formation state
• Members obtain limited liability protection

Pros:

• Clear limited liability for token holders/members
• Flexibility in governance (pure on-chain or hybrid)
• Relatively low formation costs ($5,000-$15,000)
• Established legal precedent in 13 states

Cons:

• U.S.-only (may trigger nexus for non-U.S. DAOs)
• Annual compliance requirements (registered agent, reports)
• Some ambiguity around multi-jurisdictional operations

Best for: U.S.-focused DAOs, investment DAOs, protocol DAOs with primarily U.S. participants

Foundation + Association Model (Switzerland/Liechtenstein)

European DAOs have gravitated toward Swiss foundation structures combined with member associations, offering limited liability within robust regulatory frameworks.

How it works:

• Establish foundation to hold protocol assets and IP
• Create member association for governance
• Foundation board executes decisions made by association
• Smart contracts implement approved actions

Pros:

• Excellent for non-profit or public goods protocols
• Strong legal precedent and regulatory clarity
• Favorable tax treatment for qualifying foundations
• International credibility

Cons:

• High formation costs ($75,000-$150,000)
• Ongoing compliance and audit requirements
• Foundation board may create centralization concerns
• Complex multi-entity structure

Best for: DeFi protocols, public goods projects, internationally-focused DAOs

Marshall Islands DAO LLC

The Marshall Islands enacted DAO legislation in 2022, creating a flexible offshore entity option with minimal compliance burdens.

How it works:

• Incorporate as Marshall Islands DAO LLC
• No physical presence required
• Minimal annual reporting
• Limited liability for members

Pros:

• Low formation costs ($10,000-$25,000)
• Minimal ongoing compliance
• International entity (no U.S. tax nexus)
• Privacy-protective (limited public disclosure)

Cons:

• Less established legal precedent
• Potential regulatory scrutiny (offshore jurisdiction)
• Limited international recognition
• May complicate banking relationships

Best for: Internationally distributed DAOs, privacy-focused projects, lower-compliance tolerance

Hybrid Framework (Legal Wrapper + On-Chain Governance)

The emerging best practice: combine legal entity wrapper with preserved on-chain governance, using the entity as a liability shield rather than operational control layer.

Structure:

• Legal entity (LLC, foundation, etc.) owns protocol contracts/treasury
• DAO governance votes remain fully on-chain
• Entity simply executes decisions made by token holder vote
• Directors/managers have fiduciary duty to implement DAO decisions

This approach maintains decentralization while establishing clear limited liability. The entity acts as a "dumb executor" of community governance decisions.

Decision Matrix: Which Structure for Your DAO?

Selection factors:

• Token holder geography: U.S.-heavy = Wyoming; International = Swiss/Marshall Islands
• Protocol purpose: Public goods = Swiss Foundation; Investment = Wyoming LLC
• Compliance tolerance: Low = Marshall Islands; High = Swiss Foundation
• Decentralization priority: Maximum = Hybrid Model

Retrofitting Existing DAOs

Most DAOs reading this launched without legal structures. Can you fix this retroactively?

Yes—but act quickly. The process involves:

1. Entity Formation (2-4 weeks)

• Select jurisdiction and entity type
• File formation documents
• Appoint initial directors/managers
• Establish registered agent

2. Asset Transfer (4-8 weeks)

• Transfer protocol IP to entity
• Migrate treasury assets to entity-controlled wallets
• Assign contracts and agreements
• Update protocol documentation

3. Governance Integration (2-4 weeks)

• Amend operating agreement/bylaws to recognize on-chain governance
• Implement execution mechanisms for DAO votes
• Establish director/manager duties aligned with DAO decisions
• Document governance process

4. Community Approval (1-3 weeks)

• Present structure to DAO for governance vote
• Address community concerns about centralization
• Document consent/approval on-chain

Total timeline: 3-4 months from decision to full implementation.

Critical: Consult legal counsel experienced in DAO formations. Cookie-cutter entity structures won't work—you need governance mechanisms specifically tailored to on-chain decision-making while satisfying corporate formalities.

Cost-Benefit Analysis

"Legal wrappers are expensive" is the common objection. Let's examine actual costs versus risks.

Legal wrapper costs:

• Formation: $5,000-$150,000 (depending on jurisdiction/complexity)
• Annual compliance: $2,000-$25,000
• Governance integration: $10,000-$50,000
• Total first year: $17,000-$225,000

Unlimited partnership liability risk:

• Personal asset exposure: Unlimited (your entire net worth)
• Defense costs in litigation: $500,000-$5,000,000+
• Settlement/judgment exposure: Protocol TVL (potentially billions)
• Reputational damage: Incalculable

For a DAO controlling $10 million in TVL, legal wrapper costs represent 0.17%-2.25% of assets under management—a rounding error compared to unlimited liability exposure.

The math is obvious: Spending $50,000 to avoid billion-dollar personal liability risk is the easiest investment decision you'll make.

What to Do This Week

If you're operating or participating in a DAO without a legal wrapper, take these immediate actions:

For DAO Founders/Core Teams:

1. Assess current liability exposure - Review governance mechanisms, token holder activities, and partnership liability triggers
2. Engage DAO-specialized counsel - Not your general startup lawyer; find attorneys with actual DAO entity formation experience
3. Research jurisdiction options - Compare Wyoming, Swiss, Marshall Islands, and other frameworks for your use case
4. Present to community - Start governance discussion on legal wrapper implementation
5. Budget appropriately - Allocate $25,000-$100,000+ for formation and integration

For DAO Token Holders:

1. Evaluate your exposure - Calculate your economic stake × protocol TVL = maximum liability exposure
2. Review governance participation - Active voting/proposals increase partnership liability risk
3. Demand legal wrapper - Use governance power to require entity formation
4. Consider divesting - If DAO refuses to implement legal structure, exit before lawsuit hits
5. Document concerns - Create written record of liability concerns and entity demands (may help in future litigation)

For VCs/Institutional Investors:

1. Audit DAO portfolio - Identify which portfolio DAOs lack legal entity structures
2. Require entity formation - Make legal wrapper a funding condition for new investments
3. Exercise governance power - Vote for entity formation proposals
4. Assess fund-level risk - Determine exposure if portfolio DAOs face partnership liability claims
5. Update investment docs - Require reps/warranties about legal structure in future deals

The Bottom Line

The Samuels v. Lido DAO decision isn't an aberration—it's the beginning of legal accountability for DAOs operating in regulatory gray zones. Courts will apply traditional partnership law until DAOs adopt recognized entity structures providing limited liability.

"Decentralization" is not a legal status. Smart contracts don't override partnership law. And calling yourself a protocol won't save your personal assets when creditors come calling.

The solutions exist. Legal wrappers designed for DAOs are available in multiple jurisdictions, offering limited liability protection while preserving on-chain governance. The costs are reasonable—negligible compared to unlimited liability exposure.

The question isn't whether to implement a legal wrapper. It's whether you act before the lawsuit arrives.

Every day without limited liability protection is a day your personal assets are on the line. The Lido defendants learned this lesson the hard way. Don't repeat their mistake.

Need DAO Legal Structure Guidance?

Astraea Counsel helps DAOs implement legal wrappers, governance structures, and liability protection. Explore our Digital Assets & Blockchain legal services.

Related Resources

• DeFi Protocol Legal Structure: LLC, Foundation, or DAO? - Comprehensive entity comparison guide
• DAO LLC Formation Guide: Wyoming DUNA Setup - Step-by-step formation process
• Treasury Management for Crypto Companies - Asset custody and segregation requirements for DAOs
• Corporate & Transactions Practice - Entity formation and governance structures
• Contact Us - Discuss your DAO's legal structure

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Footnotes

1. Samuels v. Lido DAO, No. 3:23-cv-05217-VC (N.D. Cal. Jan. 14, 2025) (order denying motion to dismiss). ↩

2. Uniform Partnership Act (1997), adopted in 49 states with minor variations. ↩

3. DeepDAO, DAO Statistics (Feb. 2025), available at https://deepdao.io/organizations. ↩

4. Uniform Partnership Act § 202(a) (1997). ↩

5. Wyo. Stat. Ann. § 17-31-101 et seq. (Decentralized Autonomous Organization Supplement, effective July 1, 2021). Similar legislation enacted in Tennessee, Vermont, Utah, and nine other states as of 2025. ↩