2018 August

Your Tokens Will Be Worthless If Blockchain Doesn’t Resolve Its Dispute Resolution Issues

You’re super bullish about the future of blockchain. You’ve bought in to the crypto and blockchain industry. You’re all in, HODL HODL HODL. Good for you. But you’re about to lose it all unless a key issue is resolved soon—some call it ‘dispute resolution’, others ‘arbitration’, and still others ‘governance.’ But make no mistake—this is not merely a technology issue. It’s a human issue.

Let’s take EOS for example. EOS is a blockchain marketed to small businesses. Token prices will increase based on supply/demand and use. If EOS (and every other blockchain) remains the domain of tech dudes, the total number of holders and users will remain low.

EOS needs to crack the ‘small business adoption’ puzzle for its token prices to skyrocket. But small businesses aren’t going to transact unless they have transactional confidence and certainty. In fact, no one (aside from early adopter tech experimenters) transacts unless they have transactional confidence and certainty.

This all comes back to designing fair, efficient, scalable, and transparent dispute resolution architecture.

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The Importance of Transparency in Token Economies

One of the more tantalizing aspirations being promoting around blockchain technology is the promise of more efficient economies and systems of economic governance through the removal of human actors who cheat, lie, or game the system. Because the technology enables decentralization and its data can be immutable, the thinking goes, no single actor or group of actors should be able the stack the deck in their favor. Smart contracts can govern agreements between parties, automatically executing or declining to execute based on clear, quantifiable parameters that are visible to everyone. Such an advance could have the potential to usher in a whole new era for global economies.

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What Crypto Can Learn from Public Companies

It may seem counter intuitive to say that there is a lot the crypto space can learn from traditional public equity markets. After all, the legacy financial system – with its opacity, its tendency toward oligarchy and monopoly, and its clear inefficiencies – is one of the main spheres crypto entrepreneurs are attempting to disrupt. But the fact that blockchain technology has the capacity to effect transformative change does not mean it has nothing to learn from its antecedents.

The features of the modern joint stock company were developed over many decades of trial and error through very painful mistakes. The crypto and blockchain space can do well to learn from these lessons and selectively adopt features that make sense in order to avoid making the same mistakes. Many of the features were developed to balance the competing interests of operators and investors, i.e., giving operators enough freedom to take risks and create a profitable business while at the same time giving investors/shareholders some control and oversight.

Shareholder voting and the establishment of a board of directors are also valuable features. Public companies are, in many ways, quite decentralized, although this is not coded into their DNA as it is with blockchain enterprises.

Governance power is actually distributed between the operators and shareholders. Shareholders convene on a regular basis to vote on essential matters related to the business, including whether to pay out dividends and whom to appoint to positions of top leadership. This leadership – usually comprising a board of directors that elects a chairman – is tasked with installing officers to run the business’s day-to-day operations on behalf of the larger pool of stakeholders. Leadership is ultimately responsible to the shareholders, who can remove directors.

Throughout the entire organization, the rules and processes governing the running of the business are transparent and clear to all participants. This organizational structure makes a lot of sense and provides some protection to investor stakeholders. This feature (or at least something similar to it) has been and could be implemented in token platforms to provide investors with some protection and control.  

Beyond governance, the operation of many of these companies is also surprisingly decentralized. Consider the fast food giant McDonald’s, which has a market cap of over $120 billion. Its logo, the golden arches, is recognized around the world and Chicken McNuggets and Big Macs are familiar from San Diego to Shanghai. But McDonald’s owns and operates fewer than 20% of the restaurants that bear its trademarks. Instead, the vast majority are operated as franchises. Under this model, the corporation establishes certain guidelines for the overall business – such as, for example, the recipe for french fries and the layout of stores. But the stores themselves are owned and operated by individual entrepreneurs who are better suited at managing the day to day operations and understand the unique echospace of their locations.. This decentralized model allows McDonalds to focus on big picture strategy while off loading the day to day operations to the franchisees, ultimately creating a much more successful and adaptable brand. Indeed, not all McDonalds are the same around the world.  Each market has its own unique needs and considerations. Its economic example can be instructive when designing token economies and establishing an efficient and productive split of responsibility and control based on each participant’s strengths and weaknesses.

Clearly, blockchain offers many advantages over traditional technologies and businesses. But that should not blind us to the hows and whys of the historical evolution of enterprise governance. Successes on the part of public companies can be written into code and used to make business much more efficient, if we do it right.  It is even more important that these features be considered early on in the crypto space because they need to be programmed into the token or smart contract from the beginning.

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