Building a transparent future with the Decred blockchain

Abstract: This paper covers two major themes: The first half covers the potential use of blockchain timestamping to battle disinformation in public policy making, and how Decred’s Politeia solution can help improve public governance by empowering the public to vote directly for policy proposals, rather than voting for politicians. The second half of this paper looks at the lack of disclosure standards in the crypto asset space as the wild west days of a nascent asset class, and notes that disclosures will be a pre-requisite as this asset class matures. It ends by highlighting unique ways in which the Decred DAO is differentiating itself by promoting an ethos of transparency, which will be valuable in the years to come.

As we enter a new decade, trust in public institutions is on the decline across the world. Only 17% of Americans now trust their government “to do what is right”, according to Pew Research. Throughout the history of humanity, we’ve relied on “chosen ones” — kings, priests, presidents and parliamentary systems — to execute policy decisions. While the 20th century saw a rise in public democracies, we’ve now come to realize democracies are only as good as politicians are willing to keep their word. And politicians will often make false promises during campaigns, only to go back on their word once in office.

We live in a time of polarizing politics, and are entering an era of deep fakes where it will become even more difficult to discern truth from doctored campaign positions. Politicians currently tend to host their policies on their websites, which can be copied, modified or deleted on their whims, without notifying the public. It seems inevitable that we’ll see a need for timestamping solutions which can act as public records. The concept of stamping things for authenticity isn’t new, having been used for centuries. Digital timestamping digitizes this process by anchoring a document or text to an unalterable blockchain. Think of it like having a “verified authentic” stamp for a policy proposal, which can be confirmed by anyone.

As with most new technologies, the adoption will likely start out from niche circles. The demand for proving the authenticity of public policy proposals is more immediately apparent in developing countries where politics are rife with corruption. During the 2018 Brazilian elections, a presidential contender already registered his campaign platform on the Decred blockchain. This can provide a model for added transparency in public governance.

In an era of disinformation and low government trust, digitally time stamping campaign policies seems ripe for product-market fit.

Decred is a project best known for the cryptocurrency $DCR, and also offers timestamping and blockchain voting solutions which can be used to improve our traditional public governance systems. In the near future, honest public officials will be able to use timestamping to announce their policies, to show that they are not “flip flopping” on promises. Over the long term though, Decred’s Politeia system has potential to unbundle policies from politicians altogether.

Vote for policies, not for politicians:

The Politeia voting solution is currently used to vote on funding proposals for the Decred ecosystem. One of the benefits of this solution is that the software can run independent of any centralized providers who may have biases. In the future, the combination of Politeia and smart contracts can offer the ability to vote on exterior applications with the public realm, which can include voting for public policy proposals which get executed into law, using smart contracts.

We don’t always have to vote for politicians whose positions we “least disagree with”. We will be directly able to vote for policies we care most about.

Instead of voting for middlemen, competing view points will be able to submit well thought out proposals that are verifiable by the public, and if enough people with skin in the game agree with an idea, it can automatically get executed.

Reforming public governance will take time, but there’s a closer use case for Politeia that extends beyond Decred’s own ecosystem.

As a society, we won’t transform our governance systems overnight. But there is a more near term application for Politeia voting, which involves scaling voting capabilities to other blockchain projects. Decred is one of the first blockchains to be able to support direct exchange compatibility with other blockchains using atomic swaps. The combination of timestamping, voting, and cross chain compatibility will make it possible to offer “referendums as a service” for other blockchains. In this aspect, Decred can become an infrastructure provider to many communities looking for community voting and transparency.

Cryptocurrencies are risky enough to begin with, but they also have a transparency and disclosure problem.

Beyond the immediate get-rich-quick attraction for cryptocurrencies, much of their long term promise lies in their ability to displace politics in central bank decision making processes by automating monetary policies. It would be myopic to think about money as a technology, without considering its social construct. For all their virtue signalling, crypto communities remain mired in selective disclosures and a lack of transparency. The macro factors that will dictate cryptocurrency adoption over the next decade (e.g. global economic cycles and regulatory environments) are outside their control. But even their internal decision making processes remained mired in vagueness and a lack of transparency, adding unnecessary risk to new investors.

The first decade of crypto adoption grew in popularity with ideological adopters (cypherpunks and shadow markets) and early technology adopters, but the asset class has begun to receive increasing interest from institutional investors. Although everyday investors can invest based on emotions and ideology, institutional investors must conduct due diligence as they have to answer to fiduciaries. The largest fund managers invest for a lot of different reasons, but they always expect transparency from their assets under management.

For cryptocurrencies to gain adoption with institutional investors, they’ll need more than a “HODL and hope” strategy. Eventually this asset class will compete for portfolio allocation with other assets. There’s an opportunity for crypto communities to differentiate by taking the lead in transparency.

The total cryptocurrency market cap today is near $200 billion, per coin market cap. To the un-initiated, that sounds like a high figure, but to put this in context, the North American asset management industry controlled more than $88.5 trillion at the end of 2017, according to McKinsey. As Ryan Selkin of Messari recently wrote, unless this asset class learns to deliver on transparency, it risks being relegated to the shadows.

Crypto needs its own version of GAAP disclosure standards

The crypto asset space today is somewhat reminiscent of the wild west days in equity markets nearly a century ago, where publicly traded companies lacked a defined set of standards. It was only after the stock market crash of 1929 that accountants, regulators and investors aligned on a set of disclosure standards, which we now know as GAAP (Generally Accepted Accounting Principles). While crypto networks can use blockchain ledgers to create a transparent financial system, the governance and finance management of these networks is just as important as the technology and ideological beliefs they are selling.

“I did get the Ethereum Foundation to sell 70,000 ETH like basically at the top” — Vitalik Buterin

At the end of 2019, we learned that the Ethereum Foundation had sold $100 million of $ETH at the top of the 2018 market. While some would reason that liquidating an asset at the top of a market is a good use of treasury management, I believe not disclosing this sale presents ethical challenges, as dumping a large amount of asset invariably puts sell pressure, which would have caused many retail investors to lose money.

I believe there’s an opportunity for projects to differentiate themselves on the basis of transparency. This is one of the several reasons I am attracted to the ethos of the Decred DAO.

Transparency as a feature of the Decred DAO:

While most crypto projects rely on offline LLCs for funding support, the Decred DAO is governed by a self funding mechanism where its treasury lives on the blockchain, and can be viewed in real time. Here are three ways the Decred DAO differentiates itself based on transparency:

• A real time view of cash on hand:

Unlike other cryptocurrencies which selectively disclose their finances, Decred’s Treasury balance can be viewed 24/7. This kind of disclosure goes beyond even public markets, where companies disclose their finances on a quarterly basis.

• Frequent Execution updates:

Most people aren’t going to be checking the GitHub repos, so we need a better mechanism of seeing community progress. Decred’s monthly Journal provides an interesting example of a recurring disclosure, where a monthly update covers roadmap highlights, community engagement updates, and financial reporting rolled into one. What’s particularly interesting about this journal is how based on an open source input, with contributors from around the world. It’s a very crypto native take on traditional Edgar filings, which will be familiar to institutional investors.

• A transparent decision making process:

Cryptocurrencies are programmable money, and will need change management processes in order to have long term software support. In this aspect, the transparency of Decred’s community governance is a differentiator from other cryptocurrencies.

In many ways, Decred’s design is a contrarian approach to Bitcoin, with community governance being the largest example. Bitcoin’s governance premise is that by not having well defined change processes, the code base can push out major decisions, leading to an unchangeable base layer. By contrast, Decred’s ethos says that change is inevitable, and we need to make the change management as transparent as possible, while also setting high thresholds for consensus changes. Bitcoin’s governance process also doesn’t specify who is going to pay for improvement proposals, and changes are left to a handful of developers and miners before they can be activated. By contrast, in Decred’s governance process, improvement proposals are publicly proposed on Politeia, where $DCR owners can vote and give feedback.

Bitcoin pushes out hard decisions, hoping the current software will be good for infinity. Decred tackles the difficult decisions head on, while setting high thresholds to retain community consensus.

I believe that transparently allowing token holders to give input into community decisions will not only lead to greater long term adaptability, but also a differentiating aspect of Decred’s network effect.

Still not perfect, but a cut above others.

I did some earlier analysis to show that Decred’s self funding Treasury has the potential to grow to be worth billions of dollars some day. As the community matures, it makes sense to evolve its financial disclosures to reflect a categorized breakdown of expenses. This would potentially bring Decred’s disclosures in line with other investable assets which disclose their R&D, Marketing and other expenses.

We will look back at the 2010s as the wild west days of crypto, where standards were scarce, and scammers were aplenty. As time goes on, markets will learn to value projects which have a track record of quality and consistency.

Cryptocurrencies are about more than trusting a code base over traditional human led monetary institutions. They are about building trust in distributed networks. Ultimately, trust will only be possible if they have a foundation of transparency to build upon.

Acknowledgements: I want to thank Richard Red, Checkmate, Akin Sawyerr, and Dustin LeFebvre for being kind enough to proof read earlier versions of this article.

Disclaimer: This article is meant for informational purposes, not as professional investment advice.