Blockchain Governance, TikTok and UAE's Data Platform

Off The Blocks, Vol 121, Aug 11, 2020

The COVID-19 pandemic is still amongst us and shows no signs of life returning to normalcy anytime soon. We are working with our partners, clients, and portfolio companies, creating strong ecosystems for their mutual growth. Simultaneously, we are trying to resolve some of the most complicated and challenging issues to create a trusted environment for people to go back to work and get the economy back on its feet. You can read about our efforts in a 4 part series here. To be a part of the solution, reach out.

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The below first appeared on Coindesk on Aug 10, 2020. The views expressed by Stephanie Hurder, in this column, align with our thinking on the evolution of blockchain for the enterprise, and we have been bullish about enterprise adoption. In our experience working with both large corporates and nimble startups, it is hard to capitalize on the opportunity afforded by blockchain technology, precisely because little attention is paid on simplifying the complexity along the three vectors: tech, business models and regulatory elements. No one company can claim to have expertise on all of these and we advocate an ecosystem approach to align governance with the economic incentives for participation.

The Fourth Era of Blockchain Governance

If you follow our writing at Prysm Group, you know one of our mantras is that governance is essential for the long-term survival of blockchain projects. Blockchain projects are complex technical and economic systems that require a systematic and architectural approach to design. Governance enables blockchain projects to continually innovate, upgrade their protocols and adapt to changing market conditions while maintaining the desired level of decentralization.

Blockchain governance design has faced a steep learning curve. I have described the evolution of blockchain governance design since 2018 as having three eras:

  • Era 1: Informal/ad hoc governance design. The original blockchain projects, such as Bitcoin and Ethereum, had no formal governance. Decisions regarding upgrades and crises were made by developers and other influencers based on ad-hoc procedures. 

  • Era 2: Copy and paste governance design. Realizing that projects need well-specified decision-making procedures to succeed, projects copied and pasted voting and proposal mechanisms from other, non-blockchain platforms.

  • Era 3: Bespoke governance design. Projects realized blockchain is a new and distinct environment and began to design systems ground-up based on first principles.

After a briefing I gave two weeks ago jointly with Mark F. Radcliffe, Partner at law firm DLA Piper, I believe we have entered Era 4: the era of systemic governance design. Systemic governance design also takes a ground-up approach based on first principles while explicitly considering the ways in which a project’s governance must be designed to work in harmony with the governance of other projects in the blockchain ecosystem.  

And this era, unlike the previous three, will be led by enterprise blockchain. Enterprise use cases not only require cross-platform development but also frequently undergo rigorous, multi-year planning cycles. Enterprises considering deploying blockchain solutions want to know how various platforms and their governance designs function in sum, so they can minimize unnecessary uncertainty and deliver on their project goals.

Mark is a corporate securities and IP lawyer who advises many blockchain projects and consortia. In his view, many of the current blockchain offerings do not have sufficient governance from both an economic and legal perspective to be effectively used by enterprises.  

Enterprises considering deploying blockchain solutions want to know how various platforms and their governance designs function in sum.

Having well-defined governance is one of the best ways that an enterprise blockchain consortium can incentivize new users to join. A shared ledger with distributed control can reduce costs and provide benefits for businesses in a variety of industries. But getting enterprises to attain and sustain the cooperation required to keep these consortia functioning – via contributions of time, money, and expertise – requires transparent and well-functioning collective decision-making.  

For the earliest blockchain consortia, having any specified governance process put them at the head of the pack. But governance designed in isolation is no longer sufficient. Understanding the governance of the underlying technologies the consortium is using and the impact it will have on a consortium’s own governance also is essential.

Protocols and stablecoins

Consider two examples: protocols and stablecoins. Most blockchain applications will not build their own protocols, but will instead choose to build on existing options such as Hyperledger or Hedera. Each of these protocols has its own processes that determine development projects, upgrades and use rights. Poorly designed governance at the protocol level can have harmful and unintended impacts on the projects building on it.

Projects built on Ethereum, for example, have spent over three years wondering if and when Proof-of-Stake will be implemented and two years watching the community debate which changes, if any, to make to the transaction fee mechanism.  

Projects may also choose to adopt a third-party stablecoin rather than establish and manage their own token. MakerDAO, the builder of the U.S. dollar stablecoin (dai) with the third-largest market cap, is planning to dissolve its governing Foundation and replace it with a DAO over the next two years. This is a risky path forward: DAOs have been notoriously difficult to run well and are slow in making decisions. The transition adds significant complexity to any enterprise project choosing to use dai.

Enterprise blockchain projects can make progress in the face of such uncertainty. But having the appropriate systems in place for designing governance is more important than ever.   

First, embrace that governance design is a complex process drawing on a combination of economics, law and other disciplines. Like all parts of a blockchain project, it involves iteration over time using multiple areas of expertise.  

Second, vet the governance of potential tech partners just as thoroughly as you would vet their technology. Just having a voting system in place is typically not sufficient governance. Including more sophisticated steps such as soliciting and distributing expert feedback on proposals, introducing mechanisms to ensure timely implementation of upgrades, and having well-defined crisis governance with clear delineation of decision-making all increase the probability that governance will be reliable.    

Finally, resist the urge to regress in the face of this challenge: to design myopically and to copy and paste without context. While blockchain governance best practices are rapidly evolving, there are frameworks projects can use to minimize the prospect of overlooking essential elements. The more innovative a project, the less likely an out-of-the-box governance solution will meet its needs.

But all blockchain consortia should recognize that governance practices are evolving and should pay particular attention to the processes for changing governance procedures. Successful consortia will need to adjust their governance procedures as the business, protocols, and consortia evolve.

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Now for some news from the world this week:

  1. Law | SEC Adding Blockchain Forensics to Investigate ‘Smart Contracts’: The nation’s top financial services watchdog is in the market for tools to help untangle the complex web of digital payments made using blockchain technologies and platforms like Ethereum. The Securities and Exchange Commission plans to buy blockchain forensics software that can decipher transactions made using an emerging technology known as “smart contracts,” according to a request for information. …Link

  2. Securities | Tel Aviv Stock Exchange Launches a Central Blockchain Securities Lending Platform: The Tel-Aviv Stock Exchange (TASE: TASE) announced the first-ever launch in Israel of a Central Blockchain Securities Lending Platform, an innovative and groundbreaking financial technology. There is currently no central securities lending platform in the Israeli market. Securities Lending is at present executed using inter-bank mechanisms within, and if necessary outside, banking group limits. As a result, the market has not been fully exploited to satisfy the potential needs of economic agents. This cutting-edge platform will transform the Securities Lending market in Israel by enabling direct lending among all the major financial instruments. The platform will function as a one-stop-shop for all securities lending activities, permitting access to larger securities volumes within shorter timeframes, even operating in shorter-term positions. … Link

  3. Tokens | Blockchain project Polkadot Raises $43M in a Private Token Sale: Blockchain project Polkadot, a challenger to Ethereum, has raised $43.3 million in a private token sale. The sale, which lasted for three days from July 24 to July 27, saw participation from several investors. They all contributed nearly 3,982 bitcoins via 1,059 transactions, according to an address associated with Polkadot. Through the sale, investors grabbed Polkadot's native DOT tokens, which were reportedly available for $125 apiece. Residents of the U.S., Japan and some other countries were restricted from participating in the sale. The Polkadot project is led by Ethereum co-founder Gavin Wood via his firm Parity Technologies and non-profit the Web3 Foundation. Wood did not respond to The Block's request for comment on the token sale. … Link

  4. UAE | Dubai Debuts Nationwide Data Platform Powered by Blockchain: First revealed in February 2020, the new blockchain platform is designed to unlock digital customer onboarding, instant bank account functions, and verified KYC data sharing between licensing authorities and financial institutions.  Announcing the news on July 28, the DED and Emirates NBD said that the platform has over 120 companies already on-boarded by the bank with active bank accounts. According to the announcement, Emirates NBD is the first bank to go live on the platform at launch. The bank will primarily work with small and medium-sized enterprises, enabling them to on-board digitally. They will also be able to instantly open bank accounts through Emirates NBD’s E20 Digital Business Bank. … Link

  5. Finance | Goldman names new head of digital assets: McDermott, who is based in London, does have a radical vision for markets, however: a future in which all of the world’s financial assets reside on electronic ledgers, and activities that today require squadrons of bankers and lawyers like initial public offerings and debt issuances could be largely automated. … Link

    In the next five to 10 years, you could see a financial system where all assets and liabilities are native to a blockchain, with all transactions natively happening on chain. So what you’re doing today in the physical world, you just do digitally, creating huge efficiencies. And that can be debt issuances, securitization, loan origination; essentially you’ll have a digital financial markets ecosystem, the options are pretty vast.

The Final Word | Blockchain, TikTok, And The Influencer Economy - What Are The Connections?

Blockchain, TikTok, And The Influencer Economy - What Are The ...

Intellectual property is much more than patents; influencers, streamers, and other content creators will benefit from strengthening the connection between blockchain and intellectual property rights. Content creation on platforms like TikTok and others is a multi-billion dollar business with a global reach, and blockchain can play a key role ensuring this success is distributed to those who have earned it.

The concept of intellectual property might, and not unreasonably, strike some as a relatively dry topic. What usually comes to mind when discussing this area are items like patents, trademarks, copyrights, and accounting topics like goodwill that can seem confusing on a good day. Taking a step back, however, and the landscape for intellectual property, protecting intellectual property rights, and appropriately compensating the owners and creators of this property is much broader. … Link

About Proteum
Proteum is a global investment and advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. Velocity, our innovation hub, invests in and accelerates the time to market for startups and emerging ideas. |  | Twitter: @proteumio | Velocity