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.

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.