DAOs prepare to face off: Would vigorous IP battles be good for DeFi?

Curve Finance, a decentralized exchange for stablecoin trading, is one of the world’s largest decentralized autonomous organizations (DAO), with $6.5 billion in deposits, but last week, one of its token holders made an unusual proposal:

The Ethereum-based DAO should “engage competent counsel” — both in the United States and other relevant jurisdictions — to prevent other DAOs from the “wholesale copying” of its software code. 

Why is this unusual? In the open-source decentralized finance (DeFi) world, bringing legal action against another DAO for intellectual property (IP) infringement just isn’t done. In this case, Curve said it is “99% sure” that Saddle Finance, a newer and smaller DAO, has violated the license on its contracts.

Technically, DAOs aren’t even legal entities. Moreover, hiring a law firm to protect its intellectual property is a breach of the DeFi ethos, which often shuns anything connected with lawyers, copyrights, courts or business licenses and where open-source software is considered a common good.

But here Sam Miorelli, an attorney, was declaring on Curve’s governance forum that “IP infringement is not only wrong, it’s value-destructive both for the infringer — who wastes time copying instead of creating — and the infringed, who loses value of creation.” Moreover, venture capital firms that invest in other DAOs that purloin code need to be put on notice “that decentralization does not mean that VC’s get to steal from communities.” Saddle is supported by a number of VC firms, some of them prominent in the field.

Miorelli’s post had 3,200 views as of June 24 and unleashed a mini-storm on social media. Robert Leshner, CEO of Compound — an Ethereum-based DeFi lending platform and the third-largest DAO in total value locked with $5.5 billion, just behind Curve — warned: “Crying to meatspace courts deeply undermines the ‘code is law’ principles that DeFi was founded on. This is a slippery slope that ends with the end of DeFi.”

Meanwhile, Adam Cochran, managing partner at Cinneamhain Ventures, added, “it’s all nonsense, greed driven by people who can’t compete on innovation and build the type of horrible walled gardens that this space was built to replace in the first place.”

Another poster on the Curve governance forum, meanwhile, worried that by entering into vigorous license enforcement, Curve would “turn off” the most talented programmers “who are ‘in it for the tech.’ Would Satoshi and Hal contribute to Curve if they were around? I think not.”

But others supported Miorelli. A poll on the forum, for instance, was running two-thirds (67%) in favor of the proposal “to assert Curve’s IP rights against infringers.” Elsewhere, Gabriel Shapiro, partner at law firm Belcher, Smolen & Van Loo, stated that the “code is law” mantra is fallacious in this context, telling Cointelegraph:

“‘Code is law’ is a byword for users of a particular smart contract or system agreeing to defer to the results of that code rather than resorting to the costly and inefficient legal system. Curve never opted into a smart contract or other code system for determining its intellectual property rights, and in fact, no such code exists.”

An assertion of IP rights on the part of a DAO could even be good for decentralized finance — another sign that it was entering the economic mainstream, some asserted. “I think the Curve community’s interest in enforcing IP rights is indeed a sign of the DeFi sector maturing,” said Shapiro.

Miorelli himself seemed pleased with the response, telling Cointelegraph that the sheer fact that such a discussion is now taking place was positive, adding:

“Not only does it show that DeFi is maturing, but it also shows that the communities which have formed around these revolutionary projects are truly thinking long term.”

Preserving “the value of their network”

Shapiro further explained that governance tokens like Curve’s CRV are shares of equity in a network or digital commons, saying, “Just like TSLA stockholders would want Tesla to defend Tesla’s IP rights in batteries or software to prevent value leaking from TSLA stock, so, too, the holders of CRV would want to maximize and preserve the value of their network equity.” He further clarified that he wasn’t commenting on the merits of these particular IP claims — merely that the “impulse” to preserve network equity value was both understandable and predictable.

In Miorelli’s post, he outlined some of what was at stake: Curve pays “bug bounties,” recruits employees, and spends substantial capital developing new products. “Since CRV is the currency of this, if something damages the value of CRV, it damages this work.”

Asked if DAOs would eventually have to behave more like traditional companies in protecting their intellectual property, Wulf Kaal, a professor at the University of St. Thomas School of Law, told Cointelegraph:

“Once DAOs are jurisdictionally recognized, they will likely replace significant portions of existing business constructs. With this development, it is possible that intellectual property issues under existing law will resurface in the DAO context.”

“A unique problem”

One place where DAOs will soon be “jurisdictionally recognized” is Wyoming, which in March passed the first state law addressing governance issues for DAOs, effective as of July 1, 2021. As explained in a recent National Law Review article, “regulators have been slow to respond because DAOs present a unique problem: Who is responsible when something goes wrong?”

The new law recognizes DAOs “as a distinct form of the limited liability company,” according to the article, with the multiple benefits characteristic to LLCs, “including limited liability for its owners, a more flexible management structure than is permitted in other corporate forms, and potentially advantageous default rules.”

The bill also provides that a DAO can be defined in two different ways — as “member managed” or algorithmically managed — adding: “An algorithmically managed DAO, which would truly be decentralized, may only form if the underlying smart contracts are capable of updates or modifications.”

One presumes that a “member managed” DAO like Curve might have an easier time asserting IP rights in a venue like Wyoming where DAOs are soon to be joined to a larger legal and regulatory framework — but one can’t be sure, at least not yet.

In the meantime, the IP debate is still fraught because none of the issues have been tested in the courts, and many background issues remain, according to Shapiro, like the differences between DAO projects funded by traditional venture capitalists versus those that are more public from the start. “We need new taxonomies to grasp the issues — for instance, a ‘vampire attack’ against a VC-funded project is very different from a ‘zombie attack’ against a non-VC-funded project. Neither is inherently bad or good, but it’s important to understand incentives and social networks and how they are affecting these nascent disputes.”

Miorelli, for his part, sought to put this all in a larger context. “IP has a controversial history in the software development world” — especially with regard to open-source software, he told Cointelegraph.

Granted, it works differently under different legal systems. But Miorelli clarified that many of the misunderstandings arise “because the legal profession has not done a very good job historically at educating the public and participants in the software and crypto space.” He added further, “I don’t think my proposal got a ton of attention because I’m an IP law luminary. It got a lot of attention because I started an important conversation.” Miorelli said that he hoped his proposal would eventually progress to at least one formal DAO vote.

Kaal told Cointelegraph that lawsuits will inevitably become more commonplace as the nascent DeFi industry evolves, and yes, they might have a restrictive impact on innovation. “It depends on the legal constructs in DAOs as to how far the lawsuits can change the landscape.” A legal construct is something that is conferred by way of law or contract, such as a right.

“I definitely think we will see more legal action and threats of legal action by and on behalf of DAOs,” said Shapiro, adding further, “Whether this specific situation will set a precedent — only time will tell.”

“IP protection is an important and valid part of any maturing organization, regardless of how it’s organized,” Miorelli told Cointelegraph, adding on a conciliatory note:

“My hope is that my proposal and any future actions related to it shows that lawyers can contribute to the growth of DeFi [...] sharing their expertise on the same collaborative basis that the devs do.”