Borg: the Final Chapter?
In a Medium Post titled “Assimilating the BORG: A New Framework for CryptoLaw Entities” on April 20, 2023, Delphi Labs (Delphi) (authored primarily by their General Counsel, Gabriel Shapiro (lex_node) introduded a framework for a “Cybernetic Organization”, or “BORG.” The BORG, which combines the use of smart contracts and AI with traditional legal entities, aim to enhance state-chartered entities and address a purported misidentification and misapplication of the Decentralized Autonomous Organization (DAO) framework. In particular, the BORG concept is meant to clarify the distinction between truly decentralized DAOs (true DAOs) and those that are mislabeled as DAOs, which are often either expressly (in the case of formal entity structures, such as limited liability companies, which have been expanded under state law to encompass DAOs) or implicitly (in the case of ostensible DAOs who are burned by centralized control of one or a small cabal of participants) centralized and thus anathema to the underlying premise and promise of the DAO. Delphi believes that BORGs offer way to address these issues which is superior to current legal solutions. By introducing BORGs, the hope is to bridge the gap between “real-world” or traditional legal entities and and transient, polylithic, and mathematical associations.
This is a fascinating proposition, both as a practicing attorney and as a corporate law professor. So, in order to better understand the proposal, I have worked here to distill the excellent (but very long) original article into three shorter posts.
Resonating with the Cyborg concept from science fiction, BORGs signify the merger of autonomous technology, like AI and smart contracts, with traditional legal entities to enhance governance and operations. The core concept of BORGs infuses autonomous software into the charter documents of state-chartered entities. This allows the creation of tech-augmented companies featuring tokenized programmable shares and trust-mitigated, DAO-adjacent entities, granting DAOs on-chain control over specific powers.
The inception of BORGs aims to provide a balanced and complementary relationship between DAOs and other blockchain- and technology-augmented organizations. This harmonic relationship will allow DAOs to revert to their intended posture, while expanding and exploring what is possible for other formations, each with a unique digital identity, cumulating into the parts of the greater whole of the growing digital ecosystem.
But, what are they?
Instead of paraphrasing, the following is, in my view, the core thesis to the entire BORG proposition, taken verbatim from the Medium article (verbatim language in italics):
Just as sci-fi cyborgs (‘cybernetic organisms’) augment humans (natural persons) with robotic organs and limbs or microchip or optics implants, BORGs augment state-chartered entities (legal persons) with autonomous software such as smart contracts and AI. Crucially, legal entities that are BORGs do not merely use autonomous technologies as an incidental part of their business–instead, much like a human might have a robotic prosthesis surgically attached to his shoulder, BORGs are legally governed by autonomous technologies through tech-specific rules implanted in their charter documents.
This hybrid form then has two sub-varities:
tech-augmented companies, such as a corporation with tokenized, programmable shares (eg, tokenized preferred stock that embeds a complex set of liquidation and dividend logics); and
trust-mitigated, accountable, DAO-adjacent entities, such as a Foundation that wraps an emergency multisig for an DeFi protocol, but gives the DAO on-chain control over the emergency multisig’s powers (eg, can veto appointment/removal of signers or revoke the multisig’s powers entirely) and certain legal rights over the multisig signers if they abuse their power.
The question now is: what use cases could benefit from embracing the BORG?
Worker BORGs
Worker BORGs emerge as a solution to the difficult aspects of work handled by DAOs within a purely on-chain, decentralized model. If work is executed by anonymous or pseudonymous parties and compensated in cryptocurrency, the risks of violating employment laws, tax laws, and KYC/AML laws are high. Worker BORGs can help overcome these challenges.
Worker BORGs, whether companies, cooperatives, or other entities, can employ, contract with, or manage workers to perform tasks for the DAO. These BORGs will ensure legal compliance concerning employment and tax laws and handle KYC/AML checks. Workers receive their payments from the Worker BORG, possibly in fiat currency, which subsequently invoices the DAO for services rendered.
The DAO maintains limited but vital control over the Worker BORG, such as setting overall budgets, voting on strategic decisions, and potentially replacing the BORG management. The Worker BORG's governing documents would be publicly accessible, and the DAO (or DAO members) could sue the Worker BORG or its managers for not complying with these documents.
Treasury BORGs
Several DAOs hold significant assets, usually in the form of cryptocurrencies. Managing these assets in a decentralized manner can present challenges, especially when regulated activities like investments and loans are involved. Treasury BORGs serve to manage the DAO's assets in a legally compliant manner.
A Treasury BORG, being a legal entity, holds and manages the DAO's assets. Depending on the structure - trust, company, cooperative, etc. - it has the power to make investments, loans, or other financial activities on behalf of the DAO. It ensures compliance with the pertinent financial regulations.
Similar to Worker BORGs, DAOs maintain limited control over Treasury BORGs. It sets the overall investment policies, votes on major financial decisions, and potentially replaces the BORG's management. The governing documents of the Treasury BORG would be publicly available, with the DAO (or its members) possessing the right to sue the Treasury BORG or its managers for non-compliance.
In Conclusion
Delphi Labs’ introduction of the BORG concept represents a significant step forward towards the interconnection between traditional legal organizational structures and frameworks and the technologically-governed future teased by DAOs. But, rather than the DAO, which has been muddied in name and function, teh BORG is introduced as a more focused model when aiming to integrates and leverage existing legal and regulatory frameworks. When used in conjunction with DAOs, BORGs may lead to a future where DAOs can maintain their decentralized ethos while effectively navigating real-world regulatory and legal complexities. As with all innovations, the success of BORGs will depend on their adoption and integration. Will projects (and their lawyers) embrace this concept? Only time will tell.
What kind of lawyer would I be without a disclaimer?
Everything I post here constitutes my own thoughts, should only be used for informational purposes, and does not constitute legal advice or establish a client-attorney relationship (though I am happy to discuss if there is something I can help you with). I can be reached via email at david@bsl.group, on telegram @davidlopezkurtz on twitter @lopezkurtz and on LinkedIn here.
