Sovereignty on Blockchain: Towards Escape Velocity from the Nation State

11 JUNE 2020 – A tweet by Balaji Srinivasan prompted me to gather some thoughts on sovereignty on blockchains which we also pushed in our June 2020 Otonomist newsletter. In this post, we look at historic precedents for sovereign communities without physical territory, and how the future could have multiple overlapping and competing onchain and offchain jurisdictions.

The Knights Templar: A template for sovereignty without territory or statehood (Source: britannica.com)

Many things we accept as norm may prove the exception against the larger narrative of history.

Pax Americana may turn out a brief period of relative stability and open seas before internecine conflicts and piracy resume; The Chinese Communist Party an authoritarian aberration against a secular movement towards a democratic Middle Kingdom; Central Bank fiat money a deviation from centuries of privately-issued coins.

So it may be with sovereignty, which we have come to accept emanates from the Nation State even though this understanding only dates back to the early 18th Century.

The international law definition

There is broad consensus in international law that sovereignty requires three key components:

  1. A population;
  2. A defendable territory;
  3. Recognition.

Let’s briefly look at all three and see if a public blockchain could ever achieve sovereignty.

1. We, the token holders

First, international law sees a defined — or as a very minimum definable — population as the first requisite towards sovereignty.

Inherent in this approach is the idea that citizenship should not be fluid or shifty: there has to be a degree of permanency.

However, whilst this may hold for the acquisition of citizenship, it is not the case for rescission: we still have the freedom to tear up our passports and choose to apply for nationality elsewhere (though the U.S. recently introduced an exit tax to discourage its nationals from doing so).

This voting with one’s feet, or the right to rage-quit, may not be frequently exercised but it is not a theoretical right: international law accepts that nobody can be forced to remain a national of a Nation State against their will.

This is not the case for the acquisition of citizenship, which is a monoply right of the Nation State.

It exercises this power to grant citizenship in two main ways:

  • Through the monopoly it has on issuing birth certificates, which in turn is linked to the phsyical location you were born, or where (one of) your parents was/were born.
  • Through its naturalization laws, which lets immigrants apply for citizenship of a country if they spend enough time there or can otherwise establish a link.

As a result, it is typically not quick and easy to change your nationality.

Passport shopping

Unless you are rich.

A growing number of typically smaller sovereigns have “golden visa” schemes for rich individuals who invest money locally in return for a second passport.

Arguably, it is one of the biggest injustices of our time that this same facility is not available to everyone, though some Nation States such as Canada have lenient laws that open a quick path towards citizenship for anybody, including refugees.

In essence, golden visas are based on a club concept: you pay to get in, and abide by the rules. The difference is that the club is not a private members’ club but is run by a sovereign and its members are called citizens.

Members only

From here, it is but a small step to accept that such membership can also be granted without a physical link to a sovereign’s territory.

There is historical precedent for this, most notably in the Order of the Knights Templar, a sovereign order of crusaders without physical territory whose sovereignty was derived from that of the Church (in itself a private members club which had proclaimed itself sovereign and ruled — and still rules — itself by Canonical Law).

Admission as a Knight lead to citizenship and passe port in Old French, literally the authorization to pass through a port i.e. the right to freely enter or leave a country.

Meaningfully, this and other privileges enjoyed by the Templars were superimposed upon whichever law of the land they found themselves in.

Back to the future

The Knights Templar may have set a template for the future.

If the Templars enjoyed sovereignty on the basis of membership rather than statehood, why could sovereignty not be granted to a collective of cryptographic token holders who voluntarily subject themselves to a polity in which they together decide the rules?

As a collective, token holders are a defined group with blockchain as proof of membership. Whilst members can easily come and go, as a population they are defined and definable: basically everyone who holds a token and signs using their private key.

Despite the variable nature of this membership, a strong case can be made that token holders of a blockchain clearly meet the first test towards sovereignty: a defined population.

2. Defenseless

Some would argue that such virtual community does not meet the second test of sovereignty: a demarcated, defendable territory.

Here again the precedent of the Templars is significant: Knights were subjects of the Templar jurisdiction, irrespective of their physical location.

Whilst The Templars were in essence a military order, they had as such no territory to defend, no borders that could be invaded, no capital to be conquered.

Their sovereignty was based on a legal fiction that granted citizenship-type rights over a collective of dispersed members.

In the blockchain domain, dispersed members already voluntarily adhere to agreed rules by virtue of holding tokens.

Arguably, each holder (M/F) is his/her own castle in blockchain land, with his/her wallet protected by cryptographic moats. As a collective of wallets, their territory — whilst virtual — is cryptographically defended.

If the second prong of the sovereignty test can be met by extrapolating the going definition of what is a defendable territory to include virtual realms, blockchains as sovereign jurisdictions are within reach.

What’s missing is recognition.

3. Courting or forcing recognition?

In the early 19th Century, up to 1815 Belgium was part of the Netherlands and then France until 1830, when it was granted independence.

Cynics say the only reason it was recognized as a sovereign nation was because Europe needed a bufferzone between its then superpowers: France, Britain and Germany. Less than a century later, Belgium would indeed be the circuit breaker for Britain and France when German troops rushed west.

Belgium owes its independence entirely to the geopolitical calculations of the then major powers. Taiwan owes its status to the present major powers who are making conflicting claims: sovereign or part of China.

Generally, Nation States don’t recognize sovereignty out of magnanimity but because it serves their purpose.

Where does this leave the chances of sovereignty on blockchain?

Tactically, there are two avenues open: courtship or revolution.

Courtship

One way to aim for sovereign status of your chain is to court it.

We know of working groups at the United Nations, pockets of the European Commission, and other legacy Governments and governmental organizations who are quite endeared by the idea of virtual sovereignty.

However, courting them is a tiresome and drawn-out process. Realistically. only when a virtual chain would gain real political usefulness to a legacy Nation State could it lead to recognition as a new jurisdiction. This seems a long way off.

Perhaps we should have higher hopes of legacy Nation States extending their sovereignty to include digital realms.

Abu Dhabi lends its sovereignty to the Abu Dhabi Global Market which grants jurisdictional powers to companies incorporared there. Estonia’s e-Residency too is encouraging, be it perhaps of little practical use.

Irrespective, other countries could take lessons from these experiments, especially smaller island nations without natural GDP who could monetize their sovereignty by lending it out to a virtual realm.

“Citizen tokens” could be offered for sale, with certain rights such as tax domicile embedded. Companies could be formed onchain with automatic forum choice and residency rights attached.

Panama does that to some extent but offchain, and we look forward to the first country that will offer SoaaS: Sovereignty as a Service.

However, even under Soaas, any applicant for sovereign status remains at the mercy of the Nation State’s top down recognition.

This may be the patient route, but it has also been the single point of failure of many libertarian new country experiments, whose quest for sovereignty ultimately remains linked to land (or in the case of the Seasteading project, pods built outside territorial waters)

In this respect, Balaji Srinivasan, ex-CTO of Coinbase turned technology futurologist, in a recent tweet suggests lands should come last.

We think land can be dispensed with altogeter if we take to the barricades and force recognition of blockchain realms by the numbers.

Revolución o muerte!

Such bottom-up recognition would essentially force other countries’ hand by presenting sovereignty as a fait accompli.

One can imagine a decentralized citizen legder which airdrops voting tokens to anybody who opens a wallet and uses smart contracts that let any user participate in sculping its ground rules.

Voting could be quadratic with citizens allocating a set token budget to those issues they feel most strongly about, so they think hard what they’ll vote on.

The digital commons would be collectively curated and all IP freely licensed for use by all citizens.

Entities and companies would derive recognized legal status from their blockchain charter, luring entrepreneurs away from land-based analog jurisdictions to incorporate onchain rather than offchain.

Tax would work more like a GDP dividend: an agreed and smart-contractified periodic adjustment of people’s wallets to ensure a base level income equalization.

A hardcoded right to rage-quit would solve the “tyranny of the majority” conundrum at the heart of every democracy: if you cannot abide by the majority outcome, you can withdraw from a specific project and ultimately leave the polis altogether.

If such scheme were to achieve traction, the sheer force of numbers could lead to bottom-up recognition of a first digital realm as a sovereign entity, pari passu with legacy entities, with passport rights and asylum for all.

History shows that an existing status quo can be defied, peacefully and legitimately, if a revolution is grounded in the wills of millions of people who wish to see the ancien régime replaced by better governance and fairer government.

From our side, we cannot wait for the day such chain, as a first of many, launches in open defiance of the Nation State.*

Only since the early 18th Century did the Nation State become the reigning governance model for sovereign entities. Perhaps this too may turn out to be a brief interlude in a secular search towards a governance model that is truly based on the “consent of the governed” as stated in the U.S. Declaration of Independence.

Reaching escape velocity

Recognition is the ultimate prize: it is what will allow distributed digital realms to reach escape velocity from the gravitional pull of sovereign Nation States.

Sovereignty for blockchains will lead to overlapping and competing jurisdictions that will co-exist in a physical-virtual reality space: A Pokemon Go-type layer of jurisdictional powers superimposed on the realities of physical space which will augment token holders’ rights, irrespective of where they are.

It may feed back into legacy countries actively courting citizens and positively govern for their benefit, creating transparency in how tax is used, and giving members new tools to vote and participate in decision making.

This dynamic will be based on a futureproof, expanded acceptance of sovereignty as a legal fiction, from its mid-14th Century Anglo-French sovereynete or “authority, rule, supremacy of power”, through its early 18th Century understanding of existence as an independent state, to its future meaning as a self-proclaimed digital realm legitimized by its members’ voluntary wish to coordinate around agreed rules, rights and obligations.

*Disclosure: Otonomos, though its Foundation, is actively encouraging the study of political governance models for such chain via its Decentralized Governance School initiative, which is shortly set to open a donation campaign. For more information or to register interest as a donor, please email school@otonomos.foundation.

It’s Governance, Stupid! A School for the Study of Decentralized Governance Models

31 JANUARY 2020 – I am writing this on my return from the World Economic Forum in Davos last week. 

Exactly a week ago I was at the George Soros dinner there together with gathered media and Soros Foundation beneficiaries and staff.  

At the dinner, Soros announced USD 1 billion for a new “Open Society University Network” (OSUN) and we all got a copy of his latest book as a freebee.

At 89, Soros remains dedicated to his lifelong cause for Open Societies. He called OSUN’s efforts to combat authoritarian governments “the most important project of my life” and hopes to ”see it realized whilst I am still around”.

Open Societies have been close to my heart since I, like Soros, came in contact with Popper’s “Open Society and Its Enemies” during my London School of Economics days.

Karl Popper’s two volume first edition “The Open Society and its Enemies” published in 1945 by Routledge in London.

A New Software for Open Societies

In his book, Popper identified the dangers to Open Societies, which need trust, sound governance and citizen participation to grow and stay robust. 

Today however, many perceive our democracies as fragile and in decline.

But anybody who takes a closer look will see that most of our disagreements in liberal democracies are about the means, not the goals: there is broad consensus about the desirability of most outcomes e.g. accessible healthcare, quality affordable schooling, avoiding climate distasters, etc. However we can’t seem to agree on how best to get there.

Our thesis is that we’re simply lacking the tools. We’re not using available technologies to innovate in governance: we’re not writing governance software or releasing new versions of an “Operating System” for our democracies.  Voting is still largely paper-based, elections are held only every 4 or 5 years, and there are no citizens’ Apps that enable wider participation in decision making.

We need a toolbox to solve problems of coordination in society, including some “ragequit” function for those who don’t subscribe to the broad consensus and want to escape the “tyranny of democracy”.

Our Application to the Soros Foundation

Following the Soros dinner, I was encouraged to apply for a grant from the Open Society Foundation. 

Today, we sent in a proposal making the case for a grant to study and develop new governance models that may help solve coordination problems in Open Societies.

In our application, we highlighted Distributed Ledger Technology (“DLT”, commonly known as blockchains) – which ideologically grew out of a movement against increased centralization of economic and political power – as the key enabling technology for a new Operating System for Open Societies.

We argued that blockchains, by ensuring uncensored, self-authenticated transactions on a decentralized open ledger, hold the promise of an unprecedented level of citizen participation as the basis for such OS.

Finally, we quoted some daring recent ideas e.g. how “quadratic voting” using blockchains could change how we vote and participate in decisions.

Peripatetic Approach

As a first step, a lot more study needs done on the design and feasibility of such new governance models.  Our proposal is therefore in essence an application to fund a small-scale study centre.  

Our idea is for such School to commence as a small institute with visiting scholars from around the world, including members of the DLT community and teaching staff from across academic disciplines.

The setup would suit a peripatetic approach in which knowledge is transferred informally within a communal setting. In the spirit of the open software movement, all technology development is to be open source, and contributions to its code repository could be made from anywhere by anybody.

Beyond research, the key deliverable of the Center would be an open-source toolkit of ready-to-use applications to help countries implement new governance and voting protocols that increase citizen participation.

We believe that developing such toolkit could help solve coordination problems across a wide spectrum of organizations, from private companies to the polis of a country and even the governance of supranational – and some day interplanetary! – organizations. 

Finally, we proposed Vancouver as a possible location for the School since Canada is arguably the world’s strongest liberal democracy.

Waiting for George’s call

We’re now waiting for George’s call and working some backchannels.  

Irrespective of a Soros Foundation grant, we plan to accelerate fundraising and are building a website under the Otonomos Foundation.

We’re also seeking to attract voluntary staff and have been looking at possible sites and Universities that can host the School.  

We cannot let this cause die of neglect: technology presently increasingly provides the tools for surveillance, which in turn leads to a compounding of power in the hands of the few.  It is in our hands to build the freedom tools that guarantee censorship-resistant, “trust-less” participation for each of us as shareholders in our collective future.

Contact: school@otonomos.foundation

Chopin in Dubai: Or How to Go from Defying to Defining

Last week, I was invited to speak at the Alternative Asset Management Summit in Dubai to talk about crypto assets as a new asset class in investing.

On the flight from London, I was captivated by “Chopin’s Piano” by Paul Kildea which I had recently picked up at a Vancouver bookstore and saved for the long journey.

Chopin’s music not only defied the conventions of the Classics, but defined Romantic music for decades to come.  Hae looked back and forward at the same time, standing on the shoulders of the greats who came before him (Bach in particular, whose Welltempered Clavier was the only score Chopin carried with him on a desolate trip to Mallorca in 1838-39 where he composed the wondrous Preludes on a ramshackle local piano) but also defied them, in a playful dialectic of respect and provocation of past masters, setting his music free from conventions and in doing so, defining a future sound through the sheer gift of his unbounded imagination.

Chopin and Beethoven: They could never have walked together, but talked a lot in music.

His travel companion and femme terrible George Sand watched him compose, a touching snapshot of a frail, diminutive and sickly Chopin forcefully willing his music into the world, iterating his way to aesthetic perfection: 

It was a train of efforts, waverings, frustrated stabs at recapturing certain details of the theme that he had heard; what he had conceived as a unity he now over-analyzed in his desire to get it down, and his chagrin at not being able to rediscover it whole and clear plunged him into a sort of despair. He withdrew into his room for days, weeping, pacing up and down, breaking his pens, playing measure a hundred times over, changing it each time, then writing it out and erasing it as many times, and beginning all over again on the morrow with painstaking and desperate perseverance. He would spend six weeks on a page, only to hark back to what he had first roughed out.

George Sand

Anybody who writes or codes will recognize Chopin’s creative agony Sand describes!

His struggle speaks to the universal theme of how our imagination collides with real-world constraints, the perpetual tension between freedom and form that when resolved, as in Bach’s music, Cicero’s speeches or elegant math, results in true greatness.

Imagination first defies form and form subsequently defies imagination in some perpetual dance we call progress.

At a more mundane level, when asked at the Dubai conference how crypto and blockchain would change the world, I answered that “the thing with the future is that we cannot imagine it”, commenting how blockchain is the “rebel child of capitalism” but that we simply lacked the imagination to know what’s around the corner.

We do know however that those who, like Chopin, willed their imagination into the world are the ones who go from defying the existing paradigm to defining the next one.

Blockchains on Planes

The Air Canada flight into San Francisco had a documentary on blockchain I hadn’t come across before, produced by Alex Winter.

It’s not a bad film, and even if it was, it’s great to see this on a plane ride. Joe Lubin appears but Vitalik doesn’t, he probably declined.

Approaching San Francisco there’s a detectable film of thin smoke from the wildfires just north in Sonoma County hanging over Golden Gate Bridge, but the sky in the Bay Area is as glorious as always.

I am skipping tomorrow’s and Friday’s Blockchain conference: too much shilling on stage. Even Libra has got a slot.

Surveillance Capitalism: Leading to Fascism 2.0 or to a Privacy Revolt?

I finished reading Surveillance Capitalism, which I had been carrying with me since I picked it up last month at booksinc.net in Mountain View, ironically the home of Google.

Zuboff’s 691 pages do much more than introducing the concept of Surveillance Capitalism: it’s an analytical framework that rather magisterially dissects its origins (at Google) and its modus operandi. 

The book is also an ode to analogue humanity, to our “right to the future tense” which it sees under threat from the behaviour modification logic of this new capitalist model.

It’s prophesies about such future are spine-chilling: a world in which we live our lives in the delusional freedom of “the first text” whilst our lives are being lived for us according to the “shadow text” composed by machines who harvest each and every data point about us via our phones, our computers and all the digital paraphernalia we surround ourselves with.

The greatness of the book, apart from the truly terrific choice of words throughout, comes from the intellectual tools and analytical framework it gives readers to help understand how industrial capitalism is morphing into surveillance capitalism.   Reading this book feels like you’re given a new set of glasses.

Its minor weakness is that the narrative seems to be largely based on an anti-libertarian intellectual background that places too much hope in the State.

As a result, for all its merits in analysing the evils of corporate surveillance capitalism in which advertisers are the most prominent bidders for our “future tense”, the true horror will come once these behaviour modification tools are used by political bidders (cfr. Cambridge Analytica) or states (cfr. China).  

Such extrapolation can only herald Fascism 2.0, in which our futures will be manipulated by political puppet masters with their hands on the algorithms and big date currently at the service of purely commercial ends.  

This usurpation could be so unforeseen it may surprise us with the same suddenness as the rise of Mussolini and Hitler.  

In this light, Zuboff’s book is also a 691-pages long pamphlet of sorts, warning of humanity’s fate if we accept surveillance capitalism as inevitable and urging readers to “be the friction”: remain indignant and revolt.

Bay Area

Long immigration queues yesterday at SFO didn’t allow me to make it to meetings in Mountain View so I charmed the United Airlines lady into changing my ticket and stayed overnight in Mountain View.

Feels like I made full circle back where I left things a couple of years ago when I hatched the idea for Otonomos but didn’t have the funds to bring the family here. Instead we chose Asia and I feel all the richer for it in many ways.

Despite having all the high-tech names within a couple of miles radius from here, the Bay Area can feel very quaint. Retail is stuck in the past and visiting a bank with their 70s fit-out is so retro it’s modish again. 

The golden sun though makes one forgive all of the Peninsula’s shortcomings, only the Côte d’Azur and Lisbon rivals this place for the sheer translucency of its blue sky. Waking up here with this California sky every day of the year induces optimism. Whatever rivals there may be, Silicon Valley will continue to dominate because of its mindset and because they made building and scaling a business a true craft. 

It’s been nice to walk Castro Street and have a cuppa at Red Rock, buy a book at Books Inc and eat a taco further up the street. People seemed relaxed, content and comfortable, and not all young.  Coupa Cafe hasn’t changed and it seems neither has Sand Hill Road’s business model!

Ten Dollar Cohiba in Panama

Typing this on morning flight to San Francisco from Panama.

Yesterday was all work had a ceviche brought up to the room for lunch and only got ready around dinner time.

Walked the Casco Antiguo to get a bite and found a $10 Cohiba in some local version of a 7-11 run by Chinese.

I first thought it would be a fake cigar but it smoked well. I enjoyed it with a stiff Negroni at the rooftop bar of the Casacasco opposite the hotel, a place that seems popular for corporate outings.

I amused myself reading tweets about Facebook’s hearings in DC on its planned Libra currency and retweeted a Hayek clip in which he urges not to leave issuance of money in the hands of Governments. 

I don’t think he had Libra in mind as an alternative, a corporate currency issued by surveillance capitalists. 

Bitcoin may have been closer to his idea of a private currency and the trustless technology behind it. 

BTC came through relatively unscathed from the congressional hearings. Lawmakers seem to prefer a decentralised currency they can’t control over a “ZuckBuck”.

The Bitcoin price stuck at around USD 9,400 didn’t seem to benefit much from this regularly reprieve. 

The crypto community should be careful what it wishes for if it wants more regulatory attention to BTC. 

It could be made illegal or killed by a thousand knives. Few talk about the role of Internet Service Providers, they could be made (probably already are) instruments of surveillance and tools to restrict access.  

Blockchain may not be as unstoppable as they seem if their hardware backbone is targeted. Will Governments let them flourish as a freedom tool or use them as instruments for repression?

Participalism, Inc.

In our first blog entry we introduced Participalism as Capitalism’s rebel child.

The enabling technology for a Participalist society is emerging as we speak, and quite a few blogs and forums discuss the underlying software.  Some of the projects under development, most notably Ethereum (www.ethereum.org) hold the promise to truly unify logic, economics and law in one decentralised protocol.  If God’s language is physics, then surely that of human ingenuity is code!

However this blog post isn’t about code in itself, but how the emerging technologies could change our lives.  In the first of this series, we will look at how this applies to the “legal container” of most human endeavour, the limited company, and how it will change beyond recognition in a Participalist society.

The Limited Company, V1.0

In essence, a company is a centralised unit based on a set of legal contracts that govern the relationships between the various parties involved.

There’s the constitutional documents that anchor a company within a chosen jurisdiction (say, Delaware, or Panama).  This almost without exception involves a government-sanctioned registration in return for a fee.  Then there’s the set of documents that together form the company’s governance protocol.  They deal with issues such as how many shares will be issued, to whom shareholders will delegate the day-to-day management of the company, the relationship between the shareholders, etc.  These are typically referred to as the company’s by-laws.

The Dutch are generally recognised to have invented the joint stock company back in the 17th Century, as a result of which they had their Golden Age of extraordinary wealth creation.  The genesis company was in essence a contract.  Over time, as governments felt mandated to step in, company law increasingly marked the boundaries of what could be privately contracted.  In civil law countries, most of these boundaries are codified by law, whilst in common law countries precedents box in and interpret the limits of what can be freely contracted between parties.

All of this has been abundantly documented by historians who, depending on where they stand ideologically, at the extremes either loathe or applaud (with every possible shading in between) the increasing role of government in company formation.

V2.0: A Spec

We believe that in the same way Bitcoin and other so called crypto-currencies are set to largely circumvent existing banking laws, decentralised protocols, which we will refer to as the blockchain, allow for a new type of company, often referred to as a DAO (Decentralised Autonomous Organisation) that would live outside of existing company laws.

So far, nobody has comprehensively specced up the DAO, but from the various blogs and discussion forums on this we can start to see its contours.

There’s mention of how the DAO would be based on self-executing, “trust-less” smart shares with embedded code which – with iron logic – would make sure that when Bob does X, Alice receives Y. Governance protocols use the blockchain on distributed networks, so there’s no need for a central authority.  Multi-sig(nature) technology would validate transactions so the potential for fraud is reduced, if not eliminated altogether.

In this respect, fraud elimination is generally considered a “solvable problem” by the crypto-community. Moreover, there is unanimity that solving it is a prerequisite for the DAO not to be a stillborn idea.

No doubt the debate on how fraud can be eliminated will move in lockstep with how the underlying technologies develop, and fraud will indeed prove a solvable problem.  More generally, we are less concerned with whether a DAO can be built (it is software after all), but rather with whether it should be built.

Therefore, the approach we will be taking today is to play a little mind-game and ask ourselves the question: if God, in His infinite wisdom, would design an autonomous company, how would it look like?

A Vehicle to Advances Human Ingenuity

The overall requirement would be that it’s a vehicle that advances human ingenuity.  That would mean that as large a number of people as possible would be able to help in its creation and development.  That in turn implies that the autonomous company gets to be funded collectively, that those who contribute to its funding should also reap the rewards in proportion to their respective investments, that they have a proportionate say in how the vehicle is governed, and that they can individually contribute to it as collaborators and/or users.

A London-based company called Otonomos is working on a spec along those lines.  They gave it the suffix ĐAC instead of Ltd, for Decentralised Autonomous Company, which they plan to offer alongside traditional company formation services.  So instead of setting up your UK limited company with them, or your Delaware C-Corp, you’ll soon be able to have your very own NEWCO, ĐAC.

Their spec as it stands is both revolutionary and realistic, building on the limited company as we know it but radically rethinking its funding and governance.

1.  IPO on day one

A ĐAC’s shares would be open to the widest possible group of people to invest in.  There’s no phase in which the company stays “private” and then goes “public”.

Compare this with how startups are currently funded.  Typically, its founders are its first shareholders who, if they have some money on their own, are also its first investors.  Assuming there is more than one founder, they’ll have the equity split agreed.  From that flows the voting power if it were to come to an impasse on major issues.  Day-to-day issues are delegated to the company’s directors who in a startup are typically its founders, so its first shareholders.  Whilst it’s not always articulated through the daily workings of a young company, everybody who joins soon understands that the founder who owns the most shares has the final say.

As the company evolves, more shareholders are likely to join in, and something of a command centre grows around the founders with external directors who typically represent the company’s largest investor(s), and advisors to the Board.

External investors come in with the understanding they’ll eventually want to come out and achieve a multiple of what they’ve invested.  Each funding round is a fine balancing act between the freedom to execute that management seeks to preserve, and the tools external investors want to have at hand in case things go wrong.

Whilst each venture capitalist (VC) firm will have its own reason to invest in a company, as such there is no mechanical link between how many people use and pay for the company’s product and the price at which fresh money goes in.

More fundamentally, VC investing is a borderline paternalistic and elitist process in which a few judge themselves specialists capable of identifying companies worth investing in.  As the money being committed is typically other people’s money, the classic agency problem arises (arguably less so than in other corners of finance such as institutional asset management).

Perhaps most importantly, it is difficult to imagine how Venture Capital, once called “the least scaleable of all businesses”, could continue to be the sole transmission mechanism between savers and the massive funding needs of a Participalist economy.

The ĐAC as it is envisaged could address this problem.  It would “internalise” peer-to-peer investing that is currently happening on equity crowd funding and angel platforms like AngelList and bolt digital currency technology on top of it.  A ĐAC’s shares would be sliced off the block chain, which doubles as the company’s digital share registry.  Each and every single share is “smart” with all the rights and obligations that come with being a shareholder coded on to it.

Consequently, a funding round would be an open, transparent process: when a company decides to raise extra funds, more shares are sliced off the blockchain in exchange for an instant digital money transfer, and existing shareholders can decide to sell or top up.

Trust would be built in the same way AirBnB builds peer-to-peer trust, by social frisking through the various social media platforms, user recommendations, and reviews.

To put it in a simplified way: a shareholder in a ĐAC is granted a pair of digital keys, one public and one private, that verify his/her transactions on the company’s ledger.  These transactions go beyond the mere digital money transfers of today’s altcoin wallets: they include transferring funds to pay for shares, receiving dividend payments, exercise voting rights, participate in Board meetings, even entering the C-suite.

2.  Digital governance

It is from harnessing the potential of the blockchain beyond digital currency transfers the ĐAC represents a true departure from the company as we know it.  Each and every smart share has the company’s voting rules embedded and changes to them can be broadcast digitally to each share.  As a consequence, investors can directly exercise the voting powers and other prerogatives that come with holding a stake in the company.

Board meetings become online meeting rooms in which shareholder’s access is validated through their cryptographic key.  Resolutions on executive pay, budgets, capital increase etc are tabled and passed unless the required quorum blocks them (this is more practical than voting on each to see if a sufficient majority has been established), and even the bye-laws themselves can be revised.  Any resolutions and changes are instantaneously written onto all outstanding shares so not only is a whole lot of drama taken out of the board room, armies of lawyers and compliance staff are eliminated in the process, resulting in huge cost savings.  The business can just go on focusing on delivering for its customers – a lot of whom will be its shareholders themselves!

3.  Accounting

For the first time, under the ĐAC accounting is sexy.  Think of the ĐAC’s accounts as a walled-off ledger visible to each and every shareholder when they log in.  More powerful still, as transactions are debited or credited from the digital currency ledger, accounts update instantaneously, reflecting the ĐAC’s financial situation by the second.  Contributions by collaborators, sales revenue, expenditures: all financial transactions pass through the company’s digital wallets and get aggregated tick by tick.  Book-entry is a mere microprocessor clock cycle, top and bottom line are calculated real-time, taxes paid automatically. There goes an army of accountants.

4.  Shareholder = Customer = Collaborator

In a Participalist economy, each and anyone of us with internet access can be shareholder, director, customer, and collaborator at the same time, or any combination of these.  A customer who is delighted by the company’s product can decide to bring his/her skills to the table, join the distributed team (using any Slack-type collaborative platform), help out on a project, and get paid in digital currency.  Through this virtuous cycle, users of the company’s product can help improve it and benefit from its success as a shareholder.

Participalism, Inc. 

What may have witnessed here is the birth of the idea of a genuine Participalist company: a vehicle in which all of us can freely decide to be shareholder, manager, user and collaborator at the same time.

Perhaps this is where the greatest value of the decentralised protocols lies: that they allow for the advancement of our ingenuity by tapping into the broadest possible number of individual neurons which, connected through the network, serve as nodes in the ever expanding collective brain of humankind.

The company vehicle to channel this human ingenuity is to be fully specced still and we at Participalismo o Muertewelcome any comments and contributions.

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NEXT POST

In our next post, we plan to explore how a Participalist country could look like.  We believe Participalist economies will inevitably bring with them Participalist politics.  “Citizenship” will mean access to any of a number of walled digital gardens which will compete between them to offer citizens the best public goods and largest budget surplusses, in which they can share in return for paying taxes.

Meet Capitalism’s Rebel Child

As I write this first blog from the heart of Silicon Valley, a race is on between new protocols that use distributed processing power to execute programmed tasks, from transferring money to governing companies.

These decentralised protocols will enable anybody with access to a computer and the internet to participate in an economy that will succeed capitalism as the prevailing paradigm.

Participalism is the system in which decentralised computing power allows all of us to invest, borrow, contribute, shop, manufacture, vote, donate, spend and earn without the need for a central authority.

This blog wants to document the new technologies, from Bitcoin and other digital currencies or protocols like Ethereum, to distributed manufacturing and smart contracts, that will shape Participalism as the new narrative for humanity.

Los Altos, 1 July 2014

El Participalista