In the framework of a cross-DAO collaboration, Bankless DAO and UMA have developed a new use-case for smart contracts, able to foster decentralized legal research by engaging and incentivizing groups of jurists with different legal backgrounds. The tool could be of particular importance in facing regulatory risks affecting DAOs and DeFi.

After the discussed declarations of the U.S. Securities and Exchange Commission chairman, Gary Gensler, pertaining to the need to protect investors and regulate crypto, the legal risks affecting the DeFi and cryptocurrency ecosystem seem to be more pronounced. Prominent DeFi protocols began to allocate funds to lawyers and academics with the aim of influencing the political discourse surrounding cryptocurrencies and defending developers from liability.

Such initiatives may be problematic, as significant treasury holdings are devoted to external persons without any guarantee on the quality of the results nor on the benefits arising out of the work. Moreover, direct transfers of DAO tokens may provoke large sell-offs able to potentially impacting on the token’s price and the credibility of the project.

According to a use case developed by the Bankless DAO Legal Guild, UMA’s Key Performance Indicator (KPI) options may help to avoid dysfunctional elements and align the incentives of DAOs and lawyers/experts.

A Primer on UMA’s KPI Options

UMA’s KPI options are synthetic ERC-20 tokens that will pay out more rewards if a project’s KPI reaches predetermined targets before a given expiry date.

Every KPI option holder has an incentive to improve that KPI because their option will be worth more. These can be distributed to select addresses to align individual token holder interests with the collective interests of the protocol. In fact, the KPI can be backed by any approved ERC-20 token (e.g. DAO tokens) and can be valued against any KPI that a project wants to improve.

For example, UMA releases TVL Options: for DeFi protocols, these options payout more project tokens as TVL goes up. In this way, option holders are united and incentivized in growing protocol TVL.

Upon contract expiry, KPI Options are redeemable for an amount determined by the KPI’s progress. Who determines the progress? The Optimistic Oracle with UMA’s smart contracts proposes a price value for the KPI tokens that can be disputed by its holders.

Incentivizing Global Research

Bankless DAO and UMA have developed a particular use case for KPI options in the field of legal research to incentivize the work of jurists and experts within the ecosystem.

DAOs and cryptocurrencies pose tremendous legal challenges, which require expertise in several branches of law (e.g. securities, corporate, contracts, taxation). In addition, the worldwide nature of blockchain demands tackling legal issues from the perspective of a multitude of jurisdictions. For protocols and DAOs, which strive to create global movements, legal research and valuable output in the field of cryptocurrencies require a joint effort by a team of jurists and experts with different capabilities and inclinations.

In this context, the KPI options may become the perfect tool to incentivize group research conducted by jurists with different expertise and legal backgrounds. A project champion could distribute KPI options among contributors depending on the work done within a certain period. The Optimistic Oracle acting as the “source of truth” may express an outcome based on an assessment conducted by the interested DAO (or some experts within the DAO) or by an external committee of experts capable of fairly assessing the completion percentage of the work and its quality.

The KPI options may adapt to manifold tasks such as an opinion on the legal status of a token, research on the availability of legal entities’ models representing DAOs in the off-chain world, or a description of legal implications connected to certain events within the crypto industry.

In sum, due to the flexibility of KPI options, it is possible to anchor the incentivizing mechanism to broader or more specific tasks.

Building a Decentralized Legal Narrative

The recent U.S. infrastructure bill has once more demonstrated how regulators struggle to understand blockchain technicalities and potentialities. Therefore, from a legal standpoint it is of paramount importance to prevent detrimental regulatory interventions through explanatory statements and position papers able to provide guidance.

In this regard, UMA’s KPI options may support the creation of a decentralized legal narrative in line with the features and the spirit of the blockchain industry:

  • The smart contract may incentivize collaboration between actors located all over the world with the aim of accomplishing the work
  • The project champions would have an incentive to find highly skilled contributors able to cover all the required research angles
  • The establishment of a reliant “source of truth” (Oracle) may assure the quality of the work
  • DAOs could remunerate the experts while avoiding the risk of immediate token sell-offs
  • The group of experts would work in the interest of the DAO, given that the final reward depends also on the value of the underlying token used as a collateral for the KPI options

Due to the listed elements, legal experts would not treat DAOs as clients, but would act as contributors and work to align the functions and values of the organization to the variegated off-chain legal landscape. Such a transformation within the crypto legal space is now strongly advocated by the movement of the Lex_Punk Army, a group of lawyers and developers aiming to defend the interests of DeFi protocols from a legal point of view.

What’s next

The Bankless DAO Legal Guild is currently testing UMA’s KPI option tool for the completion of a research paper on the legal status of the BANK token.

After a careful description of the relevant facts concerning the token from its genesis, an international team of experts will assess the legal nature of the BANK specifically from the U.S. and the E.U. legal perspectives.

Contributors receive KPI options on a weekly basis. At expiry date, the option holder receives BANK in proportion to the amount of the KPI completed. For example, a 50% completed KPI would be valued at .5 BANK, 100% at 1 BANK. This allows for a scale of compensation rooted in quality metrics and progress.

eaglelex is a Law Professor interested in blockchain technology and DAO governance. He is the coordinator of the Bankless DAO Legal Guild.

Twitter: @EaglelexE

Thanks to Frank America.