On July 30th at 5pm (PST), we will host an online meetup with leading blockchain projects, MakerDAO and Tezos. Wilson Withiam, Research Analyst at Messari, will be the host for the panel discussion. Daeki Lee, Head of Ecosystem at ICON Foundation, Kevin Nielsen, Associate at TQ Tezos, and Charles St.Louis, Decentralized Governance Architect at Maker Foundation will participate in the panel discussion about governance.
Governance is an integral part of blockchain projects, yet there is still no proven approach while many blockchain projects continue experimenting with the governance of their ecosystem. As the ICON project went through decentralization last Fall, the team has learned many important lessons along the way and thought that it would be a good idea to share these lessons while learning from other blockchain projects that have gone through the decentralization process as well. With that in mind, we invited Tezos and Maker DAO, two blockchain projects that are well known in the industry for active governance of the ecosystem, to join us for a panel discussion on governance.
We hope to have a candid discussion about the latest status on the governance of each blockchain project and believe that this meetup will provide a good overview on various approaches to the governance of blockchain projects. As many defi platforms issue governance tokens, the governance topic is becoming increasingly more important. We hope that the lessons shared in this panel can inspire many who are interested in learning more about blockchain governance and in experimenting with a new governance approach.
Governance: What It Means to Blockchain Projects
Date and time
Thursday, July 30, 2020 17:00–18:00 (PST)
Profile of Speakers
Daeki Lee (ICON Foundation)
Daeki is the Head of Ecosystem at the ICON Foundation. He started his career as a venture capitalist at TransLink Capital, in which he led multiple early stage investments. He joined ICON Foundation and built ICX Station to foster the ICON ecosystem. At ICX Station, he is actively supporting projects on the ICON network, building necessary products for the ICON ecosystem, and leading the community growth. Daeki earned his B.S. in Business Administration from Haas School of Business.
Kevin Nielsen (Tezos)
Kevin Nielsen is an associate at TQ Tezos, a firm building assets and applications in the Tezos ecosystem, that helped build the Tezos Agora forum and governance dashboard. He also runs Boardroom, a monthly newsletter aiming to interpret the complex world of distributed network governance, politics, and power.
Charles St.Louis (Maker Foundation)
As the Decentralized Governance Architect at the Maker Foundation, Charles St. Louis is responsible for the initiative to further research, design and formalize Maker governance processes on behalf of the Maker Foundation, with a focus on the self-sustainability of the DAO. Charles is also an active contributor to Ethereum and the Ethereum Cat Herders, helping with improving the EIP process, advisor of Ethereum.org, project management, and working on Ethereum developer growth strategy initiative.
Wilson Withiam (Messari)
Wilson is a research analyst at Messari, primarily focusing on the design and market potential of smart contract platforms. Before Messari, Wilson was an analyst at Circle Research, where he was one half of the team focused on producing weekly updates and in-depth quarterly reports on crypto assets. He also helped launch an organization dedicated to educating blockchain application developers.
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Law expert believes a governance structure where risks and rules are thought through is the key for enterprise blockchain to move ahead.
A clear governance structure within a decentralized ecosystem is the key for enterprise blockchain to move away from uncertainties said Mark Radcliffe, a partner at global law firm DLA Piper who has extensive experience in blockchain governance, in an interview with Cointelegraph.
Freedom of decentralization and governance
Radcliffe argues that blockchain is an industry that attracts highly individualistic people who are skeptical of authority. However, he believes collaborative frameworks will be essential for the success of blockchain implementation and tokenization, just as they have been for open-source software. He added that:
“Blockchain projects frequently say that they will just be a place where people can show up and do whatever they want, but we won’t put any restriction on that. We don’t care what people do, we don’t care if we come or go, all that matters is that everyone has maximal individual freedom of choice.”
Radcliffe stresses that people need to move away from the idea that “being on blockchain hence there is no need for governance.” Building a governance structure that makes enterprises such as banks and insurance companies comfortable plays a key role in making blockchain work in the long run, according to Radcliffe.
Using the example of Ethereum forking, Radcliffe pointed out that members of the community provided a software update that caused a hard fork in the Ethereum blockchain, then the fork “rolled back” and returned Ether to original wallets for the nodes that adopted it. About 80% of the nodes adopted the software update and the remaining 20% of the nodes did not adopt the software update since “Code is law” and became Ethereum Classic.
The DAO had no board of directors or officers, so participants had no one to ask for redress which makes “on-chain governance” extremely “uncertain”. Radcliffe concluded that if enterprises are considering using blockchain to improve business efficiency, it is important to design a governance structure where the risks and rules are clear to avoid the uncertainty of new technology.
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Examining COMP’s ability to pass the Howey test for being qualified as investment contracts and to be considered a security.
Innovation springs eternal in the digital asset ecosystem, and with Compound’s launch of its governance token, COMP, last month, the burgeoning world of decentralized finance continues to pick up steam. The broader cryptocurrency community has embraced COMP, which now trades on OKEx, Binance and Coinbase Pro, among other digital asset exchanges, while other investors were dumping Compound tokens after listing on major exchanges, according to the report by Flipside Crypto. By democratizing access to liquidity and yield, DeFi is in many ways the next logical step in cryptocurrency’s seemingly unstoppable march toward disrupting the traditional financial services markets.
However, innovative blockchain and cryptocurrency applications do not occur in a regulatory vacuum. Issuances of digital tokens must always take into consideration United States federal securities laws, lest they fall victim to the cold, hard grip of the U.S. Securities and Exchange Commission, with Telegram as a case in point. Therefore, it is imperative to ask the question: “Is Compound’s token, COMP, a security?”
What is COMP?
Compound is a decentralized protocol that establishes money markets with algorithmically set interest rates based upon supply and demand, allowing users to lend and borrow various digital assets. COMP, on the other hand, is the native Compound ERC-20 token that allows for decentralized governance of the Compound protocol. Those who hold COMP may debate, propose and vote on all changes to the Compound protocol.
COMP is distributed on a daily basis to users of the Compound protocol. Each time a user interacts with the Compound protocol — e.g., by supplying, borrowing or repaying assets — COMP is automatically distributed to the user.
The Howey test
A “security” under U.S. federal securities laws includes the exceptionally broad concept of an “investment contract.” Whether any asset (including a digital asset) constitutes an investment contract and, thus a security, is determined by applying the Howey test.
An asset is deemed a security when all four criteria of the Howey test are met:
- An investment of money.
- In a common enterprise.
- With a reasonable expectation of profits.
- To be derived from the efforts of others.
Investment of money
While seemingly straightforward, the first prong of the Howey test does not specifically require a traditional investment of cash. As the SEC stated in the DAO Report, a digital asset can satisfy this prong if exchanged for cash or “other contributions of value.” Perhaps more importantly, as stated in the cease-and-desist proceedings of Tomahawk, the SEC has highlighted that “free” distributions of tokens or “airdrops” in exchange for economic gain can satisfy this prong of the Howey test.
While COMP is issued for “free” to users, it is offered in exchange for their participation in the Compound market. Once users hold COMP, they will be able to vote on updates to the Compound protocol, as well as the underlying lending and borrowing mechanics.
In one of the SEC’s rare pieces of public guidance on the topic of digital assets and the application of the U.S. securities laws, it explicitly stated that a common enterprise typically exists in the digital asset context. With respect to COMP, the token’s purpose is to actively promote the distributed governance of the Compound protocol — making it very likely to qualify.
Expectation of profits
The third element of the Howey test requires an expected return from profits. COMP is now available on multiple secondary trading markets. According to the SEC, the existence of a secondary trading market is typically an indication that people wishing to buy the digital asset may be expecting profits. It is worth noting that COMP has been trading at a 100% premium since its initial launch on June 16, 2020. Whether or not there is an “expectation of profits” typically depends on the intent of the purchasers of COMP.
Furthermore, the expectation of ancillary benefits does not diminish or serve to undermine this analysis. Therefore, if individuals purchase COMP to earn profits but also obtain some ancillary benefits, such as governance rights with respect to the Compound protocol, then the investment can nonetheless still be deemed to be made with an expectation of profits.
From the efforts of others
The fourth and final element of the Howey test requires that a return on an investment originate from the efforts of others. It would seem clear that the value of COMP is derived intrinsically from the value, operability and success of the underlying Compound protocol and its effective implementation of DeFi.
There is also no doubt that individual holders of COMP, by participating in the governance of Compound through their COMP ownership, may contribute to such returns. Unfortunately, it would appear that Compound, albeit indirectly, may likely continue to play a leading role in the development and success of its protocol. While the company will be distributing approximately 2,880 COMP to its users over the next four years, shareholders and founders of Compound will retain almost 50% of the total supply of COMP, and Compound will continue to create and focus on services that run on its protocol. While this state of affairs by no means indicates that the return on investment with respect to COMP will originate solely from Compound itself, in order to satisfy this prong of the Howey test, profits need not come exclusively from others, but rather “primarily” or “substantially.”
The final verdict
Where does this leave us? COMP’s recent listing on Coinbase is of particular significance, given that the market views the platform as an informal arbiter in these matters — only listing tokens that it believes are not securities. Unfortunately, the SEC has the final say, and the Howey test is as expansive as it is nebulous.
Despite COMP’s utility and decentralized governance mechanics, if history is any indication, there is a strong likelihood that the SEC would view COMP as satisfying each of the Howey test prongs and, therefore, constitute it a security regardless of the fact that it has yet to make such a definitive statement concerning any of the most widely distributed tokens on major U.S. exchanges.
It is worth noting that this determination says nothing of the regulatory implications of the underlying DeFi mechanics. Participants in traditional retail lending can attest to the myriad state lending laws, licensing obligations and money transmission implications. As DeFi continues to challenge traditional lending mechanics, we cannot help but contemplate the challenges that such a structure may also pose to traditional lending regulation. However, we leave that discussion for another time.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article was co-authored by Ethan Silver and William Brannan.
Ethan Silver and William Brannan are attorneys with Lowenstein Sandler. They advise cryptocurrency, blockchain and digital asset businesses navigating federal and state regulatory frameworks. They also counsel cryptocurrency trading platforms, exchanges, custodians and related businesses with respect to federal securities laws and work with technology-focused broker-dealers and robo-advisors on formation, structuring and regulatory matters. Ethan is the chair of the firm’s fintech practice, in which Will is counsel.
Polkadot is now officially in mainnet mode as the last centralizing shackle has been thrown off by the network.
The Polkadot blockchain is now fully decentralized and permissionless after a decision passed by community governance removed the admin rights enjoyed by the Web3 Foundation.
Gavin Wood, the co-founder of Polkadot developer Parity Technologies, tweeted the unshackling as it happened. The governance proposal to remove special admin privileges was enacted around 8 AM UTC on July 21, which signaled the true launch of Polkadot.
Polkadot was live since late May, but it began its life as a permissioned “proof-of-authority” network. The Web3 Foundation both validated the network and had special access to intervene on the blockchain if a crisis were to occur.
These measures were enacted to lower the damage from potential catastrophic security breaches and bugs in the newly-launched network. Over time, validation was decentralized to the community via a proof-of-stake system, which currently employs over half of the DOT tokens in circulation through 197 validators.
A key component of Polkadot consensus is the community governance system, which allows token holders to express their view on key ecosystem parameters. One of these parameters is the denomination of DOT tokens, as Cointelegraph previously reported.
The governance system was used to remove admin access as well, in what Wood called a “nicely poetic” ending. However, the procedure was also required from a practical perspective to test the governance system one last time.
With the vote, Polkadot struck off the “CC1” tag for its mainnet network, standing for “Chain Candidate 1.” This signaled the beginning of the true mainnet for the smart contract platform.
Gearing up for launch
In anticipation of the final launch, Polkadot was busy onboarding companies and developers to its community.
As Cointelegraph previously reported, the modularity of Polkadot allows it to attract both developers from other smart contract platforms like Ethereum and those from more traditional backgrounds. It uses WebAssembly for its virtual machine, which accepts “Web2” programming languages like Rust and C++ to code DApps. Frameworks to deploy decentralized apps in Solidity, Ethereum’s programming language, are also being developed.
Previously, Parity began integrating Chainlink oracles onto Kusama, Polkadot’s “canary network” used for experimenting with technology in a slightly lower stakes environment.
Cointelegraph also reported that Celer Network was working to bring layer-two scalability over to Polkadot.
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