Interview transcript on DAOs and DLT
I was recently interviewed by Alex Sims who is doing a PhD in the area of DLT and Blockchain. Following is a verbatim transcript of our conversation.
Moresh Kokane — Co-founder of Konkrete
Zoom interview — 4 September 2019
Alex: What is your background in relation to DAOs?
Moresh: I worked in finance for about 10 years in the States before I came to Australia. Then I started this company, Estate Baron, which is a property crowd funding company. We rebranded to Konkrete by replacing a centralised registry with a decentralised registry. We are introducing some programmability because we have very predictable transactions. We saw an opportunity where we could bring transparency to the whole thing/programmability to the operations of the fund raising things we were doing for clients. That’s where we thought we could create more trust if we decentralised. That’s what our background is in decentralised operations. We see some potential for decentralising the operations of businesses, but well established predictable industries only, not [early stage] businesses. Also certain asset classes lend themselves very well to be represented on the blockchain. So we want to work towards building the infrastructure which can support the programmability of those assets and that is what we are about in Konkrete.
Alex: What is your technical ability, can you code?
Moresh: Yes, I used to be a developer. I don’t code these days as I’m not that good a developer, and I’m better at other things. There are developers working for us now.
Alex: But that gives you advantages because you can read the code.
Moresh: Yes, and it means that we won’t be taken for a ride. You know how long something should take [to code], what the architectural issues are that you should be aware of. I do participate a lot in the requirements and design side of things — the technology architecture, but I don’t do any hard coding anymore.
Alex: What about any other background that has been useful to you?
Moresh: I did study economics in the States at Chicago, that has some bearing on the work that we are doing now.
Alex: What are your thoughts on DLT in general?
Moresh: I think [DLT] is widely misunderstood. One of the key things which we are coming to a conclusion [about] is, when you are using DLT what type of asset classes are you using it for? The first question you need to ask is why are you even using blockchain or DLT? Why do you want to use it? If whatever application you have can be done by a simple shared Google sheet you don’t need blockchain. Blockchain is not applicable to everything. Blockchain is not a solution for everything. In a lot of cases it actually makes things worse. So the first question is whether [blockchain] is actually useful. There are some specific niche asset classes in which it does add value and that is what our focus is on.
Alex: With the shared Google sheet, you don’t want people changing the ownership of assets…
Moresh: With real estate tokenisation or securities tokenisation, we did initially start in that space, but the reality is that if you are using a DLT to record ownership of assets, then the first thing you want to make sure is that the assets are not recorded somewhere else in a centralised manner — on a registry that is backed by the state. For example, in Australia for real estate we have Torrens title, and I’m sure you have something similar in New Zealand, where you have a state back registry. If you have that, the first question that needs to be asked is why you would have a real estate thing on DLT? What’s the value generator of that? The real answer to that is that there is none. Because, let’s say, even if you are in a developing country like Indonesia or India where the state records are not sound enough — if you did decide to make use of DLT for that then who is going to accept it? The state has the monopoly of the force. Who is going to go against the state’s ability to exercise force/physical force and use your registry? Even if your registry is widely accepted, if the state says it is [the state’s] registry that is going to be accepted you are not going to be able to compete against that. So we are talking about asset tokenisation or assets that do not already have centralised registries and contracts on a peer to peer basis. There are some finer things which are going to determine whether or not the asset is deemed as a security or not, because that often flows into whether or not that does need a centralised registry, because securities do need a centralised registry under current law in most parts of the world. So the first thing you want to make sure is that your asset does not fall under all of these things and only then DLT is useful. And then after you know that that asset does tick all those boxes, the next question you need to ask is, ok by introducing DLT what is the value that we can generate for anybody who is in that space? Assuming that value that is generated solves some problem/releases some friction/creates value then you want to look at doing it [using DLT]. Otherwise if you are just doing it because you can raise money through an ICO, because “blockchain” is the next big thing that’s not going to help you in the long run.
Alex: What does decentralisation mean to you in terms of DLT?
Moresh: It should be censorship resistant — so that is the first thing. There shouldn’t be one single entity, which can change the terms of engagement without everybody being on board. For example, in a partnership arrangement you have an agreement with your partner or even in a marriage, but certainly tomorrow, if someone says this is what we agreed upon and now these are the new terms and you can’t [opt out] then that’s not good. Now the reality in the current world, if you disagree with the state you are not going to be able to do anything. You have to live with sub-optimal conditions, even if you disagree. This is less true in western democracies, but far more true in lesser developed countries. In those countries if you disagree you can’t do anything about it, because that is what it is. It’s not necessarily the case that the centralised party is the state, it can be a non-state actor as well, we want to make sure, whether it is a state or non-state actor, unless somebody consents to being part of the system — change of terms is not enforced upon somebody without their consent. So for me that is the core essence of decentralisation.
Alex: Is it important for DAOs to run on one DLT, or multiple DLTs?
Moresh: This question came up in a different context sometime back — there is a project in Australia it used to be called Havven and now it is called Synthetix. It started coding on Ethereum as well as EOS — they had the resources to do so. It is a case of how much resources you have. But the second question is what’s the level of [decentralization] that you get by being on a certain DLT? So I think there is no real point in doing it across multiple chains. Either Bitcoin or Ethereum based chains — one of those two things is enough. There are some other interesting new chains coming up, but there is often a conflict between decentralisation and speed [,scalability] if you are really keen on being in such a position then you can’t optimise on decentralisation. That means that you may have to give up on speed. Ethereum, for example, is a little bit slower, but it is decentralised. So in that case we stick to that particular chain because it offers [a high level of] decentralisation and that will be sufficient — there is no need to be on multiple chains.
Alex: What are your thoughts on open source software?
Moresh: It has to be open source. How can you run a distributed network if it is not open source? Because what is the guarantee you are providing to other people who are participating in your network that you won’t have some sort of [back door] in your software that will allow you to exercise control without somebody else’s knowledge? So the question of whether you can have an open source thing or not does not arise. Also open source works well because it is better vetted. There will be less bugs because someone will always be able to check and find out the issues. But it doesn’t make sense to have an [inaudible] on a closed system. I’m not even talking about smart contracts, I’m talking about non smart contracts. Having said that we don’t have that right now, but we will have it in the future — we are not there yet.
Alex: What do you think about permissioned blockchains?
Moresh: There are no such things as permissioned blockchains. They are an utter nonsense. I find it laughable. Why even have a permissioned blockchain? If you are going to have a permissioned blockchain, why not have a centralised… even a Google sheet. I don’t see the value of Hyperledger or Corda or any multi chain. There are a lot of people that have come up with their own chains and they have a varying degree of decentralisation, but decentralisation is an indivisible thing — you can’t have degrees of decentralisation. It is just not a thing. Believe it or not, I’m not a crypto-anarchist. I’m very much a rules based person — we have a financial services licence, I come from the financial services world, but it’s just illogical to have a permissioned network. Either have blockchain, or don’t have blockchain — there is nothing in the middle.
Alex: What about people getting patents in DLT? Some people are designing something and getting a patent over it, whereas others are designing things and just releasing them open source free for all to copy and use.
Moresh: I’ll give an example. There is a company called Bancor, a chain called Bancor. There is another thing call Uniswap. So Bancor put some rent seeking code in which it was trying to extract more fees and value for itself — but it was in a sense open source. Uniswap basically copied everything that Bancor [had done and] basically removed the code [which had the rent seeking features]. Most of the network from Bancor gravitated towards Uniswap because the rent seeking thing was not in there. So what will effectively happen will be that the market will take care of this if there is any type of rent seeking. If there is value, if the value which is generated by a service which is based on the patent, then the market will determine whether or not to pay for that value. But if someone wants to have a patent, then sure they can have that patent and the market can decide whether they want to pay for it. I’m not suggesting people copy it, the question is whether or not to use it [the patent]. If you want to use it, if it is valuable enough, you pay for it. If there are ways in which you don’t have to use it then you don’t have to pay for it.
Alex: What is your definition of a token?
Moresh: This is a tricky one. A token is basically an unspent balance really of transactions. The way it works in blockchain is that, say I had 100 coins to start with and you had 30 and I give you 20, now you have 50. So I have 80. A token is really an unspent balance. It is not by itself a thing — it’s an unspent balance — that is the traditional definition and works for most things. It’s not an information data packet. It’s really what is left after — it is a sum of transactions. It is not a stand-alone entity. So when someone says that have five bitcoin, it is not as though there are five tangible or intangible things there, there are not even five variables representing those things. It’s just after all the transactions are summed up — what is left. Some people confused it with data packets in their own right, [tokens] are not [data packets].
Alex: What has been your experience of laws and industry practices in creating Konkrete?
Moresh: So we have a financial services license and I have done more than 25 retail IPOs. I’ve worked on several investment offers. We have a reasonably good understanding of securities regulation, plus I’ve come from the financial world. Reasonably good understanding of securities regulation in Australia and New Zealand. I would say the United States as well.
Alex: What laws or industry practices have been the greatest help in setting up Konkrete?
Moresh: I think Australia is a great country. Most people don’t appreciate how clean and simple the regulation in Australia, as well as to some extent in New Zealand (we have done offers in New Zealand as well). People tend to under estimate and not actually look at what the existing regulation is and demand or request regulation or clarification where it is not even required, it is quite clear. We have done several retail offerings without resorting to any new laws or crowd source security funding regulations. We don’t use crowd source security funding either in Australia or New Zealand, we just do an IPO. The standards are very clear, you just have to read them, they are not rocket science — it is very straight forward. Australia has a very simple regime.
Alex: What laws or industry practices have been the biggest obstacle?
Moresh: I wouldn’t say that there have been any laws that have been obstacles. There is, however, a more fundamental issue that can’t be solved by anybody. When you are doing a security or a security token offering or even any sort of thing, you are inherently living in a globalised world. You have close to 200 countries and 200 sovereign nations and each of them has their own regulations. You are not going to have uniformity in regulation across them and even if there was some [common] principles, especially when you are doing a securities offering, you are not going to be able to lodge [the application] in 200 countries. So that is fundamentally counter to the whole principle of what blockchain is — a censorship resistant thing. Because of that, what is happening is that most people do not know where the boundaries start, and the people that know where the boundaries start fall into two camps. People who willingly cross them because they just want to take short cuts. There is another group of people who cross it because you are not going to waste all of your time dealing with 200 countries. So we live in a world of nation states and we don’t have a global law thing now, which means it can’t really [be solved] in the current context. However, there are gaps which do not fall under regulation anywhere, which is where we want to be as of now.
Alex: If there could be changes in law and practice would they be?
Moresh: Well I would want one country to conquer all countries and just put up one law, but I don’t think that is going to happen, so I think there is no change required.
Alex: Is Konkrete going to use a token?
Moresh: Applications that are built on Konkrete may use tokens. So there is a specific application which we are building on Konkrete which is in the invoice factoring space. In that we are using the token to incentivise certain behaviours.
Alex: How will you judge whether Konkrete has been a success?
Moresh: When we have made a lot of money and everybody is using it — I’m a very simple person.
Alex: Are the participants in Konkrete going to use a single identity and will that identity be linked to their real world identity? I guess that it will.
Moresh: Yes, right now we are looking to use Australia Post’s digital ID system, which is probably the best solution — the best out of a number of options, I would say. There is some interesting work happening in the crypto self-sovereignty space, which we are monitoring closely and we will look to leverage that. In that case we would be very comfortable allowing those decentralised IDs, as long as it meets the criteria around counter terror financing, which we as a business are required to follow.
Alex: Yes there is a lot going on in digital identity. I’ve been involved in workshops run by our Department of Internal Affairs around developing a trust framework.
Moresh: Australian Post does stuff only for Australian things, if New Zealand has something, please bring it to my attention.
Alex: Has Konkrete had an ICO?
Moresh: No, we did not go down the ICO path, we set up a public company and we did a full disclosure offer document with ASIC and we sold equity in the business. We might do an ICO in the future.
Alex: If you do do an ICO in the future, will you limit who can participate. So, for example, no one from China or the US?
Moresh: I think the US won’t be a problem. I’m not really across China, so I can’t say much about China. But I’m pretty sure the US won’t be a problem.
Alex: What platform have you built Konkrete on?
Alex: So you will be like a dApp on top of Ethereum?
Moresh: We are not yet a dApp, but we will be a dApp.
Alex: At the moment is all your coding is being done by employees and contractors that you have engaged?
Alex: Have you partnered with any other organisations to set Konkrete up?
Moresh: No, not really. We do have people that have invested in us as well as provided us with inputs from time to time. But no formal partnership of any kind.
Alex: There are no token holders making decisions in Konkrete, but when you do set it up as a DAO, will tokens be set aside to distribute as incentives for people to use and contribute to the DAO?
Moresh: I don’t know the answer. In general I don’t really see the value of direct continuous decision making by participants. [inaudible] have clearly defined rules in which people can choose to participate or not participate. The reason why I’m not in favour of a majority vote system is because that by itself leads to sub-optimal outcomes. If someone is out voted, what are they going to do? If you disagree, then by all means set up a separate chain and create a copy of us and do your own thing. But the intention would be to have clearly defined rules and not change them too much, or at all. Obviously there may be a scenario that we have not thought of at all, in that case there would be some sort of, I would say judges, elected judges for life, who would determine on that grey area, just as you would have in a normal nation state where you have separation of powers, where you have the executive, but [inaudible]. This is the constitution, very small, very clearly defined rules — if there is disagreement on the principles the judges would decide. I’m not a great fan of direct democracy to be honest.
Alex: What happens if the rules need to be changed?
Moresh: Unless there is 100% consensus where everyone agrees that the rules need to be changed, the rules don’t get changed. If you disagree, or a faction disagrees, they can replicate the chain and start their own thing.
Alex: That’s interesting.
Moresh: That’s my take on it, I know it’s not what everybody thinks. I just don’t think that majority rule works because replacing the tyranny of one person with the tyranny of the majority is not a sensible outcome. I want it to be a law driven thing and once you agree to the rules you need to follow them. And if you need to change them everyone needs to consent to that change. We are not going to drag along anybody if they are not consenting to that.
Alex: Another way of thinking about is that in partnership law we have the default rules, ie rules that apply unless you modify them. One of those rules is that all the partners need to agree for changes to be made to the rules [to the partnership agreement]. Most partnership agreements modify that rule so that you don’t need the consent for all — because otherwise it becomes unworkable.
Moresh: But we don’t want to create any type of joint venture between all the stake holders. This is why we want this to be a dApp, rather than a DAO. We don’t expect this to be some sort of an entity in which everybody as a joint [stakeholder] of. That will be for the equity shareholders and it may in a sense have different constitutions. But as far as the wider eco-system of Konkrete is concerned, these people are users and the users will have to abide by a certain set of rules and if you want to change the rules then everybody should agree, otherwise nothing will change. In that sense I’m not even sure if we are heading in the direction of a pure DAO in that sense, because I don’t think that is the right solution for us. DApp definitely, but not a pure DAO. I just don’t place enough value in complete direct democracy.
Alex: Do you think there is anything that Konkrete, when it is in its final form, could not do if it was a company, ie with shareholders, management directors.
Moresh: There is a difference between Konkrete as a business, which is the entity behind it and right now it is a company and it’s a very workable solution and I see no impediments to its operations as a public company — even when we expand. And there is something which is Konkrete as the dApp, which will then support a lot of applications on top of it. That dApp by itself will not be controlled by us. Obviously Konkrete as the foundation company will extract some value out of the transaction fees or any other things that we charge for this dApp. And even that has to be something which does not impede the dApp and does not turn into a rent seeking proposition. But Konkrete as a business [will be distinct] to Konkrete Dapp — and the dApp itself will not involve partnership or joint venture arrangements — it’s just a user relationship between all of them. I don’t see any need for any change in regulations, to be honest. Whatever we are doing can work nicely within the current law. I would prefer that it was not complicated. Usually when you change things you tend to ruin them.
Alex: Do you think governance is important for DAOs in general?
Moresh: To be honest my experience in this is limited and anything I say might not be based upon a lot of thought. But I know a few different groups which had tried governance and it ends up not getting anywhere. Again my thought process for the whole thing would be that you have the foundation company has to be separate to the product and the product’s rules are set once and if there is any changes required then it requires complete consent from the users and any grey areas have to be determined by long term elected judges. And as far as the governance that can be done at the foundation company level, which current company law in most western jurisdictions is quite sufficient. We have the standardised reporting processes and the standard disclosure obligations, which is more than enough. I don’t see a use case for — at least us, I mean there could be specialised scenarios under which you can have some sort of a collective thing, in which people are weighing in on day to day stuff.
Alex: Did you learn any lessons from The DAO hack?
Moresh: There were a couple of different issues. One was the coding issue which attracts more attention. But the second thing was the SEC thing against it, where it was deemed as a security. Now the coding thing is fixable, but the SEC thing is probably more pertinent to us, in particular, because the SEC clearly ruled that it was a security arrangement and one of the reasons why I don’t see DAOs going a long way in the way people see them as active decision making entities, because it will always be ruled as a security and then it will be captured under securities law and then securities require centralised registries which is counter to the whole ethos of things being run in a non-custodial fashion. So the reality, at least in my opinion, is that DAOs in the current legal framework, which we have, are unfeasible. So only dApps are possible and the companies as legal structures which support them.
Alex: Konkrete, the company, has created the governance system for the dApp?
Alex: There won’t be any voting in the dApp?
Moresh: At that level there won’t be any voting, but at the company level, yes there will be voting — at the moment it is just me and my partner. It is a public company. The governance is at a company level. I don’t really see us becoming a DAO, I see us being a dApp, the product will be a dApp. In the dApp, because the rules are very clearly defined, there is no need for any role of governance.
Alex: Say you do want to make a change and there was 100% consensus, so there would be some limited voting there, would that be done on chain?
Moresh: Yes. It has to be done on chain. How else would you ensure that it is completely valid?
Alex: To check that people had validly cast their votes?
Alex: We have already covered resolving disputes as you have the judges.
Moresh: Disputes are very unlikely when you are a pure dApp. A dispute is really a edge case scenario, ok. We are not talking about governance etc. At the company level dispute resolution is very straightforward, shareholders can vote us out. But at the product level which is going to be the dApp, there will be no disputes, this is the product, this is how it works in a decentralised manner, but you can’t really dispute it because blockchain by its very nature is immutable, so either you agree to it or you don’t agree to it. So even the judges’ thing, I don’t really see a significant role for it. Only in some scenarios where we haven’t anticipated something, in that case you will need someone to weigh in on it, but I don’t see it as an active thing.
Alex: I guess you don’t have people selling goods to each other and then they dispute the quality of the goods.
Moresh: So in our case what would happen is that someone doesn’t not pay an invoice, but the system accounts for that because that is what basically there is a need for and then we will have steps to recover or not recover, in which case people lose their investment — but that’s the extent of it. Now if there are scenarios that we have not thought of then there could be a role for the judges, but that’s really edge cases which aren’t coded for — how do we account for. But I don’t anticipate for them to be significant.
Alex: Do you see any benefits of disadvantages of a DAO running a regulator node?
Moresh: Apart from private data I don’t see any reason to hide any activity from anybody. Obviously we will have a system wide view where we see the activity of everybody and people will not be able to see other people’s activities on a personal identifiable level, but as in some sort of centralised party which is able to control things, we don’t anticipate that even for us.
Alex: Do you see an advantage for say the tax office to be able to see all of it?
Moresh: But they don’t need a separate node for that. The nature of blockchain is that you do have a complete audit of all the transactions publically visible. So you don’t need a separate node for that.
Alex: So that means that all the information for the participants is open for everyone to see, so people can come along and see all their suppliers.
Moresh: Where privacy is involved, we will have to anonymise that. But as far as transactions are concerned it will be an open chain, publically visible. We are not going to so of try and shield anything.
Alex: So what I am getting at is that do you think it would be good that instead of having a regulator coming to you, for example, the tax department, and saying, oh we want some information on these people, that you just give them the access that you have to see across the whole chain?
Moresh: No. So, for example, let’s say a tax office person comes to us and says I want to see what this person has transacted, I don’t want us to be in a position that we are able to answer that question. What we will be doing is, for example, we won’t maintain identity data. For example, with Australia Post that identity is done remotely. In that case we want to have a system where we want to make sure that anti-terror financing things are met, but we don’t want to be in the position that we have the ability to answer the questions for the regulator. If we have the ability then it is a function of whether or not I want to or I don’t want to. Obviously because I’m a law abiding citizen I will always agree to the regulator’s demands, but I would rather not have the ability.
Alex: What to do see as the future of DAOs?
Moresh: I can only speak of our own experience and where we anticipate things for ourselves. We anticipate it to be a dApp and not a DAO. The DAO, if anything, would be for the company level and that’s something which works quite well enough under current company law/regulations. There could be people who know more than me and have thought more about this than me, and they might see a role for DAOs. I just don’t see a role for pure DAOs — the way that they are being projected, due primarily to securities regulation issues.
Alex: What do see as the ideal future for Konkrete as the dApp?
Moresh: Konkrete as a dApp will happen pretty soon. We already have the code for it. We are in internal testing. We will be releasing it in the next few days actually. That is something that we are completely committed to. Where is will be going is better UI, better UX, more products. It is more about hydration at that point and making sure that the code is robust enough, easy enough, where we can speed it up, we will try and speed it up.
Alex: From what you are saying you are trying for a much better, faster, cheaper user experience than what currently…
Moresh: Yes, so currently we are not even decentralised. We have a code base that works, but it is based on our existing system, which is centralised. We are working on decentralising it. Once that is done it is a question of better, faster, cheaper.
Alex: What would your nightmare future be in relation to dApps?
Moresh: This is a left of centre thing. I think that eventually dApp s will learn to co-ordinate between themselves and it will lead to some sort of intelligence in them and that’s my nightmare, for sure.
Alex: So AI taking over the world?
Moresh: Yes, except this AI will not be developed in the lab. It will happen without us actually trying to make it happen.
Alex: What are you most important sources on DLT on why?
Moresh: Obviously we all read various publications. I take a lot of interest in what the early writers like Nick Szarbo etc have written. I usually find a lot of value in first principles. So wherever possible try to go back to first principles and try to weigh against common sense. Not technology for the sake of technology, see whether the foundations are strong.
Alex: What are the least important sources of information on DLT and why?
Moresh: Anything where I don’t have to pay for it is usually not that important.
Alex: Mainstream media?
Moresh: Mainstream media…. If I’m not paying for that publication then I am the product.
Alex: Have you found any academic writing useful for what you have done?
Moresh: Yes, obviously the theory is that the original Bitcoin whitepapers were probably written by some academic — someone with a strong academic background. Probably all the white papers that I’ve gone through, only the Bitcoin and Ethereum whitepapers, maybe, maybe Ripple and Dash, are the ones which have any sense in them. There is a lot of work which was done in the pre-Bitcoin era by people like Szabo, Dai and [inaudible]. I find their work very valuable and interesting. Interestingly when I studied computer science as an engineer we studied these concepts without really understanding them — what the implications of them were. And then after I graduated and after a few years, this thing came out and it took me a few years to actually connect the dots, but the entire blockchain space is based upon some fundamental computer science data structure theory. So stuff like that is pretty important if you want to have a deep understanding of where things are and where they will go.
Alex: Bitcoin can be seen as a combination of pre-existing technologies, but combining existing things [can be extremely powerful]. With Gutenberg and the printing press, that was all pre-existing technologies that he put together.
Moresh: Yes, a lot of times for a certain thing to emerge we need certain other technologies to achieve maturity. For a certain technology to work you need some component building block technologies to actually fall into place. Once you have that then it is just a matter of time for the new technology to emerge.
Alex: Thank you very much for this. You have given a different view, which is good — otherwise it would be boring if everyone had the same [view].
Moresh: So, for me it is not a question of just having a different view. I like to reason things out. It’s not a question of me being right or me being wrong. It is a question of whether or not it can withstand scrutiny, whether it can withstand the test of logic, whether or not once you dig down deeper and once you ask more questions, whether you are satisfied that your position is sound. And if your position is not sound you should be willing to accept that and move to what does make sense. And if your position is sound it doesn’t matter whether or not someone agrees with you or not, because eventually the world will come around.
Alex: I guess the people I’ve spoken with so far have been very much in the experimental space, so they haven’t launched a product, they haven’t got a company, so they are not worrying about laws, which you are.
Moresh: So, we have a financial services licence and I’ve done 25 IPOs. We have to be very cognizant about the law. And there’s no point doing something when you can very clearly see where the roadblocks will be a few steps down the line. We started off as a securities tokenization platform a real estate platform — we thought that we would just record centralised share registry. I came to the conclusion that it makes no sense. It is a fundamentally different thing, for a lot of reasons. So we had to adapt.