J1 RF 10 Philippe Honigman Which governance for my tokens

hi everyone my name is Flip things to be here I suppose it has been a long day how many people went to flat attend flat presentation right and quite a lot of people and how many understood at least 80% of it okay so there are two people probably that would will get bored by my presentation and the other one maybe you'll find it interesting or entertaining so I'm an entrepreneur and I'd like to give you a bit of background about why I'm talking about governance today a few years ago I was running a company named F Tapia and we decided to transform it into an open community so we decided to change the way we were working in order to transform a traditional startup with his usual you know management investors and the way to do business as usual into an open community with no hierarchy with no managers and it was more a thought experiment than a real experiment but that was the goal that we had and it was called a 3f Tapia see there are some people that were part of the experiment in the yeah and so doing so we faced a lot of question many question actually like how do we organize the work that is to be done how do we pay the people who will decide how much people will be paid what is the priority for the wrong map who is deciding which kind of marketing campaign we will launch and who will be part of the decision-making process like for instance to include customers or just people who directly contribute and also question like who will design and how we will decide about the way to decide right so all kind of question that actually you don't ask yourself you don't have this problem when you run a traditional company because there are people that are in charge of making decision we have an clearly found model but the result of that and what I take from this experiment and that I actually I'm going to reuse throughout this presentation is inspired from Lawrence Lessig pathetic theory for those who know that it says that there are four main sources of constraint over how behavior as individual one is the low one is the code or the architecture which is what is given by our our environment and was and one is the social norms and the last one is the market with which is governed by supply and demand and price discovering so these are the four main constraint that are actually playing on our behavior and this is actually four main constraint for governance as well so we'll see that through other presentation and the other point that I want to make is that governance is complex this is dynamic this is a process it's not something that we can solve in one or define or predefined formal model so formal models are actually useful for governance but we believe and I believe that we have to play with the models because they are never capable of solving the entirety of governance problem and with that let me start with the agenda so I will go further through what is governance and then we'll see governance in the context of blockchains public blockchains very quickly obviously and then governance in token based economy my talk is entitled which governance for my tokens and so I will finish with a specific case which is the way we see token based governance in the project that I'm working on right now which is called tribute so first what is governance could the the people who think that they have a very clear idea of what is governance raise the hand okay so it seems that there are there are actually not very clear understanding of what is the term for most people and it is quite normal actually it's quite a fuzzy concept there are actually several ways to define governance I start with very simple one which is extracted from the oxford dictionaries and it says that it's basically the Act the action of the old manner of governing right so you have a government or you have a king I think that there is an example of the King here yeah and and the action of governing of the manner of governing is the governance itself so it has something to do with the power right the king has the power however governance is not management so in the context of the corporation in the context of the business organization power within the company is applied by the management and the Heike within the company and there is a big difference between governance and management what he said generally is that the management is about executing a strategy so let's let think for instance about the CIO the chief information officer of a company is in charge of the IT strategy you may suggest plans for the IT strategy upon the IT department there may be I prove by the executive committee let's say or the CEO and then he will go and apply the strategy and the same for the CEO who will defend his own strategy before the board of directors so it's about executing more than about the goal itself governance is about the goal governance is about making sure that all the processes are in place in order to reach a goal and the processes might be people that's why there are governance procedures for a naming executive people for instance and it might be the processes for controlling that actually the trajectory of the organization is going towards the goal one goal can be the self perpetuation of the company which is a condition for doing anything but it's actually more complex than that because there are many people that have their own goals and that influence the the governance so here in the context of corporate governance we can see the traditional stakeholders sorry about that so on the left you have the internal stakeholder the Board of Directors the executive management and employees on the right you have the the external stakeholders like the shareholders the creditors the suppliers the bank the customers the community the state in France it's often the state so you have many people that actually are part of this governance process and sometimes there are conflicts of interest and Milot misalignment of interests because all those stakeholders don't have the same goal obviously governance is also about mitigating the conflict and the misalignment of interest in anglo-american companies there is an emphasis on on the importance of the shareholders right and there is a fiduciary duty there is a very important duty of the executive management towards the shareholders the executive management is in place in order to maximize the profit maximize the value that is returned to the investors this is why the Board of Directors in those companies are named by the shareholders it's not the same case everywhere for instance in Germany who have those companies where a part of the Board of Directors is named by the please not all of them are named by the shareholders which is interesting it means that the role of the employees here is fundamental and that in a way the executive management report to the employees through the board so yeah so we can have tension and opposition between different type of stakeholders and that's participate to the sort of governance that we have so let's talk quickly about some governance failure some here may remember at the beginning of 2000 the 21st century we had those very big scandals and actually people started to talk a lot about corporate governance there then when companies like Enron are welcomed collapsed in a spectacle spectacular manner for for an idea of that for people who were not aware Enron was a company whose market cap was sixty billion dollars and it went away in a few weeks basically and their account were audited by Arthur Andersen which was one of the big five audited firm at the time and which was one of the most respectable audit firm in the industry with something like eighty thousand auditors they went down as well it was because of corporate governance issues like for instance the fact that the executive managed management cheated on the account in order to maximize their own revenue because they were incentivized through a market mechanism so that the performance on the stock market was getting them a huge compensation so that's in very interesting because it was a market you remember at the beginning I was talking about cold low market and social norms the market was a way to incentivize the management to actually align their behavior on the interest of the shareholders but doing that in a very greedy way they actually destroyed the company as a result the solution or what people what people thought was a solution was brought by the lobe and it was what was called an Sobhan Oxley regulation that was a set of regulation it was very demanding in terms of control of the account transparency transparency also of the way the auditors were doing their job and it was so demanding that I actually a lot of companies top to go to IPO because of that fast forward in 2008 we have another corporate governance issue and very mega one I I would say with the 2008 crisis obviously and then it's not audit firms but its credit rating agencies that were accused in a way of having some kind of behavior that was suspicious because at the same time there are different interests at the same time they have the interest of having the banks or the insurance as their customers but at the same time they were rating them right so that was that was an issue what is interesting here and my point here is that actually were moved from one way to deal with that kind of thing which is through lo2 another way which is through code because it's kind of contentious today to say that the bitcoin was sort of result of an effect of the crisis of 2008 or the adoption of a way that allow anyone to control is is on money instead of having to rely on banks or corrupted government and corrupted the financial institution which lead me to the governance for blockchain itself so we have stakeholders as well in the blockchain environment in the decentralized network they just don't have the same name of course the men want in a decentralized network like the Bitcoin are all the miners and the developers and the users right and the miners the valley that blocks and developers they develop the software in order to validate blocks and the user do whatever they need to do with the whole thing and then you have other stakeholders like gee exchanges for instance and so there are possibly misalignment or alignment between those different people different stakeholders and when we are going to talk about a governance crisis generally this is because we find misalignment between those people like the block size is you with the Bitcoin for instance and the misalignment between miners and developers but here I'd like to tell you about something else that everyone heard about know about it's the the DAO problem in in 2016 so what is interesting hindi in this this event is actually the DAO was a governance system it was actually on the website can see heat here defines governance Gao code defines governance the idea of the DAO was to get rid of some governance problem by coding the way people wouldn't interact to different stakeholders where investors you might remember that the deal was some kind of fund but that was decentralized and the investors were part of the the system and then there were companies or developers or teams that were willing to get the phone in order to develop their own software and contribute to the area community and then there were some other stakeholders that were the curators we're making sure that the actual proposal from developers were legit right there was a hack as you know and the trust in the DAO vanished what is interesting is what happened after I took this from just you know journalists no one that is particularly aware of the detail and the intricacies of the issue at the time but it was very interesting to see that what she said was that the embezzlement the theft of the funds were was late legal it was legal because there were no agreement between the different people that were forming the DAO if you look at the regular found you have contract between the fund managers and the LP and the limited partners and you have as well contract between the phone and each company they invested in but in this case there were no contract the only contract was the code so basically if there were someone stealing through the code then it was legal okay fine but then in the next sentence what she says it it was just at the time the hog was discovered meaning that they were the you know this locking period period of 30 days and the funds were still locked so people were hoping to get it before the period was finished and so she was saying the e theorem community has less than amount to decide what to do but what is it to do to be done it's in the code right so the only thing the D theorem community possibly could do was breaking the code but you cannot do anything else than that and that's exactly what happened and there was the fork and it was what is called a governance crisis in the etherium community that actually led to two different a theorem communities so that's a governance crisis because there was a dissensus there was a fight around the goals for one of the constituent for a part of the people in the in the community the most important goal of one of the most important goal of the etherion project was immutability and for them if you change the ledger then you could as well trash everything right because this is a critical goal that is a attacked and for the other one which became the theorem that we know it's actually not true immutability is important but it could come second compared to security for instance because having someone that has 10% of all the ETA at the time could be a problem of security or it could be second to ethics so one question that has been posed and that I asked repeatedly at the time and since then is could all of this mess I have been solved through code so instead of having to fork would it be possible to actually modify the for instance block the phones or change the software change the protocol in a way that is inside the protocol and that's about self upgradeable Ledger's and self upgradeable protocols so that's what is called as well unchain governance right so you have problem we project we have project today like tasers or Definity that are precisely about that they offer ways or they want to offer deliver ways for protocol to be upgraded depending on the vote of the people who use a protocol and you have another way to see the whole issue in the theorem community and in the Bitcoin community and what is prevailing as an opinion is that often governance is very important actually and it's part of the resilience of the protocol to have off chain process meaning that it's not on the blockchain for a number of reasons of all people interested I recommend the articles of of course Vitalik and vlad on the subject and cream a very Philippi recently an article called no block shannon is an island there are very good explanation of why it's important to actually rely on something else than the code in order to define the governance let's go through governance or of token based economies now so it's a bit different because blockchain projects are not public watching actually except some public blockchain that are centralized but most of the public portion that are not centralized are open and you have problems like Siebel attacks for instance that you don't have in most project that are using the blockchain in order to deliver some kind of application some kind of taps constants if you look at the stakeholders in the blockchain project it's actually quite different from the one that we were seeing for a public broken and it looks like traditional corporate governance right you have CEO of a project that go through an ICO for instance you have CEO you have the city or the CI mode to see whatever all you want you have a hierarchy you have employees even investors traditional investors and VC's that actually invest before the cell talking cell and then you have the usual suspect the customer the suppliers actually the infrastructure can be seen as a supplier so when adapt our company an organization that used the blockchain for a blockchain project relies on a theorem for instance there is a market interface between this organization and the infrastructure it's called gas right there is a new kid on the block here which is the investor that's kind of funny because the public investor normally you don't have them in the block either in a start-up you have them in very big company that went through an IPO but now with the fantastic thing that is called an ICO we can have public investors in a very small project like a blockchain project but then it creates some new potential for misalignment and for tension as you as you know there is this weird thing that we have in the ICO is that as an investor and as a disclaimer I'm an investor in some ICO so as an investor you buy tokens but tokens that are in most case suppose to be utility token so you buy the right to use a service later and most of the investors don't buy it because they want to use it they buy it because they think that the price is gonna rise and that they're gonna make money out of it but it's not like a traditional chair it's not like it being in the round of a startup a seed round it's not like your business Angela you have no shares you have no right you have no voice you have absolutely no influence on the internal stakeholder so the internal stakeholder get the money get the eater get the Bitcoin and they even get some talkin you talkin but they don't have any accountability towards the investor that's what is one of the problem of the ICO so what keep them actually doing what they said they will be doing it's kind of interesting a corporate governance issue right how do you make sure that there is an accountability how do you make sure that the company is actually doing and delivering what they said they will do if there's actually no change for them they already got the money they already got the investment well this is generally the reason why there is a part of the talkin that are that is allocated to the management team and to the company so that their interests are aligned to the ones are of the investor but generally it's very little compared to all the ether that they got especially when they either went up actually this is why I put again this little icon here of the social norms the reason why we don't have so many scams we have a lot of scams but actually not so many of them it's because we share in the community some social norms that it actually not right to take the money and run right and there is the law but it's a toothless for the moment but it's coming coming on on on the one that are not doing their job so there has been different ways to actually solve the problem or suggest solution and they you slow like the foundation system are they use code like the Dai Co so one one minute on each of them foundation is actually a trick that is legal it's a low system and agreement system so the idea is that you're gonna create a new vehicle and put the phone in the vehicle and the the people in charge of this vehicle won't be the same that the one in charge of the company that triggered the whole IC o---- in the first place Oregon did that very recently in a very interesting manner they said that they want to draw an ecosystem around their technology and they want to make sure that even companies that have ideas that are competitive competing with what they do could be actually supported within the ecosystem hence the foundation that will have funds to help the companies that may compete against Oregon but on the same technology that's good but it's also a problem because it's centralized it's not decentralized at all it's a traditional organization and if thing goes wrong like you've maybe heard about the Chisos problem with definition then you can have a locking of the font and the whole thing of why the other thing is the GIC Oso decentralized autonomous initial coin offerings so the idea is more or less to reuse the DAO mechanism so that instead of getting the phone right away the people who raised an IC o---- get the phone depending on the milestone and the investors actually vote on the release of the phone which is kind of cool except that it's not legal right because the GAO is not legal and it's exactly the same thing so there are issues also in terms of legal aspect and also in terms of participation we know by experience including with the GAO that people don't participate to the voting they invest but then they stop being interested so that's another issue with this kind of system and I getting slightly late so I'm gonna speed up a little bit with the last part and I'd like to tell you a little bit about our project and how we see a possible way to organize the governance a bit differently moving forward when we have the centralizing ecosystem so what we're doing is called tribute and the general idea is that it's equity for your community the general ideas that we create contributed tokens then organization can use in order to share the value of what they produce with their contributors so non employees people that are outside the company and together you know it's like everything is ecosystem today we have company but every company works with volunteers with freelance with independent workers with advisers with you name it Partners consultant so the idea is that the overall value that is created by a company is actually the result of every contribution and not only the people inside people inside we have instrument in order to incentivize them on the future value it's called stock options but we don't have that kind of thing for people outside and that's what tributes want to to solve so the general system is this so in the middle layer here it's the organization and the organization rewards external contributors using tokens when some job is actually done right and at the bottom layer you have tribute which is itself on the same model with a core team and a community of contributors the business model of the system is that it's not a SAS model we don't have a subscription model instead we are a contributor as well of every organization so if an organization issues some token using our system to pay their contributors then they issue as well the same token for paying the platform and we're becoming a whole complete ecosystem through through this process as a result we introduce what is called here a token swap meaning that every time we receive a token from a new organization we issue a governance token for this organization so that the organization itself has a say as a voice in the governance of the ecosystem the goal is to actually mirror to match two different Breann one is the realm of the code with the DL and the second one is the realm of the legal form of a company and for that we are contemplating the use of a very specific form of cooperative called the public benefit corporate if it's a French form of cooperative that has been created recently in 2001 I believe so the idea here is that we have three group of shareholders there are stakeholders the main stakeholders organization contributors and the core team and there's no group that owns the majority of the shares so the core team of the startup if you want that is tribute cannot control the main parameters of the ecosystem from the ground up it's designed to be decentralized through a legal governance the other thing that is important is that there is a duty to the network a fiduciary duty to the network and not to maximizing the value for the shareholders and that's part also of the status of public benefit cooperative and the last thing is that by nature is multi-stakeholder governance meaning that there is a cooperative style governance within each group of shareholders like a democratic governance each person has one voice but then this is group at the level of the stakeholders so if you have I don't know like 1 million person 1 stakeholder group and ten in another one then it won't change the balance between the different stakeholder group right and with that thank you I think I'm bit late for a question [Applause]