Fractal Ownership, Part 2: Implementing Value-based Ownership
This article establishes the theory and application of a new financial and business model for networks — or digital ecosystems — through tokenization, i.e. monetization of qualitative & quantitative data about network value.
We called this model Fractal Ownership, as it enables the accounting of value creation & sharing among individuals and organizations during their interactions within an ecosystem at any level in a self-similar fashion. Fractal Ownership is mechanized through a Token-Curated value creation and Token-Bonded value sharing set of smart contracts. The mechanisms enable programmable, transparent & automated incentive schemes for common action towards a common purpose without requiring organizational hierarchies.
This is a way tooo long post, for the ones who are really really really interested and want to get the hang of ElectraSeed Fund & Fractal Ownership. There will be a 5-min pitch version of this soon™. This one has a TL;DR, In Theory — general Fractal Ownership as it could be applied to any digital ecosystem of value, and Application part: ElectraSeed Fund.
In the following we give a short explanation of
- why we chose the term “fractal,” and how Fractal Ownership relates to the underlying fractional asset representation through tokenization. We will then get on with
- legal & governance framing: We combine the most flexible — hence most abused — business and financial engineering practices (Special Purpose Entities and Asset-backed Securitization) with the most abuse-resistant governance structure available today: Steward Ownership. Until legal and regulatory domains also become digital, this is what we have to work with.
NB1: Important to note is that the resulting construct is not merely a tokenized representation of the securitization process as is the case with Security Token Offerings. This will especially become evident in its application to a fully centerless, global ecosystem The ElectraSeed Fund.
NB2: Structured Finance and Financial Engineering are bad for our prospering economies. The book “Sabotage — The Hidden Nature of Finance” explains very well this oxymoron. Yet these same tools can be put to good use, if they serve a purpose other than profit maximization (for financial institutions) — which has really bad outcomes that won’t just stop of you digitalize and decentralize the same system with the bogus incentive to make money by having money without creating any value!
In order to even further reduce the misuse potential, we
- mechanize the degrees of freedom that structured finance enables with a set of smart contracts and radical transparency through open source development. These mechanics, currently only applied in the financial economy as “Decentralized Finance” or “Open Finance,” will become even clearer in their application on the real economy in the second half of this article. However, before diving into application we will also explain why we propose:
- holacracy as the autonomy-focused organizational principle for the ones in the ecosystem who fully opt-in. Other ecosystem participants can keep their current strategy & organization or transition to Fractal Ownership at any time. In the Conclusion, we discuss briefly how such transition can happen.
NB: Holacracy doesn’t work if you only share work autonomy, but not ownership! “You are free to take all the risks an entrepreneur and an investor would take — but you still only get the reward (salary) of a middle manager if you’re lucky…” is a bad deal. Fractal Ownership improves that for individuals and organizations who opt-in — yet it also is compatible with the employee-employer dynamics in established organizations, or contracting authority and contractor dynamics for individuals, who are part of the ecosystem but not yet ready to transition. Holacracy is not non-hierarchical nor is there absence of management. Instead there are levels of self-similar organizational structures, “circles,” that in our conviction should share both risk and reward equitably by having skin in the game.This is the implementation of Holacracy in Fractal Ownership.
- The second half of the article aims to clarify Fractal Ownership by applying it to the ElectraSeed Fund ecosystem and using pictures from a table top game that is fun to play and understand the cryptoeconomics behind: ElectraSeed Fun!
COME TO ETHCC in PARIS to LISTEN TO THE TALK & PLAY THE GAME!
What’s in a Name?
Presume, the ecosystem consists of networked organizations, and individuals with their networks. We use the term “fractal” to emphasize that Fractal Ownership applies at all levels within that ecosystem — when the ecosystem participants opt-in. The value of the network is fractionally shared. Fractals are self-similar geometric objects that do not have a whole numbered dimension, but a fractional one.
In Fractal Ownership, the ability to account and transact fractional shares of real world assets makes up that fractional dimension. At any point in time you can add to that value and get fractional shares, you can buy fractional shares or sell, i.e. cash-out to transparent pre-determined terms & conditions (encoded in smart contracts) of the network.
Legal & Governance Framing
In order to realize Fractal Ownership within an ecosystem, we establish a Special Purpose Entity (SPE) under the legal/governance framing of “Steward Ownership,” i.e. a “self-owned business.”
The SPE is the holder of the network (ecosystem) value. In case of not-only digital assets — a legal personality is definitely required. In traditional finance, SPEs have been abused to hide risk. The legitimate use of an SPE is however, to separately hold assets and have stakeholders who are separate from the organizations that create and curate the value in the ecosystem.
In addition, we place the SPE under the well-known Steward Ownership to further disincentivize any governance attacks: A steward-owned organization, cannot be bought, sold, or inherited. “Rather than beholden to the interests of external shareholders, steward-owned businesses are governed by people who are directly involved in operations or mission of the business. Profits are either reinvested in the company or donated to philanthropic causes aligned with the company’s mission, making them more resilient and competitive in the long-term.” In the case of the SPE that is the legal holder of the network value, the stewards, hence, are the network token holders who earned the token through direct contribution of value, instead of cash (i.e. buying the token).
Radical Transparency & Smart Contracts
In order to shine direct sunlight on the financial transactions of the SPE public smart contract platform and whenever transactions happen in the existing financial system open banking is to be used. Radical transparency doesn’t mean that all parties and their identities are known when this is absolutely not required. On the contrary, we must strive for self-sovereign identity avoiding centralized lookup tables into the privacy of individuals. However, every transaction to and from accounts associated with the SPE, i.e. the network value, will be known and fundamental part of the set of smart contracts for value accounting and sharing.
The network value can contain tangible and intangible value, such as social impact. The data-driven nature of accounting on digital ledgers allows this to happen naturally. When combined with the physical world — where most of the “intangible value flows”, i.e. social, environmental, economic impact — it is also typical that the network value still contains “cash flows” that are managed by traditional bank accounts, or (mobile) payment providers.
NB: In cases where this might make sense, — even the physical assets themselves, such as factories incl. machines, real estate, fleet of cars, decentralized energy resources etc. — could be on the accounts of the SPE. However, in order to reach digital scale it is important to keep/transfer as little as possible to the SPE which is not in itself information, and which is not essential to accounting for the network value. An example in our case is the physical smart microgrid assets — not only are they very low cost capital (compared to e.g. a nuclear power plant) they are (like the nuclear power plant) useless if not operated and used in an efficient/productive way. Hence, data on operation and use is what is transferred to the SPE stewards for analysis and smart contracts for value accounting. Hence the physical microgrid assets can remain in the books of owner/operator organizations or collectives of the ecosystem.
The minimal set of smart contracts required to implement Fractal Ownership are (1) Token-curated listing of objects, which when funded and successfully realized will add to the network (ecosystem) value, and (2) augmented Token Bonding in order to capture tangible and intangible network value and immediately make it a shared resource of token holders. We will see concrete application in the second half of the article on ElectraSeed Fund Ecosystem.
NB: Highly recommended read is the 10 months old “On the immaturity of tokenized value capture mechanisms.” The minted token that is bonded against network value realizes many of the value capture aspects of the “token taxonomy” in that article. Such token smart contracts have been successfully deployed and in use in the meantime for digital-only financial assets until now. In the second half of this article we will discuss the specific value capture and sharing aspects of token bonding applied to ElectraSeed Fund.
Strategy & Organisation
Fractal Ownership as a new financial and business model aims to incentivize and coordinate common action on global scale with a dedicated purpose within a global ecosystem. The purpose will be engraved in the DNA of a Special Purpose Entity, that is “self-owned” and only exists for that purpose. The SPE is the legal representation of the network value. Through so-called “Steward Ownership,” it cannot be sold, bought, or inherited. The stewards are people who directly connect to the operations or mission of the SPE.
Whilst Steward Ownership is a concept that applies to one organization, Fractal Ownership is a tokenized implementation of that legal and economic concept within a digital ecosystem which consists of many organizations and individuals.
Now, the ecosystem is made up of organisations and individuals who will create value, and curate value — these are the stewards of the SPE that will then come to represent that network’s/ecosystem’s value. The means of “voting,” however, is not a mere copying of shareholder voting rights of traditional organizations. As we interpret it in Fractal Ownership, the value creators and curators, “vote” by putting skin in the game — namely by staking their earned tokens to determine the direction of funds. If they are right and value is created through their directing, then their tokens now accrue more value and they earn more tokens by delivering that value.
Stakeholders who only contribute cash have two motivations (a) support the mission with what they can contribute, which is only cash — i.e. no time or no epxertise to contribute with staking (b) be shareholder in passive income generating value network. The cash contributions are essential especially when building the SPE (software and legal codification), and also later when projects are funded through the SPE. The network of value creators and curators is the “ethereal goodwill” of the network value. The token bonding curve will mint tokens for non-cash contributions as well as cash-contributions.
This is somewhat similar to how in the early days of financialization, firms would issue preferred shares related to the tangible value of the company (e.g. cash & digital assets bonded against ElectraSeed Fund token, and revenue shares from the funded project operators) and common shares issued against the perceived intangible value of the company (e.g. qualitative, quantitative data, models, smart contracts, code reviews, etc. as well as the network of people and their networks able to discover & add value, remember query incentive networks).
Finding the right balance that is good for all stakeholders and hence network health is a data-driven optimization problem — and we won’t use excel for it.
The ownership of value is “fractal” because it holds for any value creation/curation at any level in the ecosystem for the individuals and organizations who opt in.
Later, in the application on ElectraSeed Fund we will see how the role of stewards map to the individuals who curate smart microgrid projects to be funded, as well as individuals and organizations who develop and maintain the open source software logic for ElectraSeed Fund. We will also discuss at the end, how other organizations in the ecosystems, e.g. a project operator could transition from their current strategy & organization to Fractal Ownership and how by doing so, initially their customers would benefit immediately, and their operational efficiency and scalability with time.
Holacracy with Skin in the Game
The unit of value are so-called “bounties,” i.e. structuring, describing and advertising what can and/or needs to be done in order to increase network value and achieve the purpose of the Special Purpose Entity. The bounty creator earns network tokens, which are directly offered as an incentive share — a strategy called query incentive networking. Participants in the circle who take up the bounty and deliver will split the reward, i.e. the tokens. If the proposal is not implemented & used than the staked tokens get redistributed to other bounty (query) creators and their circles who did create value. These network tokens ultimately only can accrue value by adding value to the network through aiding value creators in the network.
The stewards can cash-out all or parts of their earned tokens according to the token bonding curve pricing mechanism at any time.
Let’s start with the part we left of In Theory: Bounties for developing and maintaining ElectraSeed Fund, the open source software, and the SPE as its legal person, say ElectraSeed Fund SARL.
We started of with 5 (loosely coupled) bounty creations — which are funded by the NGI Ledger The Venture Builder for Human Centric Solutions: The first 2 were critical. We swang back and forth between traditional finance, and decentralized finance, traditional organizations and decentralized organisms. Although painful, this tension yielded Fractal Ownership for Digital Ecosystems — and led to beautiful insights and experiments we would have missed otherwise.
Instead of creating a traditional platform business with a Software-as-a-Service model, we managed to create a new financial and business model that makes collaboration of individuals and organizations viable (i.e. it pays off) beyond borders towards a common goal: Clean Energy Access. Some financial innovation and engineering for the good in humanity was necessary. In order to appreciate the way we hack and rewire the financial system, please do read this, too.
- Ecosystem Canvas & Seeding
- Ecosystem Financial & Business Model Simulation
- Token Design, Modeling & Smart Contracts Development
- UX/UI Design of Ecosystem Portal(s)
- Legal Counsel & Codification in (each) one Jurisdiction
Then and in parallel we can open up for cash-contributions as the purpose is sufficiently clear and the groundwork has been laid: a minimum viable ecosystem has been bootstrapped. However, in order for it to remain viable and grow in a sustainable way, the crowd of funders, that are attracted, plays an important role. Specifically their motivation to contribute cash, but mostly also holds for non-cash contributions.
(a) super weak motivation: have safe returns. Yes you can have those through ElectraSeed Fund, as clean energy access providers are to be funded. In order to do so, the project operators pledge energy usage and cash flow data from existing project(s), and revenue share from the existing one(s) and the to-be-funded project(s). Energy access through solar smart microgrids (a) is the only viable way in offgrid settings in developing countries and (b) the socially preferred way in Europe and other parts of developed economies, in which people strive for self-sufficiency. Yet there are still quite a lot of alternative ways to safe returns — especially since we are equally interested in creating social impact through clean energy access, which is incomparably higher in developing regions of the world. So this motivation is actually a disturbing force in the ecosystem, from funders but also from curators. We witnessed that people who are not motivated by the social & economic impact of clean energy access, are quick to focus on clean energy projects in the developed world and rather scale up (i.e. bigger solar parks, wind parks etc.) than scale towards more impact, less risk. We kindly recommend players with weak motivation to join more suitable ventures in our networks.
(b) super strong motivation: you have family & friends where the projects are. Knowing the environmental, social, and economic impact of clean energy access touches people “near” to you, is a super strong motivation. This is true for cash-contributions, but maybe even more so for non-cash contributions. Many if not all techies I know would love to develop things that are directly useful in their social circles. It’s direct value flow from your creation to people you care about.
(c ) strong motivation: The next level is direct value flow from your creation/curation/contribution to causes you care about. Clean Energy Access, The United Nations Sustainable Development Goal #7, is such a cause. It might be that you have been working with decentralized energy systems for decades, or sustainable finance and alternative currencies, or helping communities transform for resiliency, self-sufficiency and self-determined prosperity. ElectraSeed Fund is a literal “portal” for you to act through, and add value, create value towards that common cause.
Our job as initiators and network members is to make it super simple to be able to contribute: (a) legal & tax considerations for cash & crypto contributions (b) task break-down and clear skill-trees so that any contributor with the right background will find their calling immediately (c ) how-to setup your own portal [next phase]
We will share more insights here and on GitHub wrt. each bounty as the network grows tighter and wider. However, one information is important: Who did we place in the creative heart of the ecosystem? Who creates the value, i.e. revenue and impact, of this network?
- The smart microgrid operators and their customers. They are the clean energy access providers, and the users of energy determine the impact of clean energy access.
Who are the value curators, who do help the creators and add value?
- People and organizations who find and onboard value creators: be it a community in the suburbs or sub-Sahara, you are a value creator/curator if you can help them get access to clean energy through a solar smart microgrid. If you can onboard impact investors, who value the social, environmental, and local economic impact of that clean energy access, you are an impact curator.
- As mentioned above if you can curate code (legal and smart contracts), model & simulate to facilitate understanding (based on data, or table top games!), design for instant gratification: both the user and developer experience; architect IT systems, data pipelines, as well as business with underlying bonding curve parameters etc. you help make value visible, actionable in this network, you are a value curator — and you have created value through data and code, your intellectual property that you have shared through AGPL.
We have bootstrapped a minimally viable ecosystem with value creators and curators. For ElectraSeed Fund ecosystem to stay viable and grow to fulfill its purpose, the non-cash contributions are optimally valued wrt. the cash-contributors of (strongly) motivated crowd funders. This as mentioned before is an optimization problem which we address in data-driven financial and business modelling of the ecosystem.
So, how is this ecosystem value created & accounted for?
First of all, the notion of Fractal Ownership gets rid of one main inhibitor of true collaboration: borders. The notion of ownership becomes borderless — no nations, no corporations, no KPIs — no other than the common goal: Clean Energy Access Globally.
When you contribute to the network you earn the network’s token.
This contract and its associated accounting methods are computed on any virtual machine capable of doing so — today this is the Ethereum Virtual Machine, that is run on any computing node with sufficient CPU/GPU, RAM and bit/s. You can access that contract from any internet connected device and use it. You can be a value creator, curator, or “cash” contributor.
NB: “cash” is any currency in which people buy the network tokens to support projects directly, it is any currency in which the project operators share their revenue in, i.e. EUR, XOF, Tk, USD, xDAI, ETH, etc. The pooling of both contributors and projects globally has a natural currency risk mitigation effect. The effect can be further optimized, e.g. at withdrawal time etc.
ElectraSeed Fund has no lead investor: it’s people, families and family offices who want to put their money where it has positive impact and does not evaporate and is accessible at any time to transparent terms & conditions, which are modeled, optimized, and simulated in a data-driven way. Crowdfunding is inclusive and diverse enough to reach the biggest strongly motivated supporters.
ElectraSeed Fund has no fund manager: it’s people who are knowledgeable about Clean Energy Access, Sustainable Finance, and who have a vast network in these domains as to be able to instantiate global query incentive networks that can outrun biggest NGOs. Crowdsourcing through a social network is faster, and scales farther.
ElectraSeed Fund has no IT department: it’s people collaborating open source, yet through query incentive networks we aim to outperform IT divisions of the biggest asset managers. Here, too, open source has a lot of competitive advantages, e.g. no legacy systems only evolution through forks, openness to global talent.
ElectraSeed Fund has no HR or Marketing department or Business Development due to the above reasons: it’s the network of people who are owners of the value that they contribute and their query incentive network.
ElectraSeed Fund has an accountant: it’s algorithmic
Any contribution of value either is data or passes through a filter that creates meta-data (data about the value contribution), e.g.
- project curation through user-generated content on ElectraSeed Fund portal(s), incl. staking
- project data committed for continuous modelling & optimization [next phase e.g. on Ocean Protocol], incl. staking
- code/data curation through GitHub, Slack, and other forms of collaboration documenting
- cash contributions towards funding the projects/bounties.
The Algorithmic Accountant
The accountant, an augmented bonding curve contract on a blockchain — does three things:
- “bond-to-mint:” the provided data and the shape of the token bonding curve(s) determine how many tokens are to be minted and logged to the associated accounts. The data itself is logged in The Reserve, a portion of the cash flow data is logged in The Funding Pool for funding projects/bounties. This translates to buying the token through tangible and intangible contributions. The bonding curve determines the price of token, which valuates both the “revenues and impact” data collected in The Reserve. People buying-in at those prices, and the amounts they buy, and the rate at which demand increases enable an aggregate subjective, a more objective valuation of intangible assets such as positive impact at a given point in time.
- “burn-to-withdraw:” at any time you could send any amount of tokens back to the bonding contract, which will trigger the process such that you receive the appropriate portion of The Reserve according to the bonding curve. Depending on the amount to be cashed out, a tribute is diverted into The Funding Pool. This translates to selling the token to pre-determined, balanced conditions according to the parameters of the curve.
- “bond/burn-to-donate:” by burning tokens without withdrawing cash from The Reserve you effectively increase the value of remaining tokens in circulation. This translates to donation of contributions that minted the amount of tokens now burnt. Subsidies, explicit subjective valuation of intangible assets such as social, environmental and local economic impact can be realized in this manner.
An additional accounting rule in ElectraSeed Fund is that every transaction enabled through the software distributes a transaction fee to holders of tokens that were minted through contributions for software.
Collective Intelligence & Web of Trust — instead of an Asset Manager with an IT division
Bounties are created through finding matching funding opportunities and defining the bounty, tasks such that remote teams can form. Hackathon participation, EU/national R&D funding, sponsored PoCs and pilots are one form. As-a-service offerings and creating a feature for and paid for other parties, and submitting those as bounties beforehand or as pull request will mint tokens.
The minted tokens towards non-cash contributions are staked, i.e locked up, until features are used. This is to enable the query incentive network around bounties. Once the new software is in use the participating accounts get their bounty shares.
In the same manner solar smart microgrid projects that are to be funded through ElectraSeed Fund are curated. For the bonding of qualitative data (from project curators) and quantitative data (from project operators) as well as for modelling and optimization (through data/code curators) tokens are minted. These minted tokens are staked to curate the projects to be funded. Other token holders, i.e. the ones who bought the tokens can stake as well in order to voice their preference, e.g. towards specific projects suiting their impact-risk-return ratio, or projects in specific regions.
Tokens staked on projects/bounties which do not get funded/used during a given time, get redistributed to the token holders who did stake their tokens on the projects/bounties that did. This curation incentive mechanism is also an optimization problem: (a) best outcome for the network, i.e. optimal impact-risk-return of clean energy projects, which increases network, hence token, value (b) best outcome for each stakeholder, such that active participation pays off individually.
This is by far the most critical, and experimental aspect of ElectraSeed Fund. Bootstrapping an ecosystem of strongly motivated participants towards one goal: Clean Energy Access (through application of this new form of finance), is one thing. Making it super smooth for them to contribute is the other. Contributions are cash, code, data.
One drawback of our domain is: very high mental cost. Even when we reduce intermediary costs at many levels to create a zero-marginal cost protocol for impact funding, users have to pay attention and learn about things that are new to them. Reducing these mental costs through experience design is very valuable.
For example, people easily get that their money in clean energy access has a much higher impact in developing countries than it even has solar powering a social housing. However, 90% assume people in developing countries “don’t have money” to be able to pay back. It’s true there is no banks in the offgrid villages — but they have the same social structures (where money is really minted in societies) of value creation as a village in the suburbs of a developed economy with ATMs in the next villages. In developing regions mobile payment is standard. These information, and messages, need to be communicated effectively, online by the project curators and operators, and energy users!
So, effective storytelling is a valuable bounty and it bonds qualitative data.
We need “portals” that make it easy to upload this type of data and/or connect existing data, e.g. on Youtube, to listed projects by annotating them: e.g. this video is a collection of stories in the villages in one project that would benefit from English subtitles etc. Also these stories remind that the “payback” is not only denominated in a national currency, when you invest through ElectraSeed Fund: You see and listen to the stories of positive impact.
The main unique value proposition of ElectraSeed Fund specifically however, comes with even higher mental cost: More Impact, Less Risk — How?! What is pooling? And what are bonding curves??? Well, we spent a lot of time, to find the right people and the right medium to explain that to really every day people — anywhere on earth. The first attempt was already quite promising: The first explanation of the idea of Fractal Ownership through drawings and clear language. Still the language was only English, and already in the 2nd level we dealt out the fractional dimension (0,781) of Fractals… And we hadn’t even started with explaining pooling of many smart microgrids across the globe yet. And how were we going to show how well the diverse pool of smart microgrids, the portfolio, fares with expected risk (e.g. cash flow defaults in Bangladesh due to seasonal earnings in villages) and unexpected risks, uncertainty, black swan events (say…Trump bombs Bavaria)?
Extrapolating from that article, we either had to write a bible, or come up with a better medium. And we did: It’s a game called “ElectraSeed Fun! …with Augmented Bonding Curves.” After the game you know as much as the token engineer who does the current cadCAD models & simulation for ElectraSeed Fund. Now, curators anywhere in the world can play it with non-techie stakeholders. We have sub-bounties for explainer videos based on it, and for online versions of the game.
The game, first and foremost, brings about meaningful conversations about what we value as a society, and how data-driven technologies can help us engineer our digital economies anew around those values!
Now whilst storytelling reduces one source of mental costs for people who will contribute cash to projects, the other is the mental cost of self-sovereignty: key management. 90% of internet users have no clue about encryption online. This is mainly thanks to the 90’s era weak encryption policies of US, but also keeps continuing in an effort of nations’ need for control over “their” people.
Contributors to a fund without a single fund or asset manager and an algorithmic accountant, need to be comfortable with handling their own private keys to keep their shares in network value safe. Crypto-currencies already helped a great deal in getting to best practices for every day people from best practices for server admins only.
In addition, we will have a majority of payments coming in some sort of fiat or other currencies that need an on-ramp. This is a bounty we share with all of the digital currency efforts out there. The race just started — but it’s all open source and follows the same “protocolization” pattern.
How do we (legally) organize this value creation and curation network?
When we bootstrapped the network of revenue & impact creators, curators, supporters — we will all become stewards of the steward-owned special purpose entity ElectraSeed SARL
NB: Maybe we would register in Germany or Netherlands, but currently France is the only clear jurisdiction with a stated objective to support innovators, and not just make crypto easier for established financial institutions.
This is a matter of legally codifying the stakeholder agreements in the jurisdiction’s official language — in a way the exact same process as coding the smart contracts in Solidity, so they can be computed in the Ethereum Virtual Machine. The upside and the risk are the same: If encoded correctly then most of the execution of the agreement is automated, but if there is a software bug then the crypto portion of the funds managed through that software can be drained or become unreachable.
What a high price to pay you might think — but if encoded correctly then this network can scale to solve the problems that our current socio-economic processes have proven unable to solve. So, the upside is priceless — since we have nothing to lose.
We share both the risk and the upside as “a crowd.” With whatever contribution you make you become part of the “common enterprise” to scale access to clean energy at digital speed.
Join ElectraSeed Fund, a crowdsourced & crowdfunded network of Clean Energy Access for More Impact & Less Risk.