Boiron, M. (2022). Sufficient Decentralization for web3 Builders and Lawyers.

Buterin, V. (2014). DAOs, DACs, DAs and More: An Incomplete Terminology Guide.

Brummer, C, Seira, R. (2022). Legal Wrappers and DAOs.

dYdX Foundation. (2022). Legal Framework for Non-U.S. Trusts in Decentralized Autonomous Organizations.

Hales, C. (1999). Leading Horses to Water? The Impact of Decentralization on Managerial Behaviour. Journal of Management Studies, 36(6), 831–851. doi:10.1111/1467-6486.00160

Jennings, M, Kerr, D. (2021). A Legal Framework for Decentralized Autonomous Organizations, Part I.

Jennings, M, Kerr, D. (2021). A Legal Framework for Decentralized Autonomous Organizations, Part II. 

Joanna7459. (2022). Organizational transformation for dYdX.

Mintzberg, H. (1989). The Structuring of Organizations. Readings in Strategic Management, 322–352. doi:10.1007/978-1-349-20317-8_23

Ogier. (2020). The Foundation Company as a Decentralised Autonomous Organization (DAO) in the Cayman Islands.

O’Grady, W. (2019). Enabling control in a radically decentralized organization. Qualitative Research in Accounting & Management. doi:10.1108/qram-07-2017-0065 

Kreutler, K. (2021). A Prehistory of DAOs.


As the dYdX DAO scales, it is important that the Community builds a process for securing goods and services. subDAO contributors may decide to engage in a procurement process to source and onboard external vendors for goods and services. Below, we outline best practices for subDAOs to carry out this process.

Needs, Planning, and Budgeting

Before engaging prospective vendors, subDAO contributors can begin by identifying and documenting the goods and/or services required. This includes determining the quantity, quality, establishing an approximate budget, and establishing a timeline for procurement activities.

Planning for a procurement process may also involve:

  • Appointing individual members of the subDAO with specific roles and responsibilities in the procurement process to form a “procurement team”
  • Including an impartial member of the community to be part of the procurement team
  • Building a transparent process for Community review and accountability


The procurement team should research and benchmark against other DAOs, the Web3 ecosystem, and, where applicable, more traditional sectors. Aside from determining the market rate for goods and services, benchmarking is helpful in identifying service providers and structuring the process. Below, we share templates that can be used to document a procurement plan and approximate budget.

Procurement Requirements

Good or Service Description Unit and Quantity required Acceptance Criteria Service Providers Budget % of the total budget

Procurement Timelines and Milestones

Date Milestone
Requirements completion
Finalize service providers
Get funding from the community treasury (if applicable)
RFPs sent
RFP submission deadline
Evaluation completion


If the subDAO already has sufficient funding to meet the procurement requirements, this step can be skipped.

Once the need for goods or services has been established, the team may initiate a governance proposal to request funding from the Community. The proposal should follow standard guidelines and lifecycle, but may also include the following specific structure:

  1. the subDAO making the request,
  2. the purpose and need for a vendor,
  3. the procurement plan, objectives, and key results,
  4. how funds will be managed,
  5. budget breakdown (optional to include a reasonable contingency buffer),
  6. the amount of funding requested, 
  7. any relevant milestones and the timeline of delivery, and 
  8. any other important details that are relevant for dYdX community members to take into consideration.

Please reference the proposal lifecycle and governance guide sections of the dYdX governance documents for a more in-depth description of creating a proposal for funding from the community treasury. At the on-chain DIP stage, the team should reference the technical guide on building a dYdX Community Treasury Spending Proposal.

Procurement Method

After establishing a plan and a budget, the procurement team can start sourcing potential service providers. Different methods can be applied to carry out this process, each with benefits and challenges. Choosing the most appropriate procurement method depends on a few different factors. In the table below, we outline a few of the methods available for procurement, along with benefits and challenges to each.

Method Best used when Benefits Challenges
Invitation to Bid (ITB) It is best used when there’s no difference between the products and services that meet set specifications.
The only real discrepancy between the ITB submissions is the pricing.
Fast and simple. No price negotiation.
Price as the only evaluation metric.
Request for Proposal (RFP) Typically, a request for proposal is used for projects that require a large number of technical requirements. It allows service providers to propose different ways of performing a task – not solely based on price, but factoring in work specifications, experience, and expertise. Hollistic assesment, customization, price negotiation. Prolonged time spent.
The evaluation and assessment of each proposal can be time-consuming and tedious, and negotiations can take longer than expected.
Procurement Team Selection and Referrals Sole sourcing and referrals should only be relied on for vendor selection after considerable diligence. Generally, sole sourcing and referrals can be leveraged when (1) goods and/or services being procured are highly niche or (2) goods or services of comparable quality cannot be obtained from another source. Speed, increased accountability. Bias/conflict of interest. Lack of transparency.
Emergency Procurement Emergency procurement can be used to quickly acquire goods or services to address urgent needs emerging from unforeseen circumstances. Speed. Incomplete diligence. Increased costs. Lack of transparency.

The RFP procurement process

Below, we provide additional information on the RFP procurement process as a more relevant process that is also slightly more complex.

The RFP procurement process should involve the following basic elements: 

  1. Deciding how the vendor should be selected - community poll, selection committee, lowest bid, highest score according to criteria, or any other method. 
  2. Drafting a description of the project that includes requirements, key deliverables, a timeline, budget, evaluation criteria, and any other relevant information. 
  3. Posting the RFP on the dYdX community forums (or another venue) and setting a deadline for responses.
  4. Evaluating responses against the selection criteria.
  5. Negotiating and finalizing the agreement, including, but not limited to, scope, timeline, budget, option for termination, and milestones.

Selection Criteria and Scoring Rubric

Selecting a vendor could be made easier by using selection criteria and a scoring rubric. The procurement team may use the selection criteria to summarize key factors. In some cases, it may be useful to assign weights/points to certain criteria based on importance.

The procurement team may want to consult with stakeholders to identify selection criteria and assign weights/points. 

Below, we provide a template for scoring an RFP process that can be replicated for future evaluations.

Selection Criteria Points
Technical Ability
Qualifications - / 10
Proposed Personnel - / 10
Proposed Management and Operations plan - / 15
Risks and Added Value Assessment - / 10
Proposed customer service support and maintenance - / 10
Historical Performance
Reference Checks - / 10
Experience with Web3 customers - / 10
Overall Cost - / 20
Flexibility in the payment schedule - / 5
Final Score

Negotiate Terms and finalize the agreement

Once a service provider is selected, negotiate the terms and conditions of the agreement. This includes service scope, pricing, payment terms, deliverables, delivery schedules, options for termination, and other relevant factors. Procurement teams can refer to online resources for best practices on contract negotiation.

Most important is the termination clause. It is ideal for procurement teams to leverage preferential termination clauses to avoid vendor lock-in.

Once the agreement is finalized, procurement teams should announce that the RFP process is closed and a vendor has been selected.

Performance Management

Performance management is essential to ensure that vendors are meeting the terms that they agreed to. By measuring performance, the procurement team and Community can ensure that they are meeting their objectives. Performance measurement can also help to identify potential risks in the process and take corrective actions to mitigate them. Moreover, performance measurement can provide valuable data that can be used to make informed future decisions.

It is advisable for procurement teams to publish the respective agreement and/or summarize the key terms to increase transparency and allow the Community to assess the service provider’s performance.

Below is a summary of the guideline above reformatted in a checklist for contributors and community members wanting to form a subDAO. By checking all the boxes, a subDAO should generally be ready to be established.

Item Description Check?
Job to be Done Identify a “job to be done” for the subDAO
Qualifications Identify necessary qualifications to perform the function and decision-making
Legal Entity Identify the appropriate legal entity to establish the subDAO
Deliverables Outline clear, important deliverables that will benefit the protocol
Funding Identify the compensation, expenses, and operational costs of the subDAO and total amount funding needed (and respective benchmarks, as applicable)
Proposal Draft and publish a dYdX Request for Comments (DRC) on the dYdX community governance forum
Snapshot Submit a snapshot proposal
If Snapshot Passes
Legal Establish the legal entity as outlined in the proposal
Wallet Establish a multisig wallet with trusted owners
Funding Determine the amount of funding needed to match the funding request. Historical exchange pricing (for example, 24h TWAP from the largest market) may be used when funding is received in a form other than a stablecoin.
On-Chain Proposal Submit an on-chain proposal
If On-chain Passes
Website Purchase a domain and launch a Notion webpage with relevant information
Functions Get to work on completing the deliverables
Reporting Reporting all activity in monthly updates

In this section, we explore common pitfalls and risks that the DAO and contributors may be subjected to with subDAOs. We hope that outlining these ahead of time can help the Community avoid them. By no means is this list exhaustive. We encourage the Community to use this as a starting guideline for thinking through the risks of subDAOs and decentralization.

subDAO Lock-In

subDAOs are living subunits of the DAO that will evolve as the protocol grows and matures. Products and markets move quickly in this space. It’s important that the DAO can respond and evolve just as quickly. 

The result may be that a previously productive subDAO is no longer needed or impactful. As such, there should be little difficulty in sunsetting a newly irrelevant subDAO. The DAO must avoid finding itself locked into a subDAO commitment that no longer benefits the protocol.

Vendor/Contributor Lock-In

Similarly, the Community should be careful of ‘vendor lock-in: continuing with an outsourcing arrangement even after poor performance’ (Joanna, 2022). The DAO may find itself stuck with a vendor if the commitment is mismanagement, or through an over-dependence on the service.Regular and detailed vendor / contributor oversight, reporting and transparency by subDAOs will help avoid this common pitfall.

subDAO Coordination

While it might seem normal for subDAOs to work closely with one another, there are significant legal implications that must be considered. Maintaining a decentralized protocol requires subDAOs to work independently of one another to avoid centralizing efforts. subDAO autonomy is essential to effective decentralization. As such, subDAOs should follow a narrow and well-defined scope to avoid commingling of contributor activities and dependencies on other groups.

The information provided below is for the current state of the dYdX DAO on Ethereum.

Governance Overview

Given the resources available, this section will not cover the dYdX governance architecture and processes. Any reader wanting to learn more about on-chain governance of dYdX should visit the Technical Overview to better understand the architecture and proposal process. Instructions for submitting a community treasury proposal can be found here. Instead, this section will serve as a resource for thinking through subDAO proposals and best practices

Governance proposals are slow and oftentimes messy. Proposal formats are inconsistent, data is shared sporadically, and information is not readily available. The Community should look to standardize proposal formats to improve the efficiency of a proposal lifecycle. By enforcing standard practices and a template, the Community can improve the assessment process and compare proposals. Below, we provide a standard template for contributors to submit subDAO proposals to the dYdX Community.

Proposal Skeleton


The summary can provide a high level overview of the subDAO, its purpose, and the motivation for the proposal. Readers should immediately get an understanding of the proposal and subDAO.


The description can go into more detail about the proposal. This section can include background on the function and/or deliverables of the subDAO to better understand its purpose. Most importantly, this section should provide a breakdown of the subDAO formation, including structure, purpose, and deliverables.


This section can be used to cover theoretical and practical information on the purpose for the subDAO. Readers should get a better understanding of why this subDAO is important.


Here, the proposal can go into all details of the subDAO formation and functions. This includes:

  • Deliverables (with expected impact)
  • Contributors (with background information)
  • Legal Entity
  • Funding requirements and respective benchmarks, as applicable
  • Compensation and expenses and respective benchmarks, as applicable
  • Timeframe and milestones


Finally, the post can end with a breakdown of the proposal to provide a brief summary of the information shared.

Assessing a Proposal

When a proposal is submitted, the Community can use Table A for helpful questions to review the content and structure. The questions can be used as standard practice for looking at subDAO proposals, but should by no means be the only review method. Each proposal will be unique and come with traits that need to be assessed independently. The Community will need to determine the impact of deliverables, compensation requests, and subDAO structure. It’s up to the contributors leading the proposal to clearly outline these items.

As always, it’s best to keep things simple. If the proposal isn’t clear with deliverables and impact to the protocol, it’s probably not a good fit. Similarly, compensation should be straightforward. Contributors can make use of comparative salaries, within reason, to estimate the value of deliverables and time spent.

Most importantly, the proposal should establish the subDAO such that control of important protocol parameters and the subDAO itself are maintained by the DAO. When launching a subDAO, DAO authority must always hold true over the underlying entity.

DAO Control

All subDAOs should remain under the control of the DAO through governance authority. This can be enforced through both on-chain measures (e.g., smart contracts if available, funding amounts) and off-chain legal procedures. If established correctly, the DAO will maintain legal control over the entity through governance proposals and decisions passed by the Community.

This process gives token holders control over the subDAO’s ongoing operations by designing the DAO to hold legal authority over the entity. By passing a proposal, the Community can enforce legal obligations on the contributors to carry out the instructions approved, which could include renewing or winding down the subDAO.

Updating a subDAO

Given their control over the legal entity, any changes to the underlying structure of the subDAO will first require Community consent through a successful governance vote. A proposal will need to be submitted outlining the changes to be carried out. Ideally, the proposal includes a legal addendum or amendment to any existing entity documentation ahead of the vote.

A Snapshot vote is typically sufficient to meet the Community consent requirement for changes to an existing subDAO.

Renewing a subDAO

Renewal proposals should be treated similar to the initial launch proposal. If the subDAO continues to play an important role in the development of the protocol, and the contributors have met their deliverables, the Community should consider a renewal. Otherwise, the Community will need to reassess the need for the subDAO and quality of the contributors.


In this section, we explore operational steps for running a subDAO. Standardizing processes and tools can help the subDAO scale efficiently in the same way that a traditional organization would.

This section has been written for subDAOs launching on the current version of dYdX within the Ethereum ecosystem. Content will be updated in line with a potential migration to the Cosmos ecosystem.

At its core, a subDAO is responsible for three functions:

  1. Performing its purpose and carrying out deliverables
  2. Reporting activity and updates to the community
  3. Safekeeping funds and paying contributors

The first point will be unique to each subDAO. There’s little we can do to standardize the way contributors work. But the remaining two points can be standardized through DAO standards and accountability. It will be up to the community to make sure that contributors adhere to these processes.


Reporting is essential to successful decentralization. In a DAO, more so than any other organization, communication between contributors and the community is key to scalable growth. Without regular reporting, how can the community properly assess the performance of a subDAO? Reports should be shared with a regular cadence (e.g., monthly) and provide all information needed to assess performance and activity.

Best Practices:

  • Monthly report shared by the subDAO with updates on activity, progress, key metrics, future plans, issues, and financial data.
  • Report is shared on the subDAO website and/or the dYdX community governance forum.

Safekeeping Funds

The DAO must be comfortable in the contributors's abilities to safely store and distribute the funds allocated to the subDAO. By adopting standard practices for storing and transferring funds, the DAO minimizes its risk of security threats and mishandling of funds. The DAO should enforce wallet standards and approval schemes to protect all funds deployed to subDAOs.

Best Practices:

  • Multi-signature wallet with a two-of-three approval minimum.
  • Secure storage and handling of private keys.
  • Trusted members of the community appointed as signers.
  • Test transactions to all new addresses.

Budget Management

Contributors are also responsible for managing funds from a financial perspective. With that in mind, subDAOs may consider converting DYDX-denominated reserves to stablecoins. The subDAO can convert DYDX received using DeFi platforms, centralized exchanges, and/or OTC desks. Converting funds to stablecoins provides stability to the subDAO budget — for example, if expenses are denominated in USD, then the subDAO should always have USD on hand to cover them.

Best Practices:

  • subDAOs should consider converting funds to stablecoins (e.g., USDC) to protect its reserves from market fluctuations.


Contributors should be compensated on a monthly basis, unless otherwise stipulated as part of their deliverable milestones. Compensation must be tracked and reported in the monthly updates.

Best Practices:

  • Monthly compensation.
  • Standard cadence or date of payment (e.g., on the last day of the month, or within the first five days of the following month).
  • Built-in incentivisation and/or variable compensation items to promote on-time, high-quality deliverables.


Ideally, expenses are paid directly through the subDAO. All expenses should be tracked and reported in the monthly update.

Best Practices:

  • Pay all expenses directly from the subDAO
  • Reimburse contributors for expenses incurred in the monthly compensation payment
  • Report all expenses to the DAO

With all these processes in mind, below, we share a table for best practices to manage these core responsibilities.

Responsibility Description
Reporting Regular updates shared with the community in the form of blog and/or forum posts that cover recent activity. Updates should be shared at least on a monthly cadence.
Transparency Resource for reviewing activity, updates, and payments. This can be a Notion page or custom website that includes all relevant information to the subDAO’s activities.
Balance and Payments Resource for reviewing financial activity, including balance sheets and payment activity. Compensation must be shared in reports and be available to review.
Expenses Expenses should be paid directly from the Multisig. Expenses must be shared in reports and be available to review. Invoices can be stored publicly, or be readily available for inquiry.
Safekeeping Funds Funds must be held with fully audited, and trusted wallet providers. Gnosis Safe should be the standard wallet used for subDAO funds. Wallets must have at least a two-of-three approval scheme. All wallet approvers/owners must be known to the community.
Treasury Management Unless DYDX or other denominations are needed, funds should be converted to a stablecoin of preference. Doing so will protect the budget from market fluctuations. The subDAO can trade through on-chain applications or use the legal entity to onboard with an OTC market maker.

subDAO Tooling

The information provided is primarily for dYdX as an Ethereum-based DAO. However, to prepare the Community for a potential Cosmos migration, we have also included the current Cosmos-based preference.

Below, we explore popular tools to help carry out subDAO responsibilities.


Gnosis Safe remains the best option to safely and easily spin up a new multisig wallet. In addition to being free and simple to use, many powerful applications are being built on top of Gnosis Safe to give users additional features.

Creating a new wallet on Gnosis Safe takes just a few steps. Head over to and follow the instructions. Contributors will need existing wallets to assign as owners of the wallet. Wallets should at least have a two-of-three approval scheme, though a higher threshold is preferable (e.g., three-of-five).

Gnosis Safe best practices:

  • At least a two-of-three approval scheme, preferably three-of-five.
  • Trust all owners of the multisig.

Cosmos: The best option remains the Cosmos-SDK built-in multi-sig module that is accessed through a node on the command-line interface. Unfortunately, this requires some technical skill.


There are additional applications available that make payments easier for contributors. These tools connect to an existing wallet and interact with Gnosis Safe through the SDK, giving users an easier interface for more complicated wallet actions.

Parcel and Utopia are two of the better options available. Both applications offer batch transactions, recurring payments, and improved transaction history. Utopia now also offers embeddable transaction metrics to improve transparency of payments or expenses.

Contributors with existing Gnosis Safe wallets can connect using their owner wallet to start using the application.

Payments best practices:

  • Use a csv upload to process batch payments.
  • Save known addresses in the Address Book.
  • Always send test transactions to new destination addresses.
  • Create recurring payments for monthly compensation.

Cosmos: There are no similar tools available on Cosmos today.


Notion is the standard and optimal choice for a public subDAO webpage. The page can include basic information on the subDAO and all relevant information needed to assess and track activity. That includes wallets, payments, deliverables, relevant legal documentation, and any other information that may benefit the community.

We have created an initial template that can be used here.

Contributors will need to pay $8 per month for the Notion Plus plan.

Additionally, it’s ideal for the subDAO to purchase a custom domain and publish the Notion page under this domain. To do so, purchase a domain from your preferred site (e.g. Google) and sign up on Super. Super will allow you to publish the Notion page under the custom domain and give it the feel of a regular website. This comes at an additional cost of $12 per month, but ideal for improving access to information.

The website will be used for all communications, but we recommend cross-posting updates on the dYdX community forums to improve visibility.

Website best practices:

  • Use the dYdX subDAO Template for the Notion page.
  • Link Utopia’s financial statements on the Notion page.
  • Create a Google account with the custom domain to enable subDAO emails.

These five tools should provide the basic requirements for any subDAO to run efficiently. By establishing a Gnosis Safe, leveraging payment services, and creating a public Notion website, the Community can expect consistent operations across all subDAOs.

This section was authored in most part by Kevin Chen from Homiak Law LLC and with invaluable feedback from partners. We would like to thank everyone for their help and invaluable insight on this topic.

DISCLAIMER: The information in this guide should not be construed as legal or tax advice for any particular facts or circumstances and is not meant to replace competent counsel. None of the opinions or positions provided below are intended to be treated as legal advice or to create an attorney-client relationship. This analysis might not reflect all current updates to applicable laws or interpretive guidance. It is strongly advised for the reader to contact a competent attorney in their jurisdiction for any questions or concerns.

Having covered how to figure out whether a subDAO is needed and who to staff it with, we can now turn to the legal aspects of subDAOs. In this section, we draw extensively from the experiences of members of existing subDAOs in launching and operating these entities, conversations with experts, and compelling legal research and analysis in published articles.

The benefits of establishing legal entities to support DAO or subDAO operations has been discussed extensively by others (Brummer, Seira, 2022) (Jennings, Kerr, 2021) (Boiron, 2022) (dYdX Foundation, 2022) and will not be addressed in detail here. In brief, these benefits include: (i) allowing the subDAO to engage in off-chain activities, including those requiring a party to execute off-chain contracts; (ii) reducing the risk of individual liability of subDAO members and participants; and (iii) clarifying tax obligations of the subDAO or its members (dYdX Foundation, 2022). 

We highlight three legal entity wrappers as options for a subDAO to consider: the Cayman Islands Foundation Company (the “Cayman Foundation”), the Guernsey Purpose Trust (the “Guernsey Trust”), and the U.S.-based Unincorporated Nonprofit Association (the “UNA”). We believe these entity types are each relatively easy to set up and administer, provided that the subDAO works with competent counsel in the relevant jurisdiction. Each of these entities can own property and generate revenue, but revenue generation can, in some cases, lead to potential tax liabilities. An important caveat is that none of these legal entity forms as applied to subDAOs have been thoroughly tested by courts or regulators. Thus, a subDAO electing to use one of these legal entity wrappers may still face risks stemming from legal and regulatory uncertainty. 

Cayman Foundation

The Cayman Foundation is a relatively new corporate entity type introduced in the Cayman Islands through the Foundations Company Act, in 2017. The Cayman Foundation is a legal entity separate from its members, directors, or officers, and has the capacity to contract, sue, and hold property in its own name. The entity is managed by a board of directors and is required to have a company secretary that is a qualified person holding a Cayman Islands Company Management License. While the Cayman Foundation must have at least one member at the time of incorporation, the Cayman Foundation can exist as an entity without members or shareholders following incorporation, so long as the entity continues to have a supervisor, whose role is to ensure that the entity acts in accordance with its charter documents and Cayman Islands law.

Several features of the Cayman Foundation make it appealing as a subDAO legal entity wrapper. First, key members of the subDAO could be appointed as directors, officers, or supervisors of the Cayman Foundation, and these persons generally enjoy limited liability protection under Cayman Islands law. At the same time, because the Cayman Foundation can exist without members, in many cases, there would not be a need for subDAO members to become members (i.e., owners) of the entity, which might impose administrative and regulatory burdens on these persons. Further, the Cayman Foundation’s internal governance rules are flexible and can be tailored to require the entity to take direction or recommendation from a subDAO or other community vote. Finally, the Cayman Islands generally does not subject a Cayman Foundation to any corporation, income, capital gains, or wealth tax; however, amounts distributed by the entity to persons in other jurisdictions could have tax consequences in those jurisdictions.

Guernsey Trust

Traditionally, a trust is a relationship created for the benefit of one or more persons. The trustee acts as the legal owner of the trust assets and is responsible for handling the assets, while the beneficiary is the party that is entitled to benefit from the trust. In a strict technical sense, a trust is generally not considered a “legal person,” but for convenience, we will refer to a trust as a type of “entity.” 

The Guernsey Trust is a special type of trust authorized under Guernsey law that allows assets to be held and used for a specific purpose, as opposed to for specific beneficiaries. In addition to trustees, the Guernsey Trust involves an enforcer, whose role is to monitor the trustees and ensure they are acting in accordance with the trust’s purpose. The roles, duties, and powers of the trustees and enforcer are set forth in a trust instrument, which can be tailored to an organization’s particular needs.  

As the dYdX Foundation explained in detail, the Guernsey Trust might solve many issues faced by subDAOs (dYdX Foundation, 2022). Because trustees generally enjoy limited liability protection, key subDAO members could be appointed as trustees and carry out activities for the trust with protection against individual liability. Additionally, the trust instrument can allow for the appointment or removal of trustees to be decided by a vote of the subDAO or larger community. Finally, the Guernsey Trust is a tax-advantaged structure that may, under certain circumstances, be exempt from any taxation under Guernsey law. Similar to a Cayman Foundation, however, a Guernsey Trust’s distribution of funds to persons in certain jurisdictions could trigger tax obligations in those jurisdictions.


Legal entity law in the U.S. is largely a matter of state law and only certain states have enacted statutes—generally, a version of model legislation known as the Uniform Unincorporated Nonprofit Act—recognizing UNA as a formal entity. In such states, the UNA is treated as a legal entity separate from its members for purposes of determining and enforcing rights, duties, and liabilities in contract and tort.

Jennings and Kerr have examined in detail the potential benefits of the UNA as a legal entity wrapper for DAOs or subDAOs (Jennings, Kerr 2021). Among other things, membership in a UNA can likely be accomplished through “agreement” rather than “contract,” which suggests members of a subDAO might be able to join the UNA simply through sufficient participation in the organization. Similar to the Cayman Foundation and the Guernsey Trust, a UNA’s charter document could be tailored to the subDAO’s preferences regarding community decision-making. From a tax perspective, the UNA is subject to the U.S. tax regime and the entity could elect to be taxed at the corporate rate to clarify its tax and reporting obligations.

Legal Entity Matrix

The matrix below provides a high-level summary and comparison of the Cayman Foundation, the Guernsey Trust, and the UNA.

Cayman Foundation Guernsey Trust UNA (US entity)
Parties Director(s), Supervisor, Member(s) (not required after incorporation), Beneficiar(ies) (not required), Secretary (required if no members) Trustee(s), Enforcer Members
Legal personality concerns Foundation itself is recognized as legal person Trust is not a legal person; however limited liability for Trustees UNA is a legal entity separate from its members for purposes of determining and enforcing rights, duties, and liabilities in contract and tort.
Decision-making and management Director(s) and Supervisor manage operations Trustee(s) manage the Trust Default is members manage the UNA; members can delegate management duties to designed manager(s)
Signing authority Director(s) and/or Supervisor Trustee(s) Member(s) or Manager(s)
Liability and duties of participants Fiduciary Duties owed by the Director(s) Fiduciary Duties owed by the Trustee(s) Members may owe fiduciary duties by default; however, fiduciary duties may be waived
Delegation of authority / hiring employees / hiring service providers Permissible Permissible Permissible
Creation and management of subsidiaries Permissible Likely permissible; trustees can form subsidiaries in their capacities as trustees Likely permissible
Asset in-flow and out-flow Can receive assets and transfer assets in accordance with charter documents; cannot distribute assets as dividends or bonuses to members, directors, or supervisors, except as authorized remuneration for services Trustees can receive assets (as trust assets) and distribute trust assets in accordance with trust instrument; distributions to a U.S. beneficiary could subject the U.S. beneficiary to tax liability Can receive and transfer assets; however, distributions to members are subject to limitations and must be consistent with not-for-profit purpose
IP rights May own IP May own IP May own IP
UBO concerns Can be ownerless; directors must be disclosed to registry; AML regulations still apply Can be formed without public filing; AML regulations still apply If the relevant state does not require registration of the UNA, then the names of the members might not need to be disclosed; AML regulations still apply
Taxation (initial transfer from treasury, top-up funding from treasury or another community controlled entity, and revenue). Generally tax exempt under Cayman Islands law; however transfers to or from the U.S. may be subject to U.S. tax regime and affect entity's status as a “grantor trust”. Generally tax exempt under Guernsey law; however transfers to or from U.S. could be subject to U.S. tax regime and affect entity’s status as a “grantor trust” Subject to U.S. tax regime; entity could elect for entity level taxation at the corporate tax rate
Registering for a bank account Permissible Trustees may open accounts in their capacity as trustees Permissible
VASP Regime Cayman VASP Guernsey VASP U.S. securities law and regulations (including Howey and Landreth tests)

Considerations Related to Legal Entity Selection

As many have already observed, there is no one-size-fits-all solution for subDAO legal entity wrapping, and we believe there is no clear winner of the three options highlighted. The choice of entity should depend on a subDAO’s careful examination of its own facts and circumstances, including its jurisdictional preferences. We offer the following questions as additional potential consideration for a subDAO to keep in mind.  

How does the subDAO want to provide individual liability protection to the subDAO members?

In each of the three entity structures above, it is likely possible for each subDAO member to be afforded limited liability protection that comes with the entity’s “wrapping.” With the Cayman Foundation, each subDAO member could be appointed as a director or officer and protected as such. In a Guernsey Trust, each subDAO member could be made a trustee and avail themselves of a trustee’s limited liability protections. And, in the UNA, each subDAO member could benefit from limited liability by becoming a UNA member through agreement.

In some instances, however, it may not be practical or administratively feasible to protect each subDAO member by making each a director, officer, trustee, or member. For instance, if a subDAO has hundreds members, it may be impractical to make each a trustee pursuant to a Guernsey Trust instrument. In such cases, one potential approach for protecting members from individual liability is to have the legal entity provide indemnity to contributing members contractually. To illustrate, if a subDAO member performs services on behalf of the subDAO, the legal entity could enter into an off-chain contract with that member agreeing to indemnify the member against potential third party claims arising from the member’s services for the subDAO.

Where will the subDAO’s operations take place and could this subject the legal entity to other jurisdictions’ laws and regulations? 

A subDAO’s choice to form a legal entity in one jurisdiction does not, in itself, remove the entity from the reach of other jurisdictions. The subDAO should carefully consider whether the geographic location of its conduct operations might subject it to the laws and regulations of another country. The U.S. Securities and Exchanges Commission, for one, has historically taken an expansive approach to asserting its enforcement jurisdiction over foreign entities suspected to have significant ties to the U.S. or U.S. citizens. 

Could the subDAO trigger tax liabilities or reporting obligations by transferring assets outside its home jurisdiction?

Similarly, a subDAO’s formation in one jurisdiction does not insulate the entity entirely from taxation or reporting obligations in other jurisdictions. To illustrate, a Cayman Foundation or Guernsey Trust’s transfer of funds to U.S. persons could implicate U.S. tax law in various ways. First, the transfer of funds to a U.S. recipient could subject that recipient to a tax liability. Moreover, the transfer of funds from a Cayman Foundation and Guernsey Trust to a U.S. person could muddy whether the entity will be regarded as a “foreign grantor trust” and “foreign nongrantor trust,” for U.S. tax purposes. As the dYdX Foundation explained in detail, an appropriately structured Guernsey Trust might have limited U.S. tax obligations if it is considered a non-grantor trust. (dYdX Foundation, 2022). Such a trust’s treatment as a non-grantor trust likely depends, in part, on the fact that the trust has no U.S. beneficiaries. If funds are transferred to a U.S. recipient, however, such a recipient might be considered a U.S. beneficiary, and the trust’s status as a non-grantor trust becomes unclear.

Given the complexity of running a decentralized exchange, transitioning control of dYdX V4 to the dYdX DAO without any formal organizational structure may result in stagnated development and protocol mismanagement. Generally, decentralized communities put the burden of protocol development on the respective DAO and community members. At this stage, we can’t expect the Community to be knowledgeable on all parameters and functions needed to run an exchange like dYdX.

To potentially mitigate this issue, the dYdX DAO can distribute protocol development to subDAOs responsible for important functions of the protocol. Doing so enables subject matter experts to play a larger role in decision-making on behalf of the Community while the DAO maintains ultimate executional authority. In other words, the DAO delegates some decision-making to contributors while maintaining control of changes to the underlying protocol.

This section explores thoughts around adding a new subDAO, finding the right contributors to run a subDAO, and examples of both successful and unsuccessful subDAOs. We note that knowing when a subDAO is needed and who to appoint will be the Community’s responsibility.

When is a subDAO needed?

When deciding if a subDAO is needed, we recommend that the Community ask itself: is there a job to be done/information to be found that requires specialization and rapid decision-making? 

If the answer is “yes,” a subDAO could be the answer.

The community may also benefit from ‘structural continuity’ with previous contributors and leveraging experience gained within the ecosystem (joanna7549, 2022). To that end, it makes sense for community members to explore previous and existing contributors that have contributed to the growth and development of the dYdX protocol. Contributors with knowledge and experience on managing specific functions of the dYdX protocol may be an easy place to start when recruiting for subDAOs.

We can also look at a subDAO’s deliverables to assess the need for its existence. A subDAO should have well-defined deliverables that provide tangible value to the dYdX protocol. For example, the community doesn’t need a subDAO to manage a Twitter page, but it may need a subDAO to maintain risk parameters and recommend building and deploying new protocol features. Any subDAO with unclear responsibilities should be seen as a red flag, and the same goes for responsibilities with little importance to the growth or maintenance of the protocol.

Ultimately, there is no hard and fast rule for “which subDAO should we launch now?”. Rather, launching subDAOs will be an iterative process for the Community to manage and develop over time as the DAO grows. Throughout this iteration, we expect common sense to win over any strict rules. However, we do have guiding questions to help the Community figure out which subDAOs to form:

  • Is the function worth being allocated protocol resources?
  • Does the function need subject-matter expertise to make decisions?
  • Does the function require frequent decisions made quickly to run efficiently?
  • Does the function require off-chain processes?
  • Would the protocol benefit from a legal entity managing this responsibility?
  • Is the function linked with protocol growth, development, and/or maintenance?
  • Does the subDAO have clear deliverables? Are the deliverables important to the ongoing development of the protocol?

If responding in the affirmative to most of these questions, there’s a very good chance that a subDAO may be a productive addition to the community. Again, subDAOs should not be confusing, nor should their purpose be hard to define. Keeping things simple will be key to successful and scalable protocol development.

Next, we face an equally important task for the Community — appointing contributors.

Who should contribute to a subDAO?

Contributors with relevant experience and expertise should be appointed to manage relevant protocol functions. There is nothing special here that makes contributor assessment different from traditional organizations. The community should hire candidates best suited to carry out the required responsibilities.

Collectively deciding on the best contributor can be tricky. A decision usually made by HR or a department head is now done by the Community. However, it’s important that this authority is maintained by the DAO and not delegated away. Appointing the right contributors will be important to protocol soundness and integrity, the Community should always be in majority agreement of subDAO contributors. Thankfully, there are ways of improving the decision making process.

As a possibility, existing contributors to the protocol and ecosystem may want to transition from their current or prior roles to a decentralized role with similar responsibilities, now acting within a subDAO instead. Doing so would allow the community to easily appoint optimal subDAO contributors, while further decentralizing the dYdX ecosystem. 

If this isn't an option, the Community can still look to mirror the background and experience of prior contributors in similar roles when assessing new candidates. 

The Community may also benefit from contributors working on short-term projects before committing to longer-term subDAO deliverables. The dYdX Grants Program can be leveraged for this purpose, allowing contributors to perform relevant one-off projects that highlight their skills. The grants program can act as a work trial pipeline for subDAOs, funneling talented contributors that can graduate into more permanent roles for the DAO.

Finally, the Community should look to supplement internal contributors with professional service providers (e.g., lawyers). By outsourcing responsibilities to service providers, the DAO ‘can maximize its cost-savings and benefit from access to knowledge and expertise’ (Joanna, 2022).

Ideally, a subDAO would be made up of both types of contributors: (i) existing experienced members and contributors, and (ii) professional service providers who step in to fill knowledge gaps. 

In terms of contributor count for subDAOs, that will depend on the responsibilities and deliverables of each subDAO.

Below, we apply both sets of questions for an easy-to-reference table that may be helpful for deciding on a new subDAO and its contributors:

Table A. Deciding on subDAOs

If the answer is “yes,” a subDAO may be beneficial
Is the function worth being allocated protocol resources?
Does the function need subject-matter expertise to make decisions?
Does the function require frequent decisions made quickly to run efficiently?
Does the function require off-chain processes?
Would the protocol benefit from a legal entity managing this responsibility?
Is the function linked with protocol growth, development, and/or maintenance?
Does the proposed subDAO have clear deliverables?
If the answer is “yes,” a contributor may be a good fit
Does the candidate have relevant experience in the protocol function?
Has the contributor completed prior work similar to the subDAO deliverables?
Is the contributor knowledgeable about dYdX and the DeFi ecosystem in general?

subDAO Example

dYdX Grants

The dYdX Grants Program (“DGP”) was the first subDAO launched in the dYdX DAO. The DGP issues grants to contributors working on projects that grow the dYdX protocol. DGP contributors are responsible for sourcing, funding, advising, and maintaining these projects.

Using the framework above, we can re-assess the need for this subDAO and the contributors appointed. We’ll explore some of the questions below to determine the need for a subDAO to manage the grants program.

Does the grants program require frequent decisions made quickly to run efficiently?

Yes, grants applications are received on a rolling basis and applicants expect quick responses. The program must also quickly adapt to new protocol developments as a means of allocating efficient funding to new contributors.

Does the grants program require off-chain processes?

Yes, most of the program is run off-chain via direct communications and monitoring of the projects.

Does the grants program have clear deliverables?

Yes, the program is responsible for distributing funds to projects that promote and contribute to the growth of dYdX.

These questions should be easy to answer. If answers don’t come easily, the Community should question the need for a subDAO.

Working groups, Vendors, and Contractors

A DAO can use different types of contributors to get things done. These contributors can be individuals, subDAOs, working groups, vendors, and/or contractors. The choice of which type of contributor is best for a given situation will depend on the specific circumstances involved. To facilitate better understanding, we will provide a brief description of some contributors in the dYdX DAO. Note, there are various types of contributors involved in DAOs and this list is not exhaustive.

  • A “dYdX subDAO”, is a Community funded entity and/or single/group of individual(s) that manages specific functions of the dYdX protocol and/or DAO through delegated decision-making authority and is accountable to the Community. A dYdX subDAO is formalised when a governance proposal to fund the subDAO’s budget passes. See the Legal Framework below about the ways that a subDAO can leverage different legal entity types.
  • A “dYdX Working Group”, is a group of entities and/or individuals who generally have a narrower scope than a dYdX subDAO and focus on a specific task or set of tasks assigned by the dYdX DAO or a dYdX subDAO. 
  • A “dYdX Vendor”, is an entity or individual that provides specific goods and/or services to the dYdX DAO and/or subDAO(s) in exchange for payment. Note, there is some overlap with a dYdX Contractor, but dYdX Vendors will generally provide goods or services on a transactional basis. 
  • A “dYdX Contractor”, is an entity or individual that provides services to a client (the dYdX DAO, a subDAO, or multiple subDAOs) under a contract. Note, there is some overlap with a dYdX Vendor, but dYdX Contractors will provide goods or under a contract.

Decentralized Organizations

Decentralized organizations are not new. There exists a wide selection of research literature to help us understand the principle of organizational decentralization. The concept is most commonly used to describe organizations that distribute decision-making to individuals across different levels of authority, in contrast to centralized organizations where decisions center at a single point (Mintzberg, 1989). Decentralized organizations carry out a process of devolution, where the power of making decisions is transferred from senior managers to members lower down the organizational hierarchy (Hales, 1999).

Decentralization is used to improve decision-making given the increasingly complex nature of businesses and their needs to respond quickly (Mintzberg, 1989). Centralized organizations benefit from the efficiency of a single authority. However, it’s unreasonable to expect one individual to have the answer to every business problem. By promoting responsibility and authority to individuals with higher subject matter expertise, the quality and responsiveness of decisions are improved.

The process for decentralization, however, is not as straightforward. Degrees of decentralization exist, with different stages of decision-making and authority distributed across each step. Mintzberg defines these stages as: information, advice, choice, authorization, and execution. A fully centralized organization keeps every stage within a single authority, while decentralizing organizations distribute these stages across levels of hierarchy to find the optimal degree of delegated authority. The choice of what decisions to devolve, and the extent to which authority is granted, can vary significantly (Hales, 1999). Ultimately, this becomes a decision unique to each organization.

Decentralization is also thought of in terms of reducing hierarchical controls to create a completely flat organization with no barriers. But research shows decentralized organizations may actually have a higher need for internal controls to manage individual autonomy at scale (O’Grady, 2019). Coordinating individuals is among the biggest challenges to efficient decentralization. A lack of controls can lead to uncoordinated decisions with no clear direction for individual efforts. Controls should exist to coordinate efforts productively, albeit without dampening the efficiency of autonomy gained from decentralization.

In the end, research shows us that decentralization is to be defined at an organizational level. While Mintzberg and others explore structures that help guide future models, organizations working through this process need to do so in a personalized approach to meet their needs and match their optimal structure.


Meanwhile, internet organizations built their own version of decentralization using networks. Early research identified the power of networks in allowing internet organizations to coordinate autonomously within an online network (Kreutler, 2021). Eventually, this was adopted by crypto researchers to create decentralized autonomous organizations (“DAOs”). Vitalik Buterin introduced the term in 2014, defining a DAO as an autonomous internet-based entity with internal capital that is managed through automation while also employing individuals to run it.

DAOs introduced something not found in previous research: an automated protocol that enforces rules on the organization. Instead of relying on a centralized authority such as senior management, DAOs use smart contracts to manage the organization in a permissionless manner. The single point of decision-making is replaced by a set of smart contracts. This is what allows a DAO to be decentralized. All members of the organization hold authority on the smart contracts, removing the need for a senior member to execute decisions.

dYdX, like most other blockchain-based protocols, uses a token (“DYDX”) to govern on-chain smart contracts and off-chain DAO or protocol related matters. The Community governs the protocol by holding DYDX, and participating in decision-making by voting on governance proposals. Voting power is determined by the amount of DYDX held - 1 token equals 1 vote. Governance proposals in this setting can be thought of as decision-making in traditional organizations. Instead of distributing decisions across the organization’s hierarchy, all members of the DAO participate in each decision.

To account for obvious attendance problems, most DAOs include a minimum quorum requirement in the decision-making process, needing only a percentage of the total voting power (e.g., total token supply) to participate in a proposal for it to be validated as a decision. In dYdX, for example, the minimum quorum for an on-chain vote is 2% (20M DYDX). dYdX has different requirements for different types of proposals. Most DAOs also include voting delegation, which allows holders of DYDX to delegate their voting power to other, more active participants.

Looking back at the distribution of decision-making authority found in more traditional decentralization (e.g. Mintzberg), protocols take a radical step in the process. Instead of optimizing for the appropriate degree of devolved authority, DAOs attribute all voting members of the protocol with identical levels of decision-making power. There is no clear delineation for Mintzberg’s decision-making stages across members. The protocol provides the opportunity for any member to participate in all stages of decision-making, and expects a minimum quorum of members to participate in voting on the decision to make it valid.

While the ethos of crypto encourages maximal decentralization, DAOs are at the risk of erasing the benefits of distributed authority from their radical implementation. Much like a centralized authority couldn’t manage a complex organization without distributing decision-making authority down to lower levels, it’s difficult to imagine an efficient organization that depends on each member weighing in on every decision. DAOs should instead look to optimize for decentralization in the same way traditional researchers argue for thoughtful devolution of authority.


There is overwhelming agreement among researchers that decentralization includes the transfer of responsibility from ‘those with accountability for the organization as a whole to those with accountability for smaller subunits of the organization’ (Hales, 1999). It only makes sense that DAOs should mirror this structure as a means of combating issues with radical decentralization.

This is where subDAOs come in. A “subDAO”, also known as a working group, manages specific functions of a protocol and/or DAO through delegated decision-making authority to individual contributors and/or service providers. In subDAOs, a subset of contributors are appointed to manage functions based on their skill sets. In doing so, the DAO is reconfiguring its distribution of decision-making authority to a more productive subunit of the protocol. The necessity for all Community members to participate in every stage of decision-making is removed.

Mintzberg introduces the concept of horizontal decentralization, which is defined as the standardization of skills among members working in parallel within an organization. Although only ‘relatively decentralized’, this structure benefits from improved productivity by delegating some stages of decision making to subject matter experts. We expect subDAO contributors to decide on information, advice, and choice on behalf of the DAO, leaving the community with the responsibility of authorization. In other words, subDAOs submit thoughtful recommendations and the DAO votes on their decisions.

Six Types of Decentralization (Mintzberg, 1989). subDAOs are a Type IV.

Just as traditional decentralization requires additional controls to manage increased autonomy, DAOs must be intentional in maintaining controls when establishing subDAOs. subDAOs should not undermine governance contracts to the extent that core protocol decisions can be executed without DAO approval. Instead, they should feed into the overarching governance structure to improve organizational decision-making. By limiting delegated decision-making authority a DAO maintains controls on decisions. Instead, subDAOs are now held accountable for the decisions put forth through their work largely done across the information gathering and recommendation stages.

In the end, DAOs maintain decentralization in authorizing and executing protocol-wide decisions, but devolve information gathering and recommendations to individual contributors with subject matter expertise. The result is a horizontally structured community, with contributors working across protocol functions on behalf of the DAO while still reporting to it for execution of their decisions.

dYdX V4 is expected to be open source and entirely controlled by the dYdX community. With the protocol fully decentralized, DYDX stakeholders (the "Community") will play an important role in the growth and success of dYdX. The Community should prepare for a future where management of dYdX protocol functions are entirely controlled by the members of the dYdX DAO, a collective organization of contributors working on the protocol. To best prepare for such a future, we believe it’s in the best interest of the community to form working groups, or subDAOs, with responsibilities tied to core protocol functions.

This document is meant to serve as a possible framework for establishing subDAOs. The first section of the document provides a background on decentralized organizations and the logic behind subDAOs. The second section is a reference guide for how the Community can establish subDAOs, with information on legal entities, operational procedures, governance proposals, maintenance, accountability, community assessment, and common pitfalls.

Although we recommend reading the first section for a contextual understanding of the problems with decentralization and benefits of subDAOs, readers seeking practical guidance on forming a dYdX subDAO can jump to the second section.

This document will not provide guidance on which subDAOs the community should launch, nor will it make recommendations for future subDAO proposals. The community will be responsible for determining which subDAOs are needed to help manage the current and future iterations of the dYdX protocol. Similarly, this document will not provide legal guidance for establishing an entity, but rather, suggestions for how to go about it.

Community members should use this document to better understand the process for launching and managing subDAOs. Ultimately, the goal is to guide the community towards a thoughtful and scalable growth of the DAO and protocol.

We created this playbook to help the dYdX community navigate DAO governance and subDAO formation. We have combined our own experience, lessons learned along the way, and knowledge from industry to leaders to build a guideline to efficiently forming subDAOs.