"The Legal Fiction of 'Decentralization': How DAOs Are Accidentally Creating Unregulated Financial Entities"

Decentralized autonomous organizations (DAOs) are championed as democratized, self-governing systems, yet this paper reveals their claims of decentralization often serve as a legal fiction. Through empirical analysis of DAO operations (2020-2025) and comparative legal assessment, we demonstrate how DAOs functionally operate as unregulated financial entities, concentrating power while exploiting regulatory gaps. The study examines critical tensions between DAOs’ algorithmic governance and traditional legal frameworks, particularly in securities regulation, cross-border enforcement, and liability assignment. We propose a DAO Liability Matrix and compliance-by-design mechanisms to bridge smart-contract autonomy with legal accountability. Our findings underscore that sustainable decentralized governance requires integrating transparency and enforceable standards into algorithmic systems.