Blockchain and business : Applications and Implications

Holcacracy : A system of self-organization in which individuals define and align the work they need to do together to get a job done; there is no hierarchy or middle managers.

ConsenSys :

ConsenSys is adapting a lot of its philosophies into a new model. Instead of traditional job descriptions, ConsenSys employees have more dynamic roles. Authority is distributed not delegated. Rules are transparent to reduce office politics, and the enterprise is built to respond quickly to changing needs. ConsenSys works really more like a blockchain platform itself than a traditional corporation. How it creates value and how it manages itself is very different from the typical corporation or even technology company. Lubin believes that we need to change capitalism if we want to survive. Today’s networks help us to communicate faster, better, and cheaper than ever before. But the old command and control hierarchies are really still the rule in most corporations. Blockhain challenges those top-down structures. Lubin told us, “Global human society can now agree on the truth and make decisions in 10 minutes or even 10 seconds.” He believes that giving people more of a voice can lead to greater prosperity for everyone. ConsenSys operates according to a plan. The plan was developed, voted on, and adopted by all the members of ConsenSys. Joe Lubin describes its structure as a hub rather than a hierarchy. Each of its projects is a difference spoke. Major contributors to each spoke hold equity. As noted, participants are members not employees. Now, these members choose from two to five projects to work on at any point in time, no top-down assignments. Lubin said, “We build small, agile teams, but there’s collaboration among them.” They share as much as possible. The watchwords here are agility, openness, and consensus. A member sees a piece of work to be done, the member jumps in and pushes it a little or a lot as appropriate given the members role. 

Transactions costs

Nobel Prize winning economist Ronald Coase 80 years ago identified three types of what he called transaction costs in the economy. First, was the cost of search. Finding all the right people and information and resources outside of a company to create something. Second, was the cost of coordination, getting all those people to work together efficiently. Third, was contracting costs. Keeping trade secrets, negotiating the cost of labor and materials, and policing and enforcing those agreements. Coase argued that a firm would expand until the costs of performing a transaction inside the firm exceeded the cost of performing it outside the firm.

The nature of the firm

Opportunity 1 : Search

The world wide ledger is a structured database of structured information. Being able to search this ledger, would yield new insights like, who’s sold which discovery to whom? And at what price? Who owns this intellectual property? Who’s qualified to handle this project? How many carbon credits has this company saved? Which suppliers have experience in China? Which subcontractors delivered on time and on budget according to their smart contract records? Query results won’t be resumes, or advertising links. You’ll get transaction histories, proven track records of individuals and enterprises, may be ranked by reputation score. Several companies are working on search engines for blockchain.

Opportunity 2 : Contracting

Contractual costs, like negotiating the price of labor or an actual resources and spelling of the terms and conditions, are one of the primary reasons that firms exist. Contracts are a way of establishing trust and setting clear expectations. Smart contracts on the blockchain create some new opportunities both inside and outside of corporate boundaries. Today, contracts are still largely made up of atoms in the form of paper, not bits in the form of software. That means they still have some big limitations, serving only to document an agreement. But if contracts were software, smart and distributed on the blockchain, they could open up a world of possibilities. One important change would be to make it easier for companies to use external resources. By reducing contracting costs, the blockchain makes it easier for firms to develop relationships outside their boundaries.

Opportunity 3: Coordination

Nobel Laureate, Oliver Williamson, went on to explain there are two significant coordinating systems. The first is the market. It’s a price system for decentralized allocation of resources. The second is hierarchy, it’s the organizing principle of traditional firms where some centralized authority allocates resources.

Canadian born psychologist, Elliot Jaques, defended hierarchy in the Harvard Business Review, arguing, Managerial hierarchy is the most efficient, the hardiest, and the most natural structure ever devised for large organizations. Properly structured, hierarchy can release energy and creativity, rationalize productivity, and actually improve morale. The trouble is, in recent businesses history, hierarchies have often been ineffective. Managers often rise to a level where they lack the knowledge required for effective leadership.

The blockchain’s smart contracts and transparency should reduce agency costs at all levels of management to a dramatic degree.

Opportunity 4 : Building trust

Trust in business and society is the expectation that the other party will act with integrity. That means acting with honesty, consideration, accountability, and transparency. Secrecy and short-term gain are fundamentally hard-wired into the Western financial system .

Blockchain developers have coded it into the software protocols and deployed it across this network. Blockchain could be a new utility for the financial services industry. The good news is that the industry can reestablish trust and keep it going forward. Blockchain is cutting the cost of searching, contracting, coordinating, and creating trust. So it should be easier for firms to open up and forge trusting relationships with external parties. Acting in one’s self-interest serves everybody’s interests, cheating the system costs more than using it. The way it’s designed. Blockchain helps ensure integrity and trust in transactions between peers, it also helps achieve transparency a critical factor in trust.

interesting article from McKinsey

Corporate Boundary Decisions

Leaders should be strategic in determining what gives their company a competitive advantage. They said companies gain competitive advantage by mastering a distinct competence. Those could be specialized skills, proprietary techniques, and unique knowledge. Those could be specialized skills, proprietary techniques, and unique knowledge. Companies could go outside to acquire other resources. But a company may have mastered some activities not critical to its core. So it needs to decide whether to continue doing them.

Some mission-critical functions like the collection and analysis of big data, may be just too risky to move outside corporate boundaries, even if you don’t have unique abilities in that area.

First question companies should ask is, are there partners who could do certain activities better? Could we benefit from peer-to-peer production, for example, or open platforms or other blockchain business models?

Second question is, what are the new economics of corporate boundaries in any situation? What are the transaction costs of partnering versus doing activities in-house? Can you develop a suite of smart contract templates to reduce your coordination costs?

Question three, how much of your business relies on technological interdependence, and how much is modular?

Question four, how good is your firm at managing this external or outsourced work? How good is your company at managing networks? Can smart contracts improve the process and lower the costs overall?

Question five, is there a risk a partner might invade fundamental parts of your business?

Questions six, are there legal, regulatory, or political obstacles to change and to networking more? Have you cut deals to lock you into your current structure or location and so on?

Questions seven, will working with partners help you improve your overall competitive advantage, your ability to create differentiated value?

Question eight, is there a danger of losing control of something fundamental, say a product or a network architecture?

Question nine, can you rapidly expand your market or value proposition while at the same time shutting out a competitor by vertically integrating, by moving in the other direction at least temporarily?

Decentralized Autonomous Organization

Decentralized autonomous organizations are entities that operate through smart contracts. Its financial transactions and rules are encoded on a blockchain, effectively removing the need for a central governing authority — hence the descriptors “decentralized” and “autonomous.”

The DAO was in essence a decentralized investment fund. Its developers promised that it would operate with the iron will of unstoppable code.Fundraising came first. Users could purchase DAO tokens by sending ether to the DAO Smart contract, then token holders could vote on which projects to fund out of the proposals that were submitted. Token holders would get a share of the DAO’s holdings. Anyone who disagreed with the funding decision could trigger a split function, moving their funds into a new child DAO.

the attacker was able to “ask” the smart contract (DAO) to give the Ether back multiple times before the smart contract could update its balance. 

An attacker used the flaw to drain funds by calling on the split function available to token holders. The attacker was able to, in essence, withdraw funds over and over without updating the account balance held in the DAO. The attacker funneled a third of the ether raised into a child DAO, where it had to sit for three weeks per the terms of the DAO. This was big money. The DAO at its peak had raised a $165 million in US dollar equivalent. The attack was spotted almost at once, but there was no way to stop it. 3.6 million ether was drained in a few hours.

Ethereum developers had two possible fixes, both tough choices. One was a Soft fork. Blacklisting the child DAO, so the funds could never be spent. The other was a Hard fork, transferring the stolen ether into a new withdrawal contract where token holders could claim their funds. Both fixes were controversial. 

Hard fork was really the only solution, but it meant admitting the ethereum blockchain could be altered or appended. Developers, we need to convince a majority of the mining power on the network to install this new version. The hope was that everyone would switch to this new protocol and leave the old one to die out. 

So the ethereum blockchain split in two in its first year of existence, with significant mining power staying on to form what is now known as a Ethereum Classic.

A key lesson was that effective blockchain governance requires both on-chain and off-chain mechanisms. The DAO showed the limitations of on-chain governance. 

New business models

•  blockchain cooperative : It’s formed by people coming together to meet common needs. This is an opportunity to create a true sharing economy, where individuals and organizations work together as a cooperative and receive most of the value that they create. Basically Uber or Airbnb but without getting cut by the company, direct peer to peer deals.
•  creators of intellectual property
• peer to peer production : Peer producers brought us open source software and Wikipedia.Blockchain technology can improve their efficiency and reward them for the value they create through incentives and reputation systems. Reddit could benefit from moving to a model where great contributors are rewarded and bad behavior is penalized economically.
• metering of asset usage : This is a different take on the sharing economy. Renting our excess capacity for all kinds of things on the Internet of Things. Renting things like WiFi hot spots, computing processing power, storage capacity, extra mobile minutes, or our remaining battery charge. 
• Platform builders : These are business models based on letting anyone use their technology platforms to create value. What if Nike running shoes could record data on a distributed ledger? Nike and the shoe wearer could monetize the data with a smart contract. Let’s say, a consumer gets a tiny piece of Nike shares when she buys a pair of sneakers. In return, she agrees to activate the device or sync to other wearables like a glucose level calculator.
• animating the physical world, making things come alive on a blockchain.Manufacturing-intensive industries though can use blockchain to source, design, and build better physical goods like that airplane.Companies in lots of industries are tending to separate into networks of suppliers and partners. Three-dimensional printing will move manufacturing closer to the user, bringing new life to mass customization. Soon, data and rights holders can store metadata about any substance, from human cells to powdered aluminum on a blockchain. They could expand the limits of corporate manufacturing.
• the enterprise collaborators.Commercial collaboration tools within a business are changing the nature of knowledge work and of management inside organizations. Products like Jive, IBM Connections, Microsoft Outlook, Salesforce Chatter, Google Apps for Work are improving performance and fostering innovation.The system delivers a stream of valuable information like a colleague’s patch of code, a Twitter feed from a conference you missed, a live stream of a client using your new product, photos of your competitors’ booths at a industry expo, or help in completing a patent application. You or your firm will gladly pay for this stream.  The benefits of this open-sourced and blockchain model are huge. There’s advertising, but you, not Facebook, get rewarded for paying attention.

https://cointelegraph.com/news/how-significant-is-blockchain-in-internet-of-things

DApps (distributed applications)

Cloud computing let users and companies store and process their software and data in third party data centers.New technology companies like Salesforce.com made fortunes by using the cloud model to save customers the big costs of developing and running their own software. the trend of centralized computing continued.Large companies keep the applications they’ve created, processed, owned, or acquired on their own large systems, but there are red flags created by the centralized structure.Single points of control make companies and their customers vulnerable to catastrophic crashes, fraud, and security breaches.Other people own the valuable data we generate, and they’re using it to build vast fortunes perhaps the greatest in history. Most of us get little benefit or compensation for handing over our data. 

Then along came blockchain and distributed applications. Now, anyone can upload a program onto the blockchain and leave it to self execute with the strong guarantee that the program will continue to perform securely.This platform is public not inside an organization and it contains a growing set of resources like digital money to reward and promote certain behavior. We’re moving into a new stage of the digital age where we can program and share distributed software. 

Blockchain technology makes the possibilities for DApps basically unlimited, DApps are a new level of digital evolution. Here’s just one example. The company’s Storj provides a distributed cloud Storj platform in a suite of DApps. It lets users store data cheaply, securely, and privately. No centralized authority has access to a user’s encrypted data. Storj eliminates the high costs of centralized storage facilities. It’s super-fast. It pays users for renting their extra disk space and its censorship resistant. No single company can prevent you from accessing what is yours by right. It’s like Airbnb for your computer spare memory space, allowing you to monetize latent capacity for profit.

Companies like Airbnb are part of the so-called sharing economy. But Airbnb is not really successful because it shares, rather it is successful because it does not share. It aggregates excess capacity through a centralized platform and resells it at a profit pocketing fees. 

Dapps, These distributed, resilient, transparent and incentivized applications will prove themselves to the world by remapping the technological landscape.

Strategic Approaches to intellectual property

Obtaining patents is expensive and can be speculative. Software innovation changes fast. A brilliant invention might soon be obsolete.

 Patent pools are a mechanism for sharing issued patents to advance the overall industry.Here’s how something like this would work. Companies will pool patents in a particular technology, then purchase a license to the pool usually at a discount from what would be negotiated for individual patents.

The entity could function like the RPX Corporation. Members of the company pay dues, the company then buys patents or patent portfolios making them royalty free for members. Guidelines would define what makes a patent essential in the blockchain space. The evaluation would determine who required a license to the same patent. Stakeholders could receive value for participating in the evaluation process with credits on their yearly dues. 

 It seems logical to use innovative technology to advance our technology law. Using a blockchain for patent pools help streamline licensing, negotiation, and enforcement. Automated review systems become more feasible. High-fidelity tracking of changes is built-in, and it provides a testing bed for non-blockchain industries to move their pools to a blockchain system.

Payments, Attribution, and Licensing

Imagine royalty payments using cryptocurrencies. Those could happen in minutes or seconds, whenever people downloaded a song or used it in their commercial. Or played it on the radio, or streamed it on Spotify,or bought ads around the music video on YouTube. Smart contracts could track these different uses of a song and meter out royalties to the artists and to other stakeholders, all without human agents. That’s the future on royalty payments on the blockchain.

Blockchain platforms make global registration easier. An artist registers a work by uploading a digital file. The platform generates a hash of that file. Now, as we have discussed previously, a hash is a unique alphanumerical digest of the content. It serves as an identifier, like a digital fingerprint. It could be used for money like bitcoin. Or it could be used in this case for a song or a piece of art. The creator secures attribution and timestamps possession of a file. That could be critical in a dispute over authorship. Now, this global registry of intellectual property could replace the separate redundant and sometimes inconsistent and even outdated silos of metadata that we have today. This registry would be available to anyone anywhere and scalable to billion of creative works.

 Streaming content would really mean streaming payments to artists. Intermediaries could focus on helping audiences discover creative works instead of dealing with paperwork.

Distributed Ownership

The blockchain could automate resale royalties and event ticketing. It could transform how organizations monetize fund data and create a more inclusive model for writes data. The technology could even help creators to find new sources of capital and new models of distributed ownership. The blockchain makes decentralized collaboration possible for groups on a large scale.

We can imagine thousands of people everywhere in the world collaborating on a blockchain based Wikipedia. Indeed, there’s already an example of this called Everipedia. Backfeed is the name of an initiative launched to encourage massive open-source collaboration among a network of peers. It operates free of centralized control. Peers can use Back feed to evaluate contributions to a group project. Individual contributors receive rewards according to the perceived value of their work. It’s a new form of commons-based peer production on the blockchain.

Module 2 Recap

You’ve learned how smart contracts can do tasks ranging from the simple to the complex with little human involvement. They can act as what we call autonomous agents on behalf of whoever set them in motion. They have potential to form a distributed autonomous enterprise, co-operating a complex blockchain-based ecosystems. But they need some human governance, as we saw in the case of the DAO or D-A-O. Distributed applications run across a network of devices forming open network enterprises for creating value. We also learned about seven types of business models. First was the blockchain co-operative, like a blockchain- based Airbnb or Uber, where people pool their resources and share all of the value created. Second, was for intellectual property management, where startups like VeriSat help creators manage their copyrights, trademarks, and patents on the blockchain. Third was peer production. Blockchain-based versions of platforms like Linux or Reddit except everyone is rewarded for the value they create, and docked for bad behavior. Fourth, was micro metering, where people can rent out their Wi-Fi hotspot, excess electricity, computer processing power, and other assets when they’re not in use. Fifth, was the platform building. Creating open source platforms for others to use and to build upon. Six was the making of things on the blockchain. Coordinating capital, talent, and assets to manufacture goods and deliver services from design right through to final usage. Last was enterprise collaboration, where we can expect the rise of new collaborative platforms for use within and between enterprises. These sets of applications and tools will be very different from those of today because they’ll be based on an employee owned sovereign identity and powered by blockchain. Blockchain technology distributes ownership, supporting new forms of collaboration, and free of centralized control. 

The C-Suite

CEO

 The tone starts at the top. If a CEO embraces blockchain and so will the company and its customers.The key responsibility of a company’s senior management team is also balancing the hype and the promise of this technology.

Now, there are three ways that a CEO can lead team and set the proper tone.

• First is acknowledging market readiness and good financial results.
•  A second strategy is effective marketing and communications.
• we need to avoid setting unrealistic expectations.

COO

 COOs get perhaps the best glimpse of this transformation. They oversee the movement of all these assets that go through their company. They could help reinvent global commerce as we know it.

• The first is manufacturing. Foxcon  is using blockchain as a trustable platform, for building relationships among partners, suppliers, and customers, who may not otherwise trust each other.
• Mining : The blockchain startup, Everledger, is taking on supply chain problems like fraud, and property rights, and provenance in the diamond industry.Buyers will be confident, that the stones they purchased are legitimate. Stolen diamonds can be traced back to the rightful owners.
• agriculture: Blockchain can reduce health hazards, and screen out bad actors in the global food chain. It helps track the quality of crops and soil, and it also helps reduce waste and increase local yields.
• retail : It worked with IBM to pilot a blockchain solution for food safety. The results were positive. It increased efficiency, it reduced impact on cargo, and checked the conditions of transport and storage of foodstuffs.
• border control and customs : Blockchain technology can help track money, goods, and people as they pass through customs, verify their identity, and automate paperwork.
• aerospace : Moog deployed blockchain to secure the transfer and use of 3D printing design files, so they couldn’t be tampered with and would print exactly the number of parts paid for in remote locations.

The global supply chain, will be more adaptable and responsive to demand, and crisis if it runs on the blockchain.

CLO

Blockchain aids the contracting process whether short or long term. Smart contracts can automate terms. Smart contracts are self-enforcing and so corporations will not want to enter them lightly. Chief Counsel and corporate lawyers will need to learn how to audit legal templates and make sure the contract software supports what it’s parties intended it to do.

One, stick with well-tested methods for creating and running Smart contracts, keep it simple. And two, make sure you have someone on staff who can audit the code of a smart contract template or the code of a distributed app behind an ICO or other crypto asset.

Tom Isaacson is a lawyer and shareholder of Pulse Donnelly. He summed up what blockchain innovators are doing. They’re filing patent applications to do three things. One, to profit from their invention. Two, to prevent others from using their invention and three to make an invention available to collaborators through patent pools or through open source.

He said a blockchain patent application must meet three criteria. One, it must be eligible and that’s not always clear. Two, it must be truly novel. The courts don’t favorite patents codifying existing business practices in software and three the design must be non-obvious.

CFO

The financial services industry needs a major upgrade. Sleek user interfaces act as digital wallpaper for old technologies, processes, and systems.The industry forces anti money laundering and know-your-customer regulations. It verifies identity and account balances, it facilitates payments, savings, loans, asset exchanges, investment, insurance, risk management, and accounting. Blockchain, it turns out, is transforming all of these.

CMO

Every CMO knows the Four P’s of Marketing; product, placement, price, and promotion.Blockchain’s biggest opportunities require a shift in marketing strategy. Profiling customers online by tracking their behavior, capturing all their data might soon be a thing of the past.Consumers in the future will own and control their own data through virtual black boxes set up on blockchains. Marketing and sales staff, will need to learn how to query these black boxes.

Jeremy Epstein, is CEO of Never Stop Marketing and an expert on blockchain and marketing. He introduced us to Brave Software and explained its approach. Brave launched the Basic Attention Token or BAT, and a free web browser blocking ads and cookies. Braves token mechanism let’s advertisers pay end users directly for their attention to ads.

• First, a CMO will be asked to demonstrate return on marketing investment.
• Second, disrupting advertising will yield new insights and challenges.
• Third, smart contracts will clearly show what CMO’s are doing to up the return on every marketing dollar.
• Fourth, more innovative and easier-to-understand loyalty programs will emerge.
•  Fifth, the marketing organization will flatten from a hierarchy to a network. 
• Sixth, brands will no longer make claims, at least not claims they can’t support.

Brands will also require four components;

• One, an inspiring mission. 
• Two, is evidence of how the brand makes the world a different and better place
• Three, is a plan to engage people, to meet their emotional, psychological, and financial needs.
• Four, is a great user experience including real utility and customer privacy.

CIO and CTO

• First, CIOs and CTOs must effectively communicate their bold visions of the future. 
• Second, they will need to orchestrate innovation across the enterprise.
• Third, they must cultivate the necessary skills, talent, and relationships in house or in the network. 
• Fourth, CIOs and CTOs should keep an eye on quantum computing.

CHRO

Organizations, especially the HR professionals in them, must think more in terms of tasks needing to be done rather than positions that needed to be filled.

HR professionals can learn how to leverage Blockchain in for ways, finding the right people, negotiating their contracts, implementing the terms, and coordinating their contributions.

The Blockchain transformation of the HR function is expected to occur in three waves.  

• The first wave, will resolve fundamental issues with recruitment. HR professionals will use Blockchain to query candidate’s black boxes of data, confirm their identity, and verify their credentials.
• The second wave will provide benefits in the broader talent ecosystem.
• The technology allows for the sourcing and execution of work projects.

HR professionals will need to reimagine their function and transform with the technology. Some jobs maybe eliminated. Some HR processes may be automated, and others will be managed by algorithms. 

Review :

CEOs set the tone at the top. They need to embrace blockchain by focusing on market readiness, effective marketing strategies, and avoiding unrealistic expectations. If they got onboard, employees and customers will also get on board. You’ve learned that COOs oversee the movement of assets through global supply chains. They can use blockchain and procurement, manufacturing and retail to adapt and respond to demands and crises. You’ve learned how corporate council need staff who can code, or audit smart contracts. They also need to stay on top of lawsuits and regulatory actions involving blockchain technology, crypto assets and patents. You’ve learned how CFOs have more tools for managing their short-term capital, and long-term investments. They can tokenize the company’s physical assets, and maybe even create all new types of crypto assets. They can also apply triple entry accounting and issue financial statements with the press of a button. You’ve learned how CMOs will be shifting their companies toward a pay for attention model. They’ll be able to show clear return on marketing investment with greater confidence in the integrity and accuracy of consumer data. You’ve learned that CIOs and CTOs, need to be communicating their bold visions, coordinating innovation across the enterprise, and cultivating blockchain talent. They also need to keep an eye on threats like quantum computing, and you’ve learned how CHROs can pioneer blockchain HR applications by promoting diverse views, and re-imagining their own job functions.

Blockchain Regulation and governance

It’s still no simple task to regulate the Internet. It sits at the intersection of computing and communications, and it’s global. 

It’s safe to assume that blockchain industry folks like early Internet developers have more expertise than most regulators do on the subject.

We’ll eventually find out which approach actually protects the public and promotes innovation (net neutrality or not).

blockchain, the second era of the Internet, is also fundamentally different from the first era. The first era enabled people and organizations to communicate, copy, and manage information. The second era deals much more with very fundamental things, assets like money, securities, intellectual property, our identities, cultural assets like music, or votes.

Regulators need to pause and to learn from the unintended consequences of their overreaction to a crisis or to some new innovation.European Parliamentary Research Services issued this caution. They said legal systems may not be able to assert any control over the borderless, decentralized activities taking place on distributed ledgers.

Global Blockchain Rights :

• Unrestricted access to blockchain applications, unless those applications violate the social contract
• Balance between your right to distribute and access information
• Balance between your right to privacy and to protect your data
• Legitimate need for governments to restrict the flow of information, provided it’s infrequent and the reasons are transparent

As with the Internet, there are different approaches to the level of regulation around blockchain development and growth. 

Small companies usually lack the resources to create the needed policies and procedures across jurisdictions. Sometimes regulators don’t even have start-ups on their radar and make no regulatory efforts to monitor them.It’s clear that there’s no single regulatory model we can apply to both powerful incumbents wading into blockchain and to the smaller development groups and startups.

A key challenge for regulators is to protect the public interest but not to crush innovation because this technology is at the heart of building a whole new innovation economy.

Fundamental Questions

Regulators should ask some basic questions about Blockchain before they set new regulations.

The most basic question is whether the Blockchain and/or the various activities that are growing using this technology should be self-regulated, government regulated, or unregulated.

A critical question is this; does this technology raise unique legal issues?

Another question is what exactly are we trying to regulate?

Just because policymakers can make existing laws work for Blockchain applications doesn’t mean they should. We may not be able to answer this question without observing the new technology in action over time. It may be necessary to apply existing laws in the meantime because Blockchain evolves in rapid and unexpected ways.

Consider the gray area between currency, commodity, and security. Just because something’s called a cryptocurrency or described as a token, doesn’t automatically mean that it’s not a security, or it is. Four factors called the Howey Test define an investment contract or security as “an investment of money in a common enterprise with an expectation of profits to be derived solely from the efforts of others.” The focus should be on economic reality, substance over form.

Regulatory principles

We must always identify the rationale for regulation as a starting point.

 So, a guiding principle must be to pair regulations with the evolution of distributed ledger technology the best we can.

With technology evolving as unpredictably as blockchain, stiff regulations are obsolete as quickly as they’re issued.Regulation development should track with the technology’s development.

We need to distinguish upfront between regulation of the blockchain, regulation of applications running on distributed ledgers, and regulation of the ecosystem overall.

A regulatory sandbox is a more benign testing ground for new business models not governed by current regulations. The UK Financial Regulatory Authority launched a regulatory sandbox in 2015. So, firms could test products and services in a controlled environment.

Regulatory attempts, if too heavy handed, can push the technology and its users to explore unanticipated directions.

Regulators must acknowledge that, often, they just don’t know whether a blockchain application will lead to an ultimately net-positive or even negative outcome.

So, flexibility is key. We don’t want to use a hammer to attack everything that needs to be done in this construction site.

Blockchain governance

For millennia, states have had a monopoly on money. They produce it, control it, grant it value based on various metrics. Now, we can see how value can be created by individuals and groups working on a distributed, global, peer-to-peer network, and that value creation could include money. Value creation and control aren’t exclusive to any central authority.

Experience proves governments should approach technology regulations cautiously, and act as collaborators with other sectors in society rather than having the “heavy hand of the law.”They need to participate as players in a bottom-up governance, ecosystem not as enforcers in a top-down regime only.

The faster a technology evolves or the greater the degree of disruption to business, to life, liberty, investing and so on, the more challenging it is for regulators to understand what if anything needs to be regulated.

Market-based and private initiatives should also be encouraged. We can measure the effective regulatory initiatives by how well the proposed regulations strike a balance between maximize benefits and minimize risk. If feedback from this experimentation doesn’t support the proposed regulations aim, then don’t adopt it. 

•  If new regulations do turn out to be the way to go, think about these points: When to intervene if at all. 
• Waiting may or may not bring better information. 
• Try to think about the possible drawbacks of waiting. 
• Regulations can come in the form of a rule, an adjudication, guidance etc. 
• Weigh the costs and benefits of each configuration and figure out which best accommodates the uncertainties of the innovation in question. 
• Regulator actions can be permanent, they can be temporary, or they can be conditional. 
• Different innovations will call for different interventions with different durations. 

The Blockchain Stack

Blockchains like Bitcoin and Ethereum rely on Transmission Control and internet protocols also known as TCP-IP. These protocols route and transfer data packets between nodes on the internet. 

Net neutrality is a foundational principle of the Internet. It’s the idea that all traffic on the network, should receive equal priority. Information should be transmitted as it is received.

In December 2017, the US Federal Communications Commission, the FCC, repealed its net neutrality rules. This opened the door to increase interference at the internet level. Let’s look at Deep Packet Inspection. This allows governments and ISPs to restrict the use of cryptocurrencies or other Blockchain systems, within specific countries or around the world. 

The amounts of data involves can be quite sizable. Operating a node involves monthly data transfers of between 70 and 140 gigabytes. The limits are imposed by choices made at the internet level. The Great Firewall of China, through which all internet traffic in China must pass, impeded mining operations.

The Blockchain layer operates on top of the internet layer, and introduces mechanisms of governance and protocols unique to each network.

A large mining pool might contract with third parties to speed up certain transactions at the expense of others. Miners could jointly agree not to process specific transactions coming from or directed towards and criminal application and a blog. Miners could blacklist specific addresses, or regulators could ban all miners in certain jurisdictions, from validating transactions of a specific account. 

There are two ways to alter the operation of a DApp. The first, is changed the state of the Blockchain to overwrite the code of the DApp.

The second change, is to a small piece of the code the DAPp lies on, like a smart contract library or proxy contract. A proxy contract is a smart contract delegating calls to other smart contracts.

Multiple Layers of Blockchain Governance

The two distinct governance structures on blockchain, are governance by the infrastructure and governance of the infrastructure.

Let’s look at Ethereum. It’s blockchain protocols and consensus algorithm are endogenous rules because they’re directly built into the network. But if a DApp were deployed on top of Ethereum, endogenous rules would also include all of the decision-making procedures and technical rules embodied in the smart contracts that govern that DApp. The underlying protocol of the Ethereum network would qualify at that point as exogenous because it’s an outside influence.

On-chain governance is predictable and fair in its execution.Because on-chain governance isn’t easily influenced, it’s unlikely to handle new and unexpected situations effectively.

In Bitcoin, these decisions are mostly made through Bitcoin improvement proposals. It’s an informal mechanism through which people can propose new features and improvements to the Bitcoin protocol. Ethereum also implemented such a system called Ethereum Improvement Proposals. It’s informal procedure allows users to suggest or request changes to the Ethereum protocol or code. Once a suggestion is made, developers of a blockchain system will put forth a proposal. Then the voting system determines whether the community adopts it as a whole.

For the first time in human history, non-state multi-stakeholder networks are forming to solve global problems and even to govern resources in the world.

Seven conditions for success

There are seven elements a hub must have for blockchain based innovation to thrive.

• First, is environment supportive of entrepreneurship.
• Second, is a community of corporate leadership.
• Third, is proximity to educational institutions.
•  Fourth, is a strong investment climate. 
• The fifth element is government support.
• Sixth, is a fair regulatory environment. 
• The final element is a diverse community of talent.

New social contract

Social contract refers to the agreements, the laws and the behaviors that people adhere to in their companies, their social circles, and their governments.

Thomas Hobbes came up with the social contract theory years ago. After the brutal English Civil War back in the 1650s, he said, “We contract with each other for security and stability in an otherwise dog-eat-dog world.”

Not long after, John Locke expanded the concept to include property in exchange for sovereign governance and protection.

Modern democracies : means of collective governance.

Now social contract is breaking : Today, US citizens live shorter lives, infant and maternal mortality rates are up, wages are down, access to education and opportunity has declined. Median income adjusted for inflation was actually lower in 2016 than it was in 1974.There’s a general belief new rules had been imposed by the few without public consent.We have growing wealth creation and declining prosperity.Today’s digital economy social contracts are taking shape infinitely faster. 

Drivers for change

• One is the Fourth Industrial Revolution, 
• another is expanded globalization, 
• a third is demographic upheaval, 
• and a fourth is worsening climate change,

The fourth industrial revolution (technology): It’s a fusion of technology blurring the lines between the physical, digital, and biological worlds. The worldwide consulting firm, McKinsey Group, used the phrase combinatorial technology explosion to describe what’s happening as these sectors meet.

Fours pillars of society :

• the state, 
• private sector,
• civil society, 
• and now the individual

 Although individuals in civil society at large grow more and more empowered by digital technologies, our voices were and largely remain stifled by those with more financial power and political influence.The private sector has a public responsibility. The private sector is the foundation of wealth creation, but it’s also a major contributor to wealth distribution.

In the past, the private sector has been a major participant in functioning democracies, until that tricky period when the greater good became less of a priority than the bottom line and personal wealth acquisition.

Both the state and the private sector have at various times and in various ways, worked either to strengthen or weaken civil society and its institutions, depending on the time or the mood of the moment. A social contract for the digital age with provisions to respect and hear the voice of the very society granting it validity, is essential.

So the first assumption was we need full-time jobs and full-time employment, to provide wealth and benefits like healthcare.

The second assumption was that government is responsible for the unemployed, the poor, the sick, the disabled, and the elderly. 

A third assumption was business and labor are pillars of prosperity.

But with the rise of shareholder and management power came the age of imbalance- not just an imbalance of power between corporations and workers, but an imbalance between quarterly incentives and long term capital investment.

Democratic institutions increasingly bow to campaign funders, not voters in the communities they represent. Leaders react to polls, not people and not to science and independent research.

A flipped classroom reverses the traditional learning environment by delivering instructional content outside of the classroom, and moves activities that may have traditionally been considered “homework” into the classroom.