EthCC 2: Hugh Karp

that's cool everyone yep thanks for its good good to be here even with the fire alarm and a bit of messed up just scheduling but hi my name's hiccup I'm the founder of of Nexus mutual we're building a decentralized alternative to insurance the idea being that people pull their funds together into a Dao and then they can cover risk that they all face and the first product that we're going to launch with is smart contract cover so the idea being that you can cover risks or bugs in my contract code so the Dao hack or parody multi-sig well that issues those types of things but I'm not really here to talk about what we're doing and necessarily what I am going to talk about is what we've learnt through the process of trying to build a Dow which is linked to a legal entity and hopefully can tell you about what we've learnt what we've come across some of the pitfalls and some of the reasons why this structure is can be quite useful so I'm going to quickly start with a big disclaimer I'm not a lawyer I'm a business person this is a legal advice but it's what we've learnt and hopefully others can find it useful we'd have a technical issue with the slide so apologies for the scrolling I'll start with a story so there's this rugby club about 10 miles out of London in Essex and it is a normal kind of sports club where people pool their money together and it pays for ground fees and the canteen and all the normal stuff and in about 2010 the the club need to get some work done to fix it Stadium etc and they contracted some people to build it and the costs over and by about one hundred and fifty thousand pounds and then the club couldn't afford to pay it and then the builders took them to court and what was the interesting part about this is that they took the president of the club to court personally and they the president mr Davies was found liable personally and had to pay the hundred fifty thousand pounds of very nearly went bankrupt to himself so the point here is that the the club didn't incorporate itself for anything it just was a group of people coming together to do something shared together and because of that the law in the UK and over and various other jurisdictions treats this is an unincorporated association which so it describes something to it and on on that basis there's unlimited liability on an individual basis for participating in this membership so you pay your membership to a sports club but you're taking on a whole lot of personal risk so if you want to look at the details you can have a look at that particular judgment there describes what I went through so that's kind of a pretty key issue and it's actually a pretty big problem with with ours in general so members of a doubt joint and severally liable for the actions of the DAO which means any particular member of the dáil could be personally liable for any action it takes on an unlimited basis is there there are multiple reasons why that might not actually happen but there is that potential risk there the point is you could be sued for the entire loss of other people doing stuff say you were just voting on a proposal it's not a particularly good position to be in it may be quite unlikely there are things you can do to restrict it for example if you do basically go full-on dark mode then no one's able to actually track who you are and so therefore you've got some level of protection against it but there that's that's one potential thing you could incorporate yourself so you have a limited liability itself before you interact but but that's not necessarily easy for a lot of people to do so so it's a problem for in my opinion for increasing adoption the other the other problem with with dolls is because they don't actually have a legal personality it can often be quite hard to do basic stuff like get a bank account pay invoices enter into contacts just do normal business stuff I I want everything to be decentralized and fully on chain as much as the next person but we're not quite there yet so it's often beneficial to be able to to interact with the non Bakhtin world so that if you're going if you don't have that legal personality you have a lot of restrictions which you can work around but it's often difficult so yeah Limited Liability so what I just skip through see basically if unlimited liability was the standard and it used to be in that eighteen hundred's shareholders had to concern themselves with basically every action that the business takes and so that meant that you only ever became a shareholder of a company in front of the company if you could trust those individuals and you knew them personally and you were quite okay with what they were doing and you were kind of involved in the decision-making just some extent the the point is the individuals are willing to take more risk of business failure if their exposure is limited to their to their actual investment that's just kind of common knowledge that's kind of how we're operating and so at the crux of it limited liability encourages investment that would not otherwise occur and so it's something that is a big driver of economic growth since the 1800s and so I guess what I'm saying is it's pretty important in my perspective so if we're going to give it up we shouldn't do it lightly so this is this is one possible solution to dealing with this issue it's the what we've done at Nexus mutual so in the in the UK there's what's called a company limited by guarantee so rather than being limited by shares which is what you would normally have a company for so this these companies are used quite extensively for charitable organisations cooperatives Mutual's those types of things some big companies Bupa Network Rail a whole bunch of clubs and membership organizations and those types of things the Oxfam is also one so the the crux of it is instead of being limited to having limited liability on a share basis you have a limited liability on a per member basis and you can ascribe what that value is and so you can just set it to a nominal value of like one pound and so if the whole thing goes bust then each member only has to throw in another pound so you're kind of basically back to the same position as a regular equity based company the other thing is because it's a membership organization it doesn't legally have any equity that means if you were to tokenize membership rights then they aren't necessarily securities they could still be securities based on their nature but they don't have to be they don't start from your tokenizing shares so therefore it's a security it actually is a way of having a token that isn't necessarily a security the the other thing you need to do is you need to link the legal documents of the company so the articles articles of association you need to link that to the smart contract code and that can be done essentially what you can describe that the operations of the company are according to these this code and you can have some company rules which is another legal document which describes how the company operates and how this MOU contracts work and who do what how the voting works and all of those types of things so you can do that and that's what we do so the the benefits that it gives you it gets you back to that limit of liability per member it has a legal personality you can get a bank account anyone in the world can join a UK company by the Corporations Act in the UK as I said before that the tokens aren't necessarily securities but one of the other things you can do is if the tokens can actually have legal rights because they are backed by a legal document as well so this potential hybrid approach does have some benefits so just from a like just drawing it up as a bit of a picture you've got the regular company on the one side you essentially have the the legal entity being the kind of company and the shareholders etc and then the customers are outside that legal entity the DAO is just a group of people interacting with each other and then this legally link down in the middle is essentially people interacting with each other but they're all within the company and they're all members of that membership organization and they can only interact on once they become a member first and you also have to ascribe board members because you have to have a board as a company so that's that's one of things I'll talk about in a second so yeah boo it's not decentralized so there are a lot of there are trade offs that this involves and the overall usefulness of definitely depends on what you're trying to do and what you want to trade off and what's most important as I said before limited liability is pretty important in my mind so maybe we're straight trading off some things but others may take a different position based on what they're trying to do that's that's fine so some of the trade-offs you have to have a board but you can actually limit their power quite substantially so a board usually has pretty broad rights to kind of do whatever they want to do what you can do is say the board only do things after the membership has voted on a particular proposal and they can only do I can only act after that has happened so you can kind of restrict them to kind of implementer type problems kyc you don't need to do kyc under this model if you want a bank account you probably have to this is not a legal requirement this is just basically the bank saying I want to know where your funds came from before I give you a bank account so if you want a bank account under this model you probably have to do kyc privacy this is another trade off because each of the member members of the organization is essentially a guarantor to the business that one pound that the list of members is publicly available led their names that's that's all you have to make publicly about and a contact address which you can just kind of set to the company address so so that's a that's a downside governance there are particular rules Companies Act etc you have to kind of set up some governance according to those rules but probably nothing to owners it just restricts you on potentially what you want to do and how you want to set it up so yeah it's not too decentralized well it is not decentralized but there are there are trade-offs there so there's a bit of an example on the board and this is kind of how we've set it up is you can have the powers of the board can be like to whitelist the proposals which a lot of dowels do anyway you could have them set the default outcome of the proposal if the quorum isn't met as an example you don't have to do that just an example but they could also act on behalf of the members in the real world so for example if a proposal went through to extract some funds from the DAO to then do some work they could then facilitate that work etc then you can put some controls in place and you could say for example that any of the board members can be overthrown at any point by a member vote that board can't stop so they have a essentially a control there to regain control of the whole thing if if one of the board members does something wrong or that they don't agree with and the code of the mutual could only be changed the code of the organization could only be changed by our members vote as well so you can put all these restrictions in place that mean the board is very very controlled or restricted in what it can do so more broadly stepping back a little bit cooperatives aren't really a new thing and this structure is used for a lot of cooperatives the right retail Society of Ecuador plain is outside of Manchester it kind of it was one of the first quad fruits to pay what was called a patronage dividend which basically means is a little shop and the people who frequented the shop got a dividend basically of an earnings and that's kind of how we're cooperative principles start a boot and began and if you actually look at these encourage you to look these up just on Wikipedia really but they began in 1844 and if you go through each of those principles that they're very similar to what a lot of dowels are trying to do first voluntary and open membership that's kind of our permission listing Democratic member control so we have members voting on on how the co-operative works there the members are participating on an economic basis they're getting something out of it the the whole entity can act on its own its autonomous and independent and then there's some stuff around education and cooperation their own cooperatives and community and things but if those first four in particular are very similar to a lot of the principles that are many many dowels kind of aspire to so then if adele is a lot of like cooperative in a lot of sense then you can start looking for legal frameworks around the world that cooperatives use and look I haven't looked into any of these other ones in any real detail and I'm sure there are different types of trade offs that exists for those types of organizations but I'm sure that some of them are several of them will work in a similar way and have similar trade offs and might be quite useful to house based in in different jurisdictions I guess what I can say is the UK one works we're doing it when we pick the UK for other particular reasons to what we're doing specifically but that structure does does work for for a legally linked out so one of it one of the problems is that we're three thousand general is and this is kind of a quote from Stephen pally he he said that Dow's are technological technologically very forward but legally very backwards and so what I'm trying to do here and what we're trying to do is combine the good stuff from the old principles terminology stuff that's been done before we don't have to reinvent absolutely everything and use that and repurpose it with or combine it with programmable money scalable coordination transparency all the stuff that the technology now allows us to do we put those two things together yes there are some trade-offs to perhaps what the absolute vision of some of the people here would like to see but I'd also say that there aren't that many people around the world that have the same type of vision and maybe we do need to make some trade-offs to get some level of certainty on other items and maybe that's the way we can get more more traction and lead towards mass adoption so that's where put trying to put these two things together to create a new kind of type of entity that is controlled like a Dao but it has the legal certainty and principles and stuff of a defined legal entity yeah I've used legally linked doubts throughout this entire presentation I actually hate that term but it kind of described exactly what we were trying to do what I would actually call them because no one in Hell knows what a Dao is outside of these conferences is call them a digital cooperative that's perhaps not exactly what it is on the technical basis some of the time but whenever I describe I start describing it down to someone that doesn't know this world they get lost and they glaze over and all the rest of it and I've started using the term digital cooperative and we just move on to the next thing very very quickly because it may not be exactly what it is technically some in some instances but they get it and it's clear and there's a lot of benefits to to making that happen and getting mass adoption because if people people need to get over these complex complex concepts very quickly and well they're not going to go into the details so we need to kind of give that high-level description I think that's a pretty accurate high-level description of what we're trying to trying to do you so yeah that's that's really it we're we're doing this we're connecting the old and the new worlds where but we've also got this framework that's actually quite can be generalized we've just got specific rules about what where our dao operates on what it does and connected them to the legal documents but we've done a whole lot of legal work here that it's hopefully valuable to the community more broadly and yeah i encourage you to get in contact if you want to investigate setting one of these things up and maybe we can help guide you in the right direction so yeah happy to take any questions [Applause] hi I'm sorry we came a bit later in so that might be a weird question and you might actually be talking about it but um do you think that those are going to emerge separately and then everybody's fault going to follow even in term of cooperatives or is it more likely that the already existing institutions are going to turn into sort of a doll so they are going to become decentralized and they're going to become a bit more autonomous so they're going to become dolls that's one and the second question I have is what are the legal issues that you're receiving we cooperatives so we've done a cooperative back in Slovenia and the legal framework for cooperatives is very fitted for dolls as well it's very what it's very feet for those it fits them very well much more than any other legal framework actually but there is still some sort of wishes and I'm very interested if you're you have identified any specific so I think the first question was how do I see Taoism evolving over time yeah I kind of see different ones emerging for different purposes and to me to me this structure is quite cool for a lot of things but I'm sure it doesn't work for a whole bunch of others if if you're trying to run this fully autonomous dark thing then this isn't the right vehicle if you want a bit more certainty on the legal aside and you want to operate something out in the open then I think this has quite a lot of benefits and perhaps the benefits are worth the trade-offs that you have to make so I think it depends on the particular situation in terms of the restrictions for particular for cooperatives in from what I've seen the the co-operative model actually fits really neatly and I haven't seen any major trade offs that you have to make I guess one of the biggest ones is potentially cooperatives have a problem raising money because they don't have any equity and therefore they can't go to capital markets and all these ease to sell equity right I actually so that's one of it they can't grow very easily that's one of the big biggest kind of story problems with cooperatives and a lot of it that's one of the reasons they often turn into shareholder companies and make more they deem mutual eyes or turning just turned into a regular company so that's happened a lot it means it kind of the co-operative stay this dinky little community model they don't kind of grow out of it but and that's one of the things we're doing it Nexus actually is because we tokenize the membership rights you actually can not legally change the funding but you add in flexibility to the funding model and allow it to scale up so so and I think that that's necessarily a legal issue it's just the technology allows you to kind of get past that legal issue actually thank you all comments not a question I really like the digital cooperative of terms it's really much better than that thank you thank you very much all right thanks [Applause]