Archive for the ‘ bigdata ’ Category

The 2018 ICO Market

Presentation at FinTank’s CryptoCon 2018:

Fintank CryptoCon 2018 – Wulf Kaal – ICO Panel

Based on this article:

Initial Coin Offerings: the Top 25 Jurisdictions and Their Comparative Regulatory Responses

23 Pages Posted: 

Wulf A. Kaal

University of St. Thomas, Minnesota – School of Law

Date Written: February 2, 2018


This article provides an overview of the evolving ICO market in January 2018. It evaluates hand-selected data for the top 25 ICO jurisdictions by market capitalization. The author codes the regulatory responses of the top 25 ICO jurisdictions and provides a comparative analysis of their respective regulatory actions.

Keywords: Initial Coin Offerings, Blockchain, Distributed Ledger Technology, Regulation, Market Abuse, Investor Protection, Artificial Intelligence, Machine Learning, Data Science, Data Scientists, Innovation, Entrepreneur, Start-up, Big Data, Crytpo Economics, Diversification, Optimization, Efficiency, Gover

JEL Classification: K20, K23, K32, L43, L5, O31, O32

Kaal , Wulf A., Initial Coin Offerings: the Top 25 Jurisdictions and Their Comparative Regulatory Responses (February 2, 2018). Available at SSRN:

Wulf Kaal @ ConsenSys Panel – World Economic Forum – Davos Switzerland 2018.

Discussing Sustainable Solutions for Crypto Evolution via Verified Domain Specific Reputation in Anonymous Decentralized and Autonomous Systems.

Panels @World Economic Forum 2018, Davos, Switzerland

Spoke on 3 panels @world economic forum 2018 in Davos, Switzerland. Here is the quick summary:

WEF18 Panel discussing the need for verified domain specific reputation in #cryptoand the with @Aron Dutta VAPHR #vaphr and @Kamran Khan #infratechcapital @ World Economic Forum
discussing why decentralized autonomous reputation verification is needed in the #crypto #economy to ensure an evolutionary structure can support infrastructure.

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Panel on using blockchain to create individual sovereignty. Discussed limitations and need for reputation verification solutions to define “good” on the blockchains @ World Economic Forum


Panel on using blockchain technology for UN sustainable development goals Consensus space @ World Economic Forum

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Presenting my academic work as law Professor @ University of St. Thomas that culminated in the Repute Platform at several panels tonight, tomorrow and Wednesday. @ World Economic Forum

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Innovation and Legislation: The Changing Relationship – Evidence from 1984 to 2015


Wulf A. Kaal

University of St. Thomas, Minnesota – School of Law

Nick Farris

University of St. Thomas – School of Law (Minnesota)

Date Written: November 29, 2017


We examine the relationship between innovation as measured by annual utility patents granted and two datasets for legislation: (1) the U.S. Code and (2) the Code of Federal Regulations from 1984 to 2015. We show that the historical relationship between innovation and legislation has changed, especially for computer and communication patents. The evidence suggests that the existing regulatory infrastructure has a diminishing capacity to react to innovation. The evolving empirical relationship between innovation and legislation has implications for the legal system and rulemaking processes in the existing regulatory framework.

Keywords: Innovation, Measures of Innovation, Legislation, Measures of Legislation, CFR, U.S. Code, Patents, Data, Matching

JEL Classification: K20, K23, K32, L43, L5, O31, O32

Kaal , Wulf A. and Farris, Nick, Innovation and Legislation: The Changing Relationship – Evidence from 1984 to 2015 (November 29, 2017). Available at SSRN:

Initial Coin Offerings – Emerging Practices, Risk Factors, and Red Flags



Wulf A. Kaal & Marco Dell’Erba


Initial Coin Offerings (ICOs) are the most efficient means of financing entrepreneurial initiatives in the history of capital formation. ICOs minimize transaction cost, democratize finance, and in the process dis-intermediate banks. Yet, ICOs have increasingly involved cases of abuse, lacking quality, and governance concerns, precipitating calls for increased regulation. This article provides an overview of the ICO market as it exists in November 2017 including the  ICO process, roadmap, market conditions, crypto economics for ICO startups, core risk factors for investors and red flags of ICO practices that require industry or regulatory improvements.

Initial Coin Offerings

Initial Coin Offerings (ICOs) provide unprecedented efficiency for capital formation in startups. ICO offer liquidity enhancement of startup finance needs through crypto investors, overcoming fundraising challenges for entrepreneurial initiatives. ICOs allow crypto startups, Fintech startups, and increasingly legacy system innovators, and the Ethereum developer community, among others, to fundraise directly in the crypto community for their activities and projects, bypassing both banking and non-banking entities (i.e. VCs) as well as their services.

ICOs can be distinguished from initial public offerings (IPOs). ICOs enable the sale of a stake in a crypto project that aims to raise funds at an early stage of development. Unlike IPOs, where companies sell stocks via regulated exchange platforms, ICOs sell digital coupons, so-called presale tokens that do not generally confer ownership rights, to early investors via unregulated or exempt exchange platforms. Risks and Rewards of tokens differ from those of equity. Unlike token ownership, equity typically conveys a right to dividends. In the case of bankruptcy, equity owners have some claims on the assets of the company.  Moreover, unlike IPOs, successful ICOs do not require the support of a reputable banking institution as underwriters and remove the associated fees for the issuer.  ICO fundraising is substantially less expensive than traditional IPO fundraising because of the relative absence of regulatory constraints and procedures in the ICO space, in addition to simpler reporting requirements, coupled with a systematic adoption of digital identity-based processes instead of paperwork in all the phases of the process.

ICOs can also be distinguished from crowdfunding.  Unlike crowdfunding, ICOs involve a financial stake in the company including, as the case may be, the right to vote on future decisions. Therefore, ICOs cannot be qualified as a donation. Unlike any campaigns conducted on crowdfunding sites such as Kickstarter, ICOs have often an element of a speculative purpose or a particular infrastructure use case developed on platforms and cryptocurrencies.  ICOs are evolving rapidly. After Satoshi Nakamoto established the use of blockchain technology for cryptocurrencies in 2008, it took until 2012 for the first ICO. However, the exponential growth of ICOs since 2015 culminated in ICO fundraising outperforming venture capital financing of crypto startups in the second quarter of 2017. Several prominent ICOs help illustrate the rapid evolution of the ICO market. In April 2016, the startup Gnosis, a decentralized prediction platform, raised about $12.5 million in 12 minutes, skipping any venture capital firm or wealthy investor network. In May 2016, the startup Blood raised $5.5 million in 2 minutes. Brave, a start-up developing a web browser via the so-called Basic Attention Tokens, raised $35.5 million in 30 seconds. In June 2016, the Bancor Foundation collected $153 million in three hours.

Ethereum enabled a uniform protocol for the overwhelming majority of ICOs.  the most significant transformation in the ICOs market to date. Ethereum’s decentralized platform incorporating smart contracts  allows developers to build applications on the Ethereum blockchain. Given these advantages, the majority of developers opted for writing smart contracts on the Ethereum Virtual Machine rather than creating their own blockchain technology. Smart contracts automatically generate tokens when receiving Ether (ETH).

1. Roadmap

ICOs are a recent phenomenon that is constantly evolving. Standard market practices for ICOs change on average every quarter. Yet, a structural pattern seems to emerge.  ICOs vary but often follow a timeline sequence of structural elements. Such elements are explored below:

– Before the launch of an ICO, the underlying **project is announced on cryptocurrency fora** (such as Bitcoin Talk, Cryptocointalk, Reddit).

– The announcement is followed by an **executive summary** to present the project to investors, thereby obtaining specific comments of the project.

– **Comments on the project** are considered by the management team / promoter when drafting a so-called whitepaper

– The **whitepaper** is the equivalent of an offering memorandum that provides more detailed information about the project with the purpose to support potential investors in their assessment of the project.

o Most important for the whitepaper are the key terms and the investment approach, including the investment strategy, criteria, restrictions, processes, and return so Whitepapers are not audited by any authority. Therefore these preliminary steps are crucial in order to build a general market credibility and investors’ trust in the soundness of the project

-The draft of a **yellowpaper** provides the technical specifications to support the project at this preliminary phase.

– In a first stage, in a so-called **pre-ICO **a preliminary offer is made to selected investors.

– After the signing of the offer, the **launch of the ICO is announced** and a PR campaign addressed to a broader segment of investors (typically including small investors) begins.

– After this preliminary phase, the **ICO is launched **

o The new venture sells its own cryptocurrency to be used with their software before the software itself is even written The better ICO companies may have a proof of concept or an alpha version before starting the token sale, and sometimes even a beta version as in the case of Storj.

o Funds are typically collected in Bitcoin, either via a global, public address (in which case the participants need to send Bitcoin from an address for which they control the private key) or by creating accounts of each participant and providing them with a unique Bitcoin address.

o ICO best practices suggest that all funds be held in a multi-sig address made public.

o Fundraising (usually only one) happens before the startup has launched its project, however duration of the ICOs may vary depending on the success of the entrepreneurial initiative among the investors: the most successful ICOs were concluded in a few minutes.

– The digital tokens are **listed on cryptocurrency exchanges for trading**. At the moment there are forty+ exchanges around the world that serve as secondary markets where cryptocurrencies can be traded for bitcoins in an open marketplace.

– A cryptocurrencies’ **pre-ICO price** is arbitrarily determined by the start-up team that structured the ICO,  whereas the post-ICO price dynamics are determined by supply and demand. Instead of a central authority or government in ICOs the network of participants determines the price:  Successful entrepreneurial activities increase the price of the tokens, granting profitable returns to investors.  Should the start-up fail, the tokens’ price will plummet.

2. Market Environment

Several market factors significantly depressed fundraising for startups before the ICO market materialized in 2012 and accelerated in 2015. Banking regulation enacted in the aftermath of the financial crisis of 2008-09 affected the availability of resources for small and medium enterprises (SMEs), making fundraising for new entrepreneurial initiatives more difficult. Basel III has further increased capital requirements and risk weighted assets, resulting in a higher pressure on banks and their Return on Equity (RoE). While this led to more prudent business practices, it also significantly constrained the financing instruments available for SMEs and companies below-investment-grade.  Moreover, the emergence of shadow banking, e.g. traditional banking services are provided by private investment funds, insurance companies, crowdfunding, and peer-to-peer lending, only marginally support the creation of new ventures and highly-innovative start-ups. ICOs’ rapid evolution was enabled in part by these negative factors that affected startup fundraising.

Given this market environment for startup fundraising at the inception of the ICO market, ICOs filled a void and enabled a democratization and inclusion process that facilitated banking disintermediation. ICOs allow startup to fundraise bypassing both banking and non-banking entities, e.g. VCs, as well as their services. This allows unlocking an unprecedented level of liquidity enabled by small investors who otherwise could not invest in highly innovative ventures. The Argon Group, an investment bank exclusively focused on cryptocurrencies and token-based capital markets, illustrates this trend in the evolution of investment banking services.

3. Crypto Economics

Monetary policy in crypto economics refers to the interaction of token supply, token release, and the maximum issuance of tokens in a given token issuance. An issuers’ ICOs strategy can pre-define monetary policy by predetermining the fixed number of tokens created and issued in the ICO. A maximum token issuance in combination with controlled token supply releases can result in small increases in demand driving token prices higher.

Several aspects related to the release mechanisms for tokens help manage the supply of tokens in circulation. For instance, escrow accounts can hold tokens that were not issued in the ICO. Such escrowed tokens may be released for future issuance to finance future projects of the issuer or support operational financing. To avoid a token price crash, token escrow accounts should provide usage and access controls that assure investors that escrowed tokens will not be issued at a discount. Lockups of escrowed tokens for a specified time period or phased releases can also help minimize the risks of token price crashes.

The economic benefits token holders receive from holding tokens are a key concept associated with quasi fiscal crypto policy. Two central questions help illustrate this point: 1. What is the underlying value of the issued tokens?, and 2. What factors contribute to the value appreciation or depreciation of the issued tokens? For instance, linking commercial benefits such as discounts and other benefits with token usage can incentivize token holders to use the services etc. associated with a given token. Several benefits are associated with the quasi fiscal tool of adjusting commercial benefits of tokens in crypto economics. First, the increase in commercial benefits associated with a token heightens the aggregate demand of the given token supply. Second, commercial benefits associated with a token issuance can help offset depreciated supply scarcity, e.g. the effects of a large issuance / supply of a given token in circulation.  Third, commercial benefits associated with tokens can be adjusted as a form of quasi fiscal policy to control the flow of tokens in a given issuance through indirect economic incentives. Adjustments in commercial benefits can help manage operational cost changes for the issuer and the external competition with other token issuers experienced by the issuer, among other factors. Fourth, adjusting the commercial benefits associated with a given token issuance avoids more drastic monetary policy intervention by way of emergency sales or building token reserves or a decrease or increase of token supply in circulation.

To create a more significant effect, the quasi fiscal policy tool can be combined with monetary policy. If the aggregate demand for a given token issuance increases through better commercial benefits associated with the tokens, the issuer can simultaneously increase the total supply in circulation. Options for increasing the total supply of tokens in circulation include issuing escrowed tokens or even secondary issuances. The combined effect of quasi fiscal policy (increasing benefits associated with the tokens) and monetary policy (increasing the token supply in circulation) may or may not have an effect on the market price of the respective tokens. The balance of commercial benefits of a token offering and associated use cases of the token in combination with supply scarcity is critical in the issuance of a token offering.

III. Disruptive Effects

ICOs have significant disruptive effects on finance. The venture capital, startups, and banking institutions are affected by the increasing prominence of ICOs in capital formation. The reorganization of capital formation with a more efficient financing tool and crypto currencies may also affect the economy as a whole.

In particular, the ICOs disrupt the traditional business model of venture capital funds, an asset class that has traditionally played a crucial role in financing highly innovative start-ups. The disruptive effect of ICOs on the venture capital industry is in part the result of the venture capital fund lacking innovation. Paradoxically, venture capital funds continuously invested in innovation, while insufficiently innovating themselves. In the second quarter of 2017, ICO issuances exceeded venture capital financing of startups for the first time, with $210 million invested in ICOs versus $180 million invested into startups via traditional venture capital funds. This trend can be expected to continue given the superior allocation of capital at lower cost via ICOs.

ICOs display several core characteristics that make them preferable for many startups to the traditional venture capital funding model.  First and foremost, ICO promoters and their developers are not forced to sacrifice their equity in the project in exchange for the funds they raised. Through borderless online sales, ICOs are directly marketed to a worldwide potential pool of investors, bypassing the typical legal, jurisdictional, and business hurdles in traditional venture capital financing. Moreover, ICOs benefit from limited accreditation standards, as well as from multiple global cryptocurrency exchanges that provide continuous access to trading with significant liquidity.

Capital formation via ICOs also disrupts the traditional hierarchies in venture capital. Traditional venture capital funds typically only allow a smaller group of elite investors to invest in highly innovative projects generally unknown to the investing public. By contrast, ICOs provide a much more inclusive option for all investors. ICOs increase the diversity and the heterogeneity of startup funding. Because of to the low barrier to entry and the borderless nature of the online token sale ICOs allow small investors from all over the world to invest.

ICOs facilitate faster capital formation for crypto startups. By contrast with traditional venture capital financing, the inclusive elements in combination with increased efficiencies, significant simplification, and better timing of capital formation provided by ICOS contributed to the creation of more liquid venture funds. Given these benefits, ICOs have the potential to disrupt other funds and asset classes including private equity and real estate funds. Given the competitive elements of ICOs, the venture capital industry is investigating ways to participate in the ICO market.

Venture capital funds increasingly try to capitalize on the opportunities presented by ICOs. The disruption of legacy finance by ICOs has triggered attempts by venture capital funds to capitalize on the source of disruption within the existing business model to benefit from its advantages. For instance, venture capital funds can capitalize on the exponential growth of cryptocurrencies. Cryptocurrencies created by blockchain startups generate investment returns that cannot be matched by legacy investments. For example, several cryptocurrencies such as Monero and NEM increase in value by 2,000%. Similarly, Ether increased by 2000% in one year, and Litecoin more than the 900%.

Venture capital funds can benefit from the early liquidity provided by cryptocurrencies. In the existing venture capital model, venture capital funds invest significant amounts of money in the hope of finding the next unicorn startup. This investment process is subject to long, complex, and time intensive processes leading up to a very late liquidity event in the form of an IPOs or acquisitions. By contrast, ICOs provide liquidity to investors much faster and allow venture capital funds to capitalize on existing profits early. Venture capital funds who invested in crypto startups gain access to much earlier liquidity via ICOs by converting their cryptocurrency profits into Bitcoin or Ether through any of the cryptocurrency exchanges and can thereafter transfer into fiat currencies via online services such as Coinsbank or Coinbase.

Blockchain Capital provides a prominent example of venture capital funds’ attempts to capitalize on the benefits associated with blockchain technology and ICOs within the VC industry. After the release of an offering memorandum on April 3, 2017, the ICO for the Blockchain Capital III Digital Liquid Venture Fund was launched on April 10.  Blockchain Capital’s ICO campaign, was intended to raise 20 percent of the firm’s next fund. The ICO raised raised $10 million in in six hours, unlocking unprecedented liquidity in previously illiquid secondary venture markets. Blockchain Capital’s ICO was the first know your customer (KYC) and anti-money laundering (AML) compliant crowdsale. The entity that engaged in the ICO was incorporated in Singapore. Under applicable Regulation S and D exemptions, the ICO was able to raise money from both international and domestic investors.

In summary, ICOs’ comparative advantage over venture capital funds consists mainly of their highly cost-effective capital formation capabilities in the emerging crypto marketplaces that operates according to highly complex yet unpredictable economic dynamics. Given these ICO adnvantages, traditional regulated IPOs and venture capital funds increasingly fail to adequately capitalizing crypto and legacy ventures driven by new economic paradigms.

1. Risk Factors

Several risk factors associated with ICOs affect investors. First and foremost, the 2012 to 2017 ICO model allowed cryptocurrencies to be raised via a token sale without any conditions, landmark requirements, or security measures to protect investors. Investors’ deposit of a cryptocurrency for a crypto platform in exchange for tokens that provided a right to use the platform associated crypto product in the future did not provide such investors with any or very limited influence over how such funds were used by the ICO promoters.  While most issuers typically established a form of a foundation or basic contracting to supervise promoter use of ICO proceeds, the traditional ICO model, in essence, allowed the promoters / issuer to do with the ICO proceeds as they pleased. Further limitations for token holders that amount to significant risk factors include token holders’ inability, unlike shareholders in the traditional infrastructure, to vote for or against directors or to nominate directors. While institutional investors may be able to influence the promoter decisions in the ICO pre-sale, actual ICO investors typically don’t have such influence and simply need to trust the promoters and their business intent. The only real control power for token holders is their decision to hold or sell their tokens and even that may be limited until the token is fully listed on an exchange.

Intangible or No Product

Crypto platform issuances of tokens provide an intangible or no product. During the lifecycle of a crypto platform, the platform typically starts the ICO when it has an intangible product based on a basic crypto idea but typically with no product that can be associated with such idea. Accordingly, token holders typically invest in the future promise of the idea associated with the platform. While that works well with core infrastructure products such as Ethereum, most other platforms struggle to fulfill that promise.

Associated with the lack of an existing product is the inability of most crypto platforms to generate revenue to offset costs like traditional businesses. While most crypto platform businesses in the form of a foundation may be equipped to pay their developers, crypto platforms typically do not have employees in the traditional sense that create and advertise the platform product. Similarly, while the creation of the crypto platform is associated with significant costs, crypto businesses typically do not have customers that create revenue for the business to pay for such costs. Cost associated with running a crypto platform can include the foundation itself, its developers, and the crypto marketing team, among others.

Because of the lacking product and no revenue to offset costs, ICO revenue raised by crypto platforms are often required to last for the lifecycle of the platform. Accordingly, crypto platforms are required to set aside a large number of tokens for future funding needs. Because the token supply is controlled by the ICO promoters, the token holders may be diluted in the future if the platform decides to issue more reserve tokens to additional investors. Increasing the supply of platform tokens to satisfy future funding needs and the resulting dilution because demand for the tokens decreases if supply increases means that token holder’s token value can be diminished without their ability to protect themselves against such events. The only real control token holders have to protect themselves is to sell their tokens post ICO. In fact, many venture capital funds that received tokens in exchange for their pre-ICO investments often quickly sell their tokens to protect themselves against devaluation. Other means of protection against such supply side induced devaluation of tokens can include hardcoded lockup periods for tokens. However, while such lockup periods may protect token holders against dilution, it also decreases much needed token economic flexibility for the promoter team to raise additional funds when needed.

Early Liquidity Despite Little Information Creates High Volatility

ICOs provide unprecedented liquidity without sufficient information resulting in high volatility. Unlike any prior financing vehicles, ICOs provide the highest possible liquidity for investors. Unlike typical legacy businesses that mature over time, increase available information pertaining to the business which eventually leads to a liquidity event such as an initial public offering, ICOs provide a liquidity event for promoters and investors alike at a very early stage in the lifecycle of the platform. Legacy businesses that experience liquidity events for promoters and institutional investors have been subject to reporting requirements under the federal securities laws, accounting standards, legal infrastructure requirements, among many other requirements for several years if not decades, before they can experience a liquidity event. Because of these requirements, the investing public gets significant assurances of the underlying business success of the entity which drives demand.  Because ICOs take typically place at the beginning of the lifecycle of a crypto business/platform, ICOs investors typically invest – and the token exchange – on very limited information which increases volatility of the tokens and the entire cryptocurrency market. Accordingly, ICOs and cryptocurrencies are a much riskier investment. Their riskiness may, however, be offset by the near unlimited use cases for blockchain technology.

Open Source

Crypto businesses use typically open source code which creates risk factors not associated with legacy businesses. Most token offerings are based on open-source software. While it is possible to consider a token issuance with a closed system, such closed binary creates significant security concerns. By contrast, the open source code and all its features can be copied at any times. Accordingly, the utility of a token that was issued to investors can at any time be recreated in another token with the same or essentially the same features at marginal costs. Investors cannot rely on the implicit promise that the token promoters and their developers will increase the value of the acquired token and not create another token with identical features. Starting another token with the same features entails rather limited financial penalties. Moreover, if a given token offering was very successful, other promoters may have incentives to copy the token and its features. A concrete example of this risk is provided by Stellar. Stellar is in essence a copy of Ripple with almost identical features. While open-source crypto startups have licenses that help protect them from competitor companies who may be using their code for profit, legacy businesses that own their code and can sue competitors who copy such code which provides a different incentive structure and makes ICO investments riskier.

No Liquidity Preference

In the case of bankruptcy or termination of the promoter’s business / the platform token investors invested in, token holders typically do not have a liquidity preference. After the debt holders and outside creditors were satisfied with the liquidation value of the corporation, token holders typically have no recourse at all. By contrast, in a typical venture capital seed stage investment, the venture capital fund should typically obtain at least a simple liquidity preference, e.g. the venture capital fund typically will be able to reclaim their initial seed investment before other claims will be paid. Some venture capital funds can get more than their initial investment back, depending on the agreement and other factors they may obtain a 1.5 or 2 times liquidity preference. Again, by contrast, token holders typically lose everything they invested as they have no liquidity preference at all.

Legal Uncertainty

The lack of a regulatory framework creates significant legal uncertainty in the ICO market. Moreover, cryptocurrencies are censorship-resistant and arguably regulation-resistant by design, leading some to argue that regulatory uncertainty associated with coin offerings may sooner or later lead the Securities and Exchange Commission to declare ICOs illegal. Token valuation is also largely uncertain and subject to incalculable risks. ICOs are not subject to predefined regulatory procedures. Whitepapers do not follow prospectus disclosure guidelines, are not reviewed or unaudited by any authorities and are not subject to any forms of rating of the new entrepreneurial initiatives. To combat these shortcomings, a private initiative, a joint-venture between Ambisafe Inc. and the Russian-based rating agency ICOrating, has been created to ensure high-quality standards, supporting investors in their due-diligence and identify potential opportunities of investment in cryptocurrencies. The parameters to evaluate the entrepreneurial initiatives take into account different indicators, that span from economic and financial parameters to more technical elements. To provide support for crypto investors, companies like Deloitte and Price Waterhouse Coopers have built specific expertise in the identification of vulnerabilities within the code and the business model of startups. Identifying legitimate projects, distinguishing them from scams, is vital to pursue investors’ protection while creating the conditions for ICOs to proliferate. Bitcoin’s and Ethereum’s founding characteristics of decentralization, independence, openness and consensus based on proof of work provide a relatively easy way to identify scams.

2. Red Flags

Zombie ICOs are ICOs that really have little chance of creating a successful market for their tokens. Such ICOs have become increasingly common in 2017. Zombie ICOs often cannot succinctly answer core questions in their whitepaper or in response to questions by possible investors. Their inability to respond to legitimate questions often involves addressing issues such as the core business and infrastructure problem the investment proposition solves, allocation of ICO proceeds towards building the underlying product, most viable products or pre-production solution, availability of underlying assets. Moreover business plans of Zombie ICOs often cannot clearly articulate how the product of the respective company works or why the investing public and customers should care about it. Zombie ICOs teams also often do not have sufficient experience in starting and running a business. Finally, investors often do not obtain sufficient information for their investment decision in the respective ICO.

Core Problems with ICOs in 2017 can be narrowed down to several uniformly identified bad practices. First, ICOs that propose uncapped raises without an underlying product constitute a very serious red flag for any investor. Uncapped ICOs have several disadvantages. First, promoters who engage in uncapped raises are often perceived by the crypto community as greedy. Second, for crypto investors, uncapped ICOs raise the uncertainty for investors about the valuation of the underlying platform / product there are buying with their investment.

Because of such concerns, capped token issuances became the dominant structure between 2016 and 2017. As Vitalik Buterin emphasized, “capped sales have the property that it is very likely that interest is oversubscribed, and so there is a large incentive to getting in first.” Examples include the token issuances Blood and BAT. With regard to the former, an amount of tokens equal to $ 5.5 million was sold in two minutes, whereas in the latter $35 million were sold in 30 seconds. The Gnosis ICO ($ 12.5 million) was another landmark in the structural evolution of ICOs. To mitigate the inefficiencies and the risks of a capped sale, the Gnosis ICO was structured as a reverse dutch auction, i.e. not only the ICO was capped to $12.5 million, but in addition the time necessary to complete the sale impacted the quantity of tokens distributed among the investors, with the rest held by the start-up team.

ICO promoters should avoid several emerging bad ICO practices. Such practices include allowing tokens to be traded before underlying protocol network or application is live, using a landing page that focuses almost exclusively on the ICO with project timeline etc. but provides less content on product, project, technology, and team. Moreover, ICO promoters should include significant and ongoing disclosures on vesting and lockup periods, should never manipulate the smart contract to change ICO sales rules mid-course during the ICO. Moreover, the ICO disclosures have to be as clear as possible and should avoid an unclear or uncertain use of proceeds pie chart and should be very clear on cryptocurrency conversion plans into actual company reserves. Finally, ICO promoters should always disclose changes in company via 10k 10q 8k equivalence.


ICO practices will continue to evolve and improve the capital formation for crypto startups. Bad practices in ICOs will over time be curtailed via voluntary or imposed industry practices. Through ICOs’ evolution and continuous practice improvements, the ICO industry and underlying crypto businesses can become the foundation of the emerging crypto economy.

First Annual Toronto FinTech Conference

Because of popular demand, here is the presentation from the First Annual Toronto FinTech Conference.


First Annual Toronto FinTech Conference – Kaal – Blockchain Solutions for Governance via Repute Platform Deck – Version 2

Blockchain Technology and Race in Corporate America

Wulf A. Kaal


Blockchain technology provides anonymous and secure transactional guarantees through democratized trust and disintermediation. Minorities and disenfranchised communities can benefit from the evolving technology and its anti-discrimination features. The article evaluates how blockchain technology helps minimize discriminatory practices in corporate America and creates a more equal society.

Key Words: Blockchain, Distributed Ledger Technology, Artificial Intelligence, Machine Learning, Data Science, Data Scientists, Entrepreneurship, Innovation, Big Data, Efficiency, Race, Community Development, Minorities, Discrimination, Optimization, Equality

I. Introduction

Race is at the core of American democracy yet racial equality in America is elusive. Race has played a large role in American politics and business since the end of slavery. Whereas in the early days of the American democracy the race struggle involved access to property, voting and other fundamental rights, the modern-day race conversation has shifted towards barriers to entry in corporate America.

Inequalities along racial lines in America can be traced in data. Researchers have commonly recognized the disproportionate large number of minorities in unskilled labor who are likely to remain untrained. During the Great Recession, a large number of African American manufacturing jobs were lost, but have steadily been returning. After the Great Recession, African American unemployment rose at a greater rate than Caucasian unemployment and African American unemployment also stayed higher for longer. This data suggests that minorities in America are “first fired, last hired”. While minorities have been able to improve in attaining upper-level corporate positions in the 1980s and 1990s, minorities were still disproportionately affected by layoffs through corporate restructuring in the 1980 and 1990s. In the early 2000, however, the risk for minorities to be laid off because of corporate restructuring decreased.

Discrimination is a common phenomenon in corporate America. Opaque promotion processes in corporations require political positioning with corporate institutions. Using Fortune 1000 corporations as a sample, one study suggests that 76% of the sample dataset had at least one minority member on their board which reflects an increase of 2% from 2003 and a 32% increase from ten years before. Within this minority sub-sect, African Americans account for 47%, Latinos account for 18% and Asians account for 11%. Contrasting these numbers with the ethnic composition of the United States, in the 2010 United States Census, African Americans made up 12.6% of the population, Latinos made up 16.3% of the population and Asians made up 4.8% of the population. Minorities as a whole made up 37.7% of the United States population. This means that of the minorities in the United States, 33.4% are African American, 47.7% are Latino and 12.7% are Asian. The remainder of the minority population identify as some other race.

The data suggest that minority groups are being underrepresented in Corporate America by significant margins without considering external factors. In the sample dataset of Fortune 1000 companies, 37% of employees are women and about 15% are minorities. Management positions are held only at 17% by women and 6% by minorities. Executive level management positions are only at 6% women and 3% minorities.

Based on the available data, this paper examines discriminatory practices afflicting disenfranchised communities in corporate America including its origins in corporate structures, corporate culture, and on the level of the board of directors. After examining such discriminatory influences in corporate America, the paper examines how employing blockchain technology can support a more equal society and help counteract historically grown and path dependent inequalities in corporate America.

II. Blockchain Technology

Leading technologists around the world have hailed blockchain technology as one of the most important technological innovations since the Internet. The peer-to-peer interactions and transactions in a decentralized network where all participants are equal and verification and validation of each transaction is provided by all parties in the network through the blockchain technology provide near unlimited opportunities and applications. For instance, in the financial world, a global consensus record of information and transactions creates the much-needed transparency and, at the same time, opens global access to finance, including in areas of the world where the banking system — in contrast to a mobile telephone network — is not readily available. The technology incentivizes direct transactions, including compensation, between the creator and consumer, eliminating the need for intermediation.

Blockchain technology creates a platform for trust through truth and transparency for parties. Blockchain technology can be described as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” Moreover, blockchain records are incredibly secure, as it is nearly impossible to alter a transaction once it has been added to the blockchain. Because the blockchain (at the least the public blockchain) is in fact public and immutable, the technology increases transparency, while at the same time significantly reducing transaction costs. Intermediaries, including lawyers, are replaced by code, connectivity, crowd, and collaboration.

Blockchain technology has been defined in many different ways, and no truly uniform definition seems to exist. Some refer to it as a giant worldwide, distributed, immutable “google spreadsheet” for transactions. Others define blockchain by focusing on its central elements, e.g., it is a transaction ledger, electronic, decentralized, immutable, and provides cryptographic verification, among several other elements. Vitalik Buterin, the founder of Ethereum, perhaps most prominently defined blockchain as follows:

Public blockchains: a public blockchain is a blockchain that anyone in the world can read, anyone in the world can send transactions to and expect to see them included if they are valid, and anyone in the world can participate in the consensus process – the process for determining what blocks get added to the chain and what the current state is. As a substitute for centralized or quasi-centralized trust, public blockchains are secured by cryptoeconomics – the combination of economic incentives and cryptographic verification using mechanisms such as proof of work or proof of stake, following a general principle that the degree to which someone can have an influence in the consensus process is proportional to the quantity of economic resources that they can bring to bear. These blockchains are generally considered to be “fully decentralized”.

Rather than attempting to agree on a mutually acceptable phraseology for a definition, a description of the core elements of ledger technology can help define the blockchain. As such, a blockchain is a shared digital ledger or database that maintains a continuously growing list of transactions among participating parties regarding digital assets – together described as “blocks.” The linear and chronological order of transactions in a chain will be extended with another transaction link that is added to the block once such additional transaction is validated, verified, and completed. The chain of transactions is distributed to a limitless number of participants, so-called nodes, around the world in a public or private peer-to-peer network.

Blockchain technology removes fraudulent transactions. Compared with existing methods of verifying and validating transactions by third-party intermediaries, blockchain’s security measures make blockchain validation technologies more transparent and less prone to error and corruption. While blockchain’s use of digital signatures helps establish the identity and authenticity of the parties involved in the transaction, it is the completely decentralized network connectivity via the Internet that allows the most protection against fraud. Network connectivity allows multiple copies of the blockchain to be available to all participants across the distributed network. The decentralized, fully-distributed nature of the blockchain makes it practically impossible to reverse, alter, or erase information in the blockchain. Blockchain’s distributed consensus model, e.g., the network “nodes” verify and validate chain transactions before execution of the transactions, makes it extremely rare for a fraudulent transaction to be recorded in the blockchain. That model also allows node verification of transactions without compromising the privacy of the parties and is therefore arguably safer than a traditional model that requires third-party intermediary validation of transactions.

Cryptographic hashes further increase blockchain security. Cryptographic hashes are complex algorithms that use the details of all previous transactions in the existing blockchain before adding the next block to generate a unique hash value. That hash value ensures the authenticity of each transaction before it is added to the block. The smallest change to the blockchain, even a single digit/value, results in a different hash value. A different hash value makes any form of manipulation immediately detectable.

Smart contracts and smart property are blockchain-enabled computer protocols that verify, facilitate, monitor, and enforce the negotiation and performance of a contract. The term “smart contract” was first introduced by Nick Szabo, a computer scientist and legal theorist, in 1994. An often-cited example for smart contracts is the purchase of music through Apple’s iTunes platform. A computer code ensures that the “purchaser” can only listen to the music file on a limited number of Apple devices.

More complex smart contract arrangements in which several parties are involved require a verifiable and unhackable system provided by blockchain technology. Through blockchain technology, smart contracting often makes legal contracting unnecessary as smart contracts often emulate the logic of legal contract clauses. Ethereum, the leading platform for smart contracting, describes smart contracting in this context as follows:

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference. These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.

1. Disruptive Innovation

Blockchain technology has vast disruptive innovative properties. Despite the very early stage developments in blockchain technology, the possible applications are near limitless. For example, until recently, most commentators viewed Bitcoin as a hype, susceptible to fraud, price manipulation and corruption. Yet, the pace of innovation in cryptocurrencies and their application in different industries and commercial settings is faster than ever. The high levels of investor activity in the blockchain area appears to provide a reliable indicator of the commercial maturity of blockchain technology. The VC investment in startup companies that utilize blockchain technology has increased exponentially since 2012. Investor interest in the technology will undoubtedly further increase. Particularly, the applicability of blockchain-based smart contracts to digital marketplaces, the sharing economy, the Internet of Things (IoT) and artificial intelligence will further accelerate its development.

Blockchain technology startups have the potential to create lasting societal changes. Some predict a future in which such blockchain startups can remove intermediaries altogether from commerce as smart contracts in the blockchain, such as the ones in the Ethereum platform, regulate commerce entirely, enabled by the trust created between parties through immutable blockchain technology.

Business, administrative, and legal processes that rely on legal intermediaries may become redundant because of advances in and acceptance and implementation of blockchain technology. Forms of keeping legal ledgers such as notary and registry services, legal motions practice in court, legal title companies, among several others, may be among the first services to disappear in the not too distant future.

Similarly, corporate processes that have ledger functionality but rely on legal intermediaries could be streamlined very quickly by implementing blockchain technology. When blockchain technology becomes more widely accepted and applications are spreading into consumer territory, existing legal/financial/backoffice processes and structures will likely be among the first processes to become redundant.

The combination of blockchain technology startups with platforms, artificial intelligence and machine learning offer opportunities for developing new technologies. Leveraging the big data that is collected by using FinTech solutions and blockchain applications in combination with machine learning creates more creative and faster tools. This, in turn, creates a surge of new and innovative platforms with disruptive effects for the many industries.

2. Limitations

Blockchain technology and smart contracts executed on blockchain technology platforms, such as, are faced with possible technological and legal limitations. First, the world of blockchain and smart contracting has not yet reached maturity. While blockchain enabled smart contracts generally do not require legal involvement across the spectrum of transactions, legal professionals often still believe that “code” in smart contracts can only deal with very simple transactions, such as buying music or perhaps a car, arguing that more complicated legal arrangements will necessitate the draftsmanship and negotiations of traditional lawyers. Even if more complex transactions could be coded and included in smart contracts, a widespread believe in the legal community suggests that lawyers will remain responsible for drafting the terms and arrangements that would later have to be coded by specialists.

Legal limitations pertaining to smart contracts and blockchain technology originate mostly from concerns over the legal origin of smart contracting. While smart contracts may reflect the underlying contract between parties, lawyers may argue that “smart contracts” are void and unenforceable under the law. Contractual legal rules regarding formation, interpretation, conditions and remedies require substantive adjustments of smart contracts in contract law.

The Blockchain evolution in combination with smart contracting also raises legal concerns regarding:  privacy, data protection, security and integrity. While blockchain technology itself offers unprecedented genuine data and privacy protection, the storage of blockchain data across a global network of nodes often will not comply with specific consumer protection rules, directives, and guidelines around the world. The existing legal issues arising in the context of sharing platforms, demonstrate that future blockchain-enabled sharing services may not be accepted quickly and without resistance on the part of incumbents challenged by new ways of delivering a service or product.

Blockchain technology and smart contracts executed over the blockchain face many of the same limitations other new technology companies face. The lack of maturity has slowed the progression of integration into the corporate world. There is still a lack of legal framework for the industry to work with, which causes uncertainty. Without knowing which laws apply, the whole industry is operating in a grey area of the law.

By operating in a grey area of law, a new level of volatility is introduced. Once Congress adopts a policy on the treatment of blockchain services, companies will be better able utilize the technology in a more legal and efficient way.

Another issue the blockchain community has seen is when Ethereum introduced what is known as a Decentralized Autonomous Organization (DAO). The DAO was launched in May 2016, in an attempt to set up a corporation like organization without the traditional structure. The DAO did not have a physical address as it was merely computer code.

During a fundraising period, the DAO raised roughly $168 Million from around 10,000 participants. Unfortunately, the code had not yet been perfected and hackers were able to take a third of the DAO tokens and transfer them into another account. This hack and other technological limitations, led to the demise of the DAO.

III. Disenfranchised Communities in Corporate America

Unlike their Caucasian peers, minorities still face obstacles in corporate America that affect their ability to succeed. Perhaps the most common method of assessing business success is the is expediency and degree of promotions in corporate America. Breaking into upper management ranks typically requires not only a high level of technical skill and understanding of the respective business, but also requires significant abilities to navigate the political environment. Because of societal perceptions of minorities, minority groups face an uphill battle in navigating the political environment in corporate America, which in turn can significantly affect their positioning and success in corporate America. However, some evidence exists that minorities can overcome the promotion gap in corporate America if they are seen as value enhancers by their superiors. If minorities are promoted, they often share common characteristics which can be predictors of minority success: “(a) is both a risk-taker and overly confident, (b) is a team player, and (c) is perceived by the employer to have the capacity to manage other non-whites.”

1. Corporate Structure

The corporate structure in America influences whether and at what rate minorities are promoted. For instance, promotion to high level executive positions often involves skillsets that are assessed subjectively, such as leadership skills, personality, judgment, attitude, initiative etc. Such criteria allow supervisors and managers to apply criteria that facially seems objective, but can be distorted with relative ease. Moreover, if minorities are promoted, they don’t necessarily use their new position to promote other minorities. In other words, in the existing corporate structure in American, minorities often have incentives to race to the top lifting the ladder behind them. Several factors support this finding. First, the corporate culture in America is individualistic and aggressive. Second, top management are supported so long as others in the corporate structure continue to hold them in power. This gives them an incentive to keep the upper management the same. If upper management allows others into positions of equal or greater power, the possibility of them being squeezed out increases.

Mentoring and targeted recruitment can help minorities break through the discriminatory incentives in the existing corporate structure in America. Programs that did not support changing the workforce composition included diversity training, diversity performance evaluations, and grievance procedures. In programs that did not work, managers were often defined as the source of the problem. Some of the more successful programs involved task forces and targeted recruiting efforts which engaged the managers in finding solutions. Mentorship with a superior manager helped minorities to be successful. Such success stories seem to suggest companies should focus more on mentoring programs and less on the formal evaluations.

The corporate structure in America is bound to change in the coming years because of the shift in labor markets. Since the early 2000’s, the percentage of minorities who are earning bachelors and graduate degrees has increased. This data suggests that a business imperative for hiring minorities will be created because corporations expanded their labor pool to include minorities, given the overall tightening in the labor markets, will create an advantage for themselves over corporations that have limited access to diverse workers.

2. Corporate Culture

Corporate culture can be defined by core commonalities in the way corporations are managed. Understanding corporate culture can help minorities gain a general understanding pertaining to the reason they are not promoted at the same rate as their Caucasian peers. By recognizing these reasons enable minorities to take steps to overcome these barriers to entry in the corporate world.

The Glass ceiling experienced by minority groups in America corporate culture can manifest itself in many ways. The most common identifiers of the glass ceiling include lack of training, lack of mentors, informal recruiting processes, wage gaps despite comparable work, and placement in a job with little growth opportunity. Any of these manifestations of the glass ceiling undermine a minority employee’s career progression and can have associated long-term effects on minority employment and community development.

Several core factors help explain the role of corporate culture and its effect on minorities in America. The clone syndrome, e.g. companies desire to hire people that are similar to the existing work-force, can lead to minority underrepresentation in corporations. The clone syndrome makes it difficult for a minority and women to break into a job predominantly held by white men. Similarly, if a corporation lacks diversity and allows group thinking, the board will likely struggle to identify issues because the corporation needs a fresh perspective. This can harm the corporation in the long term as it is less able to identify strengths and weaknesses. Changing the mindset of the corporate environment may require challenging basic assumptions of the men in charge. By not speaking out against sexist or racial comments, the corporate culture of an organization can increase the acceptability of such comments.

The discriminatory effect of existing corporate hierarchies may have their origin in the education system. Children in struggling school systems lack access to resources that better functioning school system in other districts can make available. Starting a career with lacking educational resources requires harder work to overcome barriers. Without access to the same resources, careers in corporate America are automatically geared towards those children that received the required resources. Accordingly, Caucasians dominate education, business, and politics.

3. Boards of Directors

Diversity on boards of U.S. corporations has been divisive for many decades. Whereas in the European Union board diversity has already been accomplished to some extend by mandating the participation of women on boards, board diversity in U.S. corporations is still largely elusive. According to some estimates, the lack of inclusion of minorities in corporate America costs the U.S. economy $1 trillion per year, taking into account the pay gap between whites and minorities. The structure of corporations and the role of corporate culture help explain part of the reasons for lacking board diversity in the United States.

Board diversity benefits corporations. By allowing minorities on the board, creativity increases with the different perspectives represented by minorities which acts as a defense against groupthink. While corporations also arguably have a social and moral obligation to celebrate diversity, business leaders typically look for business reasons to include minorities. Fiduciary obligations of the board may provide additional business reasons for board diversity. Board members are obliged to take actions that are in the best interest of the corporation. The board is required to act in good faith and make decisions the board reasonably believe to be in the best interests of the corporation. Directors must act after they have gained sufficient relevant information or data pertaining to the transactions in question. Arguably, a diverse board helps protect against group thinking which is in the best interest of the corporation.

Board inclusion can create risks for minorities. Minority board members are held to a different set of expectations than their Caucasian counterparts. Because board members are expected to interact with clients in order to help drive shareholder value, the minority board members are often expected to help bring in a minority clientele. However, if the product the respective corporation produces is not used by minorities, the minority board member will be perceived as a failure for not bringing in minority clients. This may stigmatize minority board members and impact their careers. Moreover, minority board members are often overextended because they tend to sit on too many boards that wish to show diversity. By having a small group of minorities who serve on a large number of boards, corporations are in fact losing the diversity of viewpoints they were initially looking for in a minority board member.

IV. Blockchain Solutions for Disenfranchised Communities

Blockchain technology holds great promise as a technology solution for disenfranchised communities. It is well established that blockchain technology holds great promise as an internet-like technology. Its anti-discriminatory and equality enhancing features have received less attention in the literature.

1. Blockchain-Enabled Trust as Anti-Discrimination

Blockchain technology allows an unprecedented increase in trust between anonymous transacting parties. Blockchain’s digital signatures enable a hightened level of security for society through transparency, eliminating errors and fraud within the network. The decentralized network enabled by the technology allows multiple copies of any transaction to be accessible to all members of the community for verification, making the reversal, alteration or erasing of information nearly impossible. Cryptographic hashes further increase trust and security of blockchain transactions by evaluating previous transactions using a complex algorithm before adding a new block to the chain. If the hash value is even incrementally off, the new block will not be added to the chain and any change or manipulation becomes immediately detectable by others in the network. Finally, Blockchain technology’s consensus model, e.g., the network of nodes agrees on the validity of a certain transaction and only the agreed upon and perfected transactions are recorded on the blockchain, allows a technology-enabled unbiased transactional verification mechanism that is unprecedented in centralized legacy systems.

The trust developed through blockchain technology benefits disenfranchised communities. Blockchain technology’s consensus model enables an unbiased transactional verification mechanism for known or anonymous parties. By establishing a network of transacting parties that trust each other despite anonymity, the technology enables unbiased transactions and eliminates prejudices against minorities. The transaction parameters or products are judged by the transacting parties based on quality perceptions not based-on other less rational and biased factors. This allows quality of the transaction and/or final product to be the true deciding factor in the market place, eliminating prejudices. Users can join the blockchain-enabled crypto marketplace without fear of prejudices from superiors in traditional corporate hierarchies. This eliminates bias-driven inefficiencies in the market economy and the associated diseconomies of scale and waste, which have been estimated at around $1 trillion dollars annually in the existing centralized business infrastructure. Corporations and society at large benefit from less biased and accordingly more efficient processes.

2. DAOs as Equalizing Organizations

A prominent example that helps illustrate the potential of blockchain-based organizations that support non-discriminatory practices and limit the impact of existing corporate hierarchies and their discriminatory effects on disenfranchised communities is the decentralized autonomous organization (DAO).

The DAO was launched in May 2016, in the founders’ attempt to set up a corporate-type organization without using a conventional corporate structure. The founders’ central idea was that the wisdom of the crowd would lead to smarter and more game-changing investment decisions. The DAO had to operate as a kind of venture capital fund managed directly by the token holders.

The DAO governance structure was built on software, code and smart contracts that ran on the public decentralized blockchain platform Ethereum. The DAO did not have a physical address as it was merely computer code. And it was not an organization with a traditional hierarchy as we know it from traditional corporate structures where authority and empowerment flows downwards from investors/shareholders through a board of directors to management and eventually staff. Indeed, it had no directors, managers or employees. Because a series of smart contracts granted DAO token holders voting rights, the blockchain-based smart contracts imitated the role of articles of association or bylaws. Because the DAO code was open source, the token holders would not only vote on “investment proposals”, but also on any change made to the code. Accepted proposals would also be backed by a software code, defining the relationship (in terms of rights, obligations and performance metrics) between the DAO and the funded proposals.

During a crowdfunding campaign in May 2016, all investors could become a DAO participants by purchasing DAO Tokens. The DAO raised more than $168 million from approximately 10,000 “investors”. DAO Tokens were designed to be fully transferable and tradeable on “peer-to-peer” exchanges, similar to shares in a traditional listed corporation. The automated structure was intended to give “participants” in the DAO direct real-time control over contributed funds. Alas, things went terribly wrong with the DAO. Fundamental flaws in the DAO code enabled hackers to transfer one third of the total funds to a subsidiary account. This hack in combination with additional technological limitations brought down the DAO initiative.

People who work for a DAO are free from existing corporate hierarchies and their possible discriminatory effects. People who work for a DAO would not be subject to a supervisor, boss, or CEO. Instead, one works in a dynamic set of working relationships that continuously and dynamically self-organize around projects and outcomes, not corporate hierarchies with implicit hierarchical biases that discriminate against minorities or people from disenfranchised communities that have not been able to work in the expected parameters of the existing corporate hierarchies in terms of background, education, etc.

Disenfranchised communities will increasingly be able to afford the buy-in into a DAO. The increasing access to DAOs eradicates a possible income based or wealth based bias because participants in the DAO are required to buy into the DAO. People who wish to work in a DAO structure are required to acquire a coin or token, whose ownership is recorded in the DAO blockchain. Currently, the most common access point involves buying cryptocurrencies, such as Ether or Bitcoin, with existing currencies such as US dollars and using such cryptocurrencies to acquire coins or tokens the respective DAO one wishes to join.

The compensation afforded to DAO members can take the form of increases in value of the DAO token the members own or can take the form of earning tokens by performing tasks for the DAO. Because the total outstanding and publicly held supply of tokens for any given DAO is fully transparent and pre-determined in code, the value of the respective DAO tokens increases along with demand. Moreover, because the total supply of tokens is pre-determined in the DAO code, dilution by central administrators such as government officials or self-interested or biased executives/supervisors/CEOs is impossible, which further illustrates the power of blockchain structures such as the DAO. Accordingly, compensation of DAO members originates from supply and demand. Importantly, the compensation of DAO members can also take the form of earning tokens by performing tasks for the DAO. In other words, people / token holders can earn a separate income in addition to token value appreciation by supporting the DAO achieve its objectives.

Disenfranchised communities benefit from the core distinguishing characteristics that separate the DAO from traditional organizations. Unlike a traditional organization, the priorities and work schedules of DAO members are not determined in a classical top-down corporate hierarchy. In fact, the traditional forms of command and control, giving and receiving orders does not exist because the functionality of a supervisor, CEO of boss does not exist in a DAO structure. While token holders in the DAO community may identify DAO requirements or needs, such as for instance a new or optimized webpage that helps the DAO community, such requirements are not identified in the form of a mandate. In other words, no particular DAO member is tasked with performing the identified optimization. In other words, disenfranchised communities who become DAO members are not required to perform tasks in a classical corporate hierarchy that they either cannot enter or are ill-equipped to function in, given the traditional demands of such hierarchies on education, background, and cultural fit.

Disenfranchised communities benefit from the non-hierarchical performance expectations in a DAO structure. First of all, a common denominator for all DAO token members is the unifying desire to optimize the DAO structure and the DAO token value. If a member-identified optimization has the potential to make the DAO more meaningful, useful, or valuable to the token holder members, the DAO token holders will desire to perform such optimization tasks as it is in their very interest to do so to help increase the value of the DAO tokens. Accordingly, token holders are determined to increase the value of tokens rather than lower the value. To increase the value of its tokens, members can make DAO optimization proposals, e.g. optimize the webpage, that explain what actions ought to be taken to optimize and what value such actions will add to the respective DAO token holder community. The token holder community then votes on a given optimization proposal. If a proposal passes, the proposing DAO member will receive an award in the form of new tokens. Any such payment is added to the respective DAO blockchain but now requires for the proposing token holder to perform on the proposed parameters of optimization. In other words, once the optimization proponent has made a deal with the DAO, it’s in the blockchain and the proponent is required to deliver on the proposal or her contract is cancelled.

For disenfranchised communities working in a DAO structure this means they will not and cannot be judged by race or cultural biases. Instead, their performance in an anonymized proposal voting scheme is the only basis for assessment and payment. If they perform well, they will get remunerated regardless of politics (there are none), background, or education. The only thing that counts is performance of optimization parameters. This is an important difference between classical corporate hierarchies and DAO member performance of optimization proposals, e.g. the DAO’s non-discriminatory performance measures.

Non-performance penalties in the DAO structure are free from racial or cultural biases. If disenfranchised community members do not deliver on a proposal that was voted in by the DAO token holder community they lose credibility in the DAO token holder community and may be perceived as lacking an ability to add value. In fact, non-performance on proposal comes with significant reputational penalties and non performers in the DAO structure will be less likely to have future opportunities to earn tokens because the other token holders are unlikely to approve non performer proposals. Crucially, non-performance reputational penalties are entirely free from racial implications as the token holders are unlikely to even know each other. Rather, they all work towards a common goal of optimizing the DAO and the token value.

The DAO token holders’ focus on adding value benefits all constituents. Because projects that cannot add value take token holders’ time away from more productive endeavors, token holders become focused on managing their time and efforts. Unlike in traditional hierarchical organization where face-time and unproductive meetings are the norm, the self-governing DAO token optimizer avoids any such corporate hierarchy inefficiencies and frees herself from top-down inefficiencies and bad outcomes. In essence, the DAO work proposal and value optimization structure allows the avoidance of bad projects, bad colleagues, and unproductive meetings as the only thing that counts is the value proposition. In other words, the focus shifts from political positioning and supervisor pleasing without performance to a laser sharp focus on adding active value to a given project. If value can be added, the tasks will be performed, if the assessment of the proposal suggests that the value proposition is in doubt token holders will try to spend their time and skills on more productive and value-adding tasks. Importantly, because the DAO structure functions without supervisors DAO token holders who decide they cannot add value on a given task can move to more productive endeavors that better utilize their skills without any penalties that would exist in the traditional hierarchical corporate structure.

Politics in the DAO structure have a different nature compared with traditional hierarchical corporate structures. In a traditional corporate hierarchy, position in the hierarchy and associated authority determine effort. In other word, the supervisor in the hierarchical structure can determine where, what, and when workers have to perform, resulting in suboptimal outcomes, attendance of unproductive and useless meetings, among many other negative effects. By contrast, in the decentralized DAO environment, influence is determined by the value a given token holder contributed to a project’s success. If a token holder adds substantial value to the DAO, other DAO token holders will want to add their skills in the same context which focuses the token holders’efforts on the highest possible value proposition. This “value to effort focus of work flows in the DAO structure has the potential to revolutionize the way society works. At the same time, the value to effort focus of work flows makes racial and cultural biases much less pronounced and protects disenfranchised communities.

In summary, DAO token holders have enormous incentives to create value for the DAO based on their respective beliefs and skillsets and not based on expectations of supervisors in traditional top-down corporate hierarchies. In other words, the DAO value creation efforts by DAO token holders is free of implicit racial biases and cultural norms, helping to create a freer and less unequal society.

V. Conclusion

Equality is a natural byproduct of the blockchain-driven evolution of the crypto economy. Blockchain’s trust enhancing consensus model, smart contracting in anonymous networks, and DAOs allow for the evolution of a more equal society. Human biases are less likely to survive in a decentralized networked society which benefits not only minorities but society at large.

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