The Otonomos Proposal to The DAO

[mano]

It has been a very interesting week here at Otonomos with weekends at work and burning of the midnight oil at the office drawing board. I believe we are now close to a final proposal to The DAO. And as usual we appreciate the dynamics of this sociopolitical experiment and seek your feedback on our proposal before we submit this to the official proposal thread.

We would also like to thank everyone that gave feedback on the Otonomos Pre-Proposal thread.

Read the Proposal here:
The Otonomos Proposal

Vote here: https://dao.consider.it/otonomosDAT.

[randomguy]

From the Summary:
"We conclude that, irrespective of whether The DAO seeks to fund online or offline proposals, it will be legally stillborn if its token sale is not conducted within existing securities laws. In addition, we identify the authors of The DAO's smart contract as the actors most at risk from securities law enforcement. "

This sounds way off. Are you saying that sharing code creates liability? Has that ever been the case anywhere? Authors of TheDao have no control of TheDao and they never did. As far as I understand all they have done is to share code.

[s8c]

It is extremely positive that you guys and some others are working on this type of proposals. Without them, this would not go anywhere.

I have browsed the doc, there are a ton of comments and questions that I already have, but I would like to make a couple of practical comments from an investment perspective (or I should say "my" investment perspective):

1) Synthetic Equity: For early stage ventures a revenue sharing agreement is a deal breaker. It is simply a transfer of wealth from investors to the pockets of entrepreneurs. That is the one of the main reasons time ago I personally disregarded this experiment as a viable economic proposition. As it is, theDAO is just dirty cheap funding.

From a return perspective, the probability of any singular project to work is very low. Most of the investments will be lost, entirely, 100%, this is just the nature of this business. Thus, an investor really needs to make sure that if an investment works, the payoff is proportional to the risk. This can only be found in an equity-like position.

Moreover, a revenue sharing agreement creates a myriad of conflicts of interests that are impossible to police in practice. An investor would need to have a fully dedicated team to check every possible aspect of the relationship. A contractor operates with a strong information asymmetry that exacerbates the always present principal-agent problem. Not to mention the very weak position theDAO has in case of conflict. In addition, entrepreneurs need to be nimble and react to market changes or product failures, it is counterproductive for everybody to define a rigid set of specifications. It just does not work. That is why these types of agreements are simply not considered.

In conclusion: I would emphasise the equity-like aspects of your proposal. This is the only way to create something that could have economic sense.

2) Simplicity: private investments are not binary propositions. There are a number of aspects in any of these negotiations, valuation is only one of them. This is just a reality. TheDAO cannot deal with this complexity, so there is a strong need to stress simplicity. In these regard, theDAO is in a position to define its own terms, and not to discuss them case by case. I would strongly suggest that theDAO defines an initial term sheet, to which entrepreneurs need to abide. There is no need to be the toughest in the market, a very good starting point is simply to adapt the industry standard, as defined by several international organisations, both in terms of contractual obligations and valuation.

This is written a bit in a rush as I don't have the time. I was exited to see that something with some realism was put together. Good work.

[Krumm]

The proposal is an interesting read and a good basis for further discussion.

I'd be interested in how you will solve the KYC issues that will arise for the DAT. I see the Identity contract and related contracts but wonder how you
1) convince token holders to identify? Splitting potential...
2) get actual id verifications done, do you rely on verification providers acting as oracles?
3) reliably associate persons with tokens, even just temporarily?
4) deal with complexities associated with tokens being anonymously tradable?

[Joel]

Hi @randomguy, while I agree with this much more liberal and modern point of view, it is important for us to consider The DAO from the perspective of the authorities e.g. SEC. If they take offense to The DAO in any way (crowdfunding legislature would be one place to start...) they'll find their culprit, whether he is technically involved or not. You can imagine that, just as you may be arrested on the grounds of "facilitating" just about any crime nowadays, the same could go for facilitating decentralized crowdfunding.

[Han]

@Krumm thanks for your reply. We solutioned KYC at Otonomos in the context of the companies we incorporate as in most jurisdictions it is a legal requirement to know the Ultimate Beneficial Owner of private company shares. We've blogged about how we approach KYC philosophically, basically turning the current, "credit-score" type approach on its head. As to your questions specifically:
1. CONVINCING TOKENHOLDERS: in the company context, KYC of the threshold shareholders/members is simply a requirement for any company to be able to act in the real world, e.g. when it accepts funds from VCs, opens a bank account etc. In some jurisdictions, the KYC data is part of a public registry (UK, Singapore), in some there is no public disclosure (e.g. Delaware).
In the context of the DAT:
- Only those DAO Token Holders who want to send Ether to fund real-world project would have to KYC themselves
-in addition, identities of beneficiaries would only need to be known to the trust (which is why trust providers are typically licensed entities, as governments sort of delegate the KYC check to them). In our case, we technologically solutioned KYC such that all KYC data is part of the shareholder's/(beneficiary's) identity smart contract and can only be decrypted with our private key as a "verification agent". Also, we store the encrypted KYC info on IPFS, moving away from central storage.
2. ACTUAL VERIFICATION: when we open a shareholder's digital wallet, he/she is being asked to upload the 2 key pieces of KYC required by regulators: proof of ID, and proof of residence. We API these with the most-commonly used databases which return a risk profile (green, amber or red). We then decide on the basis of the risk profile if we approve their KYC. Note that the KYC required by company formation agents or trustees is a lot lower than that banks insist on: e.g. there is no need to provide proof of origin of funds.
3. ASSOCIATION WITH TOKENS: This is a valid issue but is not typical to blockchain-powered KYC. For instance, when I open an account with say RobinHood to trade stocks I am asked to scan via the app a copy of my ID and proof of residence. Anybody who is in possession of these two documents could claim to be me. We ask people to first make a claim who they are, and then provide evidence of that claim. You can perfectly claim to be Micky Mouse, but only if your ID dox show you are Mickey Mouse, will we "watermark" the smart contract that holds your shares with your identity.
4. ANONYMOUS TRADING OF TOKENS: tokens can perfectly continue to trade anonymously. It would only be at the stage that somebody wishes to become a beneficiary of the trust so that funds can be sent to real-world companies that there is need for a KYC check when the wallet is opened. The way KYC is done to any next owner of tokens is that when you want to initiate a peer-to-peer transfer to a next beneficiary, that next beneficiary receives an invite from you to open his/her wallet, and we as trustee do a quick KYC check as described above before the wallet is opened.
We typed this up quickly but hope this is helpful and look forward to receiving your thoughts.

[mano]

@s8c: thanks for the constructive and insightful feedback.

1) Not sure if I fully comprehend the problem you are highlighting, so please let me know if the following options to tweak the SSE (Smart Synthetic Equity) would work:

Option A: We completely disable the founders from the dividend or revenue sharing and only allow them to participate in capital appreciation of their founder shares.

Option B: We have a separate rate at which founders would get dividends or share revenue.

2) Completely agree and we are in no way trying to replicate the entire dynamics of private investments. What we are proposing is 2-fold:

A. Only use the SSE Smart Contract at the project or product level and not for a company with too many variables in terms of payables and receivables.

B. The SSE Smart Contract at this point is only a very preliminary idea and we would like to speak to professionals and VCs (starting withour own investors; Fenbushi, Dymon) to understand the dynamics and figure out if we can standardize, simplify and automate. This is exactly the approach we adopted with our core business where we started with a very basic but impractical Company Smart Contract but today it can become a very realistically complex set of Smart Contracts.

[s8c]

Hi Mano, I was just pointing out an economic reality: a client-contractor framework is not suitable for early stage funding. If theDAO follows this route, it is going to lose 100% of any money invested.

This so blatantly clear, that any professional investor who looks into theDAO will try to figure out how to short the fuck out of any investment made under that format. Sounds harsh, but this is how markets work.

TheDAO could also enter service agreements, I don't see a problem, but NOT in exchange for venture risk. TheDAO can hire people like you or other service providers under a retainer. The technical execution is secondary, what is important is the economic concept.

Therefore, in my view, any solution that allows theDAO to take equity-like stakes in exchange for venture funding is absolutely the way to go.

Anyway, I don't have the time to go into the details of your SSE. It seems very interesting at first glance, but it requires serious thinking. You are pitching for a business, I only represent my opinion.

In any case, I don't think the problem is the implementation; paradoxically, your biggest challenge is to convince a crowd without investment wisdom.

Good luck.

[Teleos]

Watch out for s8c... they claim they hold not tokens yet are among the most strident to voice their absolute certainty that unless we do what they want, we will lose 100%...

This s8c and their toady Krumm ... are classic short shills... you see them in every stock chat room... bluster, false claims, demanding control, they will say and do anything to move a stock or an asset... their patters are the same... Fear, Uncertainty and Doubt. Yet how can they have such certitude that they are right. The truth is they have no clue. They just seek to play off of others fear.

Be careful. They smell a fast buck and rather than working hard to create value, they run around and claim to know things that frankly, no one knows. They create no value and seek only to capture the trading they can generate based upon their smarmy scripts of fear... they reek. I do not advise they be trusted.

[Chip2]

Why are you attacking the messenger and not the message?

Revenue sharing is a bad idea for the following reasons:

• Piece of revenue is harder to enforce than equity ownership. There are so many complications.
• Successful start-ups frequently don't have any initial revenue, yet they are getting enormous amount of valuation. There are valid cases for such arrangement. If investors know that eventually costumers will start paying, there can be valid economical reasons to wait and instead focus on R&D using the investors' funds.
• What happens if the company is sold, then we have to hope that the new buyer will still abide to the contract terms. What if the company is sold to another company in some dodgy anonymous jurisdiction where we will have little hope to enforce our contract?

—

Sorry for derailing this thread, but the above means that I support the idea of what Otonomos is doing here. I didn't check details of the proposal yet, but I hope it works out.

[cryptowanderer]

You're not wrong there - it is very painful and unnecessary in my view.

I must say though, this is one of the most complete proposals I have seen, and it is a rare treat to see some code and real-world use cases along with it. That said, the complexity also present a rather high barrier to understanding. Questions:

Are you sure this is correct? Is this not one of the functions of dao.link? I mean specifically entering into contracts - suing is it own can of worms afaik.

Also, wrt 'How Can The DAO Contract in the real World?' - there will be kyc done on trust tokens (which Otonomous encrypts and stores in ipfs etc etc) but would still presumably have to hand over to authorities in certain situations, correct? I am little confused by this - doesn't it say earlier that you recognise that one of the advantages/attractions of holding dao is the relative anonymity DTH's enjoy? And this speaks to a more general concern of mine - so many additional contracts and complexity. Any ideas how these might interface with our current contracts? Any ideas whether your wallet or Mist and associated programmes would be able to handle all this (I know there are already major problems just handling events).

I must say though, huge kudos for the detail and depth here, gonna take me a few days to work through it all...

[jeffanthony]

DAO.link is only for the contractors to have a proper 'paper trail' of where their income comes from. FOr instance Slock.it would be able to say they got X-Million from a registered company DAO.link rather than try to say they got X-Million out of The DAO.

[Han]

Hi cryptowanderer

Thanks for the kudos! Your comment merits a much more detailed response however for now I wanted to address some of the more urgent issues you raise.

Token sale

First I would love to hear from you why you think that a token sale should not necessarily have to be conducted as a licensed equity based crowdfunding campaign. I hope you can elaborate.

Complexity

Second, as to the overall complexity of the proposal, we are tweaking it further before final submission and definitely have simplicity in mind, as it does not make sense to add complexity at the digital layer on top of complexity in the analog layer!

DAO's legal capacity

I guess we could have been a little bit more clear when we say that if the DAO lacks legal persona, it effectively does not have the capacity to enter into contracts. We think the analysis is right that in the absence of an agreement between the token holders, there is as such no wilful act by which they amongst themselves agree to form some sort of "body corporate" which can take independent actions, e.g. as in "Otonomos BCC Pte. Ltd. signed an employment agreement with Employee#1".

In this respect, we were looking forward to receiving more details on how DAO.Link would be able to real-world contracting happen, however thus far we have not seen anything posted that addresses this issue, and we suspect that the solution may include some form of agency.

KYC
Regarding KYC, I guess what we say is that the DAO will need to eat its own cake if it wants to fund real-world projects. In such scenario, as The DAO cannot contract on its own behalf, it will have to appoint an agent (we propose a trustee of a trust of which they are beneficiaries) who in turn will enter into real-world legal agreements and do everything necessary to grow the assets of the trust. It is at that stage that third-party providers such as banks, fund managers, etc may ask the trustee to disclose the identity of the beneficiaries, as part of their routine onboarding. In addition as you rightly say the trust could be forced to disclose the identity of the beneficiaries, for instance when authorities in the context of a criminal investigation would want to know who is behind the trust.

However, this scenario is very different from the use case in which The DAO at no point makes real-world investments and limits its funding to unincorporated collaborative projects on Ethereum.

This is why we believe that ultimately there will be a subset of DAO token holders who will see the benefit of VC-type investing in real-world incorporated entities, and hence resign to the fact that this means they will have to clear KYC, at least at the trust level.

INTERFACE
Finally, our dashboard would cater for any Ether wallets: it is just a front-end wrapper around the wallets and smart contracts at the Ethereum level. In addition, the suite of smart contracts we are authoring are meant to replace or at the very least take precedent over all or most of the analog complexity and paperwork of investing the traditional way. A good example of how this would work is when a beneficiary in the trust transfers his trust tokens to another beneficiary. This transfer would be entirely peer-to-peer, with the recipient accepting an invite from the sender to open a wallet to receive the tokens (if he or she does no already have a wallet). Once the tokens are sent, the dashboard generates a "trade confirm" that looks suspiciously similar to the analog legal document currently used to replace a beneficiary in a trust, except that it has a transaction hash rather than a wet signature!. The trustee will PDF and file this document as analog proof of transfer, however the transaction at the blockchain layer effectively took precedent, with the analog confirm merely adding to the legal validity of the transaction in world that alas is not yet quit ready for full crypto-legal substitution!

[cryptowanderer]

Token Sale

More of a gut reaction I guess. My real question is has the 'crowdfund' (I actually prefer crowdfound, for the record) not already been conducted, or are you referring to future token sales if we were to adopt the proposed model? Furthermore, I think it has been made clear the holding DAO tokens does NOT represent equity (at least in slock.it and any other contractor's business unless clearly specified) so I still am not sure it is necessary.
What would interest me more would be 'new' frameworks, not bolt-ons that appeal to more traditional ways of doing things. And, even further, if we were seeking licensing, what are the chances of actually getting it now given that - for instance - the Jobs Act only allows for up to $1M crowdfunds (I hate using US-only examples, esp. given the international flavour here and the fact that the people who wrote the code are not based in the US, nor am I, but it is current in this context).

Legal Capacity

It seems like an attempt to operate by existing standards. I appreciate that some level of compliance is necessary, but I am trying to get my head around how much balance is really required in terms of creating something 'visible' to regulators versus claiming that there are actually willful acts of consensus amongst DTHs that might require something approaching fresh legal templates. I apologise for the vagueness here - I also look forward to more details on dao.link.

KYC

This leads into KYC. I guess it's a question of pre-empting regulatory concerns versus seeing how far we can go without them. This is the naive idealist in me speaking though, need more time to formulate this coherently. If I was to accept that some level of KYC was inevitable and necessary, what kinds of criminal situations might force otonomous to give up the encrypted data in ipfs, do you think?

Interface

Thanks - that covers my questions for now.

[bumerang07]

@Teleos Totally agree about the s8c

Proposal otonomos disappointed me !!!!
It looks that the team at our expense wants to make a high income constantly using their platform, and we do not get anything !!!!
I'm against !!!!
we can wait until otonomos gives life to its platform, and then join them for FREE !!!!!!!

[jLLOSAS]

Did you take a look at this? https://github.com/Otonomos/smart-equity/raw/master/Flowcharts/ProcessFlowSSE.png

Looks like the DAO would invest in / acquire the "Synthetic Smart Equity" which should increase/decrease in value depending on the value of the company invested in.

[jeffanthony]

I'd rather see Otonomous go ahead and help companies issue 'share' tokens while we develop a system to accumulate those shares.

[ch405]

@Han I am very confused by your statements regarding KYC. You say "- Only those DAO Token Holders who want to send Ether to fund real-world project would have to KYC themselves" However, in practice this is impossible. The way the DAO works is that we all vote collectively to send ETH to a smart contract associated with a given proposal. You are suggesting that each DAO Token Holder has the ability to send their ETH to only the contracts they support which is NOT the case.

Can you please explain this fundamental disconnect? I suspect that there is either a big misunderstanding here or you need to read the DAO white-paper again to understand how the DAO smart contract works.

[GroTheNetwork]

I would favor a catchphrase, 'Know (and respect) Your Customer'. I like this proposal and think that legal standing issues should be the second proposal that is voted on.

[Teleos]

To be clear. I referred to specific users. Yes, I was quite pointed, but I have seen how certain tactics and playbooks work and I'm seeing the pattern from these 2 specifically.

However, I'm quite interested and open to governance proposals from Otonomous and other credible parties. I look forward to learning from them and giving them due consideration!