Aon | Financial Services Group
Back to FSG Quick Insights | Subscribe to FSG Quick Insights >>
A class-action lawsuit filed by users of a decentralized finance (DeFi) protocol managed by a decentralized autonomous organization (DAO) may shed light on the potential legal liabilities of a DAO and its participants.
In Sarcuni v. bZx DAO1, users of the bZx DeFi protocol filed a class-action lawsuit against bZx DAO, its alleged successor Ooki DAO, co-founders of the bZx protocol, investors, and protocol and platform operators after a security breach allegedly resulted in approximately $55M loss of funds for token holders. Plaintiffs allege that the creators of the bZx protocol told users they should not “ever worry about . . . getting hacked or [anyone] stealing their funds.” However, a successful phishing attack on a bZx developer allowed hackers to access key passphrases and drain the Plaintiffs’ accounts.
The complaint alleges that the bZx DAO operates as a general partnership, and its participants are jointly and severally liable to the users of the protocol for their loss of funds resulting from the hack. Specifically, the complaint asserts that “each of the members of the DAO is jointly and severally liable to the plaintiffs and must make good on the full amount of its debts.”
When contemplating the formation of a DAO, it is vital to consider the possible exposures. This case highlights the risks of operating a DAO without any formal legal structure. Without such a structure, DAO members may, in some instances, be jointly and severally liable. Liability could also extend to members who may not have been involved in decisions allegedly resulting in losses or other issues.
While the idea of centralization tends to claw at the ethos of DAOs and the crypto community, it can be valuable to make certain “concessions” around a legal entity structure to insulate its members from potential liabilities. Discuss with your broker strategies to mitigate risk exposure from the perspective of D&O underwriters.
1 No. 22-cv-0618 (USDC SD CA May 2, 2022)
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.