BoardRoom, its Design and the Future of Blockchain Governance (Part 2)

In part two, I will provide what I believe are some broader implications of the blockchain and BoardRoom on human governance.

Giving the Power of Governance to Everyone

The End of Governance Gate-keeping

It’s easy to get lost in the technological shuffle of the underlying systems of BoardRoom. But ultimately, the power comes from the fact that we are packaging and providing contractual governance technology to everyone. Whether that be the owner of a multi-billion dollar hedge-fund or a small gym in rural Alaska. Everyone will be given access to these utilities that were once only available to the very powerful and wealthy. To set these systems up in the conventional way takes countless hours of legal work, contract construction and has bred enormous amount of legal businesses to do so. BoardRoom allows an almost instantaneous instantiation of contractual governance that is highly future-proof and extremely utility oriented.

The gate keeping of contractual governance will fall with technology like Ethereum, and BoardRoom hopes to lead the charge with components and services we believe meet practical demand. As I’ve stated before, this is only the start of the conversation on governance, one approach of many.

Reputation and Identity Systems with Governance and Membership

Trust, reputation and identity are all central focuses of BoardRooms contractual design. The idea is that governance structures will change overtime but identity should remain constant. Organizations through the contractual proxy will have their own identity, but how does reputation play into voting, and governance systems? If there are reputation systems that end up with contractual and quantifiable metrics for rating an accounts reputation in some content, Boards can use this in their voting system and structure. In fact, there may be many solutions to tyranny of the majority fund allocation through reputation systems.

Organizational membership may also be defined by the metrics of a trust or reputation system. Presently we are at a very rudimentary phase of voting metrics, where the underlying voting weight and structure will be based on services, tokens or registries. Essentially, membership sub-ledgers. But with the integration of reputation systems, we could have certain individuals gain access to Boards by having a certain community reputation. Specific functionality such as tabling proposals or voting can be determined or weighted by one’s reputation in a system. As well, the capability of the Board within the broader ecosystem, may end up being determined by their status within certain reputation systems.

Build Aristocracies, Dictatorships and Democracies

Given that all contracts and governance structures are interchangeable, this leaves room for organizations to choose, even after they have their existing governance structure, any kind of governance arrangement they want with almost any kind of philosophical leaning. Perhaps an organization would like to go from a dictatorship to a democracy or to an aristocracy to a dictatorship. This list is endless, no matter how unlikely the scenario. Even with default components, one could easily construct almost any kind of governance arrangement by altering the rule or voting system component. This means all other systems remain the same, but the rule component changes to suit the governance style.

In fact, we can think of the rule contract module as stating the style of governance an organization wants. Perhaps they have two executives, or four co-chairs. In the default contractual BoardRoom designs it is the voting system where these positions and governance styles can be contractually stated. Moreover, a Board could change the rule system with little effect to their existing proposal system. While this may not matter to some organizations, others may want a clear record of Board consensus held under a specific proposal system.

A dApp Store for Governance Components

Imagine the head of a Board looking to integrate your governance structure onto the blockchain. You view a simple interface that presents a multitude of governance options (registry democracy, tokenized democracy etc), you select a few compatible components and bam! Your organization is now on the blockchain. A simple interface could be provided to build Board’s through the BoardRoom UI. This would allow a user of any technical level to build and design their organization on the blockchain. I think it would be very exciting to see a dApp store for government components, imagine building a complex contractual democratic corporate voting system in seconds.

A New Paradigm for Human Governance

It’s safe to assume that with the help of smart-contract infrastructure like Ethereum, we are witnessing a new paradigm of human governance where the rules and structure are not defined and enforced by systems of law and society, but are instead enforced by computer code, cryptography and economics. The aim or purpose of governance remains largely the same, but the way in which we perform and build our governance structures will be vastly different.

From here we begin the process of moving from the laws of words, lawyers and legislatures to the laws of computer code, cryptography and decentralization. This will mark a paradigm shift in human governance, where we transition the way we perform governance from the physical to the digital.

Jurisdictional Compliance & Meta-Jurisdictional Governance

The Law and Blockchain-Boards

Many Boards instantiated and operating on the blockchain will want to comply with specific jurisdictional law. There are numerous regulatory bodies in many of the world’s jurisdictions which dictate what they believe are lawful operational business practices for companies and non-profits. Many organizations that operate in these jurisdictions will want to leverage BoardRoom technology but will also want to stay jurisdictionally compliant with the laws that concern their organization. This is completely possible with BoardRoom in both a loose and strict fashion. In the loose sense of compliance, Boards can have open contractual structure, but know to behave in compliance as it would be very easy to diagnose by law enforcement or regulators if they are not (given that the very nature of the blockchain is trust and transparency). The strict version of compliance would be actually designing contractual components to be in line with jurisdiction law, even going so far as to appoint jurisdictional executives with power over the Boards to thwart regulatory misconduct. Each organization will have to make a conscious decision about how they want to proceed on compliance, but we can be sure once governments catch up to systems of the blockchain, strict contractual design may be a reality for many organizations.

Alternatively, there are other interesting alternatives such as non-jurisdictional organizations that only exist as a contractual entity within the blockchain (what many call “Decentralized Autonomous Organizations” or “DAO’s”). These organizations may touch specific jurisdictions through various third-parties but are in fact outside of jurisdictional law altogether. This is the interesting aspect about BoardRoom and blockchain governance in general, contractually bound governance structures can exist without the need for conventional jurisdictional structures and systems. Once again, highlighting the shift from the physical to the digital world. We could say that these governance structures are outside of or meta-jurisdictional in nature.

Should Conventional Governments use Boardroom?

The world contains millions of conventional governing bodies, everything from small regional governments to large-scale organizations such as the United Nations. If these organizations claim to be transparent in their behaviours, there should be no reason not to use a blockchain governance system such as BoardRoom. Even if it’s to recreate or mirror existing legislation on the blockchain the use cases are enormous. If governments plan on using the blockchain for things like asset holdings or allocation, then they too need an identity and perhaps a reputation within the smart-contract ecosystem. Moreover, we can also imagine that many reputation systems may base their rating of reputation on the governance that has been transacted in the past. So if governments plan on participating fairly or transparently within the ecosystems and platforms of the public state-transition system, then they should prepare to, at the very least, simulate all legislative behaviors on the blockchain.

We can also imagine inter-governmental accounting can be done in a way that is more transparent and open than ever before. Where one governing body can transfer funds or resources to another with complete transparency and openness from the legislative process down to the accounting of the balances themselves.

Integrating BoardRoom into Existing Corporate Governance

The Challenges of Transparency

The central challenge for most organizations in integrating a technology like BoardRoom will be coming to terms with transparency. Many companies construct their business models on secrecy, it enables them to protect their research and strategic positions in markets and investments. The more a company uses BoardRoom in their business process flows, the more they expose the inner workings of their business to the world. In response to this concern, I see many companies only using Boards to establish existing company structure and accounts within the ecosystem, while others will choose a more transparent approach not fearing competition or scrutiny. I also maintain that, many companies in many different sectors will opt for a more transparent governance structure, as it will expose to investors and shareholders, critical micro-corporate decision making behaviour that has been largely black-boxed to the world since the dawn of business. I see a shift in business practise on the horizon, where transparency and confidence play a bigger role than secrecy and privacy.

Companies will have to decide what level of BoardRoom integration is right for them or how far do they want to go down the path of transparency and openness. Ultimately, many companies will resist this future for as long as they can. But I maintain, as global investment infrastructure is provided to more and more people, firms will have no choice but to become more transparent in their governance structures and business process flows.

Companies may also find challenges porting their existing governance structures onto BoardRoom. Many are filled with unnecessary rules and regulations that are either not possible or invalid in smart-contract terms. To move past these challenges, firms must attempt to subtly restructure conventional meaning and terms to suite the infrastructure that smart-contracts provide. There will be a transition process and it may not be easy, but ultimately, firms will be left with a governance structure every investor and competitor can see, a proud statement by the firm that this is the way we do business and we are willing to state it in the open.

We can also imagine that, the more digital assets a company holds on Ethereum, the less paper-work, accountants and secretaries a firm needs. Because the Board can go directly from the Board proposal to the transaction clearing, this eliminates the need to move through existing corporate infrastructure such as treasurers, secretaries or accountants, and is directly transacted and cleared by board members on the blockchain itself. I maintain this to be one of the utmost appealing aspects of BoardRoom and decentralized governance in general, the fact that the proposal execution is the transaction and is the clearing. It’s all done at once. I see many firms realizing that they don’t need half of their corporate infrastructure, and that a single governance system like BoardRoom can completely transform a way a firm does business.

The Importance of Persistent Organizational Identity Through Time

Reputation and identity will be a fundamental component of platforms and ecosystems built upon smart-contract infrastructure. Binding the power of identity and reputation with smart-contracts in a provably trustless system will surely change the world as we know it. But the technical meaning of identity will not just mean the I.D. of a single person, instead it will mean the identity of a single account (a 20-byte address on the Ethereum ledger). These accounts can be a contract, artificial intelligence, group or organization. Because of this, organizations, will need to be extremely careful about their ledger behaviour. Especially those that preform process flows on public ledgers under their company account.

I’ve designed BoardRoom to take this concept into deep consideration. By default, BoardRoom’s proxy forwarder or transaction funnel allows almost any kind of transaction to pass through that address. The rest of the organizational structure is up for debate. Business process flows instantiated on the blockchain will be used as part of a reputation score, so we must be ready to build systems that work with the latest and greatest reputation mechanisms. This is one of the main reasons why Boards should have enormously flexible governance structures, so that we can adapt over time with the latest and best technology and reputation systems of the time. Imagine holding millions in digital assets under one account but not being able to adapt your business process flow systems to the latest reputation systems. You may find your organization completely out of luck, with the only solution being a mass transfer of assets to a governance system or structure that can accommodate the new trust system. Proxies and constituted proxies (e.g. BoardRooms) will be able to participate in almost any reputation and identity system. With a Board, the reputation system would simply look at the proxy implementer to see what governance system or owner that identity has. Thus providing a simple and elegant link between the governance structure, identity and reputation system. There is a possibility that these systems may not accommodate my proxy design. For now, I see proxies as being a fundamental piece of smart-contract technology that allows identities to persist while the surrounding ownership or systems change with the times. Once we have standardized the proxy contract design, we should be at a comfortable place to say proxies are here to stay, and the backbone of reputation system design. Presently, it’s an open debate.

Crowdfunding and Governance

One very interesting combination of contractual design patterns and smart-contract services is between equity crowdfunding and governance. The idea is simple, raise capital, turn it into equity that is instantaneously issued, then allow these equity stake holders to proceed in the matters of governance over their investment. It’s a dream combination to go directly from capital raising to governance in one simple and fluent system. Contractually, the design I’ve favoured is a crowdfunding contract that solely handles the business logic of crowdfunding itself, then have an equity disbursal contract that is interdependent with the crowdfunding contract. The disbursal contract will handle the logic of issuing tokens to contributors. Once the campaign is over, any leftover tokens will be issued back to the token owner, usually the firm. Meanwhile a governance structure such as a BoardRoom can be deployed basing its membership and voting weight on this token and its account holders. The tokens may be sold and traded on digital exchanges while governance can begin almost immediately.

Crowdfunding and governance on an open and transparent state-transition ledger will change the way companies and firms conduct business and raise capitol. It will dramatically shift the idea of investment, as we can now openly define, in an immediate and contractual way, what it means to be an investor for each firm or project we invest in, before we invest in it. This provides an enormous amount of initial infrastructure that was one only available to highly skilled, educated and wealthy individuals. And even they did not have it this good.

A Note on The Original BoardRoom Designs

BoardRoom is an evolving idea. For now this post should act as a step toward an updated white paper. In the initial designs, I focused on breaking up the nature of organization into a single contractual system that would someday be broken up into multiple components.

The new designs take this multi-component approach, allowing us to freely build whatever system of governance we want, while giving the developer some starting points by way of defaults. I believe this approach to be more mature than the original, as commitment is very low to component design that is most likely flawed. The initial designs where a launch point for the idea, but we can safely assume everything will change and most of my designs will be either invalid or unusable even in the near future. For now, we can only hope the proxy which underpins every board is moderately future-proof to some extent. A discussion on standardization of such a system is certainly needed over the coming months.

So Now What?

I maintain that when Ethereum and its infrastructure becomes easily consumable by the general public, we will be able to provide almost any individual, for an enormously low cost, the most complex computationally based contractual governance apparatuses ever built. A teenager may end up solving the tyranny of the majority problem and be able to build and integrate it into thousands of blockchain governments, while a small business owner in a developing country may set up governance systems far more complex than organizations who operate the largest firms in the world today. BoardRoom hopes to even the playing field, and open the gates to contractual governance in a way that adds real value for firms and projects, while addressing practical demand and building contractually future-proof designs that will last, we can only hope, for a little while in this ever changing technological space.

For more information, please visit our website http://boardroom.to or follow us on twitter @GoBoardRoom.

If you want a sneak peak at the Beta (contracts included) checkout:
http://github.com/web3-gov/meteor-dapp-boardroom

Written by: Nick Dodson
@IAmNickDodson
BoardRoom Founder

A special thanks too: Christian Lundkvist, Niran Babalola, Peter Borah, Simon de la Rouviere and Joseph Chow for your help with contractual design.

Footnotes

[1] Vitalik Buterin, (2013). “A Next-Generation Smart Contract and Decentralized Application Platform,” , available at https://github.com/ethereum/wiki/wiki/White-Paper (last visited Feb 4, 2015).

[2] David Yermack, (2016). “Corporate Governance and Blockchains” available at https://corpgov.law.harvard.edu/2016/01/06/corporate-governance-and-blockchains/ (last visited Feb 4, 2015)

[2] Becht, Marco, Patrick Bolton, Ailsa Röell (2002). “Corporate Governance and Control” (updated August 2004)

[3] Shleifer, Andrei, and Robert W. Vishny (1997). “A Survey of Corporate Governance,” Journal of Finance

[4] Oliver Hart (1989). “An Economist’s Perspective on the Theory of the Firm,” Columbia Law Review, 89(7)

[5] Bebchuck LA. (2004).The Case for Increasing Shareholder Power. Harvard Law Review.

[6] Ronald Coase (1937). The Nature of the Firm

[7] Nozomi Hayase (2015). “The Blockchain is a New Model of Governance”, available at http://www.coindesk.com/consensus-algorithm-and-a-new-model-of-governance/ (last visited Feb 4th)

[8] Morgan Rockwell “Bitcongress Whitepaper” http://www.bitcongress.org/BitCongressWhitepaper.pdf