If this is the case, I will see if it is possible to recommend changes to steer clear of malcompliance.

The work can be found here:

https://docs.google.com/document/d/1Z4qXcd5LUolUQ1I6-67HUX9xzqmqWLATa-TX7kGmHK0/edit

https://www.ultrasound.money

https://twitter.com/VitalikButerin/status/1570306185391378434

The purpose of this model is to let the users who create value e.g. to a DEX today have a part in the future profit of the DEX.

Tokens are issued with a predefined cap, initially owned by the DEX. Every month 20% of the cap is distributed proportionally to the users who create value for the DEX.

The distribution can be done in pools/seasons, e.g. every month etc.

Vesting period

The first month after receiving the right to future yields is a vesting period.

Depending on how active the user is in voting on governance proposals the vesting can be between 0 and 100%.

Performance measurement is dangerous. In accordance with the Principal-Agent Theory, it will lead to “perverse effects”. A consequence is that you will end up with a “you will get what you measure-problem”.

• There is a risk users end up voting without any consideration just because they have to.

• Responsible opinion makers risk being drowned in noise.

• It becomes hard to know if the governance model works at all because it looks like everything is good based on the level of activity.

• It is hard to have an idea about the direction the project is moving.

On the other hand, this is only a theory. There is a chance the users are interested in making considerate choices when voting. This might especially be the case where

• the values and aligned and

• the motivation is present.

Other experiments could be to:

• create more refined goals e.g.

• the financial performance of the protocol,

• accountability for voting or

• asking the users control questions before the actual voting to make sure they know, what they are voting on. Initially giving wrong answers will simply exclude the person from having the right to cast the governance vote.

If a vesting period is not applied, the preferred model is to create motivation for voting well-considered and actively. This could be done by providing the necessary information and to make the gov-token holders feel their vote can make a positive influence on their future profit.

Yield period

When the vesting period is over, the tokens payout proportional yield for three continuous months, after that period it is burned.

The consequence of this feature is, that 80% of the cap is always on the hands of the users that help the platform create value.

The 3-month period can easily be extended as an experiment later on if this is needed.

Non-transferability

Based on the Howey test, tokens are considered to be a security, if it is (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others.

To avoid becoming a security, the token should be non-transferable by design. This way it is not possible to obtain the token due to an investment of money.

The holders might develop secondary markets. However, there will not be set a starting price.

The remaining 20%

20% distribution each month in a loop of 4 months in total makes it a total distribution of 80% to the users creating value for the DEX.

The remaining 20% can be distributed to e.g. a surplus buffer, core developers, the founding team etc.

The rights associated with this stack of tokens might differ from the ones distributed to the users.

-Open

-Boarderless

-Neutral

-Sensorship resistant

-Immutable, and

-Permissionless.

A DAO is a specific type of organization or organizational structure, that ideally is imitating some or all of those characteristics.

By being open, a DAO should allow the nature of all people, including anons.

This also means, the DAO should expect that some of the people joining, will be trying to steal, betray or embezzle. They are simply a natural part of the majority.

The system of the DAO should be designed, so the people that have joined, can not do any harm to others, even if they wanted to (or will not do so based on build-in motivation mechanisms).

Looking for sources!

If you know any good sources on this topic, please share them with me, I would love to dig down that rabbit hole.

The thesis is, that:

a) regulation of behavior can be defined on-chain or

b) a market can be designed to control actors you are dependent on.

The main arguments I have heard are:

Optimally all roles in a DAO should be defined by a smart contract.

The performance of those roles should be measurable on-chain to ensure accountability or at least create motivation directly on-chain.

On-chain motivation can be controlled by a market for risk evaluation build on collateral and on-chain reputation. “Risk evaluators” must be divided by, in some way, taking in all their signals and aggregating them to specific risk parameters in the protocol.

The charges are suspicion of involvement in concealing criminal financial flows and facilitating money laundering.

https://twitter.com/sccanavos/status/1559530518043148290

If you are a developer and have any questions you would like answered in this regard, please send them to me at yourfriends@balloonist.xyz - if you want to remain anonymous, you are welcome to use a burner email.

I will do my best to answer your questions - but at the moment there is still a lot unknown.

The questions and answers will be uploaded to the Q&A section in this document:

https://docs.google.com/document/d/1SxrqHSamIw9GhtS1xI4NvWePwSBCAnL0Bc3toOCE2qY/edit

“1/ This week, the US Treasury Dept did something it’s never done before: it sanctioned a piece of code. Weird, right? Actually, it makes perfect sense. Let’s peel that onion!

2/ Specifically, Treasury added the 🌪️Tornado Cash URL and smart contract addresses to the Specially Designated Nationals And Blocked Persons List (SDN). TC is a crypto mixer that allows people to maintain their privacy online.

3/ Prior to Tornado Cash, sanctions have only been levied against persons. It is illegal for Americans to transact with any person on the SDN list. Due to the legal doctrine of corporate personhood, formal business entities can also be put on the naughty list.

4/ However, computer code is neither a natural person nor a legal entity. Code is speech (Bernstein v DOJ). Similarly, money is speech or, more precisely, what you do with your money is speech (Buckley v Valeo; Citizens United v FEC).

5/ The legal doctrine of prior restraint holds that preemptive government censorship is almost always unconstitutional, and even government acts that have a substantial chilling effect on speech may be unconstitutional (Americans for Prosperity v Bonta).

6/ Sanctions law is a strict liability regime, meaning that if an American transacts with a sanctioned person, without intent or even the knowledge of having done so, they can be sentenced to 30 years in federal prison. This is a quintessential prior restraint & chilling effect.

7/ Beyond the likely 1st Amendment violation, this action also raises significant due process concerns in that the code was not afforded adequate notice or opportunity to appeal and individuals may be implicated without means to comply.

8/ While the law does not seem to be in Treasury’s favor, litigation will take years to play out. Treasury knows this.

9/ Now, I’ve seen a lot of discussion essentially saying, “Tornado Cash was used by criminals and 🇰🇵 hackers, so it deserves to be shut down.” While I don’t support either, let me explain why this reaction misses the point.

10/ If Treasury had sanctioned the criminals and hackers that used Tornado Cash, no problem. But, Tornado Cash is open-source code, meaning it’s not owned by anyone and is freely available to everyone. It is, thus, a public good.

11/ We enjoy the benefits of public goods and infrastructure every day: the internet, our wireless networks📶, our money💵, the banking system🏦, our roads and highways🛣️, transportation infrastructure✈️. Guess what? Criminals use these everyday, too.

12/ Of course, we should pursue criminals (persons) who misuse public goods, but we don’t sanction SMTP because hackers send phishing emails or I-95 because drug dealers drive on it or cell towers that route terrorists' calls. These are not persons - neither is Tornado Cash.

13/ Like email and highways, Tornado Cash has been misused by criminals for criminal ends. However, Tornado Cash is also a tool that enables law-abiding citizens to maintain their privacy on the blockchain for a host of legal purposes, including political speech.

14/ Taking this to its logical conclusion: If Treasury can sanction Tornado Cash, it can sanction any code. No software is safe. If sanctions are no longer limited to persons, what other objects or information can the govt summarily jail you for 30 years for interacting with?

15/ Ultimately, there is no freedom without privacy and there can be no democracy without free speech. Privacy and free speech are the bedrock of free and open societies. Make no mistake - THIS is what Treasury sanctioned this week.”

** **First, we need to carefully consider the consequences and what to do.

I have put together this response plan trying to connect the dots and push forward the work.

Suggested background music while reading: https://www.youtube.com/watch?v=dFtLONl4cNc

I will update the response plan daily, feel free to chip in if you have anything to add or if you want to join the work.

I put in some work in helping a delegate from MakerDAO with an article he soon will be publishing. Once it’s out, I will bring a link.

During the last two weeks, I was reflecting a lot on my role and the opportunity of contributing to MakerDAO. I find myself lucky and the time spend working feels meaningful. I also spend time thinking about priorities and approaches, and I will be revisiting the priorities on my stack overflow document tomorrow.

Network State

During my vacation, I finished reading the Network State by Balaji.

https://thenetworkstate.com/

Radical Markets

Next book up is Radical Markets. It has some interesting views I can use when thinking about burn-mechanisms.

https://www.goodreads.com/book/show/36515770-radical-markets

https://docs.google.com/document/d/1tYE70NQ0e9Tdcz0juZuKRwTSIMO7oHfKFyxaO5-S8S8/edit

The bear market is hurting, and it is tough for DeFi-companies to find product market fit in these times.

My coming tasks are:

• To prepare for the coming budget cycle.

• To prepare an impact assessment for MakerDAO if MiCA applies to it.

I have been invited to Paris in the period 14 - 17 July to meet with the MakerDAO team for the first time face to face.

I look forward to getting to know the team better and seeing what this kind of meeting will bring. I hope for friendship and a to better understand of the dynamics of the DAO.

Strategic Happiness

https://forum.makerdao.com/t/mip40c3-sp76-modify-strategic-happiness-core-unit-budget-sh-001/16438

Events

https://forum.makerdao.com/t/mip40c3-sp73-modify-core-unit-budget-events-001/15991

Immunefi

https://forum.makerdao.com/t/mip40c3-sp77-modify-is-001-budget/16436

If the three Core Units gets offboarded, I will do three things:

1. try to figure out what they “did wrong”

2. Assess the process of making tough decisions in a DAO with proposals, voting, unofficial meetings (I do not yet know if there were any of those), how the stakeholders initially were faced with this sad proposal, why Ippy and CodeKnight are the ones putting the proposals forward, etc.

3. Try to see if the contributors are interested in having an e-meeting with me to discuss the situation and the process

4. Start up a DeFi and DAO alumni network.

I also believe MakerDAO should have a net positive income. I have no knowledge of the team nor the performance of the three targeted Core Units. It is the offboarding process and the decision-making up to that point, I am very interested in.

In DAOs it's a bit different, as I see it. The very flat organizational structure and the low level of hierarchy make every contributor responsible for him/herself. Without the knowledge of the potential consequences of lacking compliance, every contributor risks liability. It does not make the problem less complicated that products and services see rapid development and are provided worldwide.

At the same time, it also does not make the case easier, that the word compliance to some contributors rhymes with submission KYC, which in many cases is not even the case.

I am thinking a lot about how compliance can be applied to a DAO. Any good ideas, please reach out! Discord: Balloonist#6963

Update 12 July 2022

It has to be easy for the contributors to figure out what rules apply to them.

I plan on making a Venn diagram - the contributors lists activities conducted and jurisdictions the services are made available, and the relevant products/solutions will be listed.

Astro has joined the team.

Mision and vision for the legal resiliency core unit start to formalize.

So far it looks like this:

Vision

To provide comprehensive legal and regulatory resiliency to the Maker protocol and the permanent participants in the wider Maker ecosystem.

Legal resiliency means:

• DAI currency is stable, freely accessible and uncensorable and it is used as legal tender by major economies.

• Maker protocol and ist features have a minimized regulatory exposure. If compromised, risk is isolated and outsourced from a stable, automatized core.

• Contributors, Governors and users face minimal personal liability or sanction risk . If target of legal actions, they receive operative and economical support from the DAO.

• 
  

• MakerDAO is industry leader in designing and adopting legal tools and processes for DAOs

  • to document, assess and mitigate legal risks

  • to coordinate legal work

Mision

Design, implement and facilitate frameworks, tools and processes for improving legal resiliency and coordinating legal work at the DAO

Today I heard that unofficial meetings are taking place with participants from one of the two sides. This is not good, the effect of such meetings is, that if you want knowledge, you have to join these meetings too, and joining these meetings will make the meetings become even more powerful - this dynamic must be brought to an end.

I find it so interesting to help contribute to MakerDAO at the moment, it's like being in a candy store - you can choose and pick exactly what you like. Some might be seeing it as a hornet's nest, tho.

On several occasions, I have been asking other contributors to MakerDAO who I should ask for permission to pursue an ambition or conduct some work, and I have received the same answer every time "it is a DAO, you don't have to ask permission".

In the coming weeks, I will think hard about what can be done to reach a higher level of abstraction to help stop the tribal war.

I will publish my result by the end of July.

This can be used for several of the products I hope to present to the CUs.

https://forum.makerdao.com/t/simple-makerdao-governance-from-first-principles/16207

and

My summary for personal use later on is as follows:

Optimizes contributors’ execution by

Specifying deliverables (optimally these deliverables are measurable)

Splitting the pay in two: fixed pay + payment on delivery (tied to OKRs)

A quorum must be had to avoid a denial of service attack

Adds accountability to the system by

Once you have governance and you can not make it go away, you have to make it as structured and countable as possible.

With the proposal, voting happens in 3 layers, and requires specification.

Can show where voters succeed/fail on their process of decision making.

Decisions must be split into three types:

1. Vision, 2) strategy and 3) tactical

In my personal opinion, when putting this framework into the MIP framework, it becomes very binary, so proposals go from 0 to voting in a very short time (maybe because the necessary support is gathered outside of the forum/discord).

I believe, we need a wall where ideas can be thrown at and upvoted before the actual MIP is proposed.

I am working on this wall/upvoting tool as an experiment. The important thing (IMO) is to make sure the initial idea can be discussed, pivoted, forked etc. before it gets put up for a MIP vote.

As inspiration see Reddit discussions, where the most relevant comment gets upvoted and allows sub-discussions to take place. I believe we could learn from this management of discussion/comments.

This could probably be strengthened aditionally by using proof of identity instead of governance by coin (making whales dominate … ).

General skills of council members

Birds eye view of protocol

Birds eye view of the Defi space

Long term perspective

Good at capital allocation

Required skills of specialization in a council (areas of expertise that must be represented)

Governance

Treasury management (budget allocator)

Technology

A couple of wild cards (e.g. dai holders, vault owners, etc.)

Collateral

Real world assets

IMO these skills should be tied closely to the Counsil-profile with an opportunity for the relevant stakeholders (e.g. MKR holders, DAI holders, contributors, etc.) to rate if they were happy whit the individual council member’s decisions made over the past 30-90 days. (like rating of uber drivers - it would be the review of the Delegates/council).

What we need a constitution for

https://forum.makerdao.com/t/simple-makerdao-governance-from-first-principles/16207

A constitution is what can not be put in smart contract code.

It should list,

• What the mandate is,

• the roles,

• the rights,

• the responsibilities.

This should be listed for (the correlation among):

• Daiholders,

• The Maker-protocol,

• MKR holders,

• Borrowers,

• Collateral providers,

• Core unit members,

• Council members.

I find it is important to state a purpose. However, I can see this issue being discussed before - and it is said to be harder for a DAO than for a traditional company.

I disagree with this assumption. I believe it is just a matter of how you define the DAO.

I believe MakerDAO’s actual DAO is the the Maker-protocol with the following stakeholders:

• MKR holders,

• Delegates,

• Dai holders,

• Vault owners.

All the CU’s are (IMO) just startups supporting MakerDAO, who have figured out how to get allocated funds through the governance-framework.

Each of the CUs can also be DAOs, if they meet the requirements, but is not part of the Maker-protocol, as it does not rely on them. - please correct me, if I am wrong here.

Some might argue that the lack of a purpose is what makes a DAO a DAO. I also disagree with this. Contributors can feel free to provide what ever product or service to the DAO they please. The constitution is putting up boundaries for what normally leads to paid work - however, if some crazy idea spins out from the (unpaid) community, and it turns out to be a great idea - it can of cause be adopted and paid for at a later stage - the contributors just take the risk then - which then has to be compensated in the negotiation of compensation.

More onboarding

More work on the decentralization matrix

Prepared a problem/solution overview

It was 26 degrees c (78f), so I had an ice cream in the sun with my 2yo son :-)

(IMO) The biggest difference between a Core Unit and a MetaDAO is whether the work is provided to one specific client or to a broader group of clients and who takes the initiative to conduct work.

If we apply this approach to legal work in a very black and white manner - Core Units can be compared to the work provided by inhouse-lawyers and MetaDAOs can be compared to work provided by Law firms - I do not believe this is what anyone wishes for, so we have to invent a new model.

I give my take on this below.

• Below I will be fleshing out some of the key differences of the two traditional variants and list what characteristics of each of the traditional setups. By using emojis I will mark what I believe should apply to the organization/work I am part of 5 years in the future.

✅ = should apply

❌ = should not apply

🌓 = Something in-between

🚫 = Not applicable. In a DeFI-world the end-users have to take responsibility for their actions as a default, this can be mitigated by insurances etc. that comes with a premium.

• The Legal Core Unit AKA the “inhouse-lawyers”.

  • Has deep knowledge of the specific organization they support ✅

  • Feels they are part of the organization which leads to loyalty and initiative✅

  • More self-thinking on behalf of the organization they work for will identify and solve tasks on behalf of their employer✅

  • Has to outsource some tasks to external consultants/lawyers if the issue is too complex✅

  • If the inhouse lawyer makes mistakes, it is the organization that is considered liable. 🚫

  • Are closer connected to the management in the organization ✅

  • Receives a fixed monthly salary 🌓

  • The disconnected MetaDAO AKA the “law-firm”

  • Offers services to a broad variety of clients and works on retainers or from task-to-task - this combination traditionally requires the lawyer to charge a higher fee as there is no “job guarantee”. - I believe this model is broken as new technology is applied, especially in our space where code is law as the default! ❌

  • Only starts working when they are hired for a more or less specified task. 🌓

  • Well, typically the lawyer’s superpower is the right to go to court on behalf of his/her client. ❌

  • The second superpower is the lawyer’s insurance that covers his/her legal advice in case mistakes are made. ❌

  • The third superpower is only found in the top-tier law firms. This superpower is the deeply specified knowledge in all legal areas combined in one office making the law firm able to manage tasks of very high complexity. 🌓

  • The optimal MetaDAO as I see it, has a slight degree of connection to the DAOs they are supporting

  • Has one or only a few dedicated DAO-clients that combined will cover a “basic income”; in return these DAOs get some of the same privileges from having an inhouse-lawyer.

  • One of the focuses of MakerDAOs endgame plan is on creating a decentralized workforce. This will put some distance between the people providing the work and the DAO that is benefitting from the work. However, to be able for anyone to provide the kind of legal work necessary for a DAO to survive the regulatory environment, it takes deep knowledge and it also takes the initiative usually only found in inhouse-lawyers.

  • Takes initiative to create resiliency for the DAOs they are supporting, without being called for (works a bit like an industry association) - this is why there has to be a base salary or a subscription paid each month.

  • Is ready to stand up for the DAO when called for with specific requests.

  • Knowledge base for a broad variety of individual contributors or groups of contributors (what we today call Core Units).

  • Is able to bridge the lack of knowledge in the metaDAO by the use of bounties to individual contributors e.g. lawyers in the muggle world.

    I condense my view to the following:

• Coordination: Creates resiliency on behalf of the subscribing DAOs without specific requests, however, it will of cause take requests into account.

• Connectivity: Becoming one of the leading knowledge bases in the legal area for DeFi-products and DAOs.

• Scale: Providing RegTec solutions where possible.

• Resilience: Communicating best practices to DAOs and regulators (controlling the narrative is so important)

• Transparency and translations: Help translate risk from code to a language understandable by non-technical readers, and helps provide best practices for creating reliable audit trails.

• Consumer protection: We have to take the role of regulators as we are aiming to not be regulated. Our “self-regulation” will be a combination of education and warning - not a limit of access to products and services.

I have a hard time seeing how metaDAOs should be able to boost MKR tokenholders voter participation. I believe they hold long-term and just want a “set it and forget it” solution.

FlashDAOs (as subsidiaries)

I believe FlashDAOs are the future and we have to manage them through the so-called metaDAO (a flashDAO is solving a well-defined and very intense issue in a very short period. This means one task = one flashDAO. I believe the community of those sub’s will be almost completely replaced for each sub. We have shifting thoughts and shifting interests, we also switch jobs all the time. I believe we will be way more engaging, productive and focused if we only work on things that interest us.

Discord and forums are so last year

We have to come up with what will replace Discord and the use of forums as the next new tool for scaling and coordinating work in the Web3-space.

We have to filter out the loud voices - we don't know if the ideas behind the loud voices are good or bad, all we know is that they are so loud. We need a place where we can throw things at the wall and see what sticks.

With discord and forums all the ideas are mixed and the readers has no idea what is actually a good or a bad idea in practice - we need the builders to work, experiment and take chances.

A solution could be if you hold a specific NFT you can propose ideas and upvote ideas - using a closed envelope method.

This is one of the MVPs I am working on (without tokens to begin with).

Happy to hear your thoughts.

yourfriends@balloonist.xyz