deterministic agentic capability relevance v1 with ten-claim per-paper cap
Authorized by Wulf A. Kaal, 2026-08-19: expand to the full eligible set under selection method v1.
Because net asset value drives subscriptions, redemptions, performance calculations, advertising, and fees, managers who both manage and value the portfolio have both an incentive and the ability to inappropriately over-value their portfolios.
where the manager performs or controls valuation
where NAV is the basis for fees and performance figures
Given the conflicting responsibilities, managers have an incentive and the ability to inappropriately over-value their portfolios.27
There is an adverse selection problem in independent valuation: an administrator who actually had the knowledge and understanding of complex instruments required for the task would probably be incentivized to use that expertise in a more profitable setting instead.
for administrators valuing highly complex instruments
Had the administrator the required knowledge and understanding of the complexities, he or she would probably be incentivized to use that experience and understanding in a more profitable setting.
The principal-agent problem in complex financial products is exacerbated by hierarchies in financial institutions, which create multiple layers of agency relationships between the traders using the products and the principals bearing the real economic risk.
in banks and large institutions trading complex financial products
The principal-agent problem is further exacerbated by hierarchies in financial institutions that often create multiple layers of agency relationships to trade and invest in complex financial products.
Because rating agencies are paid by CDO issuers while the ratings' main users are buyers, the agency as agent has an incentive to issue high ratings to satisfy its issuer principal, and the buyer has no means of controlling the agency other than through its relationship with the issuer.
under the issuer-pays model for structured finance ratings
The rating agency as the agent would probably have an incentive to issue high ratings to satisfy the issuer of a CDO as its principal. The buyer as the beneficiary of the rating has no means of controlling the rating agencies and its ratings other than through its relationship with the issuer.
The issuer-buyer relationship and the incentives inside it are unlikely to be able to adequately control the principal-agent relationship between issuer and rating agency so as to ensure accurate ratings.
under the issuer-pays rating model for CDOs
It seems unlikely that the issuer-buyer relationship and the incentives inherent within could adequately control the principal-agent relationship between issuer and rating agency to ensure accurate ratings.
Qualified investors have strong incentives to accept valuation problems rather than contest them, because contesting would jeopardize their relationships with management and other industry participants and damage their own reputations.
qualified investors with industry relationships and reputational stakes
Even though their preference may be to obtain accurate valuation when needed, they have strong incentives to accept valuation problems in order to maintain the relationships with management and other industry participants and protect their reputations. Managers are also dependent on their
Unless an investor's business is primarily to invest in hard-to-value assets, that investor's sophistication cannot be assumed regardless of personal wealth.
for investments in hard-to-value assets and complex financial instruments
Unless the business of an investor is to primarily invest in certain hard-to-value assets, the sophistication of such investor can probably not be assumed, regardless of personal wealth. Investors who could
Raising the Regulation D numerical tests by adding an investable assets requirement would probably not address how to remedy investors' lack of understanding of hard-to-value assets.
under the SEC proposal to add a 2.5 million dollar investments requirement
raising the numerical tests by adding an investable assets requirement236 would probably not address the question of how the lack of understanding of certain hard-to-value assets could be addressed.
More disclosure does not always mean better governance, because the information provided may be hard to assess and evaluate.
where disclosed valuation and risk data is complex
More disclosure may not, however, always mean better governance if the information provided is hard to assess and evaluate.
Investor suitability standards would address the sophistication problem by requiring independent verification that investors in highly complex financial products can evaluate investment risk independently and are capable of making independent investment decisions.
for investments in highly complex financial products
Investor suitability standards would address these concerns by requiring independent verification that investors in highly complex financial products have the capability to evaluate investment risk independently and are capable of making independent investment decisions.
Limited liability lets managers and shareholders capture most of the benefits of excessive risk taking while not bearing all of its costs, which is one explanation for why bankers take excessive risk.
corporation protected by limited liability
corporation may lack assets sufficient to pay creditors
Accordingly, both managers and shareholders of a corporation enjoy most of the benefits of excessive 62 risk taking but do not bear all of the costs.
The U.S. governance structure, built on periodic disclosure of performance data and stock price maximization, encourages risk taking because managers feel compelled to meet shareholder expectations at every reporting interval.
governance systems that emphasize periodic performance disclosure and stock price
Risk taking in this context may be encour- aged by the perceived need to satisfy expectations of shareholders. Managers feel compelled to fulfill performance expectations whenev- er results are disclosed, be it quarterly, bi-annually, or annually.
German corporate law's historical focus on conflicts between controlling and minority shareholders leaves it poorly equipped to address managerial abuse of power, including excessive risk taking by managers.
systems where ownership is concentrated and the central conflict is shareholder against shareholder
Ar- guably, a legal system that focuses on the interaction of controlling and minority shareholders is not as well equipped to deal with mana- gerial abuse of power, including excessive risk taking by managers.
Codetermination makes the German supervisory board's decision making more cumbersome, so a co determined Aufsichtsrat may not respond quickly enough to fast moving events such as an escalation of portfolio risk or a liquidity crisis.
corporations large enough to trigger employee representation on the supervisory board
employee representatives may also carry union political objectives
It may be difficult for a co-determined Aufsichtsrat to respond quickly to rapidly changing developments, such as an escala- tion of financial risk in a securities portfolio or a liquidity crisis.
Because the Aufsichtsrat owes its duty of loyalty to the firm rather than to shareholders alone, and because non shareholder constituencies such as employees and creditors are more risk averse than diversified shareholders, German supervisory boards may take a more conservative attitude toward risk than U.S. shareholder oriented boards.
German courts treat the duty as protecting the interests of the firm, not only shareholders
The Aufsichtsrat's legal duty of loyalty to the firm as distinct from its shareholders thus may dictate a more conservative attitude toward risk than that of a shareholder oriented board of di- rectors in the United States.
Director independence does not produce effective risk monitoring: as the failure of independent director oversight at Lehman Brothers and other large U.S. financial firms shows, independent directors cannot monitor risk when managers, accountants and lawyers keep them in the dark.
U.S. style independence defined by lack of financial ties to the company
information flow to the board controlled by insiders
independent directors cannot effectively monitor for risk if they are kept in the dark by the firm's managers, accountants, lawyers, and other persons familiar with its business
Because U.S. law frames the inquiry around corporate waste, and most risk taking does not meet the waste standard, showing that a decision was hazardous or excessively risky is not enough to rebut the business judgment rule in the United States.
U.S. courts presume absence of corporate waste and ask only whether that presumption is rebutted
Because most risk taking does not meet the definition of corporate waste, a showing of hazard or excessive risk is insufficient to rebut the 98 business judgment rule in the United States.
The U.S. requirement that directors act on an informed basis is watered down because many states permit charter provisions exculpating directors from liability for breach of the duty of care, including the duty to act on an informed basis.
states with exculpation statutes such as Delaware, Illinois and New Jersey
This requirement, however, is watered down in the United States by many states that allow corporations to adopt charter provisions that exculpate the directors from liability to the corporation for breach of a duty of care
Germany's 2005 introduction of the derivative suit tightened the standard of care only partially, because section 148(1) of the AktG conditions shareholder standing on holding shares worth roughly 100,000 euros, a threshold with no U.S. counterpart.
German derivative suits under section 148(1) AktG as amended by the UMAG
partly counterbalanced by VorstAG liability and compensation reduction provisions
section 148(1) of the AktG requires a threshold ownership of shares totaling !100,000 (about $127,090) for shareholders to have standing to sue on behalf 174 of the corporation in German courts
The German legislature enacted the VorstAG on the premise that managers who emphasize short term parameters lose sight of the corporation's long term benefit and are thereby incentivized to take irresponsible risks, and it accordingly required compensation reduction in a corporate crisis, a D&O deductible, and deferred payout of performance based pay.
German stock corporations subject to the VorstAG of August 2009
"managers who emphasize short-term parameters in manage- ment lose sight of the long-term benefit of the corporation and are 185 incentivized to take irresponsible risks,"
Congress intended the federal securities laws to cover only purchases and sales of securities that occur within the United States, a conclusion the authors reached with twenty-one law professors after reviewing the legislative history.
reading of the 1933 Act and 1934 Act legislative history
had intended the federal securities laws only to cover purchases
The significant steps standard of section 7216 is probably broader than the Second Circuit's conduct and effect test, and the proposed statutory language would therefore reach a wider range of defendants.
comparison of section 7216 language with existing Second Circuit doctrine
statutory language in section 7216 is arguably broader than the
The lack of securities class actions in European jurisdictions creates a void that increases the incentives for forum shopping by plaintiffs' lawyers.
European jurisdictions that do not offer securities class actions
This void increases incentives for forum shopping by
Applying section 10(b) and Rule 10b-5 together with the fraud on the market theory substantially increases the potential liability of issuers and can lead to questionable results, which is why EU jurisdictions may not want that rule applied to their securities markets.
securities markets subjected to US antifraud litigation
theory substantially increases the potential liability of issuers and
A European company retains some ability to avoid the Sarbanes-Oxley Act by declining to list its securities in the United States, an escape route that expansive extraterritorial securities litigation would close.
A European company, however, has some ability to avoid the Sarbanes-Oxley Act if it avoids listing its securities in the
Overlapping regulation and inconsistent legal rules create uncertainty, so that individual board members of European companies and their attorneys will not know which legal rules apply or what effects those rules may have.
companies exposed to more than one regulatory regime
Overlapping regulation and inconsistent legal rules create uncer-
Legal uncertainty generates transaction costs, and European company boards will inevitably incur costs minimizing the information asymmetries created by different legal regimes that may or may not apply to their company.
firms facing more than one potentially applicable legal regime
Legal uncertainty generates transaction costs.
Overlapping regulation must be distinguished from conflicting regulation: only conflicting regulation could violate international law, because the territorial integrity of a state is breached only where there is a specific true conflict in the substantive legal norms of the respective states.
analysis of extraterritorial jurisdiction under public international law
It is important to distinguish 'overlapping' from 'conflicting' regulation. Conflicting regulation could violate international law.
If US law requires disclosure of information that another country's law prohibits from being disclosed, whether for privacy or other reasons, there could be a true conflict of law and a credible case that the United States is in breach of international law.
a genuine incompatibility between US disclosure duties and foreign prohibitions
disclosure of information that another country's law would prohibit to be disclosed, whether for privacy reasons or other reasons, there could be a true conflict of law and a credible case that the United States is in breach of international law.
European boards of directors and company lawyers should follow the Morrison decision and the section 7216 legislative process closely, prepare for the resulting changes, and ask Congress to reconsider section 7216.
pending outcome of Morrison v. NAB and of section 7216
European Boards of Directors and company lawyers should fol- low upcoming events closely and prepare themselves for these impending changes. They should also ask Congress to reconsider
The plaintiffs' reading that Section 10(b) covers transactions anywhere in any security of a class listed on a U.S. exchange is inconsistent with Morrison, because the opinion turns on the location of the transaction and on the holding that Section 10(b) has no extraterritorial application.
transactions executed on a foreign exchange
This interpretation is inconsistent with the basic thrust of the Morrison opin- ion, which focuses on the location of the transactions and the fact that Section 10(b) does not apply extraterritorially,
Morrison itself refutes a listing based reading of Section 10(b): the Court knew that National Australia Bank had registered and listed shares in New York, yet held that Section 10(b) did not reach trades in those ordinary shares in Australia.
foreign issuers with U.S. registered ADRs or listed shares
The entire point of the Morrison opinion, however, is that Section 10(b) did not apply to trades in NAB's ordinary shares in Australia. This is inconsistent with a theory that the Court would apply Section 10(b) to any security listed on a U.S. exchange
There is no substantive difference between a foreign issuer listing ADRs on a U.S. exchange and listing its ordinary shares there, so Section 10(b) coverage of foreign transactions should not turn on which arrangement the issuer chose.
foreign issuers accessing U.S. markets through ADRs
It also makes little sense to argue that the result would be different, and Section 10(b) would apply to transactions in NAB's ordinary shares outside the United States, if NAB had listed its ordinary shares for trading on the NYSE instead of listing the ADRs.
The Porsche swap transactions were not the functional equivalent of a transaction on a U.S. securities exchange, but neither were they the functional equivalent of a transaction on a German exchange, contrary to the implication of Judge Baer's opinion.
over-the-counter security-based swap agreements
In the actual Porsche case, however, the swap transactions were not the func- tional equivalent of a transaction on a U.S. securities exchange, even if they also were not the functional equivalent of a transaction on an exchange in Germany.
If the presence of a single U.S. party sufficed to locate a privately negotiated derivative transaction in the United States, U.S. parties could sue in U.S. courts regardless of other factors such as where the counterparties were located.
privately negotiated derivative transactions
If the presence of one party alone should suffice, U.S. parties to privately negotiated derivative transactions would be able to sue in U.S. courts regardless of other factors, such as where the counterparties were located,
Locating a private transaction by the location of the parties is often unworkable, because the parties are frequently institutions simultaneously present in the United States and abroad, and individual parties are often in transit.
private transactions in conventional securities
Parties to a private transaction are often institutions having a simultaneous presence in the U.S. and abroad. Individual parties to a private transaction are often in transit.
Non-U.S. investors have a strong incentive to route foreign trades through U.S. brokers if that preserves a U.S. cause of action, because their home jurisdictions rarely offer the attractive features of the U.S. system such as broad discovery, higher damages, class actions, and no exposure to defendants' costs.
a broker location theory accepted by U.S. courts
non-U.S. clients trading non-U.S. securities
Indeed, the home jurisdiction of non-U.S. clients of U.S. brokers is not likely to provide many of the attractive features of the U.S. legal system, such as unparalleled discovery, a tendency towards higher damages and settle- ment amounts, the availability of securities class actions
Porsche could be exposed to substantial U.S. sanctions even though neither its own common stock nor Volkswagen's traded in the United States, solely because of swap agreements to which Porsche was not a party.
derivative contracts referencing foreign traded shares
Albeit seemingly without its own common stock trading in the U.S. or the common stock of Volkswagen trading in the U.S., Porsche could be ex- posed to substantial sanctions in the U.S. merely because of swap agreements in which Porsche had no involvement.
Section 929P(b) risks complications where the SEC proceeds unilaterally in situations in which coordinated enforcement with foreign regulators would be more effective, for example insider trading cases involving exchanges whose home regimes do not recognize comparable insider trading rules.
unilateral SEC enforcement over foreign exchange transactions
The provision risks complications if the SEC pursues cases unilaterally when coordinated enforcement with foreign regulators would be more effective.
Expanded SEC enforcement under the Dodd-Frank provision runs a serious risk of being perceived as an encroachment on the corporate governance of foreign companies.
expanded extraterritorial enforcement by the SEC or DOJ
There is serious risk that such SEC enforcement actions would be perceived to encroach upon the corporate governance of foreign companies
The AIFM Directive could create incentives for regulatory arbitrage and could provoke retaliatory action by countries outside the European Union.
non-EU funds and managers face restricted access to EU markets
The AIFM Directive could create incentives for regulatory arbitrage and potentially cause retaliatory action by non-EU countries.
If regulators lack the resources to protect against systemic risk, hedge fund regulation could be futile.
regulators are given a systemic risk mandate they lack capacity to execute
Because banks expect to be bailed out with taxpayer funds, they may have less incentive to monitor their hedge fund lending activities, even though hedge funds are not themselves counterparties in government bailouts.
governments are presumed willing to bail out banks
Hedge funds are not counterparties in government bailouts, but if banks get bailed out, they may have less incentive to monitor their hedge fund lending activities or other hedge fund-related business.
Systemic risk and financial market stability are public goods, so individual banks free ride on other banks' hedge fund credit risk management and are not incentivized to adequately monitor or limit their own hedge fund risk exposure.
Systemic risk and financial market stability generate public good and free-rider problems: banks are not incentivized to adequately monitor or limit hedge fund risk exposure because of their reliance on hedge fund credit risk management by other banks.
An institution or a country creates externalities when it manages its own hedge fund generated systemic risk without considering how its actions or inactions affect risk in the system as a whole.
An institution or country creates externalities if it manages its own hedge fund-generated systemic risk without considering the impact of its actions or inactions on the risk in the system as a whole.
Even if hedge fund investing does have systemic implications, systemic risk is multifaceted enough that addressing it could require more than one regulator in a single jurisdiction, so the SEC alone may be unable to accomplish the task.
systemic risk is difficult to measure and the required information is widely dispersed
Even assuming that systemic implications arise from hedge fund investing, systemic risk is such a multifaceted issue that it could require the involvement of more than one regulator in one jurisdiction.
Discrimination against non-EU jurisdictions under the AIFM Directive could provoke retaliatory action, and retaliation combined with a lack of intra-European cooperation could damage the European financial services industry and the whole European economy.
obstacles to EU market access for non-EU funds and managers persist
Discrimination against non-EU jurisdictions could provoke retaliatory action. As a consequence, retaliatory actions and a lack of intra-European cooperation could damage the European financial services industry and the whole European economy.
A standard objection to indirect regulation is that counterparty credit risk management will not work effectively unless the lending bank has an exclusive relationship with the hedge fund that lets it control the relationship.
a hedge fund borrows from more than one bank, so no single bank sees its overall risk exposure
CCRM will not work effectively unless the bank has an exclusive relationship with the hedge fund that allows it to control the relationship.
Banks' role in monitoring hedge funds is not easily comparable to the principal agent problem between securities buyers and credit rating agencies, because banks have more influence over hedge funds than securities buyers have over rating agencies and their ratings.
Banks have perhaps more influence over hedge funds than buyers of securities over credit rating agencies and their ratings.
The numerical wealth requirements used to define qualified hedge fund investors fail as a regulatory device, because investors who meet the wealth thresholds do not always have the knowledge, understanding, and sophistication needed to invest in highly complex financial instruments.
accredited investor standards under Regulation D and PFIARA
The policy fails to take into account investors who technically fulfill the numerical wealth requirements but lack an adequate level of financial sophistication.
The second trigger, which increases voting rights before resolution, should fire on evidence that conversion into equity was unsuccessful, that conversion came too early or too late, or that the firm's financial performance keeps trending downward.
Applies after the first trigger has already converted debt into equity
Applies before authorities initiate resolution
Increasing the voting rights pre-resolution could be triggered by evidence that the conversion into equity was not successful, that conversion was triggered too early or too late, or that there is an overall continuing downward trend in the financial performance of the company.
Contingent capital offers only limited protection against information asymmetries, principal and agent conflicts, and collective action problems, so it cannot by itself prevent economic failure.
Contingent capital can only limitedly protect against information asymmetries, principal/agent issues, and collective action problems.
Existing proposals for implementing contingent capital do not explain how they would address the information asymmetries and principal and agent problems that may lie at the core of the credit crisis.
Assumes information asymmetries and principal agent problems were central causes of the crisis
Although contingent capital has many beneficial attributes, existing proposals for implementing contingent capital are unclear as to how they will address information asymmetries and principal/agent problems.
The incentive effects of corporate governance controls may not operate in systemically important financial institutions, because managers and owners who anticipate a bailout commitment adjust their risk preferences upward.
Applies to institutions considered too big to fail
the incentives originating from corporate governance controls may not work in SIFIs. SIFIs are often considered too big to fail and may be bailed out.108 If that is the case, SIFI principals-managers-owners may anticipate a bailout commitment and adjust their risk preferences upwards.
Departing from Coffee's design, super-voting rights should be allocated to contingent capital holders only if the first trigger failed to improve the institution's financial health; at the first trigger the new shareholder gets one vote per share.
Voting rights escalate only on a continuing downward trend after the first conversion
Although we agree with the need for increased voting rights, the proposal in this Article would allocate super-voting rights to CCS holders only if the first trigger did not result in an improvement of the financial institution's financial health.
To balance constituent incentives and prevent abuse, the voting rights increase should be calibrated so that contingent capital holders obtain a majority stake only in combination with the largest institutional shareholder.
Change of control limited to the case where the first trigger failed
To balance the constituents' incentives and avoid abuse,194 the voting rights increase could be calibrated to give CCS holders a majority stake in the company only with, for instance, the largest institutional shareholder.
Information asymmetries between market participants and a systemically important institution's management before default can be reduced if a financial weakening after conversion of contingent capital triggers a voting rights increase.
Requires that the weakening occur after contingent capital has converted into equity
The information asymmetries between market participants and a SIFI's management before a SIFI defaults199 could be minimized if a financial weakening of the SIFI after conversion of CCS triggers a voting rights increase.
The second trigger voting rights increase should never actually be triggered; its function is to level the playing field between constituents, incentivize negotiation, and provide an alternative to reorganization.
The second trigger voting rights increase should never actually be triggered. Rather, it should help level the playing field between constituents and incentivize negotiation and provide an alternative to reorganization.
German corporate law permits increases in voting rights only in very limited circumstances, such as grandfathered multiple voting shares, so the proposed voting rights increase would require statutory reform in Germany.
Höchststimmrechte were banned for listed German corporations in 1998
France and the United Kingdom by contrast permit multiple votes per share
German corporate law allows an increase in voting rights only in very limited circumstances, such as grandfathering provisions for shares with multiple voting rights that were created before the enactment of the Corporations Act
Allocating super-voting stock to contingent capital holders satisfies Delaware's legitimate business purpose requirement, because the allocation serves to avoid insolvency and dissolution of the institution.
Delaware permits alternative voting arrangements if the charter provides for them or is amended
Increases are limited if inequitable or in breach of fiduciary duty
Allocating super-voting stock, as proposed herein, would be for the legitimate business purpose of avoiding both insolvency and dissolution.
Combined with other corporate governance mechanisms, contingent capital securities function as an internal, institution specific mechanism that could fill the void left by regulators' apparent inability to supervise financial institutions effectively.
where CCS are used alongside, not instead of, other corporate governance mechanisms
Com- bined with other corporate governance mechanisms, CCSs, as an internal institution-specific mechanism, could help fill a void left by regulators' seeming inability to supervise financial institutions effectively.
The threat of dilution of stock holdings, combined with the threat of loss on conversion, reduces the pressure shareholders place on the management of systemically important financial institutions to take higher risks.
where conversion dilutes existing common shareholders
The threat of dilution of stock holdings in combination with a threat of loss due to conversion could help reduce shareholder pressure on SIFI management to take higher risks.
If a market evolves in which contingent capital designs appear to provide sufficient protection against systemic risk and contagion, decision makers may come to rely on the design of those securities and neglect their own role as monitors.
theoretical possibility flagged by the author
presupposes CCS designs that appear protective
it seems theoretically possible that decision makers could rely on the design of CCS and neglect their role as monitors.
Regular corporate governance controls may not work in systemically important financial institutions, because those institutions are considered too big to fail and their leaders, anticipating a bailout commitment, are incentivized to shift their risk preferences upwards.
where the institution is treated as too big to fail and a bailout is anticipated
the regular corporate governance controls may not work in SIFIs. SIFIs are often considered too big to fail and may be bailed out. If that is the case, SIFI leaders may anticipate a bail-out com- mitment and may be incentivized to shift their risk preferences upwards.
The combination of demonstrated investor interest and an underdeveloped regulatory structure in the United States presents a unique opportunity to experiment with contingent capital designs and with their application to the corporate governance of systemically important financial institutions.
United States market conditions as of 2012
structurally different debt and equity markets from Europe
The combination of investor interest and an underdeveloped regulatory structure in the United States, pertaining to this market segment, could present a unique opportunity to experiment with contingent capital designs and their possible application in corpo- rate governance of SIFIs.
Harmonization and coordination can facilitate experimentation and learning, but experimentation is most effective when several different approaches are tried simultaneously in different jurisdictions.
where multiple jurisdictions are free to adopt divergent rules
Harmonization and coordination can help facilitate experimentation and a learning process, but experimentation is probably most effective when several different approaches can be tried simultaneously in dif- ferent jurisdictions.
A contingent capital design that increases voting rights on conversion allows systemically important institutions to lower risk taking implicitly and to achieve an indirect, institution specific form of corporate governance reform through increased checks and balances.
where CCS are issued with a voting rights increase upon conversion
With a design that increases voting rights, SI- FIs could implicitly lower risk-taking and allow for a form of in- direct and institution- specific corporate governance reform, i.e., increased checks and balances.
Because the threat of a change of control leads leaders to take fewer risks in order to avoid triggering conversion, a contingent capital design with increased voting rights allows those leaders to act more in accordance with their moral convictions and conscience.
where conversion carries a credible threat of change of control
where shareholders respond by allowing management more discretion over risk taking
It could allow SIFI leaders to increasingly act in accordance with their moral convictions and conscience because the threat of change of control may influence SIFI leaders to take fewer risks to avoid triggering the conversion of CCS and a possible change of con- trol.
Management incentives for risk control are heightened upon conversion, especially where management knows that holders of converted contingent capital would command a majority vote, with or without institutional shareholders.
depends on the volume of CCS issuance, which determines the influence of CCS holders
More importantly, management incen- tives for risk control could be heightened upon conversion, espe- cially if management knows that CCS holders would have a ma- jority vote upon conversion (with or without institutional shareholders).
Rather than banning purchases by systemically important institutions of each other's contingent capital, which could be detrimental to market evolution, the design should require disclosure of the purchaser's identity and approval by the issuer.
where the concern is competitors acquiring voting rights as equity holders upon conversion
An outright ban of SIFI CCS purchases, or at least purchases in other SIFI CCS issuances, could be detrimental for CCS mar- ket evolution. Perhaps a mechanism that requires disclosure of the identity of the purchaser for SIFIs and approval by the issuer could address these concerns.
Harmonization invites its own defeat by creating an incentive for rogue jurisdictions to attract, into their legal systems, the private actors who do not agree with the harmonized rule.
applies even within organized communities of jurisdictions such as the European Union
Third, harmonization invites efforts to undermine harmony by "rogue" jurisdictions that seek to benefit by attracting to their legal systems private actors who do not agree with the harmonization.
Defined geographic borders for securities transactions, the overarching assumption behind Morrison, are an unstable basis for limiting the extraterritorial reach of either private litigation or government regulation.
securities transactions whose location is contestable
applies to both private suits and regulatory enforcement
Defined geographic borders for securities transactions—the overarching assumption behind the Morrison decision—are an unstable basis for limiting the extraterritorial reach of both private litigation and government regulation.
Bifurcation lets a party to a disputed offshore transaction reintroduce U.S. law into the civil liability regime by threatening to involve the SEC or DOJ unless the other party offers an attractive settlement.
transaction located outside the United States
Section 929P enforcement remains available
A party to a disputed transaction outside the United States can even reintroduce U.S. law into the civil liability re- gime by threatening to involve the SEC or DOJ if the other par- ty does not offer an attractive settlement.
Without an opt-out mechanism, European class sizes will likely be substantially smaller than their U.S. counterparts, which in turn depresses settlement amounts and damages awards.
European collective procedures that require plaintiffs to opt in
Without an opt-out mechanism, European class sizes will likely be substantially smaller than their U.S. counterparts.
The German KapMuG does not relieve trial judges of deciding the legal issues in every individual case, so it remains administratively burdensome even though its model case judgment binds the trial courts.
German model case proceedings for capital markets claims
The KapMuG, how- ever, does not discharge the trial judges from addressing the legal issues in each and every case individually.
The WCAM's requirement that a court evaluate procedural and substantive fairness and the efficiency of the settlement lets the Dutch system avoid blackmail settlements, where a defendant pays simply to escape endless proceedings and reputational loss.
Dutch collective settlements certified by the Amsterdam Court of Appeal
The WCAM, thus, avoids black- mail settlements in which a defendant offers a payment to get out of a class action to avoid the prospect of endless proceedings
In Converium the Amsterdam Court of Appeal declared an international collective settlement binding on the parties even though the class members had only tenuous connections to the Netherlands.
none of the defendants and only a few plaintiffs were domiciled in the Netherlands
alleged wrongdoing occurred outside the Netherlands and claims were not brought under Dutch law
The Amsterdam Court of Appeal in its Converium decision declared an international collective settlement binding on the parties to a settlement where the class members had rather tenuous connections to the Netherlands (none of the defendants
The Netherlands is already Europe's most attractive venue for collective settlements because it is the only European country that allows a collective settlement in mass litigation to bind all class members who do not opt out.
The Netherlands is already Europe's most attractive venue to facilitate such settlements because it is the only European country that allows a collective settlement in a mass litigation to be binding on all class members who do not opt-out of the
The WCAM's structural limits could reduce the number of successful settlements: while the largest cases such as Shell and Fortis give plaintiffs enough leverage to force large settlements, smaller cases may not be successfully settled in Dutch courts.
smaller claims with limited settlement leverage
While the largest cases, such as Shell and Fortis, would probably still provide sufficient lev- erage for the plaintiffs to result in large settlements with de- fendants, smaller cases may not be successfully settled in Dutch courts.
Morrison's transactional test could prove relatively short lived because it is rooted in geography while an increasing number of securities transactions defy geographical boundaries.
transactions off organized exchanges and on exchanges that cross borders
The transactional test in Morrison could be relatively short lived because it is rooted in geography and an increasing num- ber of securities transactions defy geographical boundaries.
Because most national crisis responses took the form of public bail-outs adopted without broad international consensus, they increased the threat of international regulatory arbitrage and damaged the global competitiveness of national financial markets.
crisis-era emergency measures adopted without international coordination
Most national measures took the form of public bail-outs without broad international consensus,44 thereby increasing the threat of international regulatory arbitrage as well as negatively impacting the global competitiveness of national financial markets.
Mutual recognition of countercyclical capital buffers hollows out the national discretion the Commission proposal appears to grant: the financially strongest Member States with the largest financial sectors will effectively set the buffer size for smaller Member States whose institutions do business there.
countercyclical buffers up to the 2.5 percent mutual recognition ceiling
institutions with branches or subsidiaries in the buffer-setting Member State
Therefore, the financially stronger Member States with the largest financial sectors may dictate the size of countercyclical buffers for smaller Member States, thereby practically reducing any proposed national discretion.
Even the residual national discretion to set countercyclical buffers between 2.5 and 5 percent is misleading, because a Member State such as the United Kingdom is unlikely to sustain a 5 percent buffer while Germany requires only 2.5 percent and thereby hands German banks a competitive advantage.
buffers set above the 2.5 percent mutual recognition ceiling
competing national banking sectors, especially where the state holds bank ownership stakes
The Commission proposal explicitly allows Member States to implement countercyclical buffers of up to 5%, but limits mutual recognition to the 2.5% ceiling. Even in these instances, the proposed discretion may be misleading.
Reliance on public bail-outs, unaccompanied by any threat that management, shareholders and creditors would share significant losses, created an asymmetric incentive for excessive risk taking by financial institutions.
Germany and the United States during the height of the financial crisis
where insolvency was not a credible threat
The reliance on a public bail-out without the threat of any significant losses shared by management, shareholders and creditors may have created an asymmetric incentive for excessive risk taking by financial institutions.
The German provision allowing appropriate compensation of shareholders whose rights are impaired can defeat the statute's own purpose, because time is of the essence in bank reorganization and the appointment of a court-appointed expert to value shareholder claims may significantly slow the procedure.
reorganization procedure under the German Financial Institution Reorganization Act
where shareholders' rights are permanently impaired by the plan
Time is of the essence in any bank reorganization and the appointment of an expert may significantly slow down the procedure, making it less effective.
Because German law fixes no threshold conditions or determining factors for market reception or market confidence, the systemic relevance and contagion determinations that turn on those factors can never be made in a reliable and objective manner.
determination of systemic threat under the German Banking Act
The German law does not stipulate any threshold conditions or determining factors for market reception or confidence. As a result, it will always be difficult to determine any of these factors in a reliable and objective manner.
Contingent capital supports general risk control and reduces moral hazard by holding shareholders responsible and internalizing the costs of bank failure rather than externalizing them onto taxpayers.
Contingent capital may also support general risk control in financial institutions454 and may contribute to minimizing moral hazard by holding shareholders responsible and internalizing bank failure costs.
Because conversion carries a threat of loss and implicit dilution of stock holdings, contingent capital reduces shareholders' incentive to push management toward higher risk in pursuit of higher returns.
conversion terms that dilute existing equity holders
Moreover, given the threat of loss due to conversion and the implicit dilution of stock holdings, contingent capital has the potential to reduce incentives for shareholders to encourage management to take higher risks for higher returns.
Building critical mass in the contingent capital securities market could require banks and other financial institutions to buy their competitors' contingent capital securities, which would raise ethical, antitrust and incentive concerns.
where non-bank demand is insufficient to absorb issuance volumes
Developing a critical mass for the market in contingent capital securities could require banks and other financial institutions to purchase their competitors' contingent capital securities.533 That could raise ethical, antitrust, and incentive concerns.
A second, sequential trigger placed before reorganization or resolution cushions the risk that policy makers misstructure the first trigger, absorbing the negative effects of inadequate or untimely conversion at the moment the institution needs capital.
contingent capital with sequential triggers spanning going and gone concern
where the first trigger proves unsuccessful
Given the risk that policy makers may not structure the trigger appropriately, the negative effects of inadequate or untimely conversion of debt into equity at a time when the company requires a capital injection could be cushioned with a second trigger
Early European initiatives to put contingent convertible bonds into executive pay lack governance-improving designs; contingent convertible bonds with an early conversion trigger should be used in executive compensation instead.
systemically important financial institutions
Early initiatives by European SIFIs to include contingent convertible bonds in executive compensation packages lack governance-improving designs. This Article suggests the use of contingent convertible bonds with an early conversion trigger in executive compensation.
Contingent convertible bonds placed in executive compensation serve a different purpose than those sold to investors: the point is not capital infusion during a crisis but governance-improving design that optimizes management incentives.
contingent convertible bonds held by executives rather than outside investors
bonds issued to investors, the emphasis for contingent convertible bonds in executive compensation is not on a capital infusion when the Systematically Important Financial Institution (SIFI) is in a crisis,13 but rather on governance-improving designs to help optimize management's incentives.14
Market solutions and private ordering alone are unlikely to produce contingent capital designs that improve corporate governance in SIFIs, because privately negotiated sales so far have not produced governance-sensitive designs.
market for contingent convertible bonds still in its infancy
It is doubtful if market solutions and private ordering alone will produce contingent capital designs that help improve corporate governance in SIFIs.
Analyzing executive compensation as a single contract between an executive agent and a corporate principal fails, because it ignores the informal relational element of the principal agent relationship that often overshadows the legal terms of the agreement.
classical contract model or spot contract model
Using a model for the analysis of executive contracts that is based on the single contract between the executive–agent and corporation–principal would ignore the informal relational element of this principal– agent relationship.
Control rights in executive compensation contracts cannot sufficiently constrain ex post opportunism by executives, because of incomplete information, information asymmetry, bounded rationality, limited foresight, and transaction costs.
principal agent relationship under incomplete contracting
bounded rationality of contracting parties, the parties' limited cognition and foresight, and transaction costs, control rights in executive compensation contracts cannot account sufficiently for ex post opportunism of agents.
A contingent capital award to executives without a conversion feature yields only limited governance improvement and only limited incentive to lower risk-taking; in its current form it operates as a mere compensation supplement.
contingent capital awards without conversion into equity
Barclays's issuance of contingent convertible bonds without a conversion feature to its executives shows limited governance improvements. Without a conversion to equity, Barclays provides only limited incentives for its executives to lower risk-taking.
Because conversion damages both the debt portion and the surviving equity portion of an executive's package at the moment equity matters most for total pay, the combined effect is a strong incentive for executives to lower risk in order to avoid the triggering event.
executive package combines contingent convertible bonds with equity-based compensation
convertible bonds portion is converted and when equity is increasingly important to maintain the overall value of executive compensation.174 The combined effect could be a strong incentive for executives to take lower risks in order to avoid the triggering event.175
Before conversion, executives holding securities with long-term maturities and coupon payments have incentives to manage the company with debt-holders' interests in mind.
strength depends on the proportion of debt in the package
Because executives would be holding securities with long-term maturities and coupon payments, executives would have incentives to manage the company with the interests of debt-holders in mind.184
Trigger designs that work well in institutions with the traditional mix of debt-holders and shareholders may be suboptimal once executives themselves hold contingent convertible bonds.
executives hold debt instruments in the form of contingent convertible bonds
Trigger designs that may work well in financial institutions with the traditional mix of debt- holders and shareholders may be suboptimal if executives also hold debt instruments in the form of contingent convertible bonds.275
An early trigger design for contingent convertible bonds in executive compensation enables earlier signaling of default risk, increases incentives for creditors and shareholders to monitor, and increases executives' incentives to lower risk-taking.
Contingent convertible bonds with an early trigger design enable earlier signaling of default risk; they provide increased incentives for monitoring by creditors and shareholders as well as incentives for executives to lower their risk-taking.282
The client counting safe harbor, which let an adviser count a pooled entity rather than each investor as a single client, allowed advisers to manage large amounts of securities indirectly for several hundreds of investors across multiple hedge funds while remaining outside registration and supervision.
under the 1985 safe harbor as broadened in 1997
before the Dodd-Frank Act repealed the private adviser exemption
This safe harbor allowed investment advisers to manage large amounts of securities indirectly for several hundreds of investors in several hedge funds.53
The SEC's 2004 attempt to reach hedge fund advisers failed as a matter of administrative law: in July 2006 the D.C. Circuit vacated the hedge fund rule in Goldstein v. SEC as an instance of arbitrary rulemaking, because the SEC had no authority to define a term the Advisers Act left undefined.
SEC rulemaking under the Investment Advisers Act
where the statutory term client is not otherwise defined
Eventually, in July 2006, the D.C. Circuit in Goldstein v. SEC vacated the hedge fund rule as an instance of arbitrary rulemaking by the SEC.71
Form PF reporting achieves broad coverage of systemic exposure with narrow coverage of firms: the SEC expects the small set of large filers to account for eighty percent of total hedge fund assets under management in the United States.
advisers with at least $1.5 billion in RAUM attributable to hedge funds
SEC estimates at the time of Form PF adoption
The SEC expects this relatively small number of advisers to account for 80% of total hedge fund assets under management in the United States.145
Quarterly rather than annual Form PF updating for large hedge fund advisers is designed for timeliness: its purpose is to give the Financial Stability Oversight Council data current enough to identify emerging trends in systemic risk.
advisers with at least $1.5 billion RAUM attributable to hedge funds
Mandatory quarterly reporting for large hedge fund advisers in the United States aligns with international trends and is intended "to provide the FSOC with timely data to identify emerging trends in systemic risk."151
The hedge fund industry's concern with confidentiality and privacy is itself an obstacle to empirical research: it made obtaining a substantial effective sample size for this study difficult, independent of the survey design.
questions touching firm or client financial status
Given the particular concern in the hedge fund industry regarding confidentiality and privacy, obtaining a substantial effective sample size for this study proved difficult.
Mandated disclosure does not automatically produce usable public data: although Form ADV requires advisers to disclose chief compliance officer contact information, the SEC dataset omitted it and contained no e-mail addresses, so researchers could not reach the officers responsible for compliance.
the IARD dataset and filed Form ADVs as of 2012
Although Form ADV requires advisers to disclose the contact information for their chief compliance officer, the dataset provided by the SEC did not list this information and did not include e-mail addresses.
The standard remedies for selection bias are not reliably corrective: simulation studies show that many techniques used to prevent selection bias problems have mixed success rates, can worsen rather than improve estimates, and may skew results under ordinary circumstances.
statistical corrections for sample selection bias in social research
Simulation studies have shown that many of the techniques used to prevent selection bias problems have mixed success rates, can worsen rather than improve estimates, and may skew results under ordinary circumstances.187
Where the Form PF quarterly reporting threshold does influence behavior, it distorts fund size downward: a majority of the advisers who take the threshold into account plan to stay under $1.5 billion in assets under management, and some would close funds to new investors to do so.
the 19.54% of respondents who would take the Form PF threshold into account
A majority of those respondents who would take it into account plan to stay under the Form PF threshold for quarterly reporting of $1.5 billion AUM.
Respondents identified the creation of barriers to entry as an industry level effect of the registration and disclosure requirements, because the rules make the market environment for private funds less attractive to new entrants.
respondent projections for the private fund industry over five years
Another response cluster that merits mentioning is the creation of barriers to entry for other funds because of a less attractive market environment for private funds as a result of the registration and disclosure requirements.
The compliance burden has raised the minimum viable scale for launching a hedge fund: an adviser reports that the capital needed to start a fund in New York rose from roughly $25 to $50 million to at least $100 million because of the increased cost of compliance with the registration and disclosure requirements.
single respondent account highlighted by the Author
It used to take 25– 50 mil. to start a hedge fund in NY and then buil[d] a record and grow. Today it is at least 100 mil. [b]ecause of the increased cost of compliance with the registration and disclosure requirements.
The feedback effect between different public rulemakers and between private and public rulemakers reduces incomplete information, which in turn enables the rulemaker to modify the next action in the rulemaking process.
The feedback effect increases the availability of relevant information for rulemaking. At the same time, the reduction of incomplete information in the rulemaking process enables the rulemaker to modify the next action in the rulemaking process.
Rules with suboptimal characteristics are themselves the product of institutional arrangements and reinforce those suboptimal institutional arrangements and rulemaking processes, creating a self-perpetuating feedback loop.
Rules with suboptimal characteristics are the results of institutional arrangements and reinforce suboptimal institutional arrangements and rulemaking processes.
Because feedback effects increase the availability of relevant, decentralized, and timely information, rulemakers can predict unforeseen contingencies and adjust their actions ex-ante to avoid complex reforms and unwanted consequences.
Because the feedback effects in dynamic regulation allow rulemakers to increase the availability of relevant, decentralized, and timely information for rulemaking, rulemakers can predict unforeseen contingencies and adjust their actions ex-ante to avoid complex reforms.
The feedback process between public and private rulemakers increases the availability, timeliness, and quality of information available to the public rulemaker, which induces and supports a learning process and creates incentives for that learning.
The feedback process between public and private rulemakers increases the availability, timeliness, and quality of information available to the public rulemaker. This induces and supports the learning process for the public rulemaker.
Competition between legislators does not necessarily provide a feedback process in the sense of cooperation, but it nevertheless provides incentives for public rulemakers to consider regulatory solutions from other jurisdictions.
the competition between legislators does not necessarily provide a feedback process in the sense of cooperation, (Kirchner, Painter and Kaal 2005; Carbonara and Parisi 2008; Kerber 2000; Heine and Kerber 2002), it can nevertheless provide incentives for public rulemakers to consider regulatory
Information exchange between agents of public rulemakers, such as regulators, will not necessarily involve decentralized information, unlike feedback effects between private and public rulemakers.
Unlike the feedback effects between private and public rulemakers, the information exchange between agents of public rulemakers, such as regulators, will not necessarily involve decentralized information.
The availability of information generated through the dynamic feedback process cannot be optimized at any given point in time, because the feedback effect is intended to perpetually reinforce itself.
the availability of information generated through this process cannot be optimized at any given point in time.
Dynamic regulation helps rulemakers anticipate how institutions will react to circumstances as they arise, because the feedback process provides decentralized, timely, and institution-specific information, allowing rules to be adjusted ex-ante in anticipation of future contingencies.
Dynamic regulation helps rulemakers anticipate how institutions will react to circumstances as they arise because the feedback process provides decentralized, timely, and institution-specific information for rulemaking. Rules are adjusted ex-ante in anticipation of future contingencies.
The feedback process in dynamic regulation may be viewed as a focal point or principle for rulemaking, enabling rulemakers to provide for contingencies ex-ante and to adopt rules that are applicable and adaptable to future states of the world.
Dynamic regulation as a focal point or principle enables rulemakers to adapt to contingencies if and when they arise because the feedback effect provides relevant, timely, decentralized, and institution-specific information for rulemaking.
The feedback effect in dynamic regulation, as part of the organizational culture of rulemaking, may allow cooperation and coordination not only among private actors but also among public rulemakers and between private and public rulemakers.
rulemaking may allow cooperation and coordination not only among private actors but also among public rulemakers and between private and public rulemakers.
Governance adjustments enacted via stable rules in reaction to financial crises are inevitably followed by relaxation, revision, and retraction of those rules.
applies to rules enacted as a reaction to financial crises
Governance adjustments via stable rules in reaction to financial crises are inevitably followed by relaxation, revision, and retraction.
Since 2002 United States corporate governance has been substantially upgraded twice in response to crises, following more than seventy years of comparative regulatory inactivity, a concentration of regulatory activity in a short timespan that is itself striking.
United States corporate governance regime
Since 2002, corporate governance in the United States has been, not just once but twice, substantially upgraded in response to crises, after more than seventy years of comparative regulatory inactivity.
The existing literature on financial regulation has not adequately addressed the underlying causes and consequences of cyclical regulation.
The literature on financial regulation may not have addressed the underlying causes and consequences of cyclical regulation adequately.
The regulatory sine curve is the pattern of governance adjustments made in reaction to financial crises together with the inevitable relaxation, revision, and retraction of the rules enacted as part of that adjustment.
The regulatory sine curve describes governance adjustments in reaction to financial crises and the inevitable relaxation, revision, and retraction of rules that were enacted as part of the governance adjustment.
In the absence of crises the intensity of regulation diminishes, because regulators cannot commit to long-term regulatory strategies and instead fall back on private strategies such as self-regulation to overcome resource constraints.
In the absence of crises, however, the intensity of regulation diminishes because regulators are unable to commit to long-term regulatory strategies and instead use private strategies like self-regulation to overcome resource constraints.
The partial repeal of Section 404 of Sarbanes-Oxley through the Dodd-Frank Act illustrates that broad rules enacted during times of political expediency are often later retracted.
broad rules enacted under political expediency
The partial repeal of section 404 of SOX70 via the Dodd-Frank Act is another example that illustrates how broad rules enacted during times of political expediency are often later retracted.
The core problem for financial regulation is timing: governance improvements are not enacted before crises when they are most needed, because the collective action problem makes financial regulation mostly reactive and tied to business cycles.
A core problem for financial regulation is its timing. Governance improvements are not enacted when they are most needed - before crises. Rather, because of the collective action problem, financial regulation is mostly reactive, following business cycles.
Managers are incentivized to manage their institutions so as to avoid contingent capital triggers, and that incentive itself can optimize the governance of financial institutions.
CoCos are outstanding with credible trigger terms
Managers are incentivized to manage their respective entities to avoid CoCo triggers, which can help optimize governance of financial institutions.
Prosecutors negotiating deferred prosecution agreements may lack the expertise needed to negotiate high level corporate governance changes such as personnel changes and internal corporate and compliance procedures.
deferred prosecution agreements negotiated by prosecutors
While prosecutors may not have the necessary expertise to negotiate high level corporate governance changes, such as personnel changes and internal corporate and compliance procedures
Corporate integrity agreements improve corporate governance because the ease of reopened prosecution, increased government scrutiny, and the potential for crippling penalties improve boards' and managements' knowledge of pertinent issues in the institution and its monitoring.
institution operating under a corporate integrity agreement
The ease of prosecution, the increased scrutiny by the government, and the potential for crippling penalties can improve boards' and managements' knowledge of pertinent issues in the institution and its monitoring. CIAs can, thus, improve corporate governance.
Although CIAs sit outside the formal legal framework that defines fiduciary duties, they belong to the penumbra of extra legal forces that clarifies what is expected of directors.
fiduciary duty law understood as supplemented by extra legal forces
While CIAs are outside the traditional legal framework that formally defines fiduciary duties, they fit into the penumbra of extra-legal forces11 that helps to clarify the expectations for directors.
A CIA raises the stakes for directors who would otherwise neglect their governance responsibilities, because the agreement puts the company effectively on parole and gives the government direct access that facilitates detection of compliance failures.
companies operating under an executed CIA
A CIA increases the stakes for directors choosing to eschew their governance responsibilities. A company operating under a CIA is essentially on parole.55 CIAs give the government direct access to a health care corporation, facilitating the detection of compliance issues.
Although CIAs are not laws, they go beyond aspirational governance standards because they set forth concrete governance rules that more clearly define the duties to be informed, to exercise oversight, and to maintain effective reporting systems, thereby requiring a higher standard of care.
directors of companies operating under a CIA
Although CIAs are not laws, they do go beyond aspirational governance standards. CIAs set forth concrete governance rules that expand the fiduciary duties of directors.
Because CIAs mandate a chief compliance officer and dictate how that officer interacts with the board, they increase the board's knowledge and monitoring of compliance, and a board possessing such knowledge should play a bigger role in ensuring that the company meets federal and state standards.
CIAs that mandate a CCO and prescribe CCO to board reporting
More specifically, because CIAs often mandate a CCO and dictate how the CCO interacts with the board, CIAs can increase boards' knowledge and monitoring of the company's compliance.
When a company operates under a CIA, the judicial distinction between the law and aspirational corporate governance becomes less clear.
However, when a company is operating under a CIA, the distinction between the law and aspirational governance is less clear.
In re Pfizer stipulates that for a company that executed a CIA the court will allow an assumption that the directors were fully informed and therefore willing participants in the corporate malfeasance, so that the CIAs themselves became the court's proof that the directors could have breached their fiduciary duties.
In re Pfizer, 722 F. Supp. 2d 453 (S.D.N.Y. 2010)
boards obligated by prior CIAs to monitor the very conduct alleged
The court stipulates that in the case of a company that executed a CIA, it will allow an assumption that the directors were fully informed, and thus, willing participants in the corporate malfeasance.
Courts assume that the boards of companies that executed a CIA have more knowledge and can exercise more control, and therefore hold those directors to a heightened fiduciary duty, rejecting directors' claims of ignorance because executing a CIA or a CIA like agreement means directors do know or should know about the noncompliance.
companies that executed a CIA or a comparable agreement such as a voluntary compliance plan
To summarize, courts assume that the boards of companies that executed a CIA have more knowledge and can exercise more control and should thus act with a heightened fiduciary duty. Directors are held to a higher standard if the company executed a CIA.
Governance of health care providers is distinctively complicated because directors must balance patients, physicians, taxpayers, the government, and shareholders, and substantial government involvement and liability through Medicare and Medicaid make the taxpaying public a stakeholder.
Substantial government involvement and liability through Medicare and Medicaid further complicates governance of health care providers because the taxpaying public is a stakeholder.
As a unique hybrid category, CIAs transcend both the law of fiduciary duties and aspirational corporate governance, and courts may come to interpret CIAs and other hybrid forms such as deferred prosecution agreements as expanding the basic legal duty of care.
continued judicial recognition of CIAs and voluntary compliance plans
Given the characteristics of CIAs and courts' increasing recognition of CIAs and VCPs, courts may interpret CIAs and other hybrid forms, such as deferred prosecution agreements, as expanding the basic legal duty of care.
More research and empirical work is needed to determine how CIAs and other hybrid forms may change or expand directors' obligations.
More research and empirical work may be needed to explore how CIAs and other hybrid forms may change or expand directors' obligations.
The IAA restricts the assignment of advisory contracts without client consent in order to protect investors against changes in the character or quality of the advisory services they contracted for.
contracts between investment advisers and their clients
Moreover, to protect investors against changes in the character or quality of advisory services, the IAA prohibits the assignment of contracts with clients unless the
Investment adviser status under the IAA requires that the advice concern a security; without a security in the dealings between adviser and client the statutory definition does not apply.
classification of a person as an investment adviser under the IAA
Providing investment advice and being considered an investment adviser under the IAA requires that a person renders advice with regard to a security.
Proof of special compensation is a necessary condition for classifying a broker dealer as an investment adviser, and the burden of proving both special compensation and that the advice exceeded the incidental is on the plaintiff.
broker dealers whose advisory services are solely incidental to brokerage
A broker-dealer cannot be classified as an investment adviser without proof of special compensation.
Congress created distinct hedge fund adviser categories in Title IV of the Dodd-Frank Act because it recognized that not all hedge fund advisers pose the same systemic risks and therefore do not all require the same level of oversight.
hedge fund advisers under Title IV of the Dodd-Frank Act
When it passed the Dodd-Frank Act,17 Congress recognized that not all hedge fund advisers pose the same systemic risks and therefore require the same level of oversight. Congress therefore created different hedge fund adviser categories in Title IV of the Dodd-Frank Act.18
Title IV and the SEC forms use assets under management as a proxy for systemic threat, so that disclosure obligations scale upward with the size of the hedge fund adviser.
hedge fund advisers categorized by AUM under Title IV
forms suggest that the larger the hedge fund advisers, as measured by their assets under management (AUM), the higher the possible systemic threat the respective fund poses. Accordingly, the disclosure requirements increase with the AUM size of hedge fund advisers.
Where a state does not provide sufficient regulation of mid-sized investment advisers, oversight reverts to the SEC, so state level regulatory gaps trigger a federal backstop rather than leaving advisers unsupervised.
states whose regulation is deemed insufficient
Should a particular state not provide sufficient regulation, the SEC will oversee the mid-sized investment adviser.22
Registration is the gateway that makes data collection and enhanced disclosure by hedge fund managers possible, and the Dodd-Frank Act raised disclosure requirements for registered advisers specifically to address systemic risk concerns.
registered investment advisers after the Dodd-Frank Act
The registration of investment advisers facilitates the collection of data and enhanced disclosure by hedge fund managers. The Dodd-Frank Act increased the disclosure requirements for registered investment advisers to address concerns over systemic risk.40
The Dodd-Frank Act tightened custodial practice by requiring safeguards for client assets and verification by independent accountants, a response to concerns over theft and client exposure to Ponzi schemes.
investment advisers with custody of client assets after 2010
In 2010, in an effort to address concerns over theft and to lower clients' exposure to the risks of Ponzi schemes, the Dodd-Frank Act amended the IAA, heightening custodial practices by requiring safeguards for client assets and the use of independent accountants to verify assets.96
Because investment advisers owe a duty to obtain best execution for customer orders, they ought to evaluate the executions carried out on their clients' behalf on a periodic basis.
advisers placing or directing client orders
investment advisers are subject to a duty to obtain the best execution for customer orders,103 investment advisers ought to periodically evaluate the executions on behalf of their clients.
Referral fees to third parties are permitted only if the recipients are bona fide persons under securities laws, the fees are disclosed to the adviser's clients, and the fees are paid under a written agreement.
referral fees paid by investment advisers to third parties
Advisers may pay referral fees provided the referral fee recipients are bona fide persons under securities laws, the fees have been disclosed to the investment adviser's clients, and the fees are paid in accordance with a written agreement.113
There is a substantial overlap between the systemic risk disclosure requirements imposed on hedge fund advisers under Title IV of the Dodd-Frank Act and the disclosure requirements under the fully revised version of Bankruptcy Rule 2019.
hedge fund advisers subject to Title IV reporting
creditors and groups covered by Revised Rule 2019 in chapter 9 and chapter 11 cases
The author provides evidence of a substantial overlap between systemic risk disclosure requirements under Title IV and the disclosure requirements under the fully-revised version of Bankruptcy Rule 2019 (Revised Rule 2019).
Under the regulatory framework in place at the time of writing, the threat that hedge funds' systemic risk filings could be publicly disclosed through the bankruptcy process will affect hedge funds' tactics and their role in distressed investing only marginally.
current regulatory framework as of 2013 to 2014
Form PF disclosures not yet standardized by the SEC
In the current regulatory framework, the threat of public disclosure of systemic risk filings by hedge funds via the bankruptcy process may only marginally affect hedge funds' tactics and their role in distressed investing.
The SEC has not standardized the disclosures required in Form PF, and there is evidence that Form PF requirements rest on an inconsistent use of industry terms, which can in turn produce inconsistent and contradictory data reporting.
Form PF as promulgated and in effect at the time of writing
The SEC has not yet standardized the required disclosures in Form PF and there is some evidence that the disclosure requirements in Form PF are based on an inconsistent use of industry terms which may in turn result in inconsistent and perhaps contradictory data reporting.
Old Bankruptcy Rule 2019 was applied inconsistently in practice, with courts interpreting it with a high degree of variability both across and within jurisdictions.
period before the 2011 revision of Rule 2019
Old Rule 2019 had been applied inconsistently in practice. Courts interpreted old Rule 2019 with a high degree of variability, both across and within jurisdictions.
Mandatory quarterly Form PF reporting for large hedge fund advisers is designed to give the Financial Stability Oversight Council timely data for identifying emerging systemic risk trends and to align United States practice with international trends.
advisers with at least $1.5 billion regulatory assets under management attributable to hedge funds
Mandatory quarterly reporting for large hedge fund advisers in the United States is intended to provide the FSOC with timely data to identify emerging trends in systemic risk and align with international trends.
Bankruptcy and systemic risk disclosure obligations for hedge funds have different origins and serve different purposes: bankruptcy disclosure is meant to level the playing field in the restructuring process, while systemic risk disclosure is meant to help regulators detect and prevent systemic consequences.
Bankruptcy and systemic risk disclosure obligations for hedge funds have different origins and are intended for different purposes. Bankruptcy disclosures are generally intended to level the playing field in the bankruptcy and restructuring process.
Data staleness degrades systemic risk evaluation more than it degrades evaluation of bankruptcy disclosures, because many distressed investment strategies depend on the outcome of the restructuring process and creditors are therefore incentivized to hold their positions until it completes.
distressed investment strategies tied to restructuring outcomes
This lack of accuracy can affect systemic risk evaluation more than an evaluation of disclosures in the bankruptcy context because many distressed investment strategies depend on the outcome of the restructuring process
Form PF disclosures have not been standardized, and anecdotal evidence indicates that the SEC and the FSOC may be working with contradictory, misleading, inaccurate, and incomplete systemic risk data.
Form PF filings made under the initial implementation stages
Form PF disclosures have not yet been standardized, and anecdotal evidence suggests that the SEC and the FSOC could be working with contradictory, misleading, inaccurate, and incomplete systemic risk data in Form PF.
Because the SEC is still working out the appropriate use of Form PF and still improving the form and its instructions, its enforcement division is unlikely to open investigations into alleged misreporting or failures to report.
period while Form PF remains unstandardized
While the SEC is still ascertaining the appropriate use of Form PF and improving Form PF and the instructions to it, it is unlikely that the SEC's enforcement division will start investigations into alleged misreporting or failures to report.
If Form PF systemic risk data became publicly available, or even only available to the presiding bankruptcy judge in a chapter 9 or chapter 11 case, the hedge fund industry's strong preference for secrecy could itself precipitate a change in distressed investment practices.
public access or judge-only access to Form PF data
hedge fund industry retains its emphasis on secrecy
If systemic risk data in Form PF becomes publicly available or even only available to the respective bankruptcy judge in a chapter 9 or chapter 11 case, the hedge fund industry's penchant for secrecy could perhaps precipitate a change in hedge funds' distressed investment practices.
Contrary to the hedge fund industry's claim that increased supervision and disclosure would harm profitability, the authors find statistical evidence that the Dodd-Frank Act requirements had a positive effect on hedge fund performance.
US hedge fund advisers subject to Title IV
Contrary to the hedge fund industry's claims that increased supervision and disclosure would affect their profitability, we find statistical evidence of a positive effect of the requirements introduced by the Dodd- Frank Act on hedge fund performance.
The hedge fund adviser registration requirement under the Dodd-Frank Act creates a discontinuity in hedge fund returns at the registration effective date of March 30, 2012.
threshold of $150 million assets under management
registration effective date March 30, 2012
The registration requirement for hedge fund advisers under the Dodd-Frank Act creates a discontinuity in hedge fund returns at the registration effective date, March 30, 2012.
Strategic behavior by fund advisers around the assets under management registration threshold produces a strong increase in the measured discontinuity at that threshold.
advisers whose AUM floats above and below $150 million
Strategic actions by fund advisers lead to a strong increase in the discontinuity around the AUM registration threshold.
Dodd-Frank Act compliance costs reduce the profitability of hedge fund advisers' investment management companies, but registration and disclosure requirements do not appear to reduce the returns of the hedge funds themselves.
distinction between adviser management company profits and fund returns
However, while Dodd-Frank Act compliance costs affect the profitability of hedge fund advisors' investment management companies, registration and disclosure requirements under the Dodd-Frank Act do not seem to affect the returns of hedge funds (Kaal 2013a).
Most of the 87 strategic funds keep their AUM very close to the $150 million disclosure threshold, oscillating around it rather than moving decisively above or below it.
We notice that only few hedge funds sensibly decrease or increase their AUM under or above the threshold and then keep such position. Most funds in the sample have AUM very close to the threshold, with oscillations around it.
The largest number of strategic funds moving their AUM below $150 million occurs in the April to May 2012 window, which suggests a lagged response to the March 30, 2012 registration effective date.
The largest positive spike, which corresponds to the largest number of funds that decreased their AUM below $150 million is in the period April-May 2012, possibly suggesting some lagged effect of the registration effective date for hedge fund advisers under the Dodd-Frank Act.
The Dodd-Frank Act registration threshold creates incentives strong enough that some advisers opt out of registration and disclosure by strategically changing their AUM size to stay below $150 million.
advisers with AUM floating around the $150 million threshold
It is possible that the enactment of the Dodd-Frank Act introduces incentives that are powerful enough to cause some hedge fund advisers to opt out of Dodd-Frank Act registration and disclosure through a strategic change of AUM size.
Some large advisers reduce their AUM in the months from May to August 2012, which strongly increases the discontinuity around the registration threshold and separates the two groups more sharply, though the effect vanishes late in the sample period.
In particular, some large advisers reduce their AUM. This leads to a strong increase in the discontinuity around the AUM registration threshold, suggesting a stronger separation between the two groups. The effect vanishes during the last months of our sample period.
The difference-in-differences treatment effect is unstable over time: it loses significance in June and July 2012, then becomes significant again in August and September 2012 with negative coefficients and in October 2012 with a positive coefficient.
monthly DiD regressions March to October 2012
It loses significance in June and July, but it becomes significant again in August, September (with a negative coefficient) and October (with a positive coefficient).
The mandatory registration requirement of the Dodd-Frank Act affects the hedge fund industry asymmetrically, with advisers whose AUM floats around the $150 million threshold showing evidence of strategic AUM reduction.
advisers with AUM near the $150 million threshold
Our regression analysis also suggests that the mandatory registration requirement imposed by the Dodd-Frank Act affects the hedge fund industry asymmetrically.
This study finds no evidence of an inverse relationship between the size of regulated hedge fund advisers and the per-unit cost of compliance, contrary to the common complaint that financial regulation brings increasing returns to scale.
survey data collected after the March 2012 registration effective date for hedge fund advisers under Title IV
The author finds no evidence of an inverse relationship between the size of regulated hedge fund advisers and the per-unit cost of compliance.
The cost of Title IV compliance, and the other independent variables used as proxies for compliance cost, are associated with the size of hedge fund advisers as measured by assets under management.
survey respondents registered before the SEC registration effective date of March 30, 2012
The cost of Title IV compliance and other independent variables as proxies for cost are associated with the size of hedge fund advisers as measured by assets under management (AUM).
Anecdotal evidence suggests that Title IV of the Dodd-Frank Act more than doubled the market entry threshold requirements for smaller hedge fund advisers.
market entry for new hedge fund advisers after the Dodd-Frank Act
Anecdotal evidence suggests that Title IV more than doubled the market entry threshold requirements for smaller hedge fund advisers.
Below $100 million in initial assets under management, the administrative cost of running a hedge fund in a post Dodd-Frank environment could be prohibitive.
hedge fund advisers with initial AUM below $100 million
Below $100 million in initial assets under management (AUM), the administrative cost of running a hedge fund in a post Dodd-Frank environment could be prohibitive (Kaal [2013]).
A disproportionate effect of Title IV on startup hedge funds and smaller advisers could create barriers to market entry and precipitate a trend toward consolidation among smaller hedge fund advisers.
conditional on Title IV compliance cost falling disproportionately on smaller advisers
A surplus of larger private fund advisers holding correspondingly larger amounts of assets under management could increase systemic risk, so a regulation that consolidates the industry may work against its own systemic risk objective.
if Title IV compliance cost drives consolidation toward larger advisers
A surplus of larger private fund advisers with correspondingly larger amounts in AUM could increase systemic risk.
Because there is no evidence of an inverse relationship between adviser size and per-unit compliance cost, industry concerns over the effect of Title IV compliance cost and possible barriers to entry for smaller funds and startups appear unjustified.
hedge fund advisers in the 2012 survey sample
Accordingly, industry concerns over the effect of Title IV compliance cost and possible barriers to entry for smaller funds and startups seem to be unjustified.
Registered investment advisers must report systemic risk relevant information to the SEC, including trading practices, trading and investment positions, the amount of assets under management, valuation policies, and side letters.
investment advisers registered under Title IV
Investment advisers must provide reports with respect to certain information related to systemic risk (Dodd-Frank § 404(b)(3)), such as trading practices, trading and investment positions, the amount of AUM, valuation policies, side letters
Prior work shows that registration and the increased compliance requirements under the Dodd-Frank Act only marginally increase the cost structure of hedge funds.
hedge funds subject to Dodd-Frank Act registration requirements
requirements under the Dodd-Frank Act marginally increase the cost structure of hedge funds (Kaal [2013]).
Linear, robust, and non-linear regression models all show positive and statistically significant coefficients, and compliance costs per unit of AUM do not diminish in the sample, so the hypothesis that smaller advisers pay relatively more is not supported.
the 2012 survey sample of registered private fund advisers
Figures X and Y show that linear, robust, and non-linear regression models show positive and statistically significant coefficients. Compliance costs per unit AUM do not diminish in the sample. There is thus no support for the hypothesis.
If advisers' allegations that Form PF disclosures cannot be answered other than by guessing are correct, then the SEC's capacity to evaluate the data is compromised, and regulation built on incomplete and misleading data will itself be questionable.
conditional on the accuracy of anecdotal reports from advisers
If these allegations should be true, the SEC's ability to evaluate and assess the data could be compromised. The use of incomplete and misleading data could lead to the development of questionable policies and regulations applicable to the private fund industry.
Enlarging the sample does not cure selection bias in non-statistical sampling: a bigger sample neither compensates for the bias of non-statistical techniques nor guarantees that the sample is representative.
non-statistical or haphazard sampling techniques
Increasing the sample size does not necessarily compensate for the potential selection bias of non-statistical techniques or guarantee the representativeness of the sample.
The near identity between respondents who reported completing Sections 2 through 5 of Form PF and respondents who reported quarterly filing shows the answers are internally consistent, which the author treats as evidence that the survey responses carry above average reliability.
The comparison of Questions 2 and 3 thus illustrates that the responses to both questions are internally consistent. The internal consistency of these responses suggests that the survey responses have an above average reliability.
Advisers themselves understand Form PF's purpose the way the statute frames it: most respondents identified assessing systemic risk and closing the historical information gap about private funds as the form's purpose.
Most advisers assert that the purpose of Form PF is to assess systemic risk and address the lack of information regarding private funds.
Asked what the SEC should fix first, respondents named the burdensome nature and the ambiguity of Form PF as the most pressing issues, not the substance of what is disclosed.
Respondents identified the burdensome nature and the ambiguity of Form PF as the most pressing issues with Form PF.
Form PF's definition of leverage is overinclusive: respondents reported that it is inappropriately constructed and sweeps in funds that use neither leverage nor derivative securities.
responses to follow-up survey Question 6b(ii)
Several respondents suggested that the definition of leverage is inappropriately constructed and can include funds that don't use leverage or any derivative securities.
Regulatory assets under management is an unstable reporting concept: commenters split evenly on whether Form PF's RAUM questions required them to interpret the term in order to answer.
Commenters were equally split on whether Form PF questions pertaining to calculating RAUM required filers to interpret RAUM for purposes of completing Form PF.
Where SEC guidance failed, the failure was localized: respondents who found guidance inadequate pointed predominantly to Form PF Section 1c, Item B, which concerns information about the reporting fund.
respondents who rated SEC guidance inadequate
The majority of the commenters who believed that SEC guidance was inadequate indicated that SEC guidance was particularly unclear with respect to Form PF Section 1c, Item B (regarding Reporting Funds).
Regulatory flexibility can backfire: a category of respondents reported that the flexibility the SEC provides is not useful precisely because it is unclear and generates confusion.
minority of respondents to survey Question 7a(ii)
low overall response rate to this question
Another category of responses indicated that the flexibility provided by the SEC is not useful because it is not clear and creates confusion.
Respondents argued that the SEC's systemic risk objective would have been advanced more directly by asking a smaller set of targeted questions, emphasizing open derivatives positions, the entity's total market exposure, and its total underlying capital.
open-ended responses to survey Question 8b
the SEC's objective of limiting systemic risk could have been better more strongly advanced by asking questions in Form PF with an emphasis on open derivatives positions,56 total market exposure of the entity, and total underlying capital.
The SEC data collected from private fund advisers feeds every stage of the FSOC's systemic risk assessment, and the FSOC leans most heavily on precisely those disclosure items that are the most problematic.
private fund advisers reporting under SEC Form PF
FSOC systemic risk assessment of nonbank financial companies
The author shows that while the SEC's data plays a crucial role in all stages of FSOC's systemic risk assessment of private fund advisers, the FSOC relies most heavily on some of the most problematic disclosure items collected by the SEC.
Accuracy and consistency problems in the SEC's private fund data collection can impair the FSOC's ability to evaluate the systemic risk posed by private fund advisers.
FSOC evaluation of nonbank systemic risk
Evidence that the SEC's data collection encounters accuracy and consistency problems might hamper the FSOC's ability to evaluate the systemic risk of private fund advisers.
Prior studies and anecdotal evidence indicate that the data collection mandated by Form PF could itself create problems for the FSOC when it evaluates hedge fund systemic risk.
hedge fund systemic risk evaluation by FSOC
Several observations from previous studies and anecdotal evidence suggest that the mandated data collection in Form PF could create issues for FSOC in evaluating the systemic risk of hedge funds.
The 2008 to 2009 financial crisis altered market conditions and the factors driving private fund systemic risk, which triggered a second, distinct wave of scholarship on private funds' systemic implications.
The 2008-09 global financial crisis changed market conditions and several related factors that contribute to private funds advisers' posing a possible systemic risk, precipitating the second major wave of scholarship in the context of possible systemic implications of private funds.
The unprecedented growth of the private fund industry combined with the low interest rate environment created by post crisis quantitative easing drove private fund managers to reach for yield.
low interest rate environment following quantitative easing
The unprecedented growth in the private fund industry in combination with the low interest rate environment following the Federal Reserve's quantitative easing after the financial crisis of 2008-09 resulted in private fund managers' increasingly "reaching for yield".
International regulators agree on designation criteria but not on the unit of assessment: the FSB and IOSCO assess systemic importance at the fund level while the OFR would assess it at the asset manager level with all funds combined.
designation of globally active investment funds as systemically important
Although the proposed designation criteria are similar, the FSB and IOSCO emphasize the assessment of systemic importance at the fund-level, while the OFR suggests systemic assessment at the asset manager-level with all funds combined.
National regulators reached opposite conclusions on the same question: unlike the OFR, FSB and IOSCO, the United Kingdom's Financial Services Authority concluded from its first comprehensive survey of London's hedge fund industry that the industry poses no systemic risk.
London hedge fund industry as surveyed by the FSA
conditions prevailing at the time of the survey
In contrast with the OFR, FSB and IOSCO, the Financial Services Authority (FSA) in the United Kingdom concluded in its first comprehensive survey of London's hedge fund industry that the hedge fund industry poses no systemic risk to the financial system.
The FSOC's powers over nonbank financial institutions are broad and without precedent in United States financial regulation.
nonbank financial institutions subject to Dodd-Frank Title I
The FSOC's powers over nonbank financial institutions are broad and unprecedented in U.S. financial regulation.
The FSOC itself conceded that available data was insufficient when it tried to identify the activities of the twenty largest United States fund managers as possible sources of systemic risk.
counterparty risk, leverage, repo, securities lending, and separate accounts
Similarly, in its attempt to identify activities of twenty of the largest U.S. fund managers as possible sources of systemic risk,171 the FSOC acknowledged that the available data was insufficient
The interpretation Form PF demands generated particular concern among filers about the definition of counterparties and about counterparty performance measures.
The level of interpretation required to answer Form PF precipitated particular concerns among filers pertaining to the definition of counterparties and performance measures for counterparties in Form PF.
Prior scholarship on the corporate governance effects of non and deferred prosecution agreements rests largely on anecdotal evidence and individual case studies rather than on systematic evidence, which is why its conclusions about those effects are unreliable.
The evaluation of issues pertaining to the effect of N/DPAs on corporate governance in prior studies is largely based on anecdotal evidence and valuable case studies.
The authors contest the conventional wisdom that a corporate criminal indictment amounts to a corporate death penalty, pointing to recent guilty pleas in which BNP Paribas paid a record fine and Credit Suisse kept its investment banking license.
Several recent plea deals call into question the 'death penalty' the- ory.
Coding of all publicly available non and deferred prosecution agreements executed between 1993 and 2013 shows that 97.41 percent of them, or 264 of 271 agreements, contained relevant corporate governance changes.
we show that 97.41 percent [N=264] of the public N/DPAs from 1993–2013 con- tained relevant corporate governance changes.
In 63.47 percent of the coded non and deferred prosecution agreements the agreement itself referenced preemptive remedial measures the corporation had instituted before the agreement was executed.
counts only measures referenced within the text of an executed N/DPA
We found that 63.47 percent of the N/DPAs in the sample contained references to preemptive remedial measures instituted before the execution of the N/DPA.
Business change provisions in non and deferred prosecution agreements can go as far as requiring the entity to fundamentally change its business model or to shut down entire business units.
N/DPA mandated business changes identified in this study could require the respective entity to fundamen- tally change its business model or shut down entire business units, among other possible business changes.
Because the board changes mandated by non and deferred prosecution agreements consist largely of additional reporting obligations and committee reform rather than removal of officers or directors, those reforms alone may not create sufficient incentives for boards and management to improve governance and avoid execution of an agreement.
These reforms alone may not create sufficient incentives for boards and management to improve governance and avoid N/DPA execution.
The threat of bad press, reputational harm, legal costs, stock price declines, and the cost of implementing mandated governance changes can partly substitute for the weak direct incentives, pushing boards and management to optimize governance and keep the entity out of an agreement.
the cost of implementing N/DPA governance changes can help counteract lack- ing incentives for boards and management to optimize governance and protect the entity from entering into a N/DPA.
High quality and effective preemptive remedial measures are themselves part of good corporate governance and can help a corporation avoid investigation, prosecution, and the execution of a non or deferred prosecution agreement.
High-quality effective preemptive reme- dial measures are part of good corporate governance and can help avoid inves- tigations and prosecutions and the associated execution of N/DPAs.
Corporate wrongdoers are unlikely to prefer regulation by prosecution over regulation by legislation because prosecution and execution of an agreement carry large reputational implications.
Because of the large reputational implications of prosecution and N/DPA execution, corporate wrongdoers are unlikely to favor "regulation by prosecution" to regulation by legislation.
If corporate wrongdoing is not in fact caused by deficient corporate governance, then the governance reform imposed through a non or deferred prosecution agreement is merely a method of settlement rather than a lasting reform effort.
holds where the wrongdoing has no identifiable governance cause
If corporate wrongdo- ing is not the result of lacking corporate governance, it seems possible that N/DPA related governance reform is just a method of settlement rather than a lasting re- form effort.
Stock prices respond significantly and predictably in a positive direction to the DOJ press release announcing execution of a non- or deferred prosecution agreement and to the start of the N/DPA term.
publicly traded U.S. firms that executed N/DPAs between 1993 and 2015
event windows measured around the DOJ press release date and the start date of the N/DPA term
We document a significant and predictable positive stock price response to the DOJ press release and the start of the N/DPA term.
Investor response to N/DPAs is not uniform: it varies with the firm's industry, the severity of the financial fine, and the extent of the governance improvements the N/DPA mandates.
partitions relative to median fines and median governance intensity
We also find that investor's response differs depending on the industry and severity of financial fines and N/DPA mandated governance improvements.
Investors treat the expiration of an N/DPA term as a negative event for the firm.
reduced sample of 59 firms where the end date fell on a trading day
Inversely, our results suggest that investors see the expiry of applicable N/DPA terms as a negative event.
The combination of a positive market reaction at the start of the N/DPA term and a negative reaction at its end is evidence that the governance changes N/DPAs mandate actually matter to firm value.
governance changes become mandatory at the start of the term and unenforceable at its end
We interpret the positive market reaction at the beginning of the N/DPA term and investors' negative reaction at the end of the N/DPA term as evidence that governance changes mandated by N/DPAs matter.
From the first day of the N/DPA term through day twenty five, the period in which mandated governance improvements are in force, the market prices the N/DPA as a positive event for the firm.
period during which N/DPA governance improvements are in effect
BNDPAT t=0 and from t=0 to t=25, when N/DPA governance improvements are in effect, Figures 3 and 3a show that the market assesses such N/DPAs as a positive event for the respective entity.
The negative market reaction at the end of the N/DPA term is the market acknowledging that suboptimal governance practices are likely to resume once the term expires.
post-expiration windows in Figures 4 and 4a
In turn, we interpret the negative market reaction at ENDPAT in Figures 4 and 4a as the market's acknowledgment that post N/DPA term expiration suboptimal governance practices are likely to continue
The data support Hypothesis 3: the market reacts positively when N/DPA governance changes become mandatory at the start of the term and negatively when they cease to be mandatory at its end.
evidence drawn from Figures 3, 3a, 4, and 4a
Figures 3, 3a, 4, and 4a support Hypothesis 3: The market reacts positively at BNDPAT (E1b) and negatively at ENDPAT (E1c).
The market values N/DPA governance changes during the term because those changes effectively address the underlying corporate wrongdoing and its damage to goodwill and reputation while reducing the likelihood of continuing fines and litigation.
The market assesses the governance changes during the term of the N/DPA as beneficial for market value because it effectively addresses corporate wrongdoing and the associated negative effects on goodwill and reputation while lowering the likelihood of continuing fines and litigation.
Despite wide-ranging criticism of N/DPAs on authority, fairness, and expertise grounds, scholars agree that N/DPAs do influence corporate governance.
scholarly literature on N/DPAs through 2015
Despite the broad critique of N/DPAs, consensus exists among scholars that N/DPAs influence corporate governance (Cunningham 2014b, Kaal and Lacine 2014, Coffee 2005, Thompson 2003).
Prior coding of all publicly available N/DPAs from 1993 to 2013 across more than 230 governance categories shows that N/DPAs have a substantial effect on corporate governance.
In the largest study to date, Kaal and Lacine (2014), using a hand-selected dataset comprising all publicly available N/DPAs from 1993-2013 (N=271) in over 230 governance categories, show a substantial effect of N/DPAs on corporate governance.
Some of the most sensitive Form PF disclosures are not readily obtainable by the funds themselves: counterparty credit exposure often cannot be determined by individual fund managers, which makes the reporting requirement burdensome in practice.
applies to Form PF counterparty credit exposure reporting
For example, the disclosure of counterparty credit exposure is sensitive information that often cannot readily be determined by the individual fund managers.
If Congress changes the tax treatment of carried interest, returns to hedge fund advisers and their investors are likely to fall markedly and the popularity of hedge funds will be severely tested.
conditional on congressional elimination of the carried interest loophole
Should Congress change the tax treatment of hedge fund managers, the returns to hedge fund advisers and their investors are likely to fall markedly.
New Rule 506(c) creates uncertainty for hedge fund advisers considering general solicitation and general advertising, because the SEC required reasonable steps to verify accreditation without supplying a bright line rule for the content of such solicitation.
applies to Regulation D offerings under Rule 506(c) after September 23, 2013
New Rule 506(c) creates uncertainty for hedge fund advisers considering GSGA.
Although the JOBS Act rules freed hedge fund managers to advertise, talk to reporters, and speak at conferences from September 23, 2013, very few managers actually engage in these less restrictive communications with potential investors.
applies to the period after Rule 506(c) took effect
Yet, very few hedge fund managers are actually engaging in less restrictive communications with potential investors.
The investor verification requirement defeats the purpose of the Rule 506(c) liberalization: fearing liability for investor misrepresentations of personal wealth, most hedge funds raising money from individuals continue to use old Rule 506 rather than Rule 506(c).
applies to funds raising capital from individual investors
Fearing possible liability for investor misrepresentations of their personal wealth, most hedge funds that raise money from individuals continue to use the old Rule 506 rather than Rule 506(c).
Until the SEC finalizes verification rules and gives a clear, comprehensive definition of the reasonable steps an issuer must take, issuers cannot determine at the time of sale whether their verification attempts made general solicitation permissible.
conditional on the absence of finalized SEC verification guidance
Without appropriate SEC guidance, issuers will have difficulty ascertaining if their verification attempts at the time of the sale of securities made GSGA permissible.
Direct regulation of hedge fund leverage collapses on the details because balance sheet leverage is not an adequate measure of risk and would push funds into off-balance sheet avoidance strategies.
applies to proposals for direct leverage regulation
Balance sheet leverage is not an adequate measure of risk and would encourage avoidance behavior with off-balance sheet strategies.
Alternative risk measures such as value at risk have severe measurement problems, so any direct regulation of leverage would be set conservatively and would substantially limit hedge funds' ability to provide market liquidity.
applies to direct regulation of hedge fund leverage
Any attempt to directly regulate leverage would likely be conservative, due to measurement problems, and put major limits on hedge funds' ability to provide market liquidity.
Direct regulation of hedge fund leverage increases moral hazard costs, because lenders and counterparties relax their own vigilance once they rely on government rules to constrain fund risk taking.
applies where government rules substitute for private monitoring
Direct regulation could also increase moral hazard costs as lenders and counterparties may relax their vigilance in reliance on the government rules.
Any prescriptive regulatory regime for hedge funds risks leaving the financial system less stable rather than more stable, because counterparties relax vigilance when they believe authorities are monitoring and constraining fund risk taking.
applies to prescriptive position reporting and monitoring regimes
A risk of any prescriptive regulatory regime is that, by creating moral hazard in the marketplace, it leaves the system less rather than more stable.
Regulatory convergence is not driven only by tightened post crisis rules: the liberalization of advertising restrictions after the Dodd-Frank Act also pushes hedge funds toward mutual fund form, so deregulation and reregulation work in the same convergent direction.
U.S. private fund regulation after Dodd-Frank and the JOBS Act
This is not just a result of more stringent regulations enacted via the Dodd-Frank Act in the aftermath of the financial crisis; the liberalization of the advertising restrictions post Dodd-Frank Act also makes hedge funds more like mutual funds.
The author stipulates the term nominal confluence: legal requirements that are formally identical for mutual and hedge fund managers but that operate in materially different ways in practice, so formal legal convergence overstates actual convergence.
applies where the same statute or rule governs both fund types
The term "nominal confluence" as used herein describes otherwise identical legal requirements for mutual and hedge fund managers that can be materially different in practice.
Alternative mutual funds generally cannot deliver the same absolute returns as hedge funds, a shortfall some attribute to the lighter touch regulation and better incentives available to hedge funds.
comparison of registered alternative funds with unregistered hedge funds
Alternative funds generally cannot generate the same absolute returns as hedge funds (Hasanhodzic & Lo (2007) and McCarthy (2015)), which is attributed by some to the lighter touch regulation and better incentives applicable to hedge funds.
The traditional mutual fund governance model, in which one board serves multiple discrete funds within a sponsor's group, is subject to significant oversight challenges.
traditional single board mutual fund complexes
serving as a single board for multiple discrete funds (Morley & Curtis 2010)). The traditional governance model is, thus, subject to significant oversight challenges (Krug (2016)).
In a multimanager series trust the board is largely independent of any adviser in the fund group, because the structure is centered on an unaffiliated administrator rather than on the sponsoring investment adviser.
Unlike the board in a traditional mutual fund governance setting, the board in a multimanager series trust arrangement is largely independent of any advisers within the fund group.
Despite open issues and possible shortcomings, the multimanager series trust structure appears to offer lasting substantive governance improvements for mutual funds.
multimanager series trust governance model
Despite the open issues and possible shortcomings of the multimanager series trust model, the trust model governance structure for mutual funds appears to offer lasting substantive governance improvements for mutual funds (Krug (2016)).
The cost savings of the multimanager series trust model are a confluence mechanism: they let a growing number of smaller hedge fund advisers reach retail investors by launching a mutual fund.
smaller investment advisers by assets under management
The cost savings associated with the multimanager series trust governance model allow the increasing number of smaller hedge fund investment advisers to attract retail investors by setting up a mutual fund.
The inherent conflict of interest facing an adviser who simultaneously runs a mutual fund and a hedge fund is an important limiting factor on the continued rise of side-by-side management.
side-by-side management of a mutual fund and a hedge fund by the same adviser
An important limiting factor in the steady rise of side-by-side management is the inherent conflict of interest for the investment manager (SEC (2003), Chen & Chen (2009) and Cici et al. (2010)).
The JOBS Act reform underdelivers on its own terms: because investor verification under Rule 506(c) is legally uncertain, hedge fund advisers have better incentives to launch retail alternative funds than to use their new freedom to advertise.
Rule 506(c) offerings after the general solicitation ban was lifted
also driven by path dependencies and peer pressure
Investment advisers to hedge funds have better incentives to set up retail alternative funds that allow them to offer features that are attractive to retail investors rather than to advertise under the uncertain new regime (Rule 506(c))
Amendments to Regulation SHO may deny mutual fund advisers certain hedging techniques, making it less likely that mutual funds can attract retail investors who are looking for alternative investment exposure.
stocks subject to significant downward price pressure under amended Regulation SHO
Investment advisers to mutual funds may not be able to use certain hedging techniques after the amendment of Regulation SHO, making it less likely for investment advisers running mutual funds to attract retail investors who are seeking alternative investment opportunities.
After the D.C. Circuit vacated the SEC's 2004 hedge fund adviser registration rule in Goldstein v. SEC, the overwhelming majority of private fund advisers who had registered under that rule deregistered.
private fund advisers registered under the SEC 2004 rule
The overwhelming majority of private fund advisers that had registered under the SEC's 2004 registration requirements deregistered after the Goldstein decision.
A majority of private fund adviser respondents, 74.5 percent, do not plan any strategic response to Title IV of the Dodd-Frank Act.
strategic response understood as action to avoid or limit the impact of Title IV
majority (74.5%) of private fund adviser respondents do not plan a strategic response to Title IV of the Dodd-Frank Act.
Private fund advisers in the sample did not terminate existing employment relationships, and only few severed advising relationships, changed fund legal structure, liquidated positions, changed investment styles or portfolio structure, or closed funds to new investors.
Private fund advisers in the sample did not terminate existing employment relationships. Few respondents severed an advising relationship, changed funds' (legal) structure, liquidated positions, changed investment styles, changed portfolio structure, or closed funds to new investors.
Among respondents answering the open ended question on other actions taken, 30.8 percent hired a compliance firm, 15.4 percent said they otherwise wasted time and money reacting to Dodd-Frank requirements, and 15.4 percent implemented new policies and programs.
open ended survey question 3b, coded into response clusters
30.8% of respondents who answered this question hired a compliance firm, 15.4% suggested they otherwise wasted time and money in reacting to Dodd-Frank requirements, and 15.4 % suggested they implemented new policies and programs in response to the Dodd-Frank Act.
Of the advisers who responded, 70.60 percent would not take the current regulatory regime into account in determining the assets under management size of their funds.
Of those who responded, 70.60% would not take the current regulatory regime into account in determining the AUM size of their funds.
The majority of private fund advisers in the United States are not considering changing their assets under management in order to lower Dodd-Frank compliance costs, notwithstanding the $150 million registration threshold and the $1.5 billion Form PF quarterly reporting threshold.
inference from responses to survey question 7
$150 million registration threshold and $1.5 billion Form PF threshold in force
the majority response to Survey Question 7 implies that the majority of private fund advisers in the United States are not considering changing their AUM in order to lower their Dodd-Frank Act compliance costs.
Among advisers who factor the regulatory regime into fund sizing, the direction of adjustment is split: 18.2 percent would lower assets under management to avoid the regulatory hassle, while 27.3 percent would still increase AUM and another 27.3 percent seek the right size to cover expenses.
respondents who answered yes to survey question 7
While 18.2% would lower their AUM to avoid the regulatory hassle, 27.3% would actually still want to increase their AUM. Another 27.3% indicated a desire to attain the right size to cover expenses.
Among the minority of respondents who believed Dodd-Frank affected fund earnings, the majority attributed that effect to additional compliance costs rather than to lower returns.
respondents who answered yes to survey question 11
Figure 17 illustrates that the majority of those respondents who believed that Dodd-Frank affected their fund(s) earnings blamed additional compliance costs associated with Dodd-Frank.
Asked how Title IV will affect the private fund industry over the next five years, the largest groups of respondents identified additional expenses, at 34.9 percent, and barriers to entry for private fund market entrants, at 32.6 percent.
responses to the survey question on industry effects over five years
The largest numbers of respondents identified additional expenses (34.9%) and barriers to entry (32.6%) for private fund market entrants as likely effects.
The long-term effect of the Dodd-Frank Act on the private investment fund industry is likely to be characterized by increasing additional expenses and associated barriers to entry for new market entrants.
inference from respondent forecasts for the next five years
Given these survey results, it seems possible that the long- term effect of the Dodd-Frank Act on the private investment fund industry is characterized by increasing additional expenses and associated levels of barriers to entry for market entrants.
The SEC's 2004 attempt to require hedge fund adviser registration failed: after the D.C. Circuit vacated the rule in Goldstein v. SEC, the overwhelming majority of private fund advisers that had registered under the 2004 requirements deregistered.
SEC rulemaking under the Investment Advisers Act before Dodd-Frank
High- lighting the significant opposition of the private fund industry to the rule, the over- whelming majority of private fund advisers that had registered under the SEC's 2004 registration requirements deregistered after Goldstein.
Prior survey evidence indicates that the hedge fund industry adjusted well to the Dodd-Frank registration and disclosure requirements, and that the actual impact of those rules was much less significant than the private fund industry had feared.
short-term period immediately following the 2012 effective date
based on survey responses from registered private fund advisers
In summary, prior surveys suggest that the hedge fund industry seems to be adjusting well to the registration and disclosure requirements of Dodd- Frank. The impact of the registration and disclosure rules appears to be much less significant than feared by the private fund industry.
Growth in the private fund industry has been concentrated among the largest advisers: assets managed by advisers with more than $5 billion in AUM grew 141 percent, compared with 53 percent for firms below $5 billion.
The larger private fund advisers have generated most of the private fund industry's growth. Assets managed by private fund ad- visers with more than $5 billion AUM have grown 141%, compared to 53% for firms with less than $5 billion.
Private fund underperformance may be a product of institutionalization: pension funds have increased their private fund holdings and institutions now make up over two thirds of the private fund investor base, up from 20 percent a decade earlier.
explanation offered as possible, not established
The underperformance may result from the institutionalization of private funds, because pension funds increase private fund holdings, and, furthermore, institutions represent over two-thirds of the private fund base—up from 20% a decade ago.
As the private fund investor profile shifts toward institutional investors, fees fall; institutional investors made up 65 percent of hedge fund AUM in 2015 compared with roughly 20 percent a decade earlier.
As the investor profile for private funds shifts toward institutional investors, fees fall. Institutional investors constituted 65% of hedge fund AUM in 2015, compared to just 20% a decade ago.
Underperformance combined with the influx of institutional money means that pension funds, endowments and other institutions, which now outnumber wealthy individuals as private fund investors, hold more bargaining power over fees.
of underperformance in the private fund industry, combined with the rush of new investors into alternative investments—pension funds, endowments, and other institutions now outnumber rich individuals as private fund investors— means that those investors have more bargaining power regarding fees.
Smaller private funds spend more on compliance than larger ones, both as a share of AUM and relative to operating costs, which means increasing regulatory scrutiny falls disproportionately on smaller funds.
private fund advisers subject to Dodd-Frank compliance obligations
compliance measured as share of AUM and of operating costs
Smaller private funds spend more on compliance costs than their larger counterparts—both as a percentage of AUM and in relation to oper- ating costs; this suggests that increasing regulatory scrutiny disproportionately impacts smaller funds.
The private fund industry generated a disproportionate share of asset management profits: it produced 34 percent of the industry's 2013 profits, $31.2 billion of $93.0 billion, while controlling only 4 percent of total AUM.
Although it manages only 4% of the global asset management indus- try's total AUM ($2.8 trillion out of $68.7 trillion),121 the private fund industry represented 34% of profits generated by that industry in 2013 ($31.2 billion out of $93.0 billion).
Lifting the ban on general solicitation and general advertising was a significant formal change for private funds, but the new advertising opportunities are being taken up only reluctantly, and uncertainty about investor verification rules together with specific restrictions makes advertising by private fund advisers unlikely for the foreseeable future.
Rule 506(c) offerings after the September 2013 effective date
private fund and private equity advisers
While lifting the ban on GSGA for private fund advisers represented a signif- icant change for the private fund industry, the new advertising opportunities are only reluctantly being accepted;
Barriers to entry for small firms are becoming an increasing problem in the private fund industry under the evolving post-Dodd-Frank legal environment, with references to such barriers rising from 24 percent of respondents in 2012 to 33 percent in 2015.
2012 and 2015 survey responses about the next five years
The 2015 survey responses suggest that barriers to entry for small firms are becoming increasingly a problem for the private fund industry in the continuously evolving post-Dodd-Frank-Act legal environment.
Dynamic regulation is defined as the study of regulatory phenomena in relation to both preceding and succeeding events, using institution specific and decentralized information to generate feedback effects that support anticipatory rulemaking.
The theory of dynamic regulation conceptualizes the study of regulatory phenomena in relation to preceding and succeeding events, using institution-specific and decentralized information to facilitate feedback effects for anticipatory rulemaking.
Venture capital can function as a dynamic regulatory supplement for disruptive innovation because venture capitalists' financial allocations to innovative projects generate feedback that regulators can use.
We show that venture capital can function as a dynamic regulatory supplement for disruptive innovation. Venture capital's financial allocations to innovative projects can provide feedback for dynamic regulation of disruptive innovation.
Artificial intelligence cannot be held personally liable for damage it causes because national and international law do not currently recognize it as a subject of law, so compensation must be forced through existing provisions never designed for it.
current state of national and international law
However, national and international law do not (currently) recognize AI as a subject of law. Without legal personality, AI cannot be personally liable for damages.
Accepting suboptimal rules temporarily buys rule certainty and predictability but guarantees a later cycle of revision, amendment, and repeal, so rulemakers trade short term certainty for a costly correction process.
rulemakers knowingly accept suboptimalities tied to unknown future contingencies
Temporary acceptance of suboptimal rules increases temporary rule certainty and predictability, but it also precipitates the inevitable need for rule revision, amendments, and repeals
The collective action problem of rulemaking, the problems of trial and error rulemaking, and regulatory cycles all derive largely from the nature of stable and presumptively optimal rules rather than from independent causes.
The collective action problem of rulemaking, problems associated with trial-and-error rulemaking, and problems associated with regulatory cycles derive largely from the nature of stable and presumptively optimal rules.
Dynamic regulatory tools let rulemakers adapt to regulatory contingencies as they arise, because feedback effects deliver relevant, timely, decentralized, and institution specific information ex ante.
feedback processes are in place within the regulatory framework
Dynamic regulatory tools as a regulatory supplement enable rulemakers to adapt to regulatory contingencies if and when they arise because feedback effect provides relevant, timely, decentralized, and institution-specific information ex-ante.
Regulation is mostly reactive and follows business cycles rather than preempting crises, because of the collective action problem of regulation, path dependencies, and political inertia, so rules arrive when governance improvements are least available.
Because of the collective action problem of regulation, path dependencies, and political inertia, among many other reasons, regulation is mostly reactive, following business cycles and not preemptive, e.g. enacted before crises when governance improvements are most needed.
Private rulemakers hold a comparative advantage over public rulemakers because, unlike their public counterparts, they can produce the comparable, decentralized, and institution specific information that rulemaking requires.
Private rulemakers can have a comparative advantage over public rulemakers because, unlike their public counterparts, they often can produce necessary, comparable, decentralized, and institution-specific information for rulemaking.
The existing framework for optimal rules is self reinforcing: it perpetuates rulemaking processes that produce more optimal rules requiring costly revision, updating, and revocation, so suboptimal rules and suboptimal processes reproduce each other.
The existing regulatory framework for optimal rules reinforces rulemaking processes that perpetuate optimal rules, necessitating costly rule revision, updating, and revocation.
The data analysis shows that venture capitalists' finance allocation, and the implicit assessment of innovative products and businesses it embodies, generates highly relevant institution specific and industry specific decentralized information on innovation trends.
United States venture capital data 2005 to 2015
The data analysis shows that venture capitalists' finance allocation and the implicit assessment of innovative products, businesses, and initiatives generates highly relevant institution- and industry-specific decentralized information on innovation trends.
Government assessments of hedge fund systemic risk conflict directly: the OFR, FSB, and IOSCO treat private fund activities as important threats to the financial system, while the UK Financial Services Authority concluded from its first comprehensive survey of London's private fund industry that hedge funds pose no systemic risk.
comparison of post-crisis U.S. and UK regulator reports
By contrast, the Financial Services Authority (FSA) (2010) in the United Kingdom concluded in its first comprehensive survey of London's private fund industry that the hedge fund industry poses no systemic risk to the financial system.
Because hedge fund losses are absorbed directly by a large and dispersed body of investors and their equity capital, private fund advisers are unlikely to trigger a systemic event, and their activity may even reduce market volatility.
applies to funds financed by investor equity rather than short term debt
But some research suggests that private fund advisers are unlikely to trigger a systemic event because losses in hedge funds are directly absorbed by the multitude of investors and their equity capital and may actually reduce market volatility
Any conclusion that hedge funds contributed to the financial crisis of 2007-2008 is circumstantial or anecdotal, because the data needed to test it, on leverage, counterparty relations, AUM, and portfolio holdings, were not collected for any substantial period before the crisis.
applies to retrospective assessment of the 2007-2008 crisis
SEC systemic risk data collection began only after Title IV of the Dodd-Frank Act
Without such data for a substantial time period before the financial crisis, concluding that hedge funds may have had a role in the financial crisis is circumstantial or anecdotal.
The opacity of the hedge fund shadow banking system blocks direct measurement of hedge funds' role in the crisis, leaving researchers with indirect measures extracted from existing data rather than primary pre-crisis sources.
absence of access to primary pre-crisis hedge fund data
the shadow banking system of hedge funds and the lack of sufficient transparency create substantial obstacles to implementing direct measures, especially without the access to primary sources of data regarding hedge funds before the crisis.
The contagion story, in which hedge fund losses spread to other financial institutions and undermine systemic stability, is counterbalanced in practice because hedge fund collapses are rarely sudden and almost always unfold in incremental steps over a long period.
describes observed hedge fund collapse dynamics rather than theoretical models
First, hedge fund collapses are rarely sudden but in practice almost always occur in incremental steps over a long time period.
Strategy diversification does not insulate the hedge fund industry from systemic risk: returns across different hedge fund strategies were more correlated during the financial crisis of 2007-2008 than before it, so the industry can pose systemic risk despite investing across a broad spectrum of assets and strategies.
evidence drawn from the 2007-2008 crisis
hedge fund returns should not affect their systemic risk. However, evidence exists that the returns of different hedge fund strategies were more correlated during the financial crisis of 2007-2008 than before the crisis
About 18 percent of hedge funds ceased operations in 2008, yet little evidence exists that these failures generated losses at prime brokers or other financial institutions, which weakens the direct transmission account of hedge fund systemic risk.
According to the report, about 18 percent of hedge funds ceased operations in 2008, although little evidence exists that these fund failures contributed to losses at prime brokers or other financial institutions.
Traditional risk-adjusted alphas underestimate hedge fund risk: once correlation risk is controlled for, previously observed significant hedge fund alphas disappear, which makes correlation risk a systematic risk factor for hedge fund returns.
cross-sectional analysis of individual hedge fund returns
This finding is important because traditional risk-adjusted alphas may underestimate hedge fund risk.
Once liquidity risk is incorporated into the analysis, the superior performance previously attributed to predictability in managerial skills disappears in hedge fund portfolios.
hedge fund portfolios formed on predictability in managerial skill
They find that the outperformance previously attributed to predictability in managerial skills disappears in hedge fund portfolios when accounting for liquidity risk.
Risk measures that are not adjusted for serial correlation in hedge fund returns can considerably underestimate the true extent of both individual and systemic hedge fund risk, so empirical work in this area must account for autocorrelation.
applies to empirical studies of hedge fund returns
unadjusted risk measures can considerably underestimate the true extent of individual and systemic risks for hedge funds.
Dynamic regulation is defined as conceptualizing regulatory phenomena in relation to both preceding and succeeding events, using institution-specific and decentralized information to generate feedback effects that support anticipatory rulemaking.
The theory of dynamic regulation conceptualizes the study of regulatory phenomena in relation to preceding and succeeding events, using institution-specific and decentralized information to facilitate feedback effects for anticipatory rulemaking.105
Data derived from venture capital investments can function as a dynamic regulatory supplement for disruptive innovation, because venture capital's financial allocations to innovative projects supply feedback for dynamic regulation.
where venture capital investment allocation data is available to regulators
United States venture capital market, 2005 to 2015
We show that data derived from venture capital investments can function as a dynamic regulatory supplement for disruptive innovation. Venture capital's financial allocations to innovative projects can provide feedback for dynamic regulation of
Because artificial intelligence is not recognized as a subject of law in national or international law, it has no legal personality and therefore cannot be personally liable for damages it causes.
current national and international legal frameworks
autonomous AI acting without supervision
provisions in the existing regulatory framework. However, national and international law do not (currently) recognize AI as a subject of law. Without legal personality, AI cannot be personally liable for damages.63 With autonomous AI playing an expanding role in
The historically evolved rulemaking infrastructure could cope with its own collective action problems, regulatory cycles, and trial-and-error rulemaking without major disruption because the scope of regulatory issues was limited and institutional designs were consensus driven.
small, stable, less interconnected societies with limited upward mobility
limited and readily identifiable sets of regulatory issues
issues.80 Because of the limited scope of regulatory issues and the need for consensus- driven institutional designs, the historically evolved infrastructure for rulemaking could cope with its inherent collective action problems,81 regulatory cycles,82 and trial-and-error
The collective action problem of rulemaking, the problems of trial-and-error rulemaking, and the problems of regulatory cycles derive largely from the nature of stable and presumptively optimal rules themselves, not from unrelated institutional defects.
regulatory regimes whose outcomes are stable rather than adaptive
problems associated with trial-and-error rulemaking, and problems associated with regulatory cycles derive largely from the nature of stable and presumptively optimal rules.108 Rulemaking with dynamic elements increases the use of institution-specific,
Unrestricted exchange of information between public and private rulemakers creates regulatory synergies that increase the availability of relevant, decentralized, and timely information for rulemaking and thereby generate feedback effects.
settings permitting open information exchange between public and private rulemakers
feedback processes.115 The unrestricted exchange of information between public- and private rulemakers can create regulatory synergies that increase the availability of relevant, decentralized, and timely information for rulemaking116 and facilitate feedback
Through feedback effects, rulemakers in a dynamic regulatory framework can adopt rules that are adaptable to future states of the world rather than fixed to current conditions.
rulemaking institutions that integrate feedback processes
effects.117 Existing rules can provide feedback effects for the rulemaking process itself. Through feedback effects, rulemakers in a dynamic regulatory framework can adopt rules that are adaptable to future states of the world.
Dynamic regulatory tools lower unforeseen contingencies in rulemaking because the feedback effect supplies relevant, timely, decentralized, and institution-specific information ex ante, allowing rulemakers to adapt to contingencies as they arise.
rulemaking supplemented by dynamic regulatory tools generating feedback
because a feedback effect provides relevant, timely, decentralized, and institution-specific information ex-ante. By increasing the availability of information ex-ante, dynamic regulatory tools help lower unforeseen contingencies in the rulemaking process.
A more granular assessment of venture capital investments in Big Data and software as a service can provide regulators with much needed feedback on the regulatory needs associated with those areas.
industries disproportionately represented in later venture capital series
regulators willing to conduct granular data analysis
8-11 below. A more granular assessment of the VC investments in Big Data and SaaS can provide much needed feedback for regulators on associated regulatory needs.
Feedback effects from venture capitalists' finance allocations toward innovative products give rulemakers timely, decentralized, industry-specific and entity-specific information that allows them to adapt rules in anticipation of regulatory issues.
industries associated with the highest levels of disruptive innovation
regulators able to access and analyze venture capital investment data
anticipatory rulemaking. Through the feedback effects that are facilitated by venture capitalists' finance allocations towards innovative products, rulemakers can obtain timely and decentralized industry- and entity-specific information that allows them to adapt
After the financial crisis of 2008 to 2009 and the Madoff scandal, relatively sophisticated investors stopped accepting the slanted phrasing of due diligence questionnaires and their answers, and the questionnaires became more rigorous as a result.
including the Madoff scandal, investors, at least relatively sophisticated investors, no longer accepted the slanted phrasing of the due diligence questionnaires and their answers.13 As a result, the questionnaires became more rigorous.
In the hand selected sample of cases, the ranking of causes of action differs from the full search results: fiduciary duty leads, followed by negligent misrepresentation and breach of contract.
Unlike Figure 4, in the hand-selected sample of cases in Figure 5, the leading causes of action were by order of preference: (1) fiduciary duty, (2) negligent misrepresentation, (3) breach of contract.
While some courts found that a complete lack of investor due diligence can amount to securities fraud or breach of contract, and that lacking due diligence can breach fiduciary duties, the majority of courts evaluate private fund due diligence issues in the context of misrepresentation.
IDD can be a breach of fiduciary duties,84 the majority of courts evaluate issues pertaining to private fund IDD in the context of misrepresentation.
Defendants owe a duty to use reasonable care in conducting financial due diligence consistent with the standards of care in the profession.
Defendants have "a duty to use reasonable care in conducting financial due diligence consistent with standards of care in the profession.
Failure to supervise and direct investment of assets in accordance with an investment plan's policy, together with offering memoranda or quarterly letters that misrepresent due diligence processes, can show a failure to exercise reasonable care sufficient to plead breach of fiduciary duty.
fiduciary duty claims against private fund advisers
assets in accordance with an investment plan's investment policy, and offering memoranda or quarterly letters with misrepresentations of due diligence processes can demonstrate a failure to exercise reasonable care and sufficient to plead breach of fiduciary duty.
Funds of funds claimed to select the best managers through skilled due diligence and charged standard 2 and 20 fee structures for that service, while in reality depositing the vast majority of their capital into Madoff's opaque fund.
Madoff feeder funds and funds of funds before December 2008
and investment analysis practices and then in return charged their investors standard private fund fee structures (2/20).139 In reality, most of these funds were depositing the vast majority of their capital into Madoff's black box of a fund.
Because Madoff overtly disallowed scrutiny of his secretive and unconventional practices, it was impossible for feeder funds such as Rye to perform the due diligence they had represented to investors.
Again, it was impossible for a fund like Rye to perform due diligence as Madoff overtly disallowed such due diligence of his extremely secretive and unconventional practices.
Expert consensus in the examined litigation record converges on a set of standard due diligence practices, beginning with qualitative review of firm marketing materials, offering documents, subscription documents, and manager track records, and onsite manager meetings.
expert reports surveyed through Westlaw Expert Materials
applicable standard private fund IDD industry practices, as stipulated in the examined litigation record, include: qualitative review of firm "marketing materials, offering documents, subscription documents, manager track record[s]"243; onsite manager meetings;
The data suggest that since 2010 private fund advisers increasingly engage in investor due diligence in order to protect themselves from investor criticism and lawsuits.
The data provided in this study seems to suggest that private fund advisers since 2010 increasingly engage in private fund IDD to protect themselves from investor criticism and lawsuits.
Madoff related cases following the discovery of the Ponzi scheme in 2008 only partially explain the significant increase in the prevalence and importance of private fund investor due diligence after 2009.
post 2009 litigation and disclosure record
Madoff-related cases in the aftermath of the discovery of the Madoff Ponzi scheme in 2008 only partially explain the significant increase in the prevalence and importance of private fund IDD after 2009.
Unconstrained mutual funds share multiple investment strategy and risk attributes with fixed income hedge funds, a finding the authors ground in trading data and prospectuses of all such funds launched from 2010 through 2015.
hand-selected sample of unconstrained mutual funds launched 2010 through 2015
article demonstrates that unconstrained mutual funds share multiple investment strategy and risk attributes with fixed income hedge funds.
Average unconstrained mutual fund performance over the three years preceding the study was lower than the return on the ten-year Treasury, and poor performance was often accompanied by high fees and increased credit risk.
On average, UMF performance has disappointed over the last three years, with returns lower than the return on the ten-year Treasury.43 Often, poor UMF performance has been accompanied by high fees and increased credit risk.
Three features make it uniquely challenging for retail investors to evaluate the risks of unconstrained mutual funds: the lack of standard benchmarks, the recent emergence of the fund type, and the diversity and complexity of the strategies and risk exposures involved.
retail investors evaluating unconstrained mutual fund securities
the lack of standard benchmarks for UMFs, the recent emergence of UMFs as an investment asset type, and the diversity among and complexity of UMFs' strategies and risk exposures make it uniquely challenging for retail investors to evaluate the risks of investing in UMF securities.
Because unconstrained mutual funds comply with the Company Act, they may be marketed and sold to all classes of retail investors, including those with limited or even no experience investing in securities.
funds registered and compliant under the Investment Company Act
Compliance with the Company Act means that UMFs may be marketed and sold to all classes of retail investors, including retail investors who have limited, or even no, experience investing in securities.
The SEC's interpretation of Section 18 leaves a mutual fund subject to no statutory limitation or cap on its ability to borrow through the use of derivative instruments, provided the fund adheres to its asset segregation obligations.
mutual funds using derivatives under SEC Section 18 guidance as of 2016
In sum, the SEC's position has meant that a mutual fund is not subject to a statutory limitation or cap on its ability to borrow through the use of derivative instruments, if the fund adheres to its asset segregation obligations.
Proposed Rule 18f-4 would be highly limited in mitigating liquidity and other risks in an unconstrained mutual fund portfolio, because material leverage, counterparty, and liquidity risks in such a fund can arise from investments in a range of non-derivative instruments that the rule does not reach.
proposed Company Act Rule 18f-4 as proposed in December 2015
unconstrained mutual funds with broad investment authority
in mitigating significant liquidity or other risks in a UMF portfolio is therefore potentially (highly) limited, as material leverage, counter-party, liquidity, and other risks to a particular UMF could arise from the fund's investments in a range of non-derivative instruments,
If a private fund's offering process successfully limits its investors to accredited investors or qualified purchasers, the retail investor protection principles of the Company Act do not apply to the fund's trading, operation, and governance.
private funds relying on Sections 3(c)(1) or 3(c)(7)
Accordingly, if a private fund's offering process successfully limits its investors to either "accredited investors" or "qualified purchasers," the retail investor protection principles of the Company Act will not apply to the private fund's trading, operation, and governance.
The authors operationalize unconstrained status by binary coding eleven prospectus characteristics and treating a score of nine or better as unconstrained, producing a final study sample of 84 funds out of 114 funds identified in the Morningstar Nontraditional Bond index.
Morningstar Nontraditional Bond index constituents
most recent fund-level prospectuses as of the study
of purely unconstrained mutual funds (i.e., those which were the focus of this study) (N=84) included only those UMFs that scored a "9" or better out of a total of 114 funds identified in the Morningstar Nontraditional Bond index.
Retail investors may be led to believe that unconstrained mutual funds are safe relative to other fixed income mutual funds precisely because they are marketed, offered, and regulated as mutual funds, a risk that is unique to retail investors in these funds.
retail investors purchasing unconstrained funds through mutual fund channels
Retail investors may also be led to believe that UMFs are "safe" products relative to other fixed income mutual funds, because they are marketed, offered, and regulated as mutual funds. This is a risk that is unique to retail investors in UMFs.
A retail investor's experience investing in traditional mutual funds is likely to be a poor indicator of whether that investor will understand the risks of investing in an unconstrained mutual fund.
retail investors extrapolating from prior traditional mutual fund experience
Accordingly, retail investors' experience investing in "traditional" mutual funds is likely to be a poor indicator of whether a retail investor will understand the risks associated with investing in a UMF.
Using self-reported Morningstar earnings data for 3,424 US private fund advisers covering 2010 to 2015 in multiple regression discontinuity designs with robustness checks, private fund adviser registration and disclosure under the Dodd-Frank Act had no significant effect on private fund adviser returns.
US based private fund advisers subject to Title IV
registration effective date March 30, 2012 as the discontinuity
Based on the evidence in multiple RD designs including robustness checks, we conclude that private fund adviser registration and disclosure under the Dodd-Frank Act had no significant effect on private fund adviser returns.
The evidence contradicts the private fund industry's claim that private fund adviser registration under the Dodd-Frank Act negatively affects private fund performance.
This evidence contradicts claims of the private fund industry that private fund adviser registration under the Dodd-Frank Act negatively affects private fund performance.
Dodd-Frank Act compliance costs fall most heavily on advisers managing the largest number of reporting funds, because private fund advisers incur roughly $10,000 in compliance cost per reporting fund.
Because private fund advisers incur about $10,000 compliance cost per reporting fund (Kaal 2013a), Dodd-Frank Act compliance costs are highest for those advisers in our dataset with the highest number of reporting funds under management.
A second channel by which Title IV could lower performance is risk reduction: private fund advisers have expressed concern that regulation will force them to take on less risk and therefore earn lower returns.
advisers subject to registration and disclosure
Second, some private fund advisers have expressed concern that regulation will force them to take on less risk (Kaal 2013a), therefore lowering performance.
Surveys of private fund managers conducted in 2012 and 2015 show that a clear majority of managers believed increased compliance costs negatively affect the industry.
survey respondents among private fund managers
Kaal (2013a, 2016b) demonstrated in surveys of private fund managers conducted in 2012 and 2015 that a clear majority of private fund managers believed that increased compliance costs negatively affect the industry.
Private fund managers themselves distinguish costs from returns: a majority of surveyed managers opined that Dodd-Frank Act registration and disclosure requirements do not affect the returns of the private fund industry, even though compliance costs affect the profitability of their management companies.
the majority of private fund manager respondents opined that registration and disclosure requirements under the Dodd-Frank Act do not affect the returns of the private fund industry (Kaal 2013a, 2016b).
Estimates of annual Dodd-Frank Act compliance cost for private fund advisers range from $50,000 to $400,000 per year.
Some estimates suggest that compliance cost will range from $50,000 to $400,000 per year (Kaal 2013a and 2015b).
Title IV exempts private fund advisers with less than $150 million assets under management from registration, and requires the SEC to weigh investment strategy, size, and governance in determining the systemic risk of private funds.
Title IV of the Dodd-Frank Act exempts private fund advisers with less than $150 million AUM from registration (Dodd-Frank Act § 408) and requires the SEC to examine factors including the investment strategy, size, and governance of an investment adviser
The quarterly Form PF reporting obligation imposed on advisers with more than $1.5 billion in regulatory assets under management attributable to private funds exists to give the FSOC timely data for identifying trends in systemic risk.
advisers with RAUM above $1.5 billion attributable to private funds
The quarterly reporting requirement for large private fund advisers is intended to provide timely data that enables the FSOC to identify trends in systemic risk (IA Release 3308).
Across an array of robustness tests, the requirements introduced by the Dodd-Frank Act create no significant effect on private fund performance, with all reported RD p-values above the 5% level.
Using an array of robustness tests validating our RD results, Figures 3-7 suggest that the requirements introduced by the Dodd-Frank Act create no significant effect on private fund performance. The P-values for all RD results in Table 6 are above the 5% level and confirm our finding of no effect.
Deferred prosecution agreements produce superior feedback effects for regulation because the prosecutor's investigation and the negotiation and execution of the agreement signal regulatory needs in real time.
DPAs produce superior feedback effects for regulation as the prosecutor's investigation and DPA negotiations and executions signal regulatory needs real-time.
Early regulatory intervention becomes unnecessary in a dynamic regulatory framework, because the regulatory challenges associated with innovation would become transparent in real time through improved, decentralized information and feedback effects.
a functioning dynamic regulatory framework
Because in a dynamic regulatory framework, the regulatory challenges associated with innovation would become transparent in real- time, early regulatory intervention would not be necessary.
In the dynamic regulatory framework, feedback effects and real time information permit regulatory intervention if and only when it is needed, which avoids stunting innovation through negative early signals, the inability to keep pace with later stage innovation, and information asymmetries.
theoretical dynamic regulatory framework
In the theoretical dynamic regulatory framework, feedback effects and real-time information on regulatory challenges associated with innovation allow regulatory intervention if and only when needed.
The pace of innovation is incompatible with existing regulatory approaches that demand comprehensive knowledge as a precondition for regulatory action, because innovation is too decentralized, too fast, and too pervasive.
regulatory approaches conditioned on comprehensive prior knowledge
the pace of innovation is incompatible with existing regulatory approaches that demand comprehensive knowledge as a basis for taking regulatory action because innovation is too decentralized, too fast, and too pervasive
The United States lacks an anticipatory system at the national level because no mechanism exists for bringing foresight and policymaking into an effective relationship.
Anticipatory rulemaking in the dynamic framework is accomplished by combining institution specific, decentralized, and timely information with feedback effects, which can occur between public and private rulemakers, between outcomes and institutions, across jurisdictions, and between rules and rulemaking processes.
It relies on the use of institution-specific, decentralized, and timely information5 in combination with feedback effects (Kaal 2014b). Feedback effects can occur in several settings including feedback processes between different public and private rulemakers
Dynamic regulatory tools lower unforeseen contingencies in innovation related rulemaking because their feedback effects supply relevant, timely, decentralized, and institution specific information ex ante, which also helps maintain certainty in the rulemaking process.
By increasing the availability of information ex-ante, dynamic regulatory tools help lower unforeseen contingencies in the rulemaking process pertaining to innovation. Improved information for rulemaking also helps maintaining certainty in the rulemaking process.
Rules operate as a feedback effect on the rulemaking process itself: rules with suboptimal characteristics result from institutional arrangements and then reinforce those suboptimal arrangements, and stable presumptively optimal rules reinforce an institutional structure that perpetuates stability in rules.
Existing rules create a feedback effect for the rulemaking process itself. Rules with suboptimal characteristics are the results of institutional arrangements and reinforce suboptimal institutional arrangements and rulemaking processes.
Consumer choice adds a dynamic element to rulemaking because once consumers opt out of a suboptimal regulatory regime, public rulemakers in that jurisdiction can adjust their rulemaking in response, creating a feedback effect for the public rulemaker.
jurisdictions where consumers can opt out of a regulatory regime
Consumer choice can add a dynamic element to the rulemaking process because public rulemakers in a given jurisdiction can adjust rulemaking to consumer choice once consumers have opted out of a suboptimal regulatory regime in that jurisdiction.
Dynamic regulation optimizes anticipatory governance for innovation by emphasizing adaptation to and anticipation of the unforeseen contingencies associated with innovation.
Dynamic regulation can help optimize anticipatory governance for innovation by emphasizing the adaptation to and anticipation of unforeseen contingencies associated with innovation.
Because neither national nor international law recognizes artificial intelligence as a subject of law, AI has no legal personality and therefore cannot itself be held liable for the damages it causes.
under the legal frameworks in force as of 2017
Because national and international law do not currently recognize AI as a subject of law, AI has no legal personality and as such cannot be held personally liable for damages.
The existing regulatory infrastructure cannot sufficiently distinguish beneficial innovation from other innovation, and therefore cannot harness it.
The existing regulatory infrastructure cannot sufficiently distinguish and harness beneficial innovation.
Regulators too often define success negatively, as the avoidance of catastrophe, which makes regulatory experimentation unattractive to them.
where regulators are exposed to criticism for adverse outcomes
Too often, regulators define "success" in negative terms, as in the avoidance of catastrophe.
Because regulators seek to avoid grounds for criticism, they inevitably adopt an overly cautious posture, which is what the precautionary principle amounts to in practice.
Avoiding grounds for criticism inevitably results in an overly cautious approach, called the "precautionary principle."
The delegation of technology policy to politicians advised by experts rested on public trust that has since eroded: consistent empirical evidence shows that trust in both government and experts has declined in recent years.
recent decades, drawing on Pew survey evidence
Although the public once had a relatively high degree of trust in both the political process and the scientific/expert method, consistent empirical evidence demonstrates that both trust in government and experts has declined in recent years.
Contesting the safety rationale offered for restricting Uber, the authors argue that the two way rating system and the algorithmic matching of drivers and customers already provide an effective means of policing drivers and ensuring a safe ride.
ride hailing platforms with reciprocal ratings and algorithmic matching
The two–way rating system (drivers rate customers and customers rate drivers) and an algorithm–based system for matching up drivers and customers appear to offer an effective means of policing Uber drivers and ensuring a safe ride for customers.
There is a systematic disconnect between the facts regulators identify as important and the actual experience and wishes of most consumers.
regulatory debates over platform services such as Uber
There is a disconnect between the facts that regulators identify as important and the experience and wishes of most consumers.
The post truth diagnosis is self defeating as a basis for regulation: if there is no objective basis on which to act, the conclusion is inertia or reproduction of the status quo, which is precisely the regulatory paralysis the diagnosis purports to describe.
if the skeptical post fact account of regulation is accepted
If we live in a post–truth world then we don't have any objective basis on which to act, leading to inertia or the reproduction of the status quo.
Using investment data would let regulators act proactively, avoid wasting resources on technologies unlikely to reach the market, and define the scope of a technology more accurately by focusing on the type of firm attracting investor attention.
This might then allow regulators to be more pro–active and avoid wasting resources on technologies that are unlikely to make it to market. It would also allow regulators to more accurately define the scope of a technology by focusing on the type of firm that is attracting attention.
The most interesting feature of the sandbox is that ideas, products, and services are tested in a live environment, made possible by a set of default parameters the FCA defined that can be altered case by case.
customer numbers sufficient for statistically relevant data
pre agreed safeguards and disclosure to customers
What is perhaps most interesting about the sandbox is that new ideas, product, and services can be tested in a "live" environment.112 In order to create this environment, the FCA defined a set of default parameters that can be altered on a case–by–case basis.
Much corporate governance reform consists of repackaging old content under new or revised labels rather than introducing new governance.
illustrated by the 2016 Commonsense Principles of Corporate Governance
Corporate governance reform often takes place by repackaging old content with new or revised labels.
Platform companies embrace an unmediated, flat, and inclusive culture in which trust and value are generated through the platform itself rather than through the management of workers and physical assets.
platform companies built on peer-to-peer transactions, such as Airbnb and Uber
Most importantly, platform companies embrace an unmediated, flat, and inclusive culture.72 Trust and value are created through platforms, instead of the management of workers and physical assets.
Inclusive and unmediated stakeholder relationships demand a much higher degree of cooperation, loyalty, and mutual trust than control-oriented, centralized, and vertical organizational forms do.
Compared to the more control-oriented, centralized, and vertical organizational forms, inclusive and unmediated relationships among firms' stakeholders require a high degree of cooperation, loyalty, and mutual trust.
The use of legalese and substantial involvement of the legal department in corporate communications substantially damages the originality and authenticity of those communications, making them mediated and less effective.
corporate communications intended to build trust and dialogue with stakeholders
The use of legalese and any substantial involvement of the legal department in corporate communications can have a substantial detrimental effect on the originality and authenticity of corporate communications, making them mediated and less effective.
The monitoring and advising roles of the board are no longer sufficient, and a board confined to those roles is a missed opportunity to obtain unmediated and relevant market feedback on company initiatives.
successful companies already operating beyond the academic monitoring debate
Successful companies recognize that the monitoring and advising role of the board is no longer sufficient and that the board of directors in many ways may constitute a missed opportunity for receiving feedback on company initiatives, e.g., unmediated and relevant input from the market.
It is feasible that in the not too distant future an artificial intelligence will hold an independent board seat with voting authority and be trusted to make smarter, data-driven choices than human directors.
extrapolated from the appointment of the algorithm Vital at Deep Knowledge Ventures and Alicia T at Tieto
In the not too distant future it seems feasible that artificial intelligence will have an independent board seat and may be trusted to make smarter – data-driven – choices than humans.
Critics who dismiss artificial intelligence on boards as science fiction not worth engaging are wrong: AI on boards is a real prospect, and technologies such as blockchain-based smart contracts will both disrupt corporate governance and supply solutions to it.
Critics who argue that it is pointless to concern oneself with future science-fiction-type prospects are wrong.
Fundamental flaws in the DAO's code allowed hackers to move one third of contributed funds to a subsidiary account, ending that initiative, but the flaws were in the implementation and do not defeat the DAO vision, which developers continue to rebuild.
the original DAO, launched May 2016 on Ethereum
The initial DAO did not end well, but DAO enthusiasts and coders are developing new structures to address the flaws of the existing DAO infrastructure. Fundamental flaws in the DAO code made it possible for hackers to transfer one third of the total contributed funds to a subsidiary account.
In a decentralized autonomous organization a series of smart contracts grants token holders voting rights, so the blockchain-based smart contract performs the function that articles of incorporation or bylaws perform in a conventional company.
the original DAO structure, running on the Ethereum public blockchain
A series of smart contracts granted token holders voting rights. In this respect, the blockchain-based smart contract mimics the role of articles of incorporation or bylaws.
Contemporary corporate governance reforms are unlikely to work as policymakers and regulators intend, because experts agree improvement is needed but disagree widely on what good corporate governance is or how to achieve it.
Contemporary corporate governance reforms are unlikely to work as intended by policymakers and regulators.
Law schools that invest early in artificial intelligence, machine learning, and blockchain will gain a comparative advantage over peer schools irrespective of ranking, because demand for lawyers trained in those technologies is likely to spike once law firm adoption crosses a threshold.
first mover law schools that make the financial investment
a threshold point of law firm adoption is reached
comparative advantage vis-à-vis their peers, regardless of the ranking of such school, because the demand for lawyers adequately trained in artfical intelligence, machine learning, and blockchain is likely to increase sharply at a threshold point of law firm adoption.
Intermediaries, lawyers among them, are replaced by code, connectivity, crowd, and collaboration.
transactions capable of being executed on blockchain infrastructure
Intermediaries, including lawyers, are replaced by code, connectivity, crowd, and collaboration.
Blockchain's distributed consensus model permits node verification of transactions without compromising the privacy of the parties, which makes it arguably safer than a traditional model requiring third party intermediary validation.
blockchains using node based distributed consensus
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.
Smart contract arrangements involving several parties and greater complexity require the verifiable and unhackable system that blockchain technology supplies.
multiparty and complex smart contract arrangements
More complex smart contract arrangements in which several parties are involved require a verifiable and unhackable system provided by blockchain technology.
Leveraging the big data collected through Legal Tech solutions and blockchain applications in combination with machine learning produces more creative and faster tools, which in turn generates a surge of innovative platforms that disrupt the legal industry.
settings where Legal Tech and blockchain generate usable data at scale
Leveraging the big data that is collected by using Legal Tech solutions and blockchain applications in combination with machine learning creates more creative and faster tools.
Although blockchain technology itself offers unprecedented data and privacy protection, storing blockchain data across a global network of nodes often will not comply with the consumer protection rules, directives, and guidelines of particular jurisdictions.
global node distribution of blockchain data
jurisdiction specific consumer protection and data rules
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.
Fundamental flaws in the DAO's code let hackers move one third of its total funds to a subsidiary account, and that hack together with further technological limitations destroyed the DAO initiative.
the DAO as launched in May 2016 on Ethereum
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.92 This hack in combination with additional technological limitations brought down the DAO initiative.
Because a series of smart contracts granted DAO token holders voting rights, the blockchain based smart contracts performed the function of articles of association or corporate bylaws, in an organization that had no directors, managers, or employees.
decentralized autonomous organizations structured like the DAO
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.
Open legal questions about the DAO, including which regime governs token issuance, minority token holder protection, taxation, the binding force of DAO smart contracts, ownership of intellectual property, and conflict resolution, must be answered before future DAO structures can operate seamlessly.
future decentralized autonomous organization setups
Open legal issues pertaining to the DAO need to be addressed before future DAO setups can operate seamlessly.
For the parts of dealmaking and other legal tasks that cannot be placed on a blockchain, the role of non blockchainable agents of trust may expand, and blockchain driven disintermediation of law may itself create additional legal tasks requiring human lawyers.
legal tasks that require the ambiguity and flexibility of law
For the parts of dealmaking and the other legal tasks that are non-blockchainable, the role for other, non-blockchainable agents of trust may expand. It seems possible that the blockchain-driven disintermediation of law itself creates additional legal tasks that require human lawyer input.
Contingent capital securities are a largely overlooked dynamic regulatory mechanism, and their regulatory value lies in their capacity to generate feedback effects, optimized timing, and improved information for regulation.
Contingent capital securities are a largely overlooked dynamic regulatory mechanism.
Feedback effects change the timing of regulatory information: instead of acquiring necessary information only after rules have already proven suboptimal, they increase the availability of relevant information ex ante and support anticipation of necessary revisions.
an informational exchange process between regulated entities and rulemakers is in place
Rather than acquiring necessary information after rules have emerged as suboptimal, feedback effects help increase the availability of relevant information for rulemaking ex ante and anticipate necessary revisions
Anticipatory regulation, which uses institution-specific and timely information together with feedback effects to create new rules, can minimize costly and suboptimal ex-post trial-and-error experimentation with stable and presumptively optimal rules.
institution-specific and timely information is actually available to rulemakers
Anticipatory regulation uses institution-specific, timely information and feedback effects to create new rules.24 Anticipatory dynamic regulation can help minimize costly and suboptimal ex-post, trial-and-error experimentation with stable and presumptively optimal rules.25
Deferred prosecution agreements and venture capital investment decisions function as dynamic regulatory tools because they increase the availability of relevant, decentralized, and timely information for rulemaking and facilitate feedback effects.
regulators can observe the content of DPAs and venture capital investment trends
DPAs and venture capital investment decisions increase the availability of relevant, decentralized, and timely information for rulemaking and facilitate feedback effects.
The conversion feature of contingent capital securities has the potential to change the control dynamic, the distribution of power, and the dependencies within systemically important financial institutions.
systemically important financial institutions with outstanding contingent capital securities
The conversion feature of CCS has the potential to change the control dynamic, power, and dependencies within systemically important financial institutions (SIFIs).
The threat of dilution of stock holdings, combined with the threat of loss upon conversion, could help reduce the pressure shareholders place on management of systemically important financial institutions to take increasing risks.
conversion dilutes existing common shareholders
shareholders anticipate the dilution ex ante
The threat of dilution of stock holdings, in combination with a threat of loss due to conversion could help reduce shareholder pressure on SIFI management to take increasing risks.48
Where conversion has a negative effect on stock price, management is further incentivized to maintain and manage risk in order to avoid reputational loss and the income reduction caused by losses in stock options.
conversion depresses the issuer's stock price
management compensation includes stock options
In situations where conversion had a negative effect on stock price,49 management could be incentivized further to maintain and manage risk to avoid reputational loss and income reduction due to losses in stock
Contingent capital qualifies as a dynamic regulatory mechanism because capital injection is available only if and when needed and because the conversion of contingent capital securities into near worthless equity signals impending regulatory issues to regulators, which creates feedback effects.
contingent capital securities are outstanding and their conversion is observable by regulators
Contingent capital is a dynamic regulatory mechanism because (1) capital injection is available only if and when needed; (2) signaling to regulators of impending regulatory issues via conversion of CCS to near worthless equity creates feedback effects;
Contingent capital creates feedback effects because the conversion of debt to equity signals to regulators that the entity's management was unable to avoid the trigger, which is itself a call for increased regulatory scrutiny.
Second, contingent capital creates feedback effects because the conversion of debt to equity signals to regulators that the respective entity's management that was unable to avoid the trigger from debt to equity, which calls for increased regulatory scrutiny.57
Most of the design features of contingent capital securities and their triggering events remain underdeveloped, yet despite these shortcomings such securities could still help regulators anticipate regulatory needs in real time through feedback effects and improved information.
state of contingent capital design as of the time of writing
While most of the design features of CCS and their triggering events are underdeveloped, despite these shortcomings, CCS could help allows regulators to anticipate regulatory needs in real-time, supported by feedback effects and improved information for regulation.
Private fund advisers' increasing use of blockchain technology, artificial intelligence, and big data is a distinct source of downward pressure on the traditional 2/20 fee structure that commentators have not examined.
A factor contributing to the market pressure on the fee structure that has not been examined by commentators pertains to the increasing use of use of blockchain technology, artificial intelligence, and big data by private fund advisers.
The majority of private fund advisers that deploy blockchain technology, artificial intelligence, and big data in their operations or strategy charge their investors lower fees, even though not all blockchain enabled funds charge per transaction fees.
advisers using the technologies in operations or strategy
While not all blockchain-enabled private investment funds charge per-transaction fees, the majority of private fund advisers that use blockchain technology, artificial intelligence, and big data in different aspects of their operations or strategy charge their investors lower fees.
New managers increasingly face contested track records, meaning the new firm cannot get a consensus from the manager's old employer about the manager's track record with that employer.
first time managers spinning out of a prior employer
Moreover, the industry is increasingly seeing contested track records for new managers, i.e., the new firm cannot get a consensus from the new manager's old employer about the manager's track record with that employer.
Blockchain removes fraudulent transactions primarily through completely decentralized network connectivity via the Internet, rather than through digital signatures alone, which only establish the identity and authenticity of the parties.
decentralized peer to peer networks with Internet connectivity
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.
Blockchain's distributed consensus model, in which network nodes verify and validate chain transactions before execution, makes it extremely rare for a fraudulent transaction to be recorded in the blockchain.
distributed consensus models with node verification prior to execution
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.
Cryptographic hashing makes blockchain manipulation immediately detectable because the hash incorporates all previous transactions, so that even a single digit change produces a different hash value.
chained hashing that incorporates all prior transactions
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.
In the Numerai model, the use of artificial intelligence achieves efficiency and optimum capital allocation by reducing overhead costs, because there is no cost of human capital.
crowdsourced data scientist models synthesized into a meta model
cryptocurrency incentivized contribution
In the Numerai model, the use of artificial intelligence ultimately helps achieve the goal of efficiency and optimum capital allocation by reducing overhead costs because there is no cost of human capital.
Traditional per transaction fee models failed because settlement and calculation created a prohibitive amount of work that made such operations very difficult to execute; blockchain technology overcomes all of these restrictions.
fee models requiring manual reconciliation and settlement
In contrast to the traditional settlement and calculation of fees in a per-transaction model that created a prohibitive amount of work making such operations very difficult to execute, blockchain technology overcomes all of these restrictions.
Manual per transaction fee calculation and settlement is prone to human error, and these errors are removed through the use of blockchain technology.
fee calculation and settlement performed manually
While normally the use of this type of fee is prone to human errors that occur during manual calculation or settlement, these errors are removed through the use of blockchain technology
The rise of blockchain applications in private investment funds can exacerbate the industry's already changing fee structure.
private investment fund industry as of 2017
The paper has illustrated that the rise of blockchain applications in private investment funds can exacerbate the already changing fee structure of the industry.
If the jurisdictional means necessary for conflict resolution mechanisms covering Ethereum blockchain based smart contracting are absent, consumers will mistrust the new technology, and that mistrust can undermine the evolution of the blockchain based crypto economy.
Ethereum blockchain based smart contracting
Not having the required jurisdictional means necessary for conflict resolution mechanisms for Ethereum blockchain-based smart contracting, may invoke consumer mistrust in the new technology. This can then undermine the evolution of the blockchain-based crypto economy.
Even if every user and supporter of the blockchain and their locations were known, it would still not be possible to exercise jurisdiction in the traditional meaning of the word, because the system operates largely autonomously.
Because the system operates largely autonomously, even if every user and supporter of the blockchain and their location were known, it would still not be possible to exercise jurisdiction in the traditional meaning of the word.
Because the challenges crypto transactions pose to the existing legal and jurisdictional infrastructure are severe, including good governance in crypto transactions requires instituting governance solutions inherent in the blockchain technology itself.
Because of the severity of these challenges for the existing legal and jurisdictional infrastructure, we conclude that the sensible approach for including good governance in crypto transactions necessitates instituting governance solutions inherent in the blockchain technology itself.
Proof of work mining carries significant externalities: the authors estimate that the total energy cost of running the global network of computers solving proof of work puzzles was around 700 million US dollars per year before publication.
proof of work consensus, before publication of the article in 2017
One problem with proof-of-work mining is that there are significant externalities. Before the publication of this article, the total energy costs for running the global network of computers devoted to solving the proof-of-work puzzles was estimated at around $700 million USD per year.
Anonymity survives the blockchain's permanent public record because a new private key can be created for each transaction, so although public key addresses are stored eternally, each transaction allows an entirely new cryptographically secured private identity.
public-key cryptography as implemented in bitcoin and Ethereum
So, while we can track the public key of the addresses of each transaction, and that information is stored eternally in the blockchain, each transaction allows for an entirely new private identity which is cryptographically secured.
Because smart contracts are coded for computer programming rather than for a human observer, courts may not be able to hypothesize a reasonable human's interpretation of a given smart contract.
contract interpretation disputes over coded smart contracts
Because of the emphasis on code for computer programming (and artificial intelligence), courts may not be able to hypothesize a reasonable human's interpretation of a given smart contract.
Real world court decisions on smart contract disputes, even where attainable, may not carry the same legitimacy and authority for the parties as intra-blockchain dispute resolution mechanisms.
In other words, real world court decisions even if attainable may not have the same legitimacy and authority as other intra-blockchain dispute resolution mechanism may have.
Even if courts were given authority to order changes to smart contract code, a programmer coerced by a court could not override the will of the majority of anonymous international blockchain users to make an effective change.
decentralized blockchains maintained by an anonymous global user majority
Even if courts were given such authority, no programmer so coerced by the court would be able to override the will of the majority of anonymous international blockchain users to make an effective change.
The economic incentive for Aragon judges to follow the more popular vote, since judges keep their bond only if they voted with the majority, calls into question whether the mechanism delivers effective, non arbitrary, and fair dispute resolution.
the Aragon bond and majority reward mechanism, despite anonymous voting
the economic incentives for judges to follow a more popular vote (in the Aragon system judges keep their bond if they voted with the majority), despite the overall anonymity of the voting, may call required notions of effective, non- arbitrary, and fair dispute resolution mechanisms into question.
Because no conceivable way exists to permanently hide an arbiter's reputation from the arbiter in an open system, the corruption risk created by high reputation arbiters becoming valued counselors for disputants is an insoluble problem with the authors' own proposal.
open reputation systems for anonymous arbiters
Because no conceivable way exists to permanently hide an arbiter's reputation from the arbiter in an open system, this is an insoluble problem with the proposal.
Blockchain technology lowers transaction costs by eliminating intermediaries, and it substitutes immutability and cryptography for the trust that intermediaries previously supplied.
Blockchain technology's elimination of intermediaries removes transaction costs and creates a platform for trust through truth and transparency for parties through its immutability and use of cryptography.
Blockchain creates a data protection paradox: the technology itself offers strong privacy protection, yet storing blockchain data across a global network of nodes will often violate specific consumer protection rules and directives in individual jurisdictions.
applies where consumer protection or data protection rules impose jurisdiction specific storage requirements
The DAO failed because of fundamental flaws in its own code, which allowed hackers to move one third of its funds to a subsidiary account, showing that governance built entirely on smart contracts inherits the defects of its code.
applies to organizations whose governance and asset control rest entirely on open source smart contract code
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.
The SEC's denial of the Winklevoss Bitcoin exchange traded fund on grounds of susceptibility to fraud reflects the agency's distrust of the crypto asset class as a whole, and especially of funds that trade digital currencies.
The SEC's decision regarding the Bitcoin ETF reflects its distrust towards the crypto asset class as a whole, especially funds attempting to trade digital currencies.
Cryptocurrency gains are massively underreported to the IRS: despite Bitcoin rising from under twenty dollars in 2013 to over twelve hundred dollars in 2017, the IRS received only around 900 Form 8949 filings indicating crypto gain or loss over four years.
While the value of Bitcoin in 2013 under $20 and its value appreciated to over $1200 in 2017, in the past four years, the IRS has only received around 900 Form 8949 that would indicate some gain or loss from cryptocurrencies.
Blockchain removes the reconciliation problem in private equity administration by letting every party to a deal view a single compiled version of the transaction and its associated data, instead of reconciling multiple copies of deal documents.
illustrated by the February 2017 Northern Trust and IBM private equity administration partnership
the blockchain program announced by Northern Trust and IBM allows all involved parties in an equity deal to look at a single compiled version of the transaction and all other data relating to the deal.
Repeated use of the same dataset by data scientists creates an overfitting risk: the training model fits the test set so closely that its performance on a different dataset degrades.
applies to adaptive data analysis where the same data set is used repetitively
When data scientists use the same data set repetitively a risk exists that the training model will overfit the test set of data which can limit the performance of the applied model on a different dataset.
Requiring data scientists to stake a cryptocurrency on their own predictions converts private confidence into a public signal, which enables the fund to select the optimal model and improve fund performance.
describes Numerai's use of the Numeraire token as a staking mechanism
The staking process, in turn, enables Numerai to choose the optimal model and in the process improve the performance of its hedge fund.
Anecdotal evidence suggests that the majority of private fund advisers who use blockchain, artificial intelligence, and big data in their operations or strategy charge substantially lower fees than advisers who do not use these technologies.
characterized by the author as anecdotal rather than sample based evidence
Anecdotal evidence suggests that the majority of private fund advisers that use blockchain technology, artificial intelligence, and big data in different aspects of their operations or strategy have a substantially lower fee structure than those who do not use them.
Blockchain enabled per transaction fees align fees with strategy turnover: clients in transaction intensive strategies agree upfront to higher fees while clients in less transaction rich strategies pay lower overall fees.
assumes the per transaction fee is predetermined with clients and can be made publicly available
Accordingly, clients who invest in a more transaction-prone strategy will be able to agree upfront to higher fees whereas clients who invest in a less transaction-rich strategy will pay overall lower fees.
Banks overexposed themselves to private investment fund lending, which allowed LTCM and similar funds to grow significantly and led banks as counterparties to put their own existence at risk.
banks lending to private investment funds
However, banks overexposed themselves to private investment fund lending, allowing LTCM and other private investment funds to grow significantly. As counterparties to private investment funds, such as LTCM, banks put their own existence at risk with their lending practices.
Post LTCM proposals for clearer credit risk strategies and credit risk management policies at financial intermediaries were inappropriately applied across the whole range of business models and lacked concrete implementation elements.
He found that proposals involving clearer credit risk strategies and credit risk management policies and processes for financial intermediaries were inappropriately applied across the range of business models and lacked concrete implementation elements.
Stress tests, Value at Risk, and Monte Carlo scenarios imposed on financial intermediaries that lend to private investment funds necessarily rely on historical data, so they are of limited value as indicators of high risk sensitivity to future events.
risk models used by intermediaries exposed to private funds
Increased stress tests, Value at Risk, and Monte Carlo scenarios for financial intermediaries to private investments funds necessarily use historical data and are less valuable as an indicator of high risk sensitivity for future events.39
Investor suitability standards requiring independent verification of an investor's ability to evaluate complex financial products and investment risk would make wealth redundant as a proxy for sophistication in determining investor eligibility.
private investment fund investor eligibility
Such proposed investor suitability standards would require independent verification of investors' ability to evaluate highly complex financial products and investment risk, rendering wealth as a proxy for sophistication redundant for investor eligibility.54
Because advisers and third party service providers can flatten out and sanitize the information disclosed in Forms ADV and PF, the resulting disclosures may be less useful to the FSOC and the SEC in determining the systemic risk posed by private funds.
level of sanitizing could not be verified in the study
Although the level of sanitizing of disclosures could not be verified, sanitized disclosures could be less useful for Financial Stability Oversight Council (FSOC) and SEC evaluation and their determination of the systemic risk posed by private funds.84
The second survey found long-term negative effects of Title IV: 34.9 percent of respondents expected it to affect the industry over the next five years through additional expenses, and 32.6 percent expected it to create barriers to entry for new private fund market entrants.
2015 survey of registered investment advisers
More than a third of respondents (34.9%) opined that Title IV will affect the private fund industry in the next five years because of additional expenses, and nearly a third (32.6%) opined that it will create barriers to entry to private fund market entrants. 50% of
Rules become adaptable when institutions and rulemaking processes integrate feedback effects, including feedback between industry and regulators, that generate timely, relevant, and decentralized information before rules are finalized.
dynamic regulation of the private investment fund industry
Rules can become adaptable if institutions and rulemaking processes integrate feedback effects, including feedback effects between the industry and regulators, that produce timely, relevant, and decentralized information for rulemaking ex- ante before rulemakers finalize rules.137 By increasing the
The SEC's private fund data collection encountered accuracy and consistency problems that hampered the FSOC's ability to evaluate the systemic risk of private funds.
The paper created and evaluated data evidence that demonstrated that the SEC's data collection encountered accuracy and consistency problems that hampered the FSOC's ability to evaluate the systemic risk of private funds.141 The author
The FSOC relied most heavily on some of the most problematic disclosure items the SEC collects, even though SEC data played a crucial role at every stage of its systemic risk assessment of private funds.
FSOC systemic risk assessment of private funds
The author showed that while the SEC's data played a crucial role in all stages of FSOC's systemic risk assessment of private funds, the FSOC relied most heavily on some of the most problematic disclosure items collected by the SEC.
Blockchain technology enables managers to charge per-transaction fees, which undermines the existing 2 and 20 fee model, because it allows fully automated allocation of the correct fee to each executed trade without manual reconciliation or settlement.
blockchain enabled private investment funds
Blockchain technology enables managers to charge per- transaction fees which undermines the existing 2/20 fee model.
Jurisdiction over the public blockchain does not exist within the present doctrinal infrastructure for jurisdiction, and in practice the blockchain cannot be regulated or governed because it is decentralized and autonomous.
applies to public, permissionless blockchains rather than private or consortium ledgers with an identifiable operator
More specifically, jurisdiction over the public blockchain does not exist within the present doctrinal infrastructure for jurisdiction. In practice, the blockchain itself cannot be regulated or governed because it is decentralized and autonomous.
The immutability and permanent recording built into blockchain technology may be the root of legal difficulties in European countries that recognize a right to be forgotten or comparable privacy rights.
applies in jurisdictions recognizing a right to erasure, notably the EU under the General Data Protection Regulation
The immutability and eternal recording of blockchain technology may be the root of legal difficulties in European countries that recognize the "right to be forgotten" or certain other privacy rights.
Despite early cautioning and a call for action from its own commissioners, the SEC has not addressed core issues pertaining to the recognition of blockchain technology applications in finance.
Despite this early cautioning and call for action, the SEC has not yet addressed core issues pertaining to the recognition of blockchain technology applications in finance.
In the decentralized DLT model, distributed consensus replaces the trusted central validation system, substituting cryptographic solutions and economic incentives for a central validator.
In the decentralized DLT model, "distributed consensus" replaces the trusted central validation system.
Complex smart contracts involving several parties can only work if they rest on a verifiable and unhackable system, which is what blockchain technology supplies.
applies to multiparty smart contracts of higher complexity, such as derivative contracts
Complex smart contracts involving several parties need to rely on a verifiable and unhackable system provided by blockchain technology.
The market for private investment funds that invest in and utilize blockchain technology is close to equally divided between the United States and the European Union, with Russia and China playing significant roles.
based on the article's hand coded dataset of 120 private investment fund advisers using blockchain technology
The data analysis in this article suggests that the market for private investment funds who invest in- and utilize blockchain technology appears to be near equally divided between the US and the EU with Russia and China playing a significant role.
Because American funds lean on smart contracting, they have a better opportunity to launch disruptive blockchain implementations, but they may also experience a higher rate of failure from greater exposure to technological risk.
conditional on American funds continuing to emphasize smart contracting over conservative crypto asset strategies
This may imply that American private investment funds will have a better opportunity to launch future disruptive implementations of blockchain technology, while at the same time they may experience a higher rate of failure, due to a greater exposure to technological risks.
Whether private investment funds succeed in disintermediating banks through blockchain implementation depends on their ability to find scale opportunities.
Private investment funds' bank disintermediation through the implementation of blockchain technology will depend on their ability to find scale opportunities.
The Northern Trust and IBM blockchain program removes the need for parties to reconcile multiple copies of deal documents by letting every party to a private equity deal look at a single compiled version of the transaction.
private equity deal administration, partnership announced February 2017
which requires parties to reconcile multiples copies of the documents that form the deals to understand the greater picture, the blockchain program announced by Northern Trust and IBM allows all involved parties in an equity deal to look at a single compiled version
The Numerai model reduces overhead costs because there is no cost of human capital, and it eliminates barriers to entry because participating users need neither capital nor any special finance or data knowledge.
applies to the Numerai crowdsourced data science model running on the Ethereum blockchain
reducing overhead costs because there is no cost of human capital.135 In addition, Numerai eliminates barriers to entry because users do not need capital or any special finance or data knowledge.
Under MBCA Section 7.32 the ten year duration limit is only a default rule, unlike the corresponding limit for voting trusts, so parties who specify a longer term are permitted to have it.
agreements formed under MBCA Section 7.32
The section specifies a 10 year limit, a similar period to voting trusts, but unlike voting trusts, this period is just a default rule, so that if the parties specify a longer period it is permitted.
Duration ceilings contained in voting trust statutes do not carry over to other types of shareholder agreements, and courts have repeatedly sustained shareholder agreements intended to run indefinitely.
Duration limitations in the voting trust statutes do not apply to other types of shareholders' agreements.15 Numerous decisions have sustained shareholders' agreements which were to remain in effect indefinitely.
MBCA Section 7.32 requires a writing but, departing from earlier statutes, does not require the agreement to sit in the articles or bylaws, so stand alone written shareholder agreements are expressly valid.
The agreement must be in writing, but unlike some earlier statutes, the written agreement does not have to be in the articles or bylaws—stand-alone written agreements are specifically allowed.
Voting arrangements are not self executing: their existence does not relieve the corporation of observing the legal formalities of director and shareholder action.
voting trusts, pooling agreements, and irrevocable proxies
Voting arrangements are not self-executing, and the mere existence of a voting arrangement does not mean that the corporation should dispense with the legal formalities of director and shareholder actions.
A shareholder suing derivatively sues on the corporation's behalf and cannot convert the action into a personal one, even where the corporate injury has impaired the value of that shareholder's own stock.
The shareholders are simply suing on the corporation's behalf and cannot maintain actions on their own behalf to redress an injury to the corporation even if the value of their stock is impaired as a result of the injury.
Where a shareholder agreement is folded into the charter or bylaws, it thereby becomes subject to whatever amendment procedure those documents or the statute provide, so charter integration exposes the arrangement to later modification.
agreement incorporated into charter or bylaws rather than free standing
Because shareholder agreements are often designed to avoid corporate formalities such as majority rule, "it is not unreasonable to require that the degree of deviation intended be explicitly set out.
Shareholders frequently fail to place their agreements in the charter or bylaws, sometimes through ignorance or inadvertence and sometimes deliberately, because charters are public records and the parties prefer not to expose their arrangement to outsiders.
Still, shareholders often fail to include their shareholder agreements in the charter or bylaws—whether by ignorance or inadvertence.124 Sometimes this is intentional because charters are public records, and shareholders may not want their agreements open to outsiders.
Absent explicit statutory authorization, many courts have refused to enforce veto provisions contained in shareholder agreements, which is why such provisions should be implemented through charter or bylaw amendment.
states without statutes specifically authorizing shareholder control agreements
explicit statutory authorization, many courts have refused to enforce veto provisions in shareholders' agreements.
Even though New York decisions such as Adler v. Svingos suggest veto arrangements outside the charter will be specifically enforced, the better practice remains to amend the charter to insert them.
While shareholders of New York close corporations may be able to set up veto provisions without amending the corporation's charter, the better practice is to amend the charter to insert such arrangements.
Because damages rarely provide an adequate remedy for breach of a shareholder agreement, refusing specific enforcement amounts in substance to declaring the agreement invalid.
suits to enforce shareholder voting agreements
Most often a suit for damages does not provide an adequate remedy for a breach of a shareholder agreement, so the denial of specific enforcement essentially declares the agreement invalid.
ICOs cannot be qualified as donations and are therefore distinguishable from crowdfunding, because ICO participants acquire a financial stake in the company and, as the case may be, a right to vote on future decisions.
comparison of ICOs to crowdfunding platforms such as Kickstarter
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.
Because Ethereum's decentralized platform incorporating smart contracts lets developers build applications directly on its blockchain, the majority of developers chose to write smart contracts on the Ethereum Virtual Machine rather than create their own blockchain technology, giving ICOs a uniform protocol.
Given these advantages, the majority of developers opted for writing smart contracts on the Ethereum Virtual Machine rather than creating their own blockchain
Because whitepapers are not audited by any authority, the preliminary steps of the ICO roadmap, project announcement, executive summary, and investor comments, carry the burden of building market credibility and investor trust in the soundness of the project.
standard ICO roadmap practice as of 2017
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
Token holders, unlike shareholders in the traditional corporate infrastructure, cannot vote for or against directors or nominate directors, so ordinary ICO investors have no governance channel and simply must trust the promoters and their business intent.
ordinary investors as distinct from institutional pre-sale investors
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.
Associated with the lack of an existing product is the inability of most crypto platforms to generate revenue to offset costs the way traditional businesses do, since they typically have neither employees who create and advertise a product nor customers who generate revenue.
crypto platforms organized as foundations
Associated with the lack of an existing product is the inability of most crypto platforms to generate revenue to offset costs like traditional businesses.
Because token offerings are built on open source code, the utility of an issued token can at any time be recreated in another token with essentially identical features at marginal cost, so investors cannot rely on the implicit promise that promoters and developers will increase the value of the acquired token rather than launch a duplicate.
token offerings based on open source software
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.
Legacy businesses own their code and can sue competitors who copy it, whereas open source crypto start-ups rely only on licenses, and this weaker incentive structure makes ICO investments riskier.
open source crypto start-ups compared to legacy code-owning businesses
While open-source crypto start-ups 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.
The Gnosis ICO shows how a reverse dutch auction can mitigate the inefficiencies and risks of a capped sale: the offering was capped at $12.5 million and the time needed to complete the sale determined the quantity of tokens distributed to investors, with the rest held by the start-up team.
capped token sales exposed to first mover rush dynamics
To mitigate the inefficiencies and the risks of a capped sale, the Gnosis ICO was structured as a reverse dutch auction
ICO promoters should not allow tokens to be traded before the underlying protocol network or application is live, and should not use a landing page that focuses almost exclusively on the ICO while providing less content on the product, project, technology, and team.
emerging bad ICO practices identified in 2017
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.
ICO promoters should make significant and ongoing disclosures on vesting and lockup periods and should never manipulate the smart contract to change ICO sales rules mid-course during the offering.
ongoing ICO sales governed by smart contracts
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.
Blockchain technology delivers anonymous and secure transactional guarantees through democratized trust and disintermediation, and its anti-discrimination features allow minorities and disenfranchised communities to benefit from the technology.
public, permissionless blockchain networks
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.
Because network nodes verify and validate chain transactions before execution under a distributed consensus model, recording a fraudulent transaction on the blockchain is extremely rare.
distributed consensus with node verification before execution
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.34
Because each new block's hash value is generated from all previous transactions, the smallest change to the blockchain produces a different hash value, which makes any form of manipulation immediately detectable.
chained cryptographic hashing of prior transactions
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.37
Although blockchain technology itself offers genuine data and privacy protection, storing blockchain data across a global network of nodes often will not comply with specific consumer protection rules, directives, and guidelines.
global node distribution under jurisdiction-specific consumer protection regimes
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
The DAO failed because its code had not yet been perfected: hackers took a third of the DAO tokens and transferred them to another account, and that hack together with other technological limitations led to the demise of the DAO.
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.58
By establishing a network of transacting parties that trust each other despite anonymity, blockchain technology enables unbiased transactions and eliminates prejudices against minorities.
anonymous or pseudonymous transacting parties on a blockchain network
By establishing a network of transacting parties that trust each other despite anonymity, the technology enables unbiased transactions and eliminates prejudices against minorities.
People who work for a DAO are free from existing corporate hierarchies and their possible discriminatory effects because they are not subject to a supervisor, boss, or CEO.
DAO structures with no directors, managers, or employees
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.
Reputational penalties for non-performance in a DAO are entirely free from racial implications because token holders are unlikely to even know each other.
Crucially, non- performance reputational penalties are entirely free from racial implications as the token holders are unlikely to even know each other.
Unlike traditional hierarchical organizations where face-time and unproductive meetings are the norm, the self-governing DAO token optimizer avoids corporate hierarchy inefficiencies and the bad outcomes that come from top-down direction.
self-governing DAO structures without supervisors
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.
Equality is a natural byproduct of the blockchain-driven evolution of the crypto economy, because the trust enhancing consensus model, smart contracting in anonymous networks, and DAOs together allow a more equal society to evolve.
continued evolution of the crypto economy
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.
ICOs lower barriers to entry for a diverse body of investors and thereby increase the diversity and heterogeneity of start-up funding.
ICOs provide low barriers to entry for a diverse body of investors and thus increase the diversity and the heterogeneity of start-up funding.
Unlike shareholders in traditional corporate structures who can vote for or nominate directors, ICO investors have no control whatsoever over promoters.
Unlike shareholders in the traditional corporate infrastructure who are able vote for or against directors or to nominate directors, ICO investors have not control over the promoters whatsoever.
The absence of mandatory disclosure requirements for ICOs leads many promoters to make irregular or no disclosures about the platform over time, producing a significant lack of transparency in the ICO market.
Moreover, the lack of mandatory disclosures for ICOs leads many promoters to make irregular or no disclosures about the platform as time passes, leading to a significant lack of transparency in the ICO market.
The top 25 ICO jurisdictions in this study are identified from ICO WatchList data, which ranks countries by the number of ICOs launched and reports how much was raised through those ICO projects.
ICO WatchList as the underlying data source
To determine the ICO's used for this project, the author used data generated by ICO WatchList.1 ICO WatchList ranks countries by the number of ICO's launched and provides information as to how much was raised through these ICO projects.
Few governments have prohibited financial investors from investing in ICOs, a greater number have suggested not taking part, and many have issued warnings without any recommendation to citizens either way.
Finally, few governments have prohibited financial investors from investing, but a greater number of governments have suggested not to take part. Many countries have issued warnings, but have not made a suggestion to its citizens as to whether to take part or not.
If a digital token security falls outside Monetary Authority of Singapore regulation, no duty of fair dealing applies to it.
If the security falls outside the MAS- regulations, there will be no duty of fair dealing.
Israel taxes cryptocurrency as property: profits are subject to capital gains tax at rates between twenty and twenty-five percent, and individuals mining or trading cryptocurrencies in connection with businesses must also pay a seventeen percent value-added tax.
cryptocurrencies will be subject to capital gains tax at rates between twenty percent and twenty-five percent, while individuals mining or trading cryptocurrencies in connection with businesses must pay a seventeen percent value-added tax (VAT) in addition to capital gains tax.
Poland's Ministry of Finance interpretation states that selling or exchanging cryptocurrency for traditional currency, or exchanging one cryptocurrency for another, could create a VAT tax obligation.
the sale and exchange of cryptocurrencies into traditional currency and vice versa, as well as the exchange of one cryptocurrency for another, could create a VAT tax obligation.
The National Bank of Serbia holds that financial institutions may not participate in ICOs or other cryptocurrency investments because cryptocurrencies are not legal tender.
Serbia has taken the position that financial institutional are not allowed to participate in ICO's or other cryptocurrency investments because they are not legal tender.
World governments largely either apply existing laws to cryptocurrencies or wait to see how other countries react to the crypto evolution.
For the most part, the general view of the world governments appears to be that they are using existing laws to regulate cryptocurrencies or wait to see how other countries react to the crypto evolution.
Reputation value in any decentralized reputational system can be corrupted through three channels: direct purchase of reputation, automated worthless work, and degeneration of the system into a majority of inexpert opinions.
In any such decentralized reputational system there is always the potential to corrupt the value of reputation by purchasing it directly, or through automated worthless work, or through the degeneration of a majority of inexpert opinions.
The problems of corruption, Sybil attacks, and tyranny of the majority have plagued every previous autonomous decentralized reputation platform, so they are the design constraints any new architecture must meet.
prior autonomous decentralized reputation platforms
These are the respective problems of corruption, Sybil attacks, and tyranny of the majority that have plagued all previous autonomous, decentralized reputation platforms.
The chosen expert is deliberately not paid directly out of the fee but only indirectly in newly minted tokens, because the architecture secures itself by making reputation more valuable than any one time payment.
applies to off-platform work engaged through the platform
One counterintuitive element is that the chosen expert is not paid directly in fees, only indirectly in newly minted tokens. The platform was designed to ensure security, and encourage maximal productive cooperation, by valuing reputation over all else.
The platform is Sybil attack resistant because all power is weighted by reputation rather than by account: an owner of a single account holding 1000 tokens has the same or more power than an owner of 1000 accounts holding one token each.
assumes every power in the system is reputation weighted
The platform is Sybil attack resistant because all power in the platform is weighted by reputation. An owner of a single account with 1000 tokens has the same or more power than an owner of 1000 accounts with one token.
Reddit's upvote system imposes insignificant punishment for voting randomly, and this lack of cost compromises the informational value of an upvote, which is the failure mode a staked validation pool is designed to avoid.
As a second example, Reddit's upvote system currently has insignificant punishment for voting randomly, which compromises the value of the meaning of an upvote
A 51 percent collusion that votes against common sense is visible in an open system, which erodes trust, reduces use and fees, and lowers the value of the attackers' own reputational salary, so the tactic can destroy an expertise tag but cannot enrich the attackers.
assumes attacker value is held in the attacked tag
This would erode trust in the platform, and therefore use and fees would diminish, making the 51% holding of reputational salary less valuable. Therefore this tactic generally has the potential to destroy the expertise tag, but not enrich the attackers.
Healthy expertise tags are secure not because attack is impossible but because it is easier to profit from them by improving them than by harming them.
applies to healthy expertise tags, defined as those generating fees
Healthy expertises are secure because it is easier to profit from them by improving them than by harming them.
The platform becomes fully autonomous almost immediately after deployment, because once the Ethereum DApp is posted its authors have no more control over the evolution of the expertise tags than any other Ethereum user.
after the DApp is deployed to the blockchain
The platform achieves full autonomy almost immediately. Once the Ethereum DApp is posted to the blockchain, its authors have no more control over the evolution of the expertise tags in its forum than any other Ethereum user.
Because absolute certainty is unavailable, the architecture substitutes a calculable probability of confidence built on verified reputation, which is enough for business to proceed even though no provably certain algorithm exists.
applies where an impossibility result rules out guaranteed fair exchange
the architecture provides a means for developing a platform which can give users confidence that business can proceed through a system of verified reputation. This gives a calculable probability of confidence, even if no provably certain algorithm exists.
Faking a reputable expertise tag is nearly costless: a successful tag's open record can be copied and reposted under a new name for the price of the anti denial of service fees, and the capital used to mimic fees paid into the sham tag is mostly recovered by the sham owners through the salaries they control.
sham owners hold the majority of the sham tag's tokens
easily be copied and reposted under a new tag name for the low cost of the anti-DoS fees. The capital used to mimic fees paid to the sham expertise tag is mostly recovered by the sham owners through the salaries they control.
No single, fixed, entirely algorithmic policing solution can completely prevent independent nodes in a distributed system from gaming block production to advantage some parties over others. Any consensus protocol that relies on a permanently fixed rule set will therefore be gamed as conditions change.
distributed systems with independent, self interested nodes
protocols that are fixed rather than continually revisable
In fact it is obvious there can be no single, fixed, entirely algorithmic policing solution which completely prevents independent nodes in a distributed system from gaming the system by producing blocks with transactions that advantage some parties over others1.
Because all block creation fees are shared with the whole group as a reputation weighted salary, SPoS removes the direct monetary reward for forming mining pools or block production cartels, which the authors identify as a decentralization threat that raises the likelihood of 51% attacks.
fees distributed as a reputation weighted salary rather than paid to the producer
Therefore, unlike every other implemented platform, there is no direct monetary reward incentive for creating mining pools or block production cartels, which are a threat to decentralization which increases the likelihood of 51% attacks.
Because the stakes in SPoS are reputation tokens that are far less fungible than cryptocurrency stakes, long term probity is incentivized and many short term arbitrage opportunities are eliminated. Fungibility of the staked asset is what makes short horizon attacks profitable in other proof of stake systems.
stakes denominated in non fungible reputation tokens rather than currency
In particular, the stakes (sem tokens) are naturally far less fungible than cryptocurrency stakes, so long-term probity is incentivized, eliminating many short- term arbitrage opportunities.
Staking tokens with the potential for slashing is necessary to avoid the tragedy of the commons in a validation pool. Voting without something at risk does not produce honest evaluation of contributions.
community voting on the value of contributions
The staking of tokens, with its potential for slashing, is necessary to avoid the tragedy of the commons.
Even though proof of stake mitigates the economy of scale advantage, block production cartels can still arise in PoS systems through lotteries, through built in voting delegations, or because the stakes required to be a block producer can simply be bought.
PoS systems that use lotteries, delegation, or purchasable stakes
However, block production cartels may still arise due to lotteries, or the fact that voting delegations are built into the system, or the fact that the stakes needed to be a block producer may be bought
If block producers' identities are revealed, the supranational independence and security of the blockchain are threatened, because local jurisdictions can then exert legal power over block production. This threat is most acute in delegated proof of stake, where delegates must win popularity contests.
protocols where producers must identify themselves to be chosen
identities are revealed, the supranational independence of the blockchain is threatened as is its security. In this case local jurisdictions could exert legal power over block production
Any blockchain whose soft forks are decided through private communication between famous token holding whales is ultimately less secure than legacy centralized systems, which at least address centralized security risks deliberately.
off chain governance conducted privately among large holders and developers
Any blockchain subject to such governance is ultimately less secure than legacy centralized systems which pointedly address centralized security risks.
A healthy expertise will have near unanimous consensus on every evidence of work validation pool, and that very unanimity creates an impediment to development, because honest members risk their stakes by voting for untested changes.
well functioning expertise where all members run the same validated algorithms
A healthy expertise will continually have near-unanimous consensus on every evidence-of-work validation pool. This creates an impediment to development.
Finality in SPoS is measurable because forking away from a given block would cost the community all sem tokens created on the chain after it, and that quantity equals half of all fees sent since the block was produced.
sem minted in proportion to fees on every validated block
the sem that members gain from policing block production is equal to half of all fees sent since the production of the block. In order to fork a chain from that particular block, the community will lose all sem tokens created subsequently
A malicious party using Sybil accounts cannot be prevented from cloning the structure of a successful proof of stake blockchain at far lower cost than cloning a proof of work chain, leaving a new user unable to distinguish the truly decentralized chain from a clone that has manufactured even more tokens. The authors answer that this is resolved off chain, by a trusted user interface, as with cloned web pages.
new users joining without prior knowledge of the genuine chain
PoS chains where clone creation costs only new public keys
Then, when a new user joins the network, how will they be able to distinguish a truly decentralized blockchain from a cloned blockchain that has manufactured an even larger number of tokens?
Semada is stipulated as an autonomous, decentralized, open source protocol on the Ethereum blockchain that enables domain specific reputation verification for human task crowdsourcing.
Semada is an autonomous, decentralized, open-source protocol29 that enables domain specific reputation verification for human task crowdsourcing, built on the ETHEREUM blockchain.
The protocol lowers cost because it removes the manual verification step and the associated multiplication of micro task work that centralized systems require, letting decentralized workers capture the gains from disintermediation.
micro task crowdsourcing under the Semada Protocol
the Semada Protocol removes the manual verification and the associated multiplication of micro task work necessitated by centralized systems, enabling its decentralized micro task workers to profit from the disintermediation.
Reputation tokens supply a staking mechanism that incentivizes high quality work and task completion by workers, and that simultaneously lets requesters verify and track worker quality, integrity, and quantity.
participants staking reputation tokens on the platform
Through the reputation tokens, the Semada Protocol provides a micro task worker reputation staking mechanism that incentivizes high quality work and task completion by workers.
Unlike its decentralized competitors, the Semada Protocol is claimed to be resistant to both Sybil attacks and Tyranny of the Majority attacks.
comparison with existing decentralized mechanical turk protocols
However, unlike its decentralized competitors, the Semada Protocol ensures Sybil Attack and Tyranny of the Majority attack resistance.
The protocol architecture together with its incentive structure is what produces enhanced 51 percent attack resistance, which the author claims exceeds prior reputation verification attempts in both decentralized and centralized networks.
The Semada Protocol architecture and its incentive structure facilitates enhanced 51% attack resistance unlike any previous reputation verification attempts in decentralized and centralized networks.
Rather than repeating the same task across many workers to reach quality, the architecture verifies quality directly by examining and validating individual worker task performance through reputation verification.
micro tasks routed through the reputation verification architecture
Instead of repeating work on given tasks to attain high quality work products for micro tasks, Semada uses an architecture of reputation verification that examines micro worker task performance and verifies the validity and quality of the work.
Staking creates disincentives for malicious actors, and it is this disincentive structure that makes the network both more efficient and attack resistant.
workers and verifiers who have reputation tokens at stake
Semada staking mechanism creates disincentives for malicious actors, enhancing the efficiency of the Semada Network and making it attack resistant.
Attack resistance should be designed to increase as the platform grows, in contrast to designs like GEMS that detect and ban malicious actors, because a self enforcement mechanism lets the incentive system steer users away from bad actors once the system matures.
Unlike GEMS, which bans malicious actors detected through the GEMS trust mechanism from the platform, the Semada platform has a self-enforcement mechanism.
Centralized platforms cannot simply drop identity verification, because they need it to keep malicious actors from abusing the network and to ensure work quality; this is the tradeoff a staking based design is meant to dissolve.
However, centralized micro task platforms need to verify identity to prevent malicious actors from abusing the network and ensure work quality.
Because the reputation token staking mechanism supplies attack resistance directly, users need not verify their identity to complete micro tasks, which circumvents the costs, delays, and privacy surrender attached to centralized identity verification and thereby enlarges the willing labor pool.
workers staking reputation tokens rather than proving identity
By contrast, on the Semada Platform, users do not need to verify their identity to complete micro tasks. The Semada Protocol architecture, and specifically its reputation token staking mechanism, make the Semada Platform attack resistant.
Centralized, hierarchical organizations fail on two fronts in a fast changing environment: they adapt too slowly to changing reality and they are losing public trust.
Most obviously, such organizations are slow to adapt to a fast-changing reality and are losing public trust.
Peer-to-peer transactions are possible because a distributed consensus model has network nodes verify, validate and audit transactions before and after execution, and this is often safer than routing transactions through a single trusted third-party intermediary.
"Peer-to-peer" transactions are possible because the technology uses a "distributed consensus model" where the network "nodes" verify, validate and audit transactions before and after they are executed.
Blockchain technology creates an independent and transparent platform for establishing truth and building trust, replacing intermediaries, bureaucracy and old procedures with what the authors call the four Cs of code, connectivity, crowd, and collaboration.
In short, blockchain technology creates an independent and transparent platform for establishing truth and building trust. Intermediaries, bureaucracy, and old-fashioned procedures are replaced by the "4 Cs" of code, connectivity, crowd, and collaboration.
Centralized organizations also lose the competition for talent, because the younger generation views centralization as a threat to personal autonomy, choice and happiness and is increasingly sceptical of traditional hierarchies.
The younger "Millennial" generation view centralization as a threat to personal autonomy, choice, and happiness.
The design premise of the DAO was that because people do not always follow rules even when the rules are well designed, it is better to use computer code to manage an organization.
organizations aiming to automate governance
The DAO intended to automate governance and was based on the idea that since "people" don't always follow the rules (even if the rules are well-designed), it is better to use computer code to manage an organization.
The DAO showed that a corporate-type organization can operate with no physical address, no directors, no managers and no employees, with its governance structure built entirely from software, code and smart contracts running on Ethereum.
Indeed, the DAO didn't have any directors, managers or employees. The governance structure was built with software, code and smart contracts that ran on the public decentralized blockchain platform, Ethereum.
In a DAO, blockchain-based smart contracts granting token holders voting rights perform the function that articles of association or bylaws perform in a conventional corporation.
A series of smart contracts granted the holders of the tokens voting rights. In this respect, the blockchain-based smart contract mimicked the role of articles of association or bylaws.
A DAO inhibits rent-seeking and delivers transparency because its governance protocols are open source, so weaknesses are constantly tested and revised in the open rather than hidden inside a managerial hierarchy.
Such an organization inhibits "rent-seeking" and offers transparency. And they are secure. For instance, the governance protocols used in a DAO are open source and weaknesses are constantly tested and revised.
Fundamental flaws in the DAO's code allowed hackers to transfer one third of the total contributed funds to a subsidiary account, and this together with other technological limitations ended the initiative, but the authors argue it did not end the underlying vision of decentralized autonomous organization.
To be sure, fundamental flaws in the DAO code made it possible for hackers to transfer one-third of the total contributed funds to a subsidiary account. This, and other technological limitations meant the end of the initiative
Issuing coins or tokens across all ecosystem participants creates a level playing field and helps establish a flatter, community-owned platform that is not based on the traditional hierarchies between shareholders, executives, managers and staff.
well-designed token distribution across ecosystem participants
As such, the issuance of coins or tokens creates a "level playing field." Crucially, this helps establish a flatter, "community-owned" platform, which isn't based on traditional hierarchies between the platform participants
The result of this pattern is reputational: lawyers have developed a reputation as the least trusted of professions.
As a result, lawyers have developed a reputation as the least trusted of professions.
Because blockchain network nodes verify, validate and audit transactions both before and after execution, the model is safer than a traditional one in which transactions can only be accomplished through third party intermediaries such as a bank, judiciary or notary.
peer to peer networks using a distributed consensus model
verify, validate and audit transactions before and after they are executed. 49 This is safer than a traditional model in which transactions can only be accomplished through third-party intermediaries, such as a bank, judiciary or notary.
A decentralized autonomous organization is merely computer code with no directors, managers or employees, its governance structure built with software, code and smart contracts running on a public decentralized blockchain platform.
DAOs built on public platforms, in most cases Ethereum
DAOs are "merely" computer code. They don't have any directors, managers or employees. The governance structure is built with and on software, code and smart contracts that ran on a public decentralized blockchain platform (in most cases Ethereum).
In a digital world trust can be embedded directly in software code, and recent interest in smart contracts suggests this will be a significant growth area in the near future.
digital transactions where code can carry contractual terms
In a digital world, trust can be embedded in software code. Recent interest in smart contracts suggests that this is going to be a significant growth area in the near-future.
As machine to machine interaction becomes normal in an Internet of Things environment, trust ceases to be primarily a legal question and becomes a technical and design problem.
machine to machine transactions in an Internet of Things environment
code is also crucial in machine-to-machine (M2M) based transactions. As M2M interaction becomes normal in an Internet of Things environment, the issue of trust becomes a technical and design problem.
Building lawyers' capacity to think about the social and ethical implications of code is both essential and inevitable, but saying anything sensible about the ethics of technology first requires understanding coding and coders.
ethical questions raised by automation, artificial intelligence and driverless vehicles
Building the capacity of the lawyers of the future to think about the social and ethical implications of code is both essential and inevitable. But, to say something sensible about the ethical aspects of technology, it is necessary to understand both more about coding and coders.
Existing blockchains and DAOs still lack genuine decentralization, and there are currently no true DAOs: Bitcoin's proof of work protocol has produced mining pools because of economies of scale and unbalanced reward structures.
In our discussion, the following weaknesses were highlighted. There is still a lack of decentralization (there are currently no "true" DAOs). For instance, Bitcoin's proof of work protocol has led to "mining pools" because of economies of scale and unbalanced reward structures.
A reputation verification platform matters because trust created through an eternal reputational record would be open to review and driven by proper incentives.
blockchain based reputation systems that reward trustful parties and punish bad actors
This was considered to be important because if the trust were to be created through an eternal reputational record, it would be open to review and driven by proper incentives.
The real design challenge for consensus protocols is to find a proof of stake protocol that offers both trust and security without unintentionally creating just another centralized validation system.
The students understood that the real challenge is to find a "proof of stake" protocol that offers both trust and security (without unintentionally creating just another centralized validation system).
Coders and developers do not always understand the industry or business environment they target with their software solutions, nor do they always consider the trust or ethical issues raised by the technology based business solutions they implement.
technology based business solutions built by developers
Coders, programmers, and other developers do not always understand the industry or business environment they target with their software solutions. Nor do they always consider the trust or ethical issues when implementing technology-based business solutions.
Crypto-economics is arguably a misnomer, since it is really just economics; what may legitimate the label is the unprecedented combination of disciplines required to analyze incentive designs in decentralized systems.
Crypto-Economics really is just economics and, in fact, may be a misnomer.
DAOs can replace the coordination and monitoring functions supplied by the firm, because they can measure each member's contribution to the finished work product more efficiently and allocate rewards accordingly.
supported by trust enhancing technologies such as reputation verification in decentralized anonymous systems
Arguably, DAOs can replace the otherwise needed functions that are supplied by the firm that acts as the coordinator and monitor of a team because DAOs can more efficiently measure the contribution of each DAO member to the finished work product and allocate respective rewards accordingly.
In decentralized systems the functions previously performed by policy designers, central bankers, and economists in centralized markets are taken over by the token designer for the respective token economy.
Whereas policy designers, central bankers, and economists previously coordinated market design and economic regulations in centralized systems, these functions are taken over by the token designer for the respective token economy.
Many token whitepapers omit information necessary for a full economic analysis, and the research team could not find a single project among the top 100 that had examined blockchain governance fully.
whitepapers of the top 100 cryptocurrencies by market capitalization as of April 2018
Many whitepapers do not include all the information that would generally be necessary for a full economic analysis. For instance, the researchers could not find a project that had examined blockchain governance fully.
Proof of Work remains the most popular consensus protocol type among the top 100 tokens, and the Other category alone comprises thirty-four tokens.
N=100 dataset; consensus time series n=97
Figure 9a shows that the "Other" consensus protocol type, made up of thirty-four tokens.
Attempts to increase throughput and scale in consensus protocols concentrate on proof of stake, and the data are consistent with anecdotal evidence that proof of stake may be the most dominant attempt at scaling.
Attempts to increase throughput and scale for consensus protocols often focus on proof of stake attempts. The data is consistent with anecdotal evidence that suggests that proof of stake may be the most dominant attempt at scaling.
To date no blockchain coherently and comprehensively combines scale, security, and decentralization, the three objectives of the blockchain trilemma, although continued experimentation with consensus algorithms can help overcome it over time.
To date, no blockchain truly combines these three objectives coherently and comprehensively. Experimentation with different consensus algorithms can, over time, help overcome the blockchain trilemma.
Tokens experimenting with alternative consensus protocols typically change the transfer process in an effort to become more efficient.
outlier consensus protocols among the top 100 tokens
Tokens experimenting with alternative consensus protocols often change the transfer process in an effort to become more efficient.
Tokens launched before 2015 were overwhelmingly developed on a hardfork governance mechanism or a combination of hardfork and one other governance type.
top 100 tokens, governance types coded as hard fork, soft fork with tokenholder voting, masternodes, or other
Tokens launched prior to 2015 were overwhelmingly developed on a hardfork or a combination of hardfork and one of the other governance types depicted.
Outlier governance mechanisms rose sharply in the dataset: three per year in 2015 and 2016, then eighteen in 2017, and five in the first six months of 2018.
During 2015 and 2016, three outlier tokens were launched per year. These tokens were Tether, Factom, and Iota; DigixDAO, Gas, and Ark. During 2017, this figure jumped to eighteen tokens.
Today's internet is designed for hierarchical societal structures on an underlying authoritative trust model, and that traditional hierarchical trust model carries many inefficiencies including serious cyber security vulnerabilities.
Worse yet, today's internet is designed for hierarchical societal structures and with an underlying authoritative trust model. Many inefficiencies are associated with the traditional hierarchical trust model including serious cyber security vulnerabilities.
Every centralized reputation score can be sybil attacked, because fake internet accounts or fictitious ratings disrupt true reputation scoring.
All centralized reputation scores can be sybil attacked, e.g. fake internet accounts (sockpuppets) or fictitious ratings disrupt true reputation scoring
Users on internet based platforms earn their reputation but do not own it, so if a platform deletes an account, years of reputation data disappear and users have near zero ability to reclaim it.
Users earned their reputation but do NOT own reputation - e.g. if Facebook and other internet-based platform businesses accidentally deleted user account, years of data would be removed and users have near zero ability to reclaim the data
Meaningful and secure reputation tokens supply the incentives needed for secure proof of stake consensus in block production, which eliminates the unsustainable inefficiencies of proof of work based blockchains.
tokens that represent reputation per type of expertise
giving the proper incentives for guaranteeing secure proof-of- stake consensus protocols for block production. This eliminates the unsustainable inefficiencies of proof-of-work based blockchains.
Semada replaces fungible currency staking with reputation staking for block propagation, a consensus algorithm the authors call Semada Proof of Reputation.
Block propagation in the Semada platform is facilitated by staking reputation, not a fungible currency as in PoS. Accordingly, the consensus algorithm is called Semada Proof of Reputation (PoR).
Because Semada's Anchor Protocol uses reputation scores as a non fungible currency to qualify for block propagation, the resulting proof of reputation consensus is attack resistant, fully decentralized, scalable, and open to evolutionary protocol upgrades.
reputation scores that cannot be transferred
Unlike traditional PoS, PoR, e.g. Semada's Anchor Protocol, uses reputation scores as a non-fungible currency to qualify for block propagation. As such, the Anchor protocol (PoR) is attack resistant, fully decentralized, scalable and allows evolutionary protocol upgrades.
A Web of Trust reputation system can be gamed with sockpuppet accounts, because an attacker can behave well for a while and then transact with himself repeatedly and rate himself high to raise his reputation arbitrarily.
reputation systems based on counting positive peer rated transactions
If I use a lot of sockpuppet accounts, I can raise my reputation arbitrarily high, by behaving well for a while, then making a lot of transactions with myself and rating myself high.
The other horn of the identity verification dilemma is that when reputation is not valuable, honest users will not bother to go through the hoops required to identify themselves securely.
If the reputation is not valuable, then you won't be able to get honest users to go through the hoops required to identify themselves securely, since it
In an economic network where real money is at stake, historical good behavior cannot be assumed to prove future good behavior, because sockpuppet accounts allow participants to game the system automatedly, create valuable reputation falsely, and leach value out of the system.
networks where trust must support real monetary value
you can't just assume their historical good behavior will prove their future behavior will also be good. Sockpuppet accounts allow us to automatedly game the system and falsely create valuable reputation, so we can leach whatever value there is out of the system.
Semada's voting algorithm is designed so that gaming the system is not economically feasible without contributing genuinely valuable improvements, because value is proven through the fees added to the system and every fee is subject to a fair validation pool.
The voting algorithm of Semada core is designed to combat that very system, so that it is not economically feasible to game the system without adding genuinely valuable improvements, as proven with the fees that are added to the system and the fair validation pool that every fee is subject to.
Agency problems originate from the lack of trust between principals and agents, which itself stems from information asymmetries and agents' opportunistic self-interested behavior.
Agency problems originate from the lacking trust between principals and agents.
Blockchain provides an alternative governance mechanism that eliminates agency costs, meaning the principal's cost of supervising agents, by creating trust in the contractual relationship between principal and agent.
Blockchain technology provides an alternative governance mechanism that eliminates agency costs - the principal's cost of supervising agents - by creating trust in the contractual relationship between the principal and the agent.
The immutability of the blockchain and its cryptographic security systems provide transactional guarantees that create trust between principals and agents in the integrity of their contractual relationship, and ensure that no participant can circumvent the rules embedded in blockchain code.
The immutability of the blockchain and its cryptographic security systems provide transactional guarantees and create trust between principals and agents in the integrity of their contractual relationship.
Cryptographic hashes increase blockchain security and remove the trust barriers in agency relationships that otherwise require monitoring of agents and generate agency costs.
Cryptographic hashes used in blockchain technology further increase blockchain security and removes trust barriers in agency relationships that require monitoring of agents and create agency costs.
Decentralized Autonomous Organizations have begun to challenge the core belief that governance necessitates agency, because blockchain enables the removal of agents as intermediaries through code, peer-to-peer connectivity, crowds, and collaboration.
Decentralized Autonomous Organizations (DAOs) have started to challenge the core believe that governance necessitates agency.
The unifying interest of DAO token holders in raising token value means they will voluntarily perform optimization tasks, because doing so is directly in their own interest.
DAO structures where members hold tokens whose value tracks the organization
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.
Non-performance reputational penalties in a DAO are entirely free from racial or cultural biases, because the token holders imposing them are unlikely to even know each other.
DAOs where token holders are pseudonymous and mutually unknown
Crucially, non-performance reputational penalties are entirely free from racial or cultural biases and associated implications as the token holders are unlikely to even know each other.
The core issues that afflict centralized governance solutions, including information asymmetries, censorship, opportunism of agents, breaches of fiduciary duties, and fraud, can only be truly removed if and when a truly decentralized public blockchain emerges that is scalable and fully secure.
decentralized rather than centralized blockchain implementations
and fraud or third-party interference, can only be truly removed to fully reform the agency relationship if and when a truly decentralized public blockchain emerges that is scalable and fully secure.
Without a decentralized human backstop to code, the immutability of the blockchain and its cryptographic security systems may not be able to create truly transactional guarantees and trust between principals and agents.
Similarly, without a decentralized human backstop to code, the immutability of the blockchain and its cryptographic security systems may not be able to create truly transactional guarantees and trust between principals and agents in the integrity of their contractual relationship.
Blockchain-based corporate governance solutions in DAOs require evolutionary blockchain governance protocols, and socially optimal hard-forking rules cannot suffice.
Blockchain-based corporate governance solutions in DAOs require evolutionary blockchain governance protocols. Socially optimal hard- forking rules cannot suffice.
JPM Coin's closed structure, restricting the token to existing J.P. Morgan clients, is an anachronism, because closed ecosystems are unsustainable in emerging decentralized commerce.
applies to permissioned stable cryptocurrencies limited to a single institution's clients
The close structure of the JPM coin, e.g. JPM makes it only available to existing clients, appears to be an anachronism.95 Closed ecosystems are unsustainable in the emerging decentralized commerce.
A fiat backed stable cryptocurrency that is not fully collateralized is exposed to arbitrage trade attacks of the kind George Soros used against the pound sterling; full collateralization is therefore a necessary defense.
applies to stable cryptocurrencies claiming a fiat peg
Without a 100% fiat collateralization, such projects would run the risk of arbitrage trade attacks similar to what Financier George Soros used to "break the bank of England
Fiat currency collateralization is expensive and inefficient because the entire backing value must be held liquid; anything less opens arbitrage opportunities of the Soros type.
assumes the backing must remain fully liquid to prevent arbitrage
Fiat currency collateralization is expensive and inefficient because all of the value that is backing the cryptocurrency needs to be liquid, otherwise arbitrage opportunities, such as the Soros attack, are possible.
A well established stable cryptocurrency and a universal exchange form a positive feedback loop: the exchange's liquidity is enhanced by the stable cryptocurrency, and the stable currency's stability and adoption are enhanced by the exchange.
requires a universal exchange bridging traditional and crypto assets
In essence, the combination of a well- established stable cryptocurrency with a universal exchange create a positive feedback loop. The exchange liquidity is enhanced by the stable cryptocurrency and the stability and adoption of the stable currency is enhanced through the exchange.
Because hardcoded cryptocurrency policy is transparent and therefore predictable, market participants can anticipate policy and adjust behavior in advance, and such anticipatory reactions could over time make actual policy making the exception rather than the rule.
assumes policy rules remain largely hardcoded and transparent
Because of this transparency and associated predictability, market participants can anticipate policy making and adjust behavior accordingly. In fact, such anticipatory policy reactions could, over time, make actual policy-making the exception rather than the rule.
Full hardcoding is impossible: no stable cryptocurrency can encode all required policies and policy actions with full transparency, because future policy needs cannot be anticipated ex ante.
No stable cryptocurrency can hardcode all required policies and policy making actions with full transparency as future policy cannot be fully anticipated ex ante, before the needs occur.
Monetary policy for stable cryptocurrencies should combine hardcoded transparent rules with protocols enabling decentralized autonomous organizations, with decentralized but fully transparent policy DAOs functioning as the policy makers for what cannot be hardcoded.
depends on DAO governance designs that address expertise and incentive problems
monetary policy for cryptocurrencies can additionally be supported by protocols enabling decentralized autonomous organizations (DAOs).152 Decentralized but fully transparent policy DAOs can help function as policy makers.
The interoperability deficit in cryptocurrency markets is partly intrinsic to blockchain technology itself, because the consensus mechanism that allows block propagation on one chain in some ways negates interoperability with other chains and their consensus.
The lack of interoperability can in part be traced back to blockchain technology itself. The consensus created to allow block propagation in some ways negates interoperability with other chains and their consensus.
Mass adoption fails at the user level: the average user will not identify, research, and purchase diverse sets of tokens even where those tokens would create value, because the existing cryptocurrency market structure is simply too cumbersome.
The average user is unwilling to identify, research, and purchase diverse sets of tokens, even if their application and use cases would create value. The existing market structure for cryptocurrencies is simply too cumbersome for the average user.
Near instant settlement with stable cryptocurrencies removes counterparty risk, and the resulting reduction in counterparty risk boosts consumer confidence and increases transactional certainty relative to systems like Visa that take five to seven business days to pay merchants.
Such speed in settlement takes away the counterparty risk and with less counterparty risk, speed of settlement with cryptocurrencies boosts consumer confidence and increases certainty for transactions.
The reputation tokens of the underwriting DAO are separate and distinct from the cash currency that insureds use to pay premia; the two must not be conflated.
It is important to note that the reputation tokens are separate and distinct from the cash currency that the insured use to pay their premia.
Tokens in the proposed DAO function as reputation because an agent's proportional token holdings will grow over time only if that agent follows sound and successful underwriting practices.
tokens are minted as rewards for staking on underwritten policies
We will refer to these tokens on occasion as reputation tokens as an agent's proportional holdings of these tokens is likely to increase over time only if the agent were to follow sound and successful underwriting practices.
Participation in underwriting is gated by token ownership: only token holders may underwrite insurance policies in the DAO, and inbuilt processes assign new business among them.
First, only token holders are allowed to participate in underwriting insurance policies. Inbuilt processes are used to assign new business to token holders.
Insurance premia are treated as revenue of the entire DAO rather than of the underwriters who wrote the policy, and are shared among DAO participants; consequently the value of a token is a function of the DAO's expected future cash flows.
Instead, the premia are treated as the revenue of the entire DAO and shared among the DAO participants. Thus, the value of the tokens is a function of the expected future cash flows of the DAO.
Because newly minted reward tokens go only to agents who stake tokens on policies, passive holders are diluted over time, which pushes agents toward active underwriting while still permitting passive investment.
reward tokens minted per policy underwritten
Thus, the total number of tokens grows over time. This implies that "passive" agents who hold the tokens purely to receive a share of future premia will find their proportional ownership in the DAO decrease over time.
Unlike prior token research, the purpose of issuing tokens here is not only to raise capital but also to give owners the opportunity and incentive to develop the DAO's business.
Another key difference is that in our study, the purpose of issuing tokens is not only to raise capital but also to provide the owners the opportunity and incentive to develop the business of the DAO.
The design's innovative features stem from tokens serving several purposes at once: as reward for risk taking and as a substitute for both reputation and capital.
In sum, many of the innovative features of this design stem from the fact that the tokens serve multiple purposes: as reward for risk- taking, and a substitute for reputation and capital.
Trust requirements in the DAO are minimized by appropriately designed economic incentives rather than by intermediary reputation or regulation.
The need to trust is minimized by appropriately designed economic incentives.
The governance rules of the DAO can be set up so as to ensure that minority token holders are appropriately protected.
Assuming all agents are active underwriters, the DAO's rules can be designed so that the proportion of policies an agent writes in the long run is commensurate with that agent's proportion of token holdings.
In general, assuming all agents are active underwriters, the rules can be designed to ensure that the proportion of policies written by an agent in the long run is commensurate with the proportion of the agent's token holdings.
Good governance principles are crucial to every aspect of a long-term stable currency because markets inevitably change and because the Folk Theorems of game theory pose a fundamental obstacle to any fixed protocol.
Most importantly, good governance principles are crucial for every aspect of instituting any long-term stable currency due to inevitable changes in the market and the fundamental obstacle represented by the Folk Theorems of game theory
The Folk Theorems of game theory imply that no matter how complicated a stable coin protocol becomes, a powerful and patient player has strategies to subvert the system and profit at the expense of the group.
No matter how complicated the protocols become for creating a stable coin, there are strategies that a powerful and patient player can use to subvert the system to profit at the expense of the group
The reserve argument depends on two requirements, and failing either one grounds a criticism of an existing protocol: the stable-value requirement criticizes MakerDAO and the maintenance-cost requirement criticizes the Reserve protocol.
reserve maintenance cost exceeds arbitrage profit
The first requirement leads to a criticism of the MakerDAO protocol (e.g.), the second requirement leads to a criticism of the Reserve protocol (e.g
Misestimating the hot money ratio fails in both directions: overestimation makes the currency more costly to use, and underestimation leaves it insecure, so efficiency and security are in direct tension.
A currency that overestimates this hot money ratio will cost more to use. A currency that underestimates the ratio will be insecure
The day-to-day stability mechanism can be fully automated by algorithm, but monetary and fiscal policy choices cannot be: the algorithm's parameters must be chosen by hand and adjusted regularly to balance security against efficiency.
stability mechanisms operating in changing markets
However, monetary and fiscal policy choices cannot be fully automated. The parameters for the algorithm must be chosen by hand and adjusted regularly to balance security with maximal efficiency in response to network performance
Parameter and policy choices for a stable cryptocurrency should be made by a decentralized autonomous organization, the Stability DAO or SDAO, which functions as a transparent, decentralized, open analog of the US Federal Reserve.
Such choices need to be made by a decentralized autonomous organization, which we call the Stability DAO or SDAO
Transparency is not an unqualified good for monetary policy: a currency only partially backed by reserves can be arbitraged by a Soros-style shorting strategy much more easily when the quantity of reserves is public.
For instance, a currency partially backed by reserves can be successfully arbitraged by Soros' shorting strategy much easier if the quantity of reserves is known
The Folk Theorems of game theory prove that no protocol, however complex or well engineered, can eliminate corruption, understood as behavior that profits a minority at the greater expense of the majority.
Finally, we repeat the idea that the Folk Theorems of game theory prove that it is impossible to create protocols, no matter how complex or well- engineered, which can eliminate corruption
Commonly held expressions of organizational values are essential to designing and implementing any governance structure and are far more important in decentralized organizations, which inherently have less motivational structure than centralized hierarchies.
such values are far more important in decentralized organizations, which inherently have less motivational structure than centralized hierarchies
The authors recommend an SDAO governance design coordinated through reputation-weighted democratic governance, whose core objective is to create incentives that lead independent and selfish actors to collaborate productively toward a common goal.
In that paper we recommend an SDAO design coordinated through reputation-weighted democratic governance
Trust barometers such as the Edelman report show a radical depreciation of trust in centralized institutions between 2017 and 2018.
Trust barometers, such as the Edelman report, assessing the level of trust in centralized institutions suggests radical depreciation in trust between the years 2017 and 2018.
Although smart contracting in decentralized systems is perceived as creating trust through preordained coded coordination without agency problems, decentralized commerce is equally afflicted with trust issues.
While smart contracting in decentralized system can be perceived as creating trust through mathematical and coded — preordained coordination without agency problems, several factors suggest that decentralized commerce via decentralized solutions is equally afflicted with trust issues.
Trust between counterparties in decentralized systems can only limitedly be assured by smart contracts, because the contract cannot verify the underlying qualities or future conduct of the parties.
decentralized systems with anonymous counterparties
Trust between counterparties in decentralized systems can only limitedly be assured by smart contracts.
Smart contracts leave counterparty information asymmetries unresolved: the tenant of a smart property cannot fully know whether the landlord is providing a worthy property, and the landlord cannot know in advance how likely the tenant is to destroy the premises.
In our example above, the tenant of the smart property cannot fully know if the landlord is providing a worthy property. In turn, the landlord cannot know in advance how likely the tenant will destroy the premises.
Counterparty trust in the programmed parameters of a smart contract is more justified in simpler contracts, and specifically where the smart contract template has a history of successful executions.
template has a prior record of successful executions
In simpler smart contracts such trust may be more justified if the smart contract template has a history of successful executions.
In more complex smart contracts the counterparties cannot fully know whether the contract will do what it was programmed to do, or whether it will contain bugs or follow a logic the parties did not anticipate.
In other words, in more complex smart contracts, the counterparties to the contract cannot fully know if the contract will do what it was programmed to do and whether it will have bugs or otherwise follow another logic that was not anticipated by the parties to the contract.
Solving the trust problem in decentralized commerce requires an intangible value system, not a further transferable store of value.
To solve the issues of trust in decentralized commerce, an intangible value system is needed.
Until blockchain technology was introduced via bitcoin in 2009, decentralized reputation systems mostly relied on the old and corruptible concept of the Web of Trust.
Until blockchain technology was introduced via bitcoin in 2009, decentralized reputation system mostly relied on the old and corruptible concept of the Web of Trust.
Validated smart contract templates increase trust for counterparties and remove the need for costly back testing and experimentation with smart contract templates.
templates have been validated through reputation verification
Validated templates of smart contracts increase trust for counterparties. The validation removes the need for costly back-testing and experimentation with smart contract templates.
Truly increasing counterparty trust in decentralized smart contract based commerce requires that counterparties be able to review a long history of each other's conduct in decentralized commerce and of performance in earlier smart contracts.
decentralized smart contract based commerce
To truly increase trust for counterparties in decentralized smart contract-based commerce, counterparties need to be able to review a long history of each other's conduct in decentralized commerce and the history of performance in earlier smart contracts.
LTCM was diversified across markets but not across strategy, so its positions failed together; market level diversification does not imply strategy level diversification.
stress conditions in which risk spreads widen across markets simultaneously
It became obvious that while the fund was diversified in terms of markets, its overall strategy was not diversified.
Conventional risk models understated LTCM's losses because the models were estimated during more stable periods and therefore did not describe behavior under stress.
models calibrated on data from stable market periods
markets greatly exceeded what conventional risk models suggested were probable, but these were estimated during more stable periods.
The same leverage that produced LTCM's high returns magnified its losses, so leverage is a symmetric amplifier rather than a one directional source of performance.
In spite of the fact that leverage was key to LTCM ́s high returns, it also magnified LTCM ́s losses.
Before its collapse LTCM held roughly $4.8 billion in capital while controlling $160 billion in stocks and bonds, with derivatives of a notional value of $1 trillion.
position as of the period immediately before the 1998 crash
LTCM had $4.8 billion in capital prior to the crash and controlled $160 billion in stocks and bonds. In addition, derivatives of the fund had a notional value of $1 trillion.
Hedge fund disclosure to counterparties and investors relies on balance sheet concepts that are uninformative about the actual nature of market risk and credit risk exposures.
Disclosure by hedge funds to counterparties and investors are often made by using balance-sheet concepts, which are not informative about the nature of the exposures to market risk and credit risk.
LTCM reached systemically dangerous size because banks lent to it without regard to repayment capacity, and in doing so the banks endangered their own existence.
LTCM grew as large as it did because banks lent it money without regard for whether this money could be paid back. Banks put their own existence at risk with their lending practices during this time.
Additional direct limitations on hedge funds spill over onto other private investment pools such as venture capital funds and structured financings, which do not present the same systemic risk concerns.
rules drafted broadly enough to capture private investment pools generally
The imposition of additional limitations on hedge funds can impose unwarranted burdens on other types of private investment pools, such as venture capital funds and structured financings that do not raise the same concerns as hedge funds in terms of systemic risk.
The complex trading, investing and corporate structures of active international hedge funds are a major constraint on effective prudential supervision.
internationally active hedge funds with complex group structures
One of the major constraining factors that constricts effective prudential supervision of hedge funds is the complex trading-, investing- and corporate structure of active international hedge funds.
Indirect regulation asks banks to fully assess the risk they incur from hedge fund counterparties, but that assessment is often dubious at best because of the opacity of hedge fund activity.
banks face opaque hedge fund counterparties
Regulators who regulate banks' risk management processes are in essence asking banks to fully assess the risks they incur in engaging with hedge funds as their counterparties. That assessment is often dubious at best.
Indirect regulation makes ex post opportunism by hedge funds less likely because the financial intermediaries, not just the funds, stand to lose reputation and market position if their counterparty risk evaluation proves insufficient.
intermediaries face reputational exposure in the market
ex post opportunism of hedge funds is less likely considering that not only hedge funds but also their financial intermediaries are endangered to lose their reputation and market position in case it transpired that their risk evaluation of a counterparty hedge fund is insufficient
Because information flow in decentralized systems is optimized through dynamic feedback effects, such systems mutate and change easily, which makes them more attack resistant and allows them to grow very quickly.
Decentralized systems can also very easily mutate and change because the information flow is optimized through dynamic feedback effects. As a result, such systems become more attack resistant on multiple levels.
Decentralized Autonomous Organizations challenge the core belief that governance necessitates agency, because a DAO can operate a governance structure built entirely on software, code, and smart contracts.
DAOs instantiated on public blockchain platforms such as Ethereum
Decentralized technologies increase consumer and market trust at unprecedented scale, which lowers transaction costs and raises confidence and certainty, thereby facilitating economies of scale that centralized structures may not be able to achieve.
technology enabled decentralized commerce
Trust can help lower transaction costs but it also increases consumer and overall market confidence and certainty, which facilitate economies of scale that may not be possible in centralized structures.
The flexibility that human business requires will unlikely ever be attained in existing decentralized protocols unless a decentralized verification system is built into decentralized commerce.
the needed flexibility in existing decentralized protocols will unlikely ever be attained unless a decentralized verification system is built into decentralized commerce.
Reputation avoids the recentralization dynamic that afflicts currencies because it must be earned and can be lost yet cannot be converted into a fungible store of value exchangeable for goods.
reputation used as a metric and store of value in decentralized systems
Reputation as a metric and store of value does not suffer the same consequences and does not lead to centralization because it must be earned, it can be lost, yet it cannot be turned into a fungible store of value that allows the
Decentralized reputation verification is the backstop for smart contracting: it makes mathematically rigid smart contracts more adjustable for business needs and validates smart contract templates, which raises counterparty trust and removes the need for costly back-testing.
Decentralized reputation verification systems enable mathematically rigid smart contracts to become more adjustable for the needs of business. Reputation verification becomes the backstop for smart contracting.
Increasing counterparty trust in decentralized commerce requires that the full history of transactions be openly viewable and verifiable, so that counterparties' actions endure as part of a public record and a meaningful precedence system.
decentralized smart contract based commerce between anonymous parties
The history of transactions has to be fully openly viewable and verifiable, so that business parties can see that their counterparties will perform as expected.
A DAO's profit distribution weights across present workers, past workers, protocol designers, and governance designers should match the DAO's current values, since a greater share for new workers attracts new workers, a greater share for older workers signals long term stability, and a greater share for protocol designers attracts innovation.
A greater share for new workers will attract new workers, a greater share for the older workers will signal long-term stability, while a greater share for the protocol designers will attract more innovation.
For any static set of rules in an infinitely repeated game using reputation stakes there is a way to subvert the rules for individual profit at the expense of the group, a result the author attributes to the Folk Theorems of game theory.
infinitely repeated games using reputation or stakes
For any static set of rules in an infinitely repeated game using reputation (stakes), there is a way to subvert the rules for an individual's profit at the expense of the group.
A dynamic, changing set of governance rules can address the problem that any static rule set is gameable, and can establish the incentives necessary to stop such abuses.
decentralized governance systems exposed to strategic attack
A dynamic, changing set of governance rules can address the conundrum, and can set up the incentives necessary to stop the abuses.
Current hedge fund trading technology is hard coded by humans, whereas deep learning systems can be given a simple command and derive a result from data on their own; this is the operative difference between legacy quantitative tools and machine learning.
The current technology used in hedge fund trading is hard coded by a human. In contrast, a deep learning AI machine learning algorithm can be given a simple command and automatically find a result based on data.
Machine learning improves portfolio diversification by searching for instruments that are uncorrelated with each other and that still match the requirements of the target risk profile.
portfolio construction against a defined risk profile
ML can help in accurate portfolio diversification by looking for uncorrelated instruments that match requirements of the risk profile.
Repeated use of the same data set by data scientists creates an overfitting risk: the training model overfits the test set, which limits the performance of the applied model on a different dataset.
data scientists reusing a single data set repetitively
When data scientists use the same data set repetitively a risk exists that the training model will overfit the test set of data, which can limit the performance of the applied model on a different dataset.
The Northern Trust and IBM blockchain removes a specific inefficiency in private equity deal practice by letting all involved parties in a deal look at a single compiled version of the transaction and all data relating to it, rather than reconciling multiple copies of the deal documents.
Northern Trust and IBM partnership from February 2017
Because blockchain is transparent, verifiable, self-authenticating and self-enforcing, transactions can settle instantaneously at near zero cost, and it is this combination plus technology-driven democratized trust that drove the financial industry's large blockchain investments out of fear of obsolescence.
Blockchain technology is transparent, verifiable, self- authenticating, and self-enforcing, financial transactions can be executed instantaneously at near zero transaction costs, increasing the efficiency for business and individuals exponentially.
Machine learning applied to execution algorithms lets large orders be split into thousands of smaller transactions without moving the market, with the algorithm adjusting its aggressiveness to market conditions.
ML can be applied in execution algorithms that help execute large orders by dividing them into thousands of smaller transactions without influencing the market, while adjusting their aggressiveness to the market situation.
Artificial intelligence and machine learning are used far more heavily for idea generation and portfolio optimization than for execution: two thirds of surveyed funds use them to generate trading ideas and optimize portfolios, while only just over a quarter use automation to execute trades.
Two-thirds of respondents use AI/ML to generate trading ideas and optimize portfolios.101 Just over a quarter of respondents use automation to execute trades.
Adoption of artificial intelligence in hedge funds remains partial rather than total: more than four out of ten survey respondents still rely on conventional human thinking to guide their investment processes.
However, more than four out of ten of survey respondents still rely on conventional human thinking to guide their investment processes.
Whether deep learning can identify particular features of a stock that would be profitable remains contested rather than settled.
There is disagreement over whether deep learning may be able to identify particular features of a stock that could be profitable.
Most large private equity and hedge fund advisers have not yet even considered combining blockchain with big data and artificial intelligence, leaving first mover efficiency gains to smaller competitors.
Most large fund advisers in the private equity and hedge fund industry have not yet considered implementing blockchain technology in combination with big data applications and artificial intelligence.
Blockchain reduces counterparty credit risk through a specific mechanism: a single shared ledger compresses the settlement cycle so that cash or securities are verifiably in the account within seconds of the trade, leaving almost no window for counterparty default.
a single shared ledger used across trading firms
credit risk is reduced because cash (if selling) or the securities (if purchasing) are in the account for verification shortly after the trade (which could be seconds, if not fractions of a second), because the settlement cycle is substantially reduced.
Because direct ownership on a blockchain removes the need for the Depository Trust Corporation to hold the certificate and for a broker to record beneficial ownership, agency costs can be cut and ownership clarity increases.
direct registration of ownership on the ledger
By establishing a system that makes the DTC obsolete, agency costs have the potential to be cut and clarity surrounding ownership will increase.
Transfer agents become unnecessary in blockchain based trading models because every function they perform, including maintaining the holding record, can be automated in code and is already produced by the ledger's design.
fully blockchain based trading and settlement models
In blockchain- based trading models, transfer agents will not be needed because every task they preform can be automated through coding.
The double spending problem has not been eradicated in theory: a group or syndicate obtaining 51 percent control of a network could reverse transactions and create a private chain that the market could only limitedly discern as not real.
a decentralized network where one party can amass majority hashing control
There is the possibility a group or syndicate could gain 51% control over the network and would therefore be able to reverse transactions and create a private blockchain, which the market could only limitedly discern as not real.
Blockchain based offerings introduce technology risks from code design and functioning and from third party intrusions that are generally absent in traditional offerings, and these risks cannot really be quantified.
blockchain based offerings compared with traditional offerings
Technology-based risks include risks from the design and functioning of code, and from third-party intrusions. Such risks are generally not present in a traditional offering.
Near instant settlement creates its own regulatory problem: there is no practical ability to correct trade errors when settlement is same day, whereas the T+2 or T+3 structure supplies a correction window even as its delay causes other trading violations.
same day or near instant settlement compared with T+2 and T+3
Settlement-related issues (e.g., no practical ability to correct trade errors because of same-day / near-instant settlement versus T+3 / T+2 structure).
Despite an early call for regulatory leadership from Commissioner Stein in 2015, the SEC has not addressed core recognition questions for blockchain in finance, including cryptocurrencies, tokens as securities, and DAOs as investment advisers.
SEC action between 2015 and the time of writing
The SEC's rejection of the Winklevoss Bitcoin ETF, reasoned on Bitcoin's unregulated nature and susceptibility to fraud, reflects agency distrust of the crypto asset class as a whole rather than a narrow product objection.
SEC order disapproving the Winklevoss Bitcoin Trust listing
Development of blockchain based processes will take several years if not decades, so the most likely outcome is that legacy and blockchain based issuance, trading, and settlement systems coexist side by side for the foreseeable future.
transition period for securities market infrastructure
will take several years if not decades, and so the most likely circumstance is that legacy and blockchain-based securities issuance, trading, settlement, and related systems and processes will have to co-exist side-by-side for the foreseeable future.
The Overstock structure fails to deliver investor privacy, because all existing broker-dealer customer agreements contain provisions allowing the broker-dealer to share the customer's identity, whereas ideally the individual's privacy would be contained.
existing broker-dealer customer agreements
For instance, all existing broker-dealer customer agreements included provisions which allows the broker-dealer to share the identity of the customer. Ideally, the privacy of the individual would be contained.
Decentralized systems mutate and change easily because their information flow is optimized through dynamic feedback effects, and this capacity to mutate is what makes them more attack resistant on multiple levels.
holds for systems whose information flow is genuinely distributed
eBay's user rating system, despite being its biggest competitive advantage, is clearly flawed, and the persistence of those flaws demonstrates the unmet need for a decentralized reputation verification system, since no better technology has yet been produced.
applies to centralized platform reputation systems as of 2019
While the user ratings eBay uses clearly have flaws (that illustrate the need for a decentralized reputation verification system – discussed in Chapter 6), so far, nobody has been able to come up with a better technology.
Decentralized Autonomous Organizations challenge the core belief that governance necessitates agency, attacking organizational design at a fundamental level rather than merely reforming it.
applies to DAOs built on smart contracting platforms such as Ethereum
While it is still difficult to imagine a world without governance structures facilitated by agency constructs, Decentralized Autonomous Organizations (DAOs) have started to challenge the core believe that governance necessitates agency.
DAOs are in their infancy and cannot currently overcome core governance problems while maintaining a decentralized structure; the two objectives are, as of 2019, in tension.
DAOs are in their infancy and cannot currently overcome core governance problems while maintaining a decentralized structure.
even as smart contracts grow more sophisticated
While more sophisticated smart contracts over time can fulfill some of these human business requirements, the needed flexibility in existing decentralized protocols will unlikely ever be attained unless a decentralized verification system is built into decentralized commerce.
Until blockchain technology arrived with Bitcoin in 2009, decentralized reputation systems rested on the roughly twenty five year old and corruptible concept of the Web of Trust.
pre 2009 decentralized reputation systems
Until blockchain technology was introduced via Bitcoin in 2009, decentralized reputation systems mostly relied on the roughly 25 year old corruptible concept of the Web of Trust.
It is immaterial whether security incidents occur on centralized exchanges, on centralized systems appended to decentralized structures, or in the decentralized systems themselves, because the public perceives the resulting security concerns as a technology risk across all of these technologies.
public perception of cryptocurrency and blockchain security
structures or the decentralized systems themselves is immaterial in this context. The security concerns are seen by the public as a technology risk across technologies.
Decentralized reputation verification systems make mathematically rigid smart contracts more adjustable for the needs of business by serving as the backstop for smart contracting.
requires an operational decentralized reputation verification layer
mathematically rigid smart contracts to become more adjustable for the needs of business. Reputation verification becomes the backstop for smart contracting.
Without a core common ethical denominator, decentralized systems cannot last: they lose coherence, become attackable, and can be corrupted, leading to suboptimal societal outcomes.
applies to decentralized systems as to all attempts to organize society
Without a core common ethical denominator, decentralized systems cannot last, they lose coherence, become attackable, and can be corrupted, leading to suboptimal societal outcomes.
For any static set of rules in an infinitely repeated game using reputation stakes, there is a way to subvert the rules for an individual's profit at the expense of the group, which is why static decentralized governance rules can always be gamed and only dynamic, changing rules can address the problem.
infinitely repeated games with reputation or stake based rules
Forking a chain is an insufficient governance mechanism, and even attempts to create socially optimal chain forking rules cannot suffice as a substitute for evolutionary blockchain governance protocols.
existing blockchain governance that relies on forks
Existing blockchain governance still mainly consist of forking a given chain. Even attempts to create socially optimal chain forking rules cannot suffice.
Dynamic power organization in a DAO succeeds only if the decentralized governance structure motivates token holders to collaborate productively by fairly rewarding development, work, and the policing of any diminishments.
DAO designs that distribute autonomous power to members
The successful implementation of such dynamic power organization requires a decentralized governance structure that motivates DAO token holders to collaborate productively, by fairly rewarding development, work, and the policing of any diminishments.
Participants must be incentivized to improve their own utility while simultaneously benefiting the institution over the long run; without that duality of incentivization, rational and opportunistic internal and external constituents will attempt to game the governance design.
all blockchain governance structures, especially on chain governance
Without that duality of incentivization, rational and opportunistic internal and external constituents will attempt to game the governance design.
Ex post code based majoritarian rules generated by DAOs are superior to ex ante majoritarian default rules because they rest on more accurate real time information from the edge and decentralized feedback effects, and are not subject to the same information asymmetries.
DAOs with dynamic governance mechanisms allowing token holder votes on code
Ex-post code-based majoritarian rules are superior to ex-ante majoritarian rules because they are based on more accurate real-time information from the edge and decentralized feedback effects.
A decentralized on chain precedent system makes reputation based DAO governance dynamic: a post or template that is increasingly referenced gains non fungible reputation weight and associated fungible salaries, while unused precedent dissipates over time.
DAO designs with a weighted directed acyclic graph and public on chain posts
As a post/template on the blockchain gets increasingly referenced by the DAO members and other users, it increases in non-fungible reputation weight and associated fungible salaries.
Optimized DAO governance should pay members only indirectly, through fungible salary tokens issued in proportion to non fungible merit tokens, because the indirect economic effects remove corruptive elements and make the design more attack resistant and stable in the long run.
bifurcated DAO designs with two disparate token types
The indirect economic effects remove corruptive elements and make the governance design more attack resistant and stable in the long run.
Reputation based staking removes the corruptive elements of fungible tokens from voting because third parties are less likely to be able to take over a non fungible asset that is organically grown and maintained through actual expertise in the DAO subject matter.
voting by staking non fungible reputation tokens
The corruptive elements of fungible assets/tokens are removed because third parties are less likely able to take over a non-fungible assets, such as reputation, that is organically grown and maintained through actual expertise in a given DAO subject matter.
Reputation based metrics were ineffective in centralized governance systems because before blockchain, reputation could not be stored autonomously, anonymously, and transparently, so it was not a reliable predictor of actors' future actions.
pre blockchain centralized reputation systems such as the web of trust and platform ratings
Before the emergence of blockchain technology, reputation could not be stored autonomously, anonymously, and transparently. Accordingly, reputation was not a reliable predictor of actors' future actions in centralized governance systems.
Reputation based DAO governance turns a zero sum game into a positive sum game, because members are given incentives to build lasting non fungible value through a long term record of productive cooperation that improves the DAO.
DAO designs using non fungible reputation rather than fungible rewards
DAO members have incentives to create lasting non-fungible value for the institution by developing a long-term non-fungible record of productive cooperation that in effect improves the DAO.
DAO member reputation should be designed as inflationary rather than as a permanent stock, so that non use such as non staking or non voting leads to value depreciation.
The DAO member reputation should be inflationary in the DAO design.
ICO sale terms are not fixed at launch: promoters can alter the smart contract to change the sales rules mid course during an offering, a risk factor for retail investors that has no analogue in a registered offering.
ICOs administered through promoter controlled smart contracts
Promoters can also alter the smart contract to change ICO sales rules mid-course during an ICO.
Institutional investors face a distinct barrier beyond volatility: fiduciary responsibility to their clients limits the type of risk they may take on, and the lack of custody solutions recognized by regulators compounds the problem.
institutional investors subject to fiduciary duties
early 2020s absence of regulator recognized custody solutions
While larger institutional players face the same issues, they are also limited by their fiduciary responsibility to their clients, which limits the type of risk they can be exposed to. Compounding these challenges is the lack of stable custody solution(s) that are recognized by the regulators.
Cyber security incidents contribute to the volatility of the digital asset market through a specific channel: consumers instantaneously withdraw their assets from an exchange affected by an incident.
digital asset exchanges affected by cyber security incidents
Some indicia suggest that cyber security incidents contribute to the volatility of the digital asset market as consumers withdraw instantaneously their assets from an exchange that has been affected by a cyber security incident, among other reasons for this relationship.
Accountability is a structural concern in DeFi: without a central entity it can become unclear who is responsible for wrongdoing, and when problems arise no central party can freeze transactions, fix problems, or restore normal operations.
fully decentralized finance systems without a central operator
"Without central entity involvement, who should be held accountable for potential wrongdoing can become unclear. Who do you resort to for help? When problems arise, no central party can take actions to freeze transactions, fix problems and restore normal operations.
In the early 2020s the DeFi technology infrastructure was insufficiently developed to support DeFi growth estimates and growth potential, and fulfilling that potential requires significant tradeoffs between scaling, security, and levels of decentralization.
DeFi infrastructure as of the early 2020s
In the early 2020s, the DeFi technology infrastructure was insufficiently developed to support DeFi growth estimates and growth potential.
The tradeoff between transaction approval speed and immutability has the potential to undermine the DeFi infrastructure in the long run.
consensus based decentralized ledgers supporting DeFi
The trade-off between transaction approval speed and immutability has the potential to undermine the DeFi infrastructure in the long run.
Consensus in decentralized systems presents a two sided cost problem: creating consensus raises the costs of prepping, processing, and storing information, while reducing the number of computational checks increases the risk of collusion attacks that could change the record.
information distributed to and validated by all parties
Creating consensus requires increase costs of prepping, processing, and storing information.333 On the other hand, fewer computational checks for consensus increase the risk of collusion attacks that could change the record.
Conducting monetary policy through a central bank digital currency imposes a requirement on the technology layer: the underlying network protocol must enable the central bank to adjust the money supply at will and to act as lender of last resort with access to unlimited supply.
CBDC built on a blockchain style protocol
central bank intends to conduct monetary policy through the CBDC
Moreover, in order to be able to conduct monetary policy with CBDC, the underlying network protocol would have to enable the central bank to adjust the money supply at will.
The Bank of Canada's year long Jasper trial revealed a tradeoff rather than a solution: Ethereum would make the wholesale payment system more resilient but was costly and raised privacy issues, while Corda addressed cost and privacy but made the system less resilient, and the Bank concluded in May 2017 that blockchain was not mature enough to run a national interbank payment system.
national interbank payment system use case
While Ethereum would make the wholesale payment system more resilient but would be costly and raised privacy issues, Corda was able to address the cost and privacy concerns but made the system less resilient.
Although the public realm of coins could not exist without prior private experimentation, it is possible that the public realm will impact or even pre empt private coin development, for example if central banks attempt to censor the use of digital currencies they did not issue.
coexistence of central bank digital currencies and privately issued coins
it is possible that the public realm of the coin evolution could attempt to impact or even pre- empt the private coin development and use. For example, some central banks may attempt to censor the use of non-centrally-issued digital currencies.
A DAO realigns the otherwise disparate interests of principals and agents because all participants in the DAO share the same goal, which reduces behavior contrary to the interests of the organization.
Incentives are realigned between otherwise disparate interests of principals and agents because all participants in a DAO share the same goal, which reduces behavior that is contrary to the interests of the organization.
Reputational penalties for non performance in a DAO are free from racial and cultural bias, because token holders are unlikely even to know one another.
members are pseudonymous or unknown to each other
Absent continual effort to maintain decentralized order, the very values that initially unite DAO members tend to produce ever tighter and more complex hierarchical structures inside the DAO, ending in a fully centralized tree structure.
no ongoing effort is made to preserve decentralized order
Without continual efforts to maintain decentralized order, values that initially unite DAO members have a tendency to result in ever tighter and complex hierarchical structures in the DAO.
The immutability of blockchain ledgers is itself a vulnerability, because once a DAO is in operation its essential construction is very difficult to alter should a bug in the code appear.
The immutable nature of blockchain ledgers could also make the DAO vulnerable to attacks because it is so difficult to alter the essential construction of the DAO once the system is in operation, should a bug in the code arise.
The identity of actors in a DAO governance design typically creates corruptive elements, and merit identifiers other than individual identity remove the most corruptive influences.
Similarly, the identity of actors in a DAO governance design creates typically corruptive elements. Merit identifiers other than individual identity remove the most corruptive influences.
Reputation based staking removes the corruptive elements of fungible tokens because a third party is less likely to be able to take over a non fungible asset such as reputation that was organically grown and maintained through actual expertise in the DAO's subject matter.
reputation is non fungible and expertise based
The corruptive elements of fungible assets/tokens are removed because third parties are less likely able to take over a non-fungible asset, such as reputation, that is organically grown and maintained through actual expertise in a given DAO subject matter.
Paying DevDAO salaries in fungible stable tokens in proportion to members' non fungible reputation scores makes the economic benefit indirect, which removes corruptive elements and makes the governance design more attack resistant and stable over the long run.
a bifurcated token design with non fungible reputation tokens and fungible salary tokens
The salary payments in fungible stable tokens are in proportion to DevDAO members' respective non-fungible reputation token scores. The indirect economic effects remove corruptive elements and make the governance design more attack resistant and stable in the long run.
The reputation based DevDAO governance design creates a positive sum game, because members have incentives to build lasting non fungible value through a long term record of productive cooperation that improves the DevDAO itself.
reputation is non fungible and publicly reviewable
By contrast, the reputation- based DevDAO governance design creates a positive-sum game because DevDAO members have incentives to create lasting non- fungible value for the DevDAO by developing a long-term non- fungible record of productive cooperation that in effect improves the DevDAO.
DevDAO member reputation is inflationary by design, so that non use, meaning failure to stake reputation tokens or to vote, causes value depreciation, which incentivizes action and makes liveness faults less likely.
The DevDAO member reputation is inflationary in the DevDAO design. As such, non-use, e.g. non-staking of reputation tokens or non-voting, would lead to value depreciation, which incentivizes action and thus value enhancement. Liveness faults become less likely.
Reputation weighted salary distribution defeats sock puppet attacks, because a member who creates ten accounts holding one reputation token each ends up in the same position as one account holding ten reputation tokens.
salary is distributed in proportion to reputation token holdings
This solves the sock- puppet attack because if a DevDAO member creates 10 accounts with 1 reputation token each, it is the same as 1 account with 10 reputation tokens.
Centralized coordination of behavior for the common good risks undermining individual effort, whereas blockchain technology's autonomous and anonymous decentralized coordination of individual action can deliver common good outcomes without suppressing individualism and its welfare enhancing effects.
applies where common good objectives require coordinating many individuals
While centralized common good coordination of human behavior risks undermining individual effort, blockchain technology's autonomous and anonymous decentralized network coordination of individual human action can help overcome the threat to individualism and its welfare enhancing effects.
Blockchain's formal immutable guarantees, improved data ownership, transparency, network integrity, and data privacy together generate a form of trust that helps optimize both business and society.
Through its formal immutable guarantees, improved data ownership, transparency, network integrity, and data privacy, blockchain technology facilitates unprecedented trust that helps to optimize business and society.
Power in a blockchain system is exercised through the consensus protocol, which places control of data with multiple networked parties and thereby creates checks and balances that prevent any single vested interest from controlling the system.
Power is exercised by way of blockchain's consensus protocol. The consensus protocol enables the control of data by multiple networked parties. It facilitates a system of checks and balances that prohibits any vested interest and control of the system.
Trust created by law is often limited because it is only indirectly democratically legitimized, inflexible, untimely, resistant to change, dependent on fallible human centric decision processes, and constrained to human speed.
applies to trust generated by legal guarantees and judicial enforcement
Legally created trust is often limited as it can be arbitrary because it is only indirectly democratically legitimized, inflexible, untimely, resistant to change, with fallible human-centric decision processes, and human speed.
Microdemocratic vote allocation improves outcome quality because a voter's proportional allocation of votes to an issue is itself evidence of that voter's higher knowledge of the issue, and voters are unlikely to give top priority to issues they know little about.
Moreover, part of the power of this microdemocratic approach derives from the higher levels of knowledge a given voter has on a particular issue that is evidenced by the voters' proportional allocation of votes on such issue.
Representative democracies in the early 2020s were slow and inflexible because of their constitutional and institutional infrastructure and their legal systems, with change typically depending on the election of a new government after around four years at the earliest.
describes representative democracies as of the early 2020s
In the early 2020s, representative democracies were largely slow and inflexible because of their constitutional and institutional infrastructure and their respective legal systems.
Decentralized voting pools can become supplemental voting systems that help overcome the legitimacy deficit of representative democracies, but installing them as upgrades to existing representative democracies would require constitutional or democratic support that is dubious at best.
requires constitutional or democratic authorization for adoption
Of course, such upgrades to existing representative democracies may require constitutional or democratic support which is dubious at best.
Blockchain based land title records can serve as collateral for credit or as identity verification, removing a requirement that is often challenging and prohibitive for accessing both financial and non-financial services.
applies where identity or title verification is a prerequisite to service access
Such blockchain title data can serve as collateral for accessing credit or verifying identities which is often a challenging and prohibitive requirement for accessing both financial and non-financial services.
Consumers increasingly favor genetically unmodified organic food from local and sustainable sources, yet the integrity of such products is usually difficult to verify, a verification gap blockchain technology can close.
Blockchain technology can help ascertain the integrity of clean food for consumers. Consumers increasingly favor genetically unmodified organic food from local and sustainable sources. Yet, it is usually difficult to verify the integrity of products.
The transparency that blockchain offers can address the public's diminishing trust in traditional charities, because blockchain based giving allows donations to be tracked to their destination, kept anonymous or named, and freed of administrative cost or fee.
The transparency blockchain technology offers can help address the public's diminishing trust in traditional charities.
Decentralization is not merely delegation, deconcentration, devolution, or the redistribution of centrally organized authority or centrally collected revenue; equating it with those terms misstates what decentralization is.
Termino- logically, decentralization is not just synonymous with delegation, deconcentration, disassortative, devolution, circulation, or partnership.
The degree of decentralization can be delineated by distinguishing logical decentralization, architectural or hardware decentralization, and political or governance decentralization, though some overlap among these concepts is unavoidable.
The degree of decentralization can be delineated by distinguishing several core con- cepts such as logical decentralization, architectural decentralization, and political de- centralization.
Because information in decentralized systems is continuously outdated by a changing environment, decentralized governance must be autonomous and automated, able to evolve, mutate, and create new information precedent, in the way mitosis replaces worn out cells.
decentralized systems whose information changes continuously
Like mitosis, this decentralized governance process has to be autonomous and automated in the system. Decentralized governance has to be able to evolve and mutate and create new information precedent for the continuous efficient operation of the system.
Natural selection operates as a decentralized selection mechanism: no centralized authority determines which organisms survive, and the population with the most adaptable and heritable traits gains a natural comparative advantage without any centralized mechanism.
biological evolution as an analogy for decentralized systems
The natural selection of the most adaptable and survivable population char- acteristics materializes without a centralized mechanism.
Technology-driven decentralized systems depend on existing infrastructure and follow existing natural network patterns, just as predator populations could not evolve without prey.
Technology-driven decentralized systems depend on an ex- isting infrastructure.
Decentralized systems depend on network effects, which occur when increasing numbers of participants in a network improve the value of network access for the entirety of users; however, a network's infrastructure can compromise its network effects and the associated user benefits.
Decentralized systems depend on network effects. Network effects occur when in- creasing numbers of participants or users in a given network improve the value of network access for the entirety of the users.
Information in decentralized systems originates at the edges and is optimized through feedback: peers who receive information transmit its changed relevance back to the original generator, who evaluates and amends it, constantly updating and optimizing information quality.
This feedback constantly updates and optimizes the quality of infor- mation.
Independent and autonomous subgroups, formed randomly based on members' ability to contribute to a common cause and characterized by equality and mutual trust, form the backbone of decentralized structures.
Independent and autonomous subgroups create the backbone of decentralized structures. Subgroups are formed randomly based on individual members' ability to contribute to the common cause of the group.
Centralized coordination enables attack coordination because the hierarchical structure allows attackers to identify a single point of failure, whereas the constantly morphing information flow of decentralized systems increases their attack resistance.
comparison of centralized and decentralized system security
Centralized coordination enables attack coordination because the hierarchical struc- ture allows the identification of a single point of failure.
There is no clear-cut discrete difference between centralized and decentralized; organizations fall along a spectrum whose essential differentiator is the freedom of each member in the network.
There is no clear-cut, discrete difference between centralized and decentralized. There is a spectrum between the two that any organization will fall along. The essen- tial differentiator is the freedom of each member in the network.
Human group coordination progresses through three stages: chaos, then decentralized organization, then centralized hierarchy. Decentralized organization is not a deviation but the natural intermediate stage between no organization and a completed hierarchy.
human group coordination and institutional development generally
Human group coordination naturally progresses from the first stage, chaos (barbari- ans ravaging the landscape, "Raahr!"), to decentralized organization ("Let's all agree to band together to defend ourselves from the barbarians"), to centralized organiza- tion ("Long live the king").
At the decentralized stage the individual nodes remain autonomous and the network assigns no fixed roles; coordination comes from alignment on a shared transcendental goal rather than from formal position, so that, as the authors put it, the values are the organization.
decentralized stage of organization, before a hierarchy has formed
The individual nodes remain autonomous; the network does not have fixed roles for each member. But they are all responding to a higher calling as they unite in purpose.
As members constantly probe the edge of acceptable behavior, policing the rules becomes more expensive, the rules become divorced from the shared goals, and relationships become brittle and formal instead of warm and loose.
organizations relying on formal rule enforcement
As members constantly probe the edge of acceptable behavior, policing the rules becomes more expensive. The rules become divorced from the shared goals. Relationships become brittle and formal instead of warm and loose.
Long-term organizational stability requires a dynamic governance system that can adapt the rules to changing circumstances, a requirement that holds for any organization but especially for decentralized ones.
organizations seeking long-term stability
The fact that any set of rules can be corrupted illustrates two necessities for the long-term stability of any organization, but especially for decentralized organiza- tions. First, a dynamic governance system must be designed that can adapt the rules to the circumstances.
Decentralization, though it may look wastefully redundant, gives every member greater autonomous power, whereas centralization limits members' powers and reduces them to cogs in the machine.
Decentralization, while it may be seen as wastefully redundant, gives every member greater autonomous power. Centralization limits its members' powers, reducing them to mere cogs in the machine.
The Maghribi traders built a sophisticated decentralized trade network using the information technology of their era plus reputation, and later farmers used dynamic governance designs to create the most powerful decentralized organization in history.
historical decentralized trade and cooperative organizations
The Ma- ghribis built a sophisticated decentralized trade network using WWth century infor- mation technology, and reputation. Wcth century farmers used dynamic governance designs to create the most powerful decentralized organization in history.
Western democracies still run on structures developed decades or centuries ago and have no formal interaction with the new data stream produced by modern information technology.
Western democracies are still using the structures developed decades or centuries ago, and lack any formal interaction with this new data stream.
The autonomous element of a DAO comes from its governance system being programmed through smart contracts, which makes a DAO ultimately democratic rather than relying on a benevolent dictator to correct course during black swan events.
decentralized autonomous organizations governed by smart contracts
The autonomous aspect of a DAO stems from its programmed governance system through smart contracts. A DAO is ultimately democratic, instead of having a benev- olent dictator behind the scenes to efficiently correct course during black swan events.
Decentralized money and decentralized contracts have been built, but decentralized business will not work until roughly eight further decentralized institutions that people actually use in business are built.
decentralized commerce built on blockchain infrastructure
Two important tools have been built, decentralized money (Bitcoin) and decentral- ized contracts (Ethereum). But it won't work until eight more decentralized institu- tions are built that people use to do business.
Money and contracts are worthless in business with counterparties who cannot be trusted to keep a bargain, so decentralized commerce requires a system in which reputation means something.
decentralized business among parties without prior trust
Money and contracts are worthless in business with barbarians who can't be trusted to keep a bargain. To do business, we need a system where reputation means something.
The unstoppable power of decentralization is threatened by unregulated competition for profits, but it can be maintained even in extreme circumstances by a secure and meaningful reputational system.
decentralized organizations exposed to profit competition
requires the reputation system to be secure and meaningful
The "unstoppable power of decentralization" is threatened by unregulated competition for profits, but can be maintained in the most extreme circumstances by a secure and meaningful reputa- tional system.
Modern Western democracies, which the authors treat as the largest DAOs ever assembled, show that a network whose members hold diverse values can be united by protocol centralization, and that the destabilizing effect of that protocol centralization can be ameliorated by power decentralization through dynamic governance design.
networks uniting members with diverse values
Analyzing modern Western democracies, the largest DAOs ever as- sembled, shows networks of members with diverse values can be united with proto- col centralization, and its destabilizing effect can be ameliorated by power- decentralization through dynamic design of governance.
The centralized hierarchy built by the Chinese Communist Revolution was extremely successful at the military goal it was designed for, but once the military threat was gone it failed completely at solving other important problems, producing catastrophic reforms such as the Cultural Revolution and the Great Leap Forward.
China from 1949 until Mao Zedong's death in 1976
This centralized hierarchy was extremely successful at the military goal it was designed for, but completely failed at solving other important problems once the military threat was gone.
The lesson the authors draw from Imperial China and Pharaonic Egypt is that decentralization of power and individual autonomy give long-term stability when the society also has unifying ideals it can believe in.
requires unifying ideals the society believes in
The lesson of Im- perial China, and Pharaonic Egypt before it, is that decentralization of power, individ- ual autonomy, gives long-term stability when there are unifying ideals that the society can believe in.
The strong trust that sustained Maghribi trade, in which embezzlement was rare despite extreme information asymmetry, cannot be explained by a strong centralized government, since the Maghribis could not form a centralized legal or political hierarchy and the official legal channels were slow and unreliable.
Maghribi Jewish traders around 1000 AD under the Fatimid caliphate
In point of fact, the records show that such embezzlement was rare. Instead, a strong sense of trust pervaded. So what mechanism protected the principals from their agents' asymmetric information? The answer was not a strong centralized gov- ernment.
Honesty would be the wrong strategy for an agent if the contract were anonymous and its resolution did not affect future contracts, because that situation is a single-stage zero-sum game in which stealing all the entrusted wealth is optimal.
no effect of the outcome on future business
Honesty would be a bad strategy for the agent if the contract was anonymous and the resolution didn't affect future contracts.
Adding reputation to the contracting game converts it from a single-stage zero-sum game into a repeated positive-sum game in which the rest of the community becomes relevant, because reputation is a future-oriented commodity that pays off with the promise of future contracts.
networks where reputation is observable and policed by the community
By adding reputation to the game, it becomes a repeated game, and the rest of the community becomes relevant. Reputation is a future-oriented commodity, which pays off profits with the promise of future contracts. Now the game is a repeated game which is positive-sum.
Reputation permits business with any member of a network regardless of personal acquaintance, but only if the network is closed and its size is limited by the ability to police reputation with the available information technology.
size bounded by available information technology
First, reputation allows business dealings with any member of the network, regard- less of personal acquaintance. This requires the network to be closed, however, with a size limited by the ability to police reputation using the information technology available.
Focusing rewards on reputation rather than on immediately fungible cash encourages decentralized organization because it disperses power fairly: anyone with equivalent talent is equally acceptable, those already employed are unavailable, and the exponential rich-get-richer concentration of power is diminished.
networks that reward members with reputation rather than immediate cash
Finally, a focus on reputation instead of immediately fungible cash rewards encour- ages decentralized organization because it disperses power, and it does so fairly.
The authors stipulate that functioning democracies are decentralized autonomous organizations: the United States government is a DAO, as are Norway, Mauritius, Uruguay, and South Korea, and every functioning democracy is more akin to a DAO than to a centralized corporation.
The United States government is a decentralized organization, a DAO. Norway is a DAO—the best DAO according to the democracy index.38 Mauritius, Uruguay, and South Korea are also DAOs. Every functioning democracy is more akin to a DAO than to a centralized corporation.
Rating systems on centralized marketplaces are actively gamed: new Amazon sellers are solicited by sock puppet operators offering to inflate their ratings and attack competitors.
observed on major centralized e-commerce platforms
For example, one of the first things that will hap- pen if you open a shop on Amazon is that you will receive several messages from ma- licious sock-puppet wranglers offering to game the rating system to improve your company's ratings while attacking your major competitor.
Social networks grow exponentially more powerful through the network effect, but they are stifled by the centralized ownership and governance of the Web 2.0 companies that run them; governing decentralized information flow requires decentralized incentive designs.
applies to networks whose value comes from member interaction
But these networks are stifled by the centralized ownership and governance of the Web ).5 companies that run them. Governing decentralized information flow ne- cessitates decentralized incentive designs.
If a peer to peer network were decentrally owned by its users, its algorithms could be open source and still remain safe, because the network could reward members for policing exploitation instead of relying on a centralized company to keep the algorithm opaque.
requires an incentive design that rewards members for defending the algorithm they own
if the P)P network were decentrally owned by the users them- selves, the algorithms can be open source and still remain safe.
A truly decentralized organization requires that its rules be transparently available to all members; otherwise the keepers of the knowledge acquire higher status and a hierarchy forms.
applies to organizations that claim to be decentralized
In order to have a truly decentralized organization, the rules must be transpar- ently available to all members. Otherwise the keepers of the knowledge have a higher status, creating a hierarchy.
The goal of the Web3 movement is to foster radical bureaucratic transparency through open source design, to advance individual autonomy and privacy through cryptography, and to level access to information and computing resources through decentralized networks.
The goal of the WebG movement is to foster radical bureaucratic transparency using open source design, to further individual au- tonomy and privacy using cryptography, and to level the access to information and computing resources with decentralized networks.
Bitcoin proved that a decentralized peer to peer network can manage valuable assets without a central authority, but the centralizing force of competition concentrated power anyway, as economies of scale produced large mining farms in place of millions of individual members maintaining the ledger.
applies to proof of work networks where mining rewards create economies of scale
But the centralizing forces of competition led to concentration of power in the Bitcoin network, as econo- mies of scale led to large computer farms devoted to mining for bitcoins, instead of millions of individual network members maintaining the ledger on their laptops.
Bitcoin and Ethereum have no formal binding governance framework declaring how consensus protocols may be changed in the future, which the authors identify as a deep flaw that weakens the networks and will lead to instability.
applies to major blockchains lacking on chain governance
In Bitcoin and Ethereum, there is no formal binding governance framework de- claring how the protocols for consensus might be changed in the future. This is a deep flaw which weakens these networks and will lead to instability.
Hash functions let a leaderless network reach consensus on identity and ordering, because every node independently hashes a transaction's data and deterministically arrives at the same unique identifier that everyone recognizes.
requires all nodes to run the same deterministic hash protocol
Thanks to the hash function, every node in the network hashes the transaction's data and independently arrives at the same an- swer, giving the transaction a unique ID that everyone recognizes.
Anonymity can exacerbate second and third order discrimination because it makes such discrimination more difficult to detect, so other governance mechanisms in a decentralized organization must be used to combat it.
applies where members infer protected characteristics from behavior, and to systemic discrimination
In fact, anonymity can exacerbate )nd and Grd-order effects, as it makes it more difficult to detect. To combat such effects, different mechanisms in the governance of a decentralized organization must be employed.
Anonymity should be balanced rather than absolute: a member's power to broadcast should be tied to a pseudonymous account carrying meaningful and valuable reputation that is lost when the broadcasting power is abused.
applies to decentralized networks that permit anonymous participation
Therefore, anonymity should be balanced. Your power to broadcast your voice should be tempered by hav- ing that voice tied with a pseudonymous36 account with meaningful and valuable rep- utation. If you abuse your broadcasting power, then you should lose your reputation.
Effective decentralized DAO governance necessitates reputation verification systems.
We believe that effective decentralized DAO governance necessitates reputation verification systems.
A DAO that is internally well governed by a reputation verification engine lets other entities clone its governance for their own purposes and run with the same governance metrics, so mastery of internal decentralization becomes transplantable infrastructure governance.
applies to IoT infrastructure entities seeking governance and interoperability
DAOs that are internally well-governed by a reputation verification engine allow other IoT infrastructure entities to simply clone the DAO governance for their own purposes and run a DAO with the same gov- ernance metrics.
Self policing is more effective when the members themselves hold the power, because a centralized hierarchy in which each member holds distinct powers and responsibilities is more prone to structural corruption.
where members hold the best domain knowledge about their own processes
The power of decentralization is individual autonomy. Self-policing their own members is more effective when the members have the power, unlike a centralized hierarchy which is more prone to structural corruption when each member holds distinct powers and responsibilities.
Code based trust in decentralized applications lowers transaction costs and simultaneously raises consumer and market confidence and certainty, which facilitates economies of scale that are only occasionally and temporarily possible in centralized structures.
holds despite the cybersecurity issues associated with cryptocurrencies
code-based trust can help lower trans- action costs, but it also increases consumer and overall market confidence and cer- tainty, which facilitate economies of scale that are only occasionally and temporarily possible in centralized structures.
Keeping a decentralized organization aligned in pursuit of its goals requires providing something more valuable than money, namely reputation, following the Maghribi traders' example.
politically decentralized networks devoted to profit
In order to keep a decentralized organization aligned in the pursuit of their goals, you must provide something more valuable than money: reputation.
Centralized authorities have a long record of using crises to justify the introduction of monitoring tools that outlast their original purpose.
centralized authorities have a long rec- ord of using crises to justify the introduction of monitoring tools that outlast their original purpose.
The re entrancy programming bug was not the 2016 DAO's most serious problem; the system would eventually have failed more spectacularly because it was designed poorly on other levels.
But that technical design flaw was not its most serious problem. The system would have eventually failed more spectacularly, because it was designed poorly on other levels.
New DAO proposals appear almost quarterly in the 2020s and most fail because of a lack of decentralized governance solutions.
New DAO proposals appear almost quarterly in the RWRWs. Most fail because of a lack of decentralized governance solutions.
Aragon's refusal to use its own protocol to arbitrate an internal dispute is testimony to the lack of trust its own system designers place in their system's capabilities, and its reputation and legislative and judicial governance protocols remain trivial.
In RWRW, Aragon declined to use their own protocol to arbitrate an internal dispute, which is testimony to the lack of trust of their system designers in their own system capabilities.
Because DAO performance assessment is based on optimizing fungible token value rather than on hierarchical or political processes, the focus on token value enhancement can lead to short termism and may cause ethical and governance issues to be ignored.
DAO designs inheriting the path dependencies of the 2016 DAO
Yet, the focus on the value en- hancement of fungible tokens can lead to short-termism and may ignore ethical and governance issues.
Any set process or set of rules that can ever be designed will ultimately fail to secure a network for all time, so no static rule set can serve as the permanent foundation of a DAO.
A core precept for the creation of DAOs is the recognition that any set process or set of rules that can ever be designed will ultimately fail to secure a network for all time.
Building effective and efficient DAOs requires three things together: a secure and meaningful reputation system, maximum bureaucratic transparency through a dynamic governance structure, and coherent transcendental values for long-term stability.
DAOs with open membership to anonymous individuals worldwide
In this chapter we argue that building effective and efficient DAOs requires a secure and meaningful reputation system, maximum bureaucratic transparency through a dynamic govern- ance structure, and coherent transcendental values for long-term stability.
Protocol centralization, meaning rigid and immediately enforced rules such as those executed by smart contracts, leads to instability unless it is implemented wisely.
However, protocol centralization leads to instability if it is not implemented wisely.
Because a group sometimes genuinely has no consensus to be discovered, network forking is at times inevitable rather than a governance failure that better rules could prevent.
cyclic or irreconcilable group preferences
decentralized networks whose members can exit
First, that is a major problem for democracy. Sometimes there is no consensus to be had. This leads to the second conclusion that sometimes network forking is inevitable.
Across all the alternative polling methods explored in the literature, changes both help and hurt: new approaches solve old problems while creating new opportunities for manipulation, a pattern the authors identify with increasing the attack surface.
alternative voting and polling mechanisms
continuous or weighted voting technologies
In all the methods dis- cussed the answer has always been that changes both help and hurt. New approaches solve old problems, but they create new opportunities for manipulation.
Since no algorithm can be perfectly secure in all circumstances, protocol developers should redirect effort from proving algorithms correct to building a governance process that updates the algorithm as network circumstances change, rewarding protocol improvement with meaningful reputation instead of leaving attack as the profitable option.
proof of stake and other consensus protocols
Given the impossibility of creating an algorithm that will be perfectly secure in all circumstances, we should instead focus on developing a governance process that al- lows us to update our algorithm to adapt to the changing network circumstances to the security level required
Cooperation is sustained only when the promise of future profits outweighs the present value of defecting, so a discount factor that is too low, or a game known to be ending soon, makes defection the rational choice.
Therefore, the promise of future profits must outweigh the present value to en- sure cooperation.
Anonymity increases rather than decreases the value of reputation tokens, because when potential business partners have less knowledge of a counterparty's identity, the number of reputation tokens held becomes the more important signal.
incomplete information about counterparties
When potential business partners have less knowledge of your identity, the knowledge from the number of reputation tokens you hold becomes more important.
The deterrent power of reputation tokens grows with network size, because the loss of opportunity from having reputation slashed increases as the network gets larger.
Another advantage to digital tokens in open global networks is that the loss of opportunity from having your reputation slashed grows as the size of the network in- creases.
Paying contributors in reputation tokens rather than fees, and then distributing all fees as a periodic reputation weighted salary, defeats the sockpuppet attack because splitting a holding across many accounts yields exactly the same share of fees.
anonymous DAOs with multiple accounts per member
A periodic reputation-weighted salary will distribute all fees the DAO earns to all members. Individuals who perform tasks that bring fees to the DAO will be rewarded with reputation tokens, not the fees. Members who own more reputation tokens share in a larger percentage of the fees.
A DAO will not be a genuinely profitable addition to the economy until decentralized versions of the legal system, the political system, the media, banking, and other services exist to support it.
profit-seeking DAOs competing in the contemporary economy
The legal system, the political system, the media, banking, and other services are all needed before the first DAO will be a genuinely profitable addition to our economy.
Keeping decentralized networks running productively requires a dynamic design with checks and balances combined with the incentive design insights of game theory.
applies to decentralized networks intended to operate over time
A dynamic design with checks and balances and the incentive design insights of game theory are necessary to keep these networks running productively.
The governance architecture designed for one decentralized institution can be ported to many other DAOs with only superficial changes, so institutional design effort is reusable across the ecosystem.
The archi- tecture guiding one institution can be reasonably ported to many other DAOs with superficial changes.
Reputation rather than money is the proper motivator of good behavior in business and governance, because properly accounting for reputation switches incentives from short-term zero-sum thinking to long-term positive-sum behavior.
requires a secure and meaningful system for accounting reputation
This is the proper goal, instead of money, for motivating good behavior in business and governance. Properly accounting for reputation switches the incentives from short-term zero-sum thinking to long-term positive-sum behavior.
Without a secure and meaningful reputation system, none of the other aspects of the decentralized economy will be effective, which makes reputation a precondition for the rest.
Without building a secure and meaningful reputational system, none of the other aspects of the decen- tralized economy will be effective.
A sophisticated governance system is required for a decentralized organization to adjust effectively to market changes and to maintain stability.
A sophisticated system of governance is required to effectively adjust to market changes and to main- tain stability.
Decentralized governance design must address all three branches: executive governance as automated policing, legislative governance as non-automated protocol development, and judicial governance as both automated and non-automated dispute resolution.
Executive (automated policing), legislative (non-automated protocol de- velopment), and judicial (both automated and non-automated dispute resolution) governance must be considered.
Reputation and governance are the two most important institutions missing from the decentralized economy, and once they are solved the remaining missing pieces are relatively easy to supply.
Reputation and governance are the two most important institutions that are lack- ing in the decentralized economy. They occupy the majority of our concern for the remainder of the book. Once they are solved, the rest of the missing pieces are rela- tively easy to supply.
A fully decentralized structure with proper governance could solve the abuses that pervade the gig economy.
The gig economy is rife with horror stories, but a fully decentralized structure with proper governance could solve such problems.
News services acting as oracles and information repositories must themselves be decentralized if the decentralized economy is to have a trustworthy information layer.
News services (oracles) and information repositories need to be decentralized.
A Web of Trust style reputation ledger, in which each party rates each transaction and reputation is summed with weightings by rater reputation, will have all of its value drained by the sockpuppet attack, because an attacker can build reputation through transactions between their own fake accounts and then use it to cheat.
open networks that permit account creation
Unfortunately, the sockpuppet attack will suck all value from the network. Setting up fake accounts, an attacker can build their reputation by making transactions be- tween their own accounts. Once their reputation is sufficiently large to trick a mem- ber, they can use it to cheat the system.
The Web of Trust works acceptably for low-value information transmission but should not be used for transactions involving larger wealth in the general economy, which is part of why the scheme it originated in is called pretty good privacy rather than good privacy.
It works well for low-value infor- mation transmission, but it should not be used for transactions involving larger wealth in the general economy.
Sockpuppet attacks are inevitable in any organization that wants open membership and anonymous members, and since those properties are essential to the autonomy that makes a global decentralized organization efficient, reputation must be weighted every time it is used.
Sockpuppet attacks are inevitable if you want the membership to be open and to allow anonymous members. These properties are essential for fostering the individual autonomy that makes a global decentralized organization efficient and powerful.
Every single reputational implementation the authors have audited in the blockchain DAO space carries the flaw of vulnerability to the sockpuppet attack on the Web of Trust model.
blockchain DAO reputation systems audited by the authors as of writing
This is the flaw in every single reputational implementation we've audited in the blockchain DAO
SingularityNet's reputation system, which tracks self-reported transaction quality, transaction value, duration of satisfaction, and prior reputation weights, will have its value eroded by the sockpuppet attack once the system becomes valuable enough to merit attack, because it does not implement the other necessities.
systems implementing only a subset of the seven necessities
once the reputation becomes valuable enough to merit attack
Without implementing the other necessities, the sockpuppet attack will eventually erode their value, once it becomes valuable enough to merit the attack.
With the balanced staking and fee-sharing necessities implemented, the cost of faking reputation is at an absolute minimum double the value of that reputation, which is how reputation is made more valuable than money.
both the balanced staking necessity and the shared salary necessity are implemented
With #e and #j implemented, the cost of faking your reputation is (at an absolute minimum) double the value of the reputation.
Concentration of power is the greatest threat to any decentralized organization, because a single member or sub-coalition that gains a majority of power in an inherently democratic organization will eventually control it no matter what safeguards are in place, at which point the organization is no longer decentralized.
especially profit-devoted and therefore competitive ones
The idea is that if a single member, or even a sub-coalition, gains j\% of the power in an inherently dem- ocratic organization, they will eventually control it, no matter what the safeguards are.
Reputation-based governance faces a chicken and egg problem: voting becomes more efficient once reputation is valuable, but reputation cannot become valuable without meaningful voting.
bootstrapping a reputation system on existing infrastructure
This is another chicken and egg problem. Voting will be more efficient with valu- able reputation. Reputation can't be valuable without meaningful voting.
A meaningful reputational system with the potential for retrospective review would let a network rely on fewer nodes, since randomly selected nodes staking their reputation can do the polling work and be reviewed and punished later, which is one reason proof of stake is more efficient than proof of work.
consensus is near unanimous nearly all the time
Byzantine behavior is detectable on later review
But if we had a meaningful reputa- tional system with the potential for review, we could rely on fewer nodes. This mech- anism is one reason proof of stake is more efficient than proof of work.
The Maghribi traders show that reputation alone can sustain a decentralized network under extreme information asymmetry: using only handwritten letters, Jewish merchants built a reputational system spanning the Silk Road in which nothing but the promise of better reputation deterred agents from cheating.
historical trading networks with communication latency on the order of months
Nothing incentivized the agents from cheating except the promise of building better reputation.
Reputation changes the incentive structure of a decentralized organization from a single stage, zero sum game into a repeated positive sum game, which is why the authors treat reputation as the key to effective decentralized governance.
the reputation system is formally linked to the organization's profits
Reputation changes the incentive structure from a single-stage, zero-sum game to a repeated positive-sum game.
Reputation can be objectively valued by estimating the probability of future business deals, taking the expected value of that probability, and computing the present value of those deals, which is what makes reputation function as a promise of future rewards.
reputation is tied to a stream of future business opportunities
Reputation gives the promise of future rewards. Reputation can be objectively valued, by estimating the probability of future business deals, taking the expected value of that probability, and calculating the present value of those business deals.
No centralized platform such as Amazon or eBay has been able to create meaningful and secure online reputation, because central ownership and control prevent them from giving members the power and incentives needed to police their own reputation.
centrally owned and controlled platforms
No centralized platform, such as Amazon or eBay, has been able to create mean- ingful and secure online reputation. Because they are centrally owned and controlled they cannot give members the power and incentives they need to police their own reputation,
The alternatives to a reputational system for countering profit driven instability, namely external stabilizing forces such as governmental fiat and rapidly expanding profit opportunities, are inadequate because expansion driven stability lasts only as long as the expansion does.
organizations destabilized by profit competition
Alternatives to reputational systems for countering the instability generated by profit competition include external stabilizing forces (such as governmental fiat) or rapidly expanding profit opportunities (which will only stabilize a group until the ex- pansion stops).
The two sources of instability require different remedies and must not be swapped: dynamic rules are a mismatch for instability caused by the profit motive, and a reputational system is not an efficient method for attenuating instability caused by a group's diverse values.
Trying to institute dynamic rules to attenuate the instability due to a for-profit motive is a mismatch. Similarly instituting a reputational system is not an efficient method for attenuating the instability due to a group's diverse values.
If unanimous consensus is strongly incentivized in every validation pool, a DAO will degenerate quickly, because members holding minority opinions will not raise alternatives for fear of losing all their reputation tokens; this is why loosely coupled votes are needed.
validation pools that penalize minority positions
If unanimous consen- sus is strongly incentivized by every validation pool, our DAOs will degenerate quickly, as alternative options will not be raised by members with minority opinions for fear they will lose all reputation tokens.
Loosely coupled voting, in which staked reputation cannot be lost, encourages dissenting opinions, while tightly coupled voting, in which losing stakes are redistributed, guarantees consensus; a DAO steers deliberation by moving between the two.
Loosely-coupled voting encourages dissenting opinions. Tightly-coupled voting guarantees consensus.
Equal distribution of output, where every member receives an equal share regardless of contribution, is impossible to maintain under current technology in a system with open access and privacy, because sockpuppet accounts would be abused.
This is impossible to maintain under the current technology with open access and privacy, since sockpuppet accounts would be abused. Improvements in ZK proofs and identity protocols, however, will soon make it possible to efficiently and securely com- bat such sockpuppet attacks.
Because major social media platforms are privately and centrally owned, their governance processes and reputation distribution algorithms are necessarily opaque, since their users' incentives are not aligned to police reputation against gaming.
users hold no financial stake in the system
Since Stack Overflow and Reddit and Facebook and Twitter and all the other successful social media sites are privately, centrally owned, their governance processes—their algorithms for distributing reputation—are necessarily opaque.
Against Eric Raymond's argument that love does not scale, the authors hold that reputation does: weighted democracy, properly measured and aggregated, can scale from valuing local expertise to valuing expertise on global issues.
reputation valuations across DAOs reach equilibrium through market freedom
Love doesn't scale, but reputation does. Weighted democracy, properly meas- ured and aggregated, can scale from valuating expertise on a local level to expertise on global issues.
The decentralized economy cannot fully proliferate until it acquires the institutions ordinary commerce depends on, above all a secure and meaningful reputation system for anonymous supranational partners and an effective, dynamic governance system.
the decentralized economy as of the early 2020s
the decentralized economy is missing the major institutions that our society relies on to conduct profitable business, especially a secure and meaningful system for evaluating reputation for anonymous supranational partners, and an effective and dynamic governance system
Maintaining consensus without a central authority forces a reputation system to verify members' votes extremely redundantly, which imposes serious computational overhead.
decentralized networks with no central authority
In order to maintain consensus in a decentralized network, with no central authority to check in with, a reputational system needs to verify each others' votes extremely redundantly, which leads to serious overhead costs in computation.
Liquidity has always been a problem on decentralized exchanges because meaningful history and reputation cannot form where there is little or no governance structure, no insurance, no appeals process and no reputable decentralized news service.
But liquidity has always been a problem in decentralized exchanges, as meaning- ful history and reputation are difficult to achieve when there is little to no governance structure, no insurance, no appeals process, and no reputable decentralized news ser- vice
Reputation must be grounded to be meaningful, so reputation tokens should be minted only when policy premia enter the group, reputation should dictate power, and fees should be shared through reputation weighted salaries.
Reputation needs to be grounded to be meaningful, so reputation tokens should only be minted when fees (policy premia) enter the group. Reputation should dictate power in the group. So, reputation should determine how the fees are shared, through reputation-weighted salaries.
Because underwriting mints new reputation tokens, passive holders see their proportional ownership in the DAO fall over time, which is designed to incentivize agents to underwrite actively while still allowing passive investors to earn income.
Underwriting DAO that rewards underwriting with newly minted tokens
Underwriters encumber reputation tokens against each policy under a preset formula, and if the insured event occurs they lose control of those tokens, which are auctioned to meet the claim, with new tokens minted and sold if the auction falls short.
In case the insured event were to occur during the life of the policy, the agents who underwrote the policy would lose control of their encumbered tokens, which would be sold at auction to meet the claim.
In the Underwriting DAO a breach occurs only when the market values the encumbered reputation tokens at less than the payout, which requires minting additional tokens to meet the claim.
Underwriting DAO with encumbered reputation tokens
We would consider the need to mint more reputation tokens to meet a policy claim to be a breach. Under what circumstances would a breach occur? It would occur only if the market values the encumbered reputation tokens as less than the payout.
From the viewpoint of consumers and regulators, encumbered reputation tokens serve as a substitute for capital, because they derive their value from the DAO's future cash flows.
Underwriting DAO whose tokens are claims on future cash flows
The key point is this: from the viewpoint of consumers and regulators, the encumbered tokens (which as we know derive their value from the DAO's future cash flows) essentially serve as a substitute for capital.
Once secure and meaningful reputation is incorporated into Web3, the collateral imbalance will reverse, and because reputation tokens are more meaningful than identity and easier to value, less collateralization will be required than in traditional protocols.
requires a coherent system that securely tracks the value of a reputation token
However, once secure and meaningful reputation is incorporated into the WebT environment, this imbalance will be reversed. Since reputation tokens are more mean- ingful than identity, and much easier to valuate, even less collateralization will be re- quired than traditional protocols
The decentralized economy still lacks trustworthy open source decentralized institutions for recording and parsing history, reporting news and guiding attention, without which the average person cannot judge which networks to join or what to invest in.
We need trustworthy open source decentralized institutions for recording and parsing history, for investigating and reporting the news, for guiding our attention to the future.
Market liquidity depends on trustworthiness, and trustworthiness depends on observed momentum: isolated instances of motion are insufficient, because the observations must be collected into a history before they carry weight and meaning.
To achieve liquidity, marketplaces must be trustworthy. They need momen- tum. It's not enough to achieve motion in any particular instance. Momentum must be observed to give trust to the marketplace. These observations need to be collected in a history to give them weight and meaning.
Governance in a decentralized organization depends on meaningful reputation, and the meaning of any reputation is determined by its history and by how that history is analyzed and presented, which makes historiography a governance variable rather than a neutral record.
Governance relies on meaningful reputation to de- cide who or what to focus on. The meaning of reputation is determined by its history and how that history is analyzed and presented.
In the SchellingCoin approach to oracle design, members stake reputation tokens on their answer to the question a DApp is asking and are rewarded according to how close they came to the resulting median value, which functions as the game theoretic Schelling point.
questions with a verifiable focal answer
The idea is to have your Oracle DAO members stake their reputation tokens on their answer to a question a DApp is asking. Then you reward those closer to the resulting median value
The protocols governing how a particular oracle question is answered should be set by the subject matter experts themselves rather than by a static centralized hierarchy, because the experts know best how their own system can be gamed and how to prevent that gaming to protect their hard earned reputation.
Giving the experts, them- selves, control of their own organization is better than relying on a static centralized hierarchy. The experts know best how to game their own system, and how to prevent gaming to protect their hard-earned reputation.
Robust decentralized oracles do not yet exist despite well funded proposals, because decentralized oracles are themselves DAOs and therefore inherit the same missing incentive structure, governance processes, and history that all DAOs suffer from.
state of the technology at the time of writing
Put simply, decentralized oracles are DAOs, so they still lack the proper incentive structure and governance processes and history that all DAOs suffer from.
Reputation in a news DAO must be anchored in fungible currency: new reputation should be minted only when articles connect to profitable endeavors such as advertising, paid analyses, or protocols relied upon for decentralized business contracts.
news DAOs building meaningful reputation
articles must have a foun- dational meaning in fungible currency. New reputation should only be minted when the articles are connected to profitable endeavors—advertising, paid analyses, new protocols that are relied upon for decentralized business contracts.
Reviewers in a news review DAO will give honest reviews despite being paid fees, because the reputational system rewards members mostly on the basis of future fees rather than present ones.
reputation systems weighted toward future fee streams
Reviewers will be incentivized to give honest reviews despite fees, because the reputational system rewards members mostly based on future fees.
Tracking and aggregating reputations across DAOs can build a more accurate picture of a person's expertise and experiential gaps than traditional educational institutions provide, which would quickly reveal meaningless certification and licensure programs as worthless.
reputation systems anchored in profitable endeavor
Tracking and aggregating our reputations in various DAOs can build a more accurate picture of our expertise and experiential gaps than our tra- ditional educational institutions have.
Transparency in a decentralized network is not optional: every function needs to be publicly auditable for people to trust it, because without a central authority to approve code, unexpected malicious behavior can be built into any opaque code.
decentralized networks without a central approving authority
Transparency is crucial in a decentralized net- work. Every function needs to be publicly auditable for people to trust it. Without a central authority to approve it, unexpected malicious behavior can be built into any opaque code.
Reviewing through references enables punishment and reward in DAOs, which shifts members' motivation away from immediate rewards toward the future and encourages delayed gratification and sacrifice for the good of the group.
DAOs with a functioning citation and review system
reviewing through references enables punishment and rewards in DAOs which changes the motivations of members from a focus on immediate rewards to the future, encouraging delayed gratification and sacrifice for the good of the group.
Strong unifying values are the institution most essential to the long-term stability of a decentralized organization, and they demand continual reevaluation rather than one-time specification.
This final essential institution is the most important for long-term stability, and demands eternal reevaluation. Decentralized organizations require strong unifying values to remain coherent.
Because a single global society is emerging in which everyone is densely interconnected, the more efficient and stable arrangement is power decentralization giving individuals and subgroup DAOs autonomous power, not a single power-centralized hierarchy controlling the whole.
the better, more efficient, more stable state of this global society is an organi- zation that is power decentralized, giving individuals and subgroup DAOs more auton- omous power to contribute to the health and wealth and happiness of all.
Overhead institutions that protect or promote essentials should be governed and borne by the group, while those protecting nonessentials should be governed and borne privately, with each DAO deciding for itself what is essential to its function.
democratic decision within the DAO's own system
Overhead institutions to protect or promote essentials should be governed and borne by the group, protecting and promoting non- essentials should be governed and borne privately. Each DAO must decide what is es- sential to its function;
Demand for insurance and reputation policing runs counter to prosperity: when the system runs well and everyone profits there is less need for insurance, and when profits fall and competition intensifies cheating becomes more attractive and more policing is needed.
If the system is running well and everyone is profiting, there is less need for insurance. When the profits decrease and the system becomes more competitive, cheating becomes more attractive, and more insurance and reputation policing is needed.
Where the line between public and private information falls is a function of a society's values, as the divergence between American, German, and Chinese practice shows.
The line between what is public information and private information is a function of a society's values.
Individual autonomy and group cohesion reinforce rather than substitute for each other: the network effect is achieved only when individuals subsume their freedom to act in concert with the group, and diminishing one quality diminishes the other.
The network effect is only achieved when individuals subsume their freedom to act in concert with the group. Again, both individual autonomy and group cohesion need to be balanced to increase both qualities. Diminishing one diminishes the other.
A long-term successful network requires a dynamic and responsive governance system that keeps the organization in the decentralized democratic realm and prevents it from moving to the next natural stage of centralized governance with a static hierarchy.
A long-term successful network requires a dynamic and responsive system of gov- ernance to keep the organization in the decentralized, democratic realm, and prevents it from moving to the next natural stage of centralized governance with a static hier- archy.
The drift into static power relationships is a universal temptation because centralization is efficient, yet centralized governance is provably flawed.
organizations facing the choice between centralized and decentralized governance
we must protect the group from falling into static power rela- tionships. The temptation is universal, because of the efficiency of centralization, but it is provably flawed.
The strength of a decentralized organization is measured by summing the power of each member in their individual autonomy, modified by the group's ability to organize and effect its goals in the larger society.
The strength of a decentralized organization is measured by sum- ming the power of each member in their individual autonomy, but this is modified by the ability of the group to organize and effect its goals in the larger society.
Decentralized organizations demand more from their members and return more autonomous power and profit, whereas centralized organizations shelter members in a niche and limit and stultify their power in exchange for security.
Decentralized organizations demand more from their members and return more, in autonomous power and profit. Centralized organizations shelter their members within a niche in a hierarchy. Centralized organizations limit the power of their mem- bers, stultifying them,
The DAO of DAOs uses a duality of internal and external governance: internal governance runs on reputation token staking, while external legal relationships are handled by a legal wrapper that represents the DAO of DAOs in real world legal contexts.
For the external legal relationships and governance, the DAO of DAOs is represented in real-world legal contexts by a legal wrapper.
Reputation based staking removes the corruptive elements of fungible tokens because third parties are less likely able to take over a non fungible asset such as reputation that is organically grown and maintained through actual expertise in the relevant subject matter.
reputation staked as a non fungible asset
reputation earned through subject matter expertise
Reputation voting has two advantages over one token one vote: it is non fungible, which avoids corruptive elements, and it aligns incentives for members individually and for the institution as a whole at the same time.
1) it is non-fungible which avoids corruptive elements, and 2) it optimally aligns incentives for DAO of DAOs members individually and at the same time aligns their incentives for the totality of the DAO of DAOs as an institution.
In the bifurcated DAO of DAOs token design, non fungible reputation tokens give members voting rights while fungible reputation salary tokens let members earn a salary in proportion to their non fungible reputation holdings.
1. the non-fungible reputation tokens give DAO of DAOs members voting rights, and 2. fungible reputation salary tokens allow DAO of DAOs members to earn a fungible salary in proportion to their non-fungible reputation tokens.
Paying members indirectly, through a fungible stable salary proportional to non fungible reputation, removes corruptive elements and makes the governance design more attack resistant and more stable over the long run.
salary paid in proportion to non fungible reputation scores
The indirect economic effects remove corruptive elements and make the governance design more attack-resistant and stable in the long run.
Reputation based governance creates a positive sum game because members have incentives to build lasting non fungible value through a long term record of productive cooperation.
By contrast, the reputation-based DAO of DAOs governance design creates a positive-sum game because DAO of DAOs members have incentives to create lasting non-fungible value for the DAO of DAOs by developing a long- term non-fungible record of productive cooperation
Member reputation is inflationary by design, so non staking of reputation tokens or non voting leads to value depreciation, which incentivizes action and makes liveness faults less likely.
reputation that depreciates with non-use
reputation is inflationary in the DAO of DAOs design. As such, non-use, i.e., non-staking of reputation tokens or non-voting, would lead to value depreciation, which incentivizes action and thus value enhancement. Liveness faults become less likely.
Superficial identifiers such as language, race, culture, social media profiles, and credit scores play less of a role in DAO of DAOs voting design, which allows inclusion of constituents who have no agency in centralized systems.
reputation based voting rather than identity based access
Such relatively superficial identifiers play less of a role in the DAO of DAOs voting designs. The more equal distribution of power in the DAO of DAOs governance design allows the inclusion of constituents who otherwise have no agency in centralized systems.
Reputation weighted salary distribution solves the sockpuppet attack, because a member who creates ten accounts holding one reputation token each ends up in the same position as one account holding ten reputation tokens.
salary pool distributed in proportion to reputation holdings
This solves the sockpuppet attack because if a DAO of DAOs member creates 10 accounts with 1 reputation token each, it is the same as 1 account with 10 reputation tokens.
Weighted keys are preferable to NFTs for reputation accounting because the smart contract itself holds the weights and each smart contract may require a different weight for the same key.
third generation blockchains that provide weighted keys
the same key used across multiple DAO smart contracts
Weighted keys are preferable to NFTs because the smart contract itself holds the weights and each smart contract may require a different weight for a given key
Agency theory and the existing legal framework have failed to resolve the core agency conflict arising from the separation of ownership and control, so peaceable and productive coordination of human behavior remains wanting.
applies to limited liability entities and their constituents
Theory and practice have not successfully addressed the outstanding issues. For example, the core agency conflicts emanating from the separation of ownership (shareholder principal) and control (manager agent) cannot be fully addressed by the existing theoretical and legal framework.
Organizational decentralization can raise economic performance without new technology: Jack Welch's separation of GE business units, each with its own profit-and-loss statement and full accountability, allowed efficient and profitable operation and GE's market value skyrocketed as a result.
pre and post internet era corporate structures
Welch's method enabled each business unit to be run efficiently and profitably, while allowing unit heads significant flexibility and independence. GE's market value skyrocketed as a result of its decentralization of business units.
eBay's user rating system is visibly flawed and illustrates the need for a decentralized reputation verification system, yet no entity or individual has produced a better technology, and those decentralized ratings remained eBay's biggest competitive advantage.
While the user ratings eBay uses clearly have flaws (that illustrate the need for a decentralized reputation verification system), so far, no entity or individual has been able to come up with a better technology.
Decentralized autonomous organizations epitomize organizational decentralization because the first DAO, built purely on code and smart contracts with no incorporation, physical address, or headquarters, entirely removed all traditional control mechanisms employed by principals in agency relationships.
describes the first DAO launched in May 2016
Launched in May 2016, the first DAO was set up as an organization based purely on code and smart contracts. It did not have a conventional corporate structure, no incorporation, and had no physical address or headquarter.
The DAO focus on enhancing the value of fungible tokens can produce short termism and can cause ethical and governance issues to be ignored, even as it frees non-performance reputational penalties from racial and cultural bias.
applies where DAO membership is organized around fungible token value
Yet, the focus on the value enhancement of fungible tokens can lead to short termism and may ignore ethical and governance issues.
DAO developers are subject to path dependencies that undermine the evolution of decentralized DAO designs, because the communication structures of the organizations that design systems invariably shape future designs.
DAO developers are also subject to path dependencies which undermine the evolution of decentralized DAO designs. The communication structures in organizations will invariably influence future designs.11
Because human brains simplify complex systems for coherence while complex adaptive systems evolve through self-organizing group behavior, decentralizing the interaction of DAO developers would support random developer interaction and make developer perspectives on software development more diverse.
proposed as a remedy for developer path dependencies
The decentralized interaction of DAO developers could help support random developer interaction and make developer perspectives on software development more diverse.
At the beginning of the 2020s no forum existed that could support truly decentralized software development with a sufficient incentive design.
At the beginning of the 2020s, no forum existed that could support truly decentralized software development with a sufficient incentive design.
Even though the creator of a DEX plays a limited role in its evolution, the code that provides the exchange's operational rules may still be subject to the centralized control of certain developers, and a completely open source DEX with no ongoing developer involvement remains untested.
the code that provides the operational rules of the exchange may still be subject to the centralized control of certain developers. The idea of a completely open source DEX without any ongoing developer involvement remains untested.
Automation and the absence of a human backstop in compliance, back office, and settlement create new risks to market integrity on decentralized exchanges, including wash trading, frontrunning, and insider trading.
The code may also create new risks to market integrity because of its automation and lack of a human backstop in compliance, back office, and settlement.
Firms that fare worst under disruptive innovation share a myopic short-term focus on shareholder value maximization, because emphasis on share price and financial metrics obscures the question of whether the firm remains relevant.
Less successful companies often share a myopic and short-term focus on shareholder value maximization that has led to an unhealthy emphasis on firm share price, market valuations, and financial metrics that obscure issues of relevancy.
The social media coordination function is still largely flawed because the incentive design underlying social proof is suboptimal; decentralized technology solutions can take over that coordination function and improve it.
applies to social proof metrics such as share counts used as quality proxies
Because the incentive design for social proof is suboptimal, the social media coordination function is still largely flawed. Decentralized technology solutions, however, can tap into the coordination function that was inaugurated by social media and improve it.
The absence of a centralized authority makes open source projects prone to separation movements, because rival developer cliques form their own belief systems about the direction of development with no authority to resolve the dispute.
contrasted with centralized software projects
Because no centralized authority decides the direction of development, open source projects are more prone to cliques of developers that develop their own belief system regarding certain aspects of the development process.
An optimally incentivized democratic decision-making tool would make separation movements in open source less likely, because voters who know the process rewards truth-seeking are more likely to accept an adverse outcome; emerging decentralization technology makes such a tool theoretically feasible.
conditional on incentive-optimal voting mechanisms being buildable
Perhaps if the open source movement had an optimally incentivized democratic decision-making tool, such separation of interests and development would become less likely.
The degree of decentralization of an open source project is determined by the degree of hierarchy in its governance: a flat structure with consensus decision-making and no power disparities between developers is the most decentralized form.
author stipulates this measure for comparing open source projects
The degree of decentralization in open source communities and projects is dictated by the degree of hierarchies in the governance of a given project.
Meritocratic allocation of power in open source projects is often a fallacy, because rank can reflect timing and one-off contributions, deflation is not built into the perception of merit, and free riding on past reputation is therefore possible.
applies where rank is awarded on perceived merit and not periodically revisited
In other words, deflation is not built into the perception of merit and free riding is possible.
Growth in connected IoT devices is offset by falling consumer confidence, because the sheer number of devices creates unprecedented cyber security exposure and attacks can be launched by unsophisticated parties at minimal cost with maximal potential damage.
estimates of 30 to 50 billion connected devices by 2020
The IoT proliferation is offset by diminished consumer confidence. By the year 2020 the majority of experts estimate that a total of 30 to 50 billion devices will connect to the internet.
People increasingly substitute trust in machines, algorithms, and code for trust in organizations and procedures, but that reliance may be misplaced because the existing internet was designed for hierarchical societal structures on an authoritative hierarchical trust model carrying serious cyber security vulnerabilities.
Peoples' increasing reliance on digitized, coded, and automated replacements of traditional cohesion mechanisms may be misplaced. The existing internet is designed for hierarchical societal structures and with an underlying authoritative and hierarchical trust model.
A truly decentralized public blockchain must satisfy three simultaneous requirements: no points of centralization and corruption, full security at the level of proof of work, and transaction throughput above one hundred thousand transactions per second.
stated as the requirement for technological decentralization via blockchain
That is, a public blockchain that is not subject to points of centralization and corruption, that is fully secure at the level of proof of work security with a transaction throughput of over one hundred thousand transactions per seconds.
Without basic decentralized infrastructure products in place, on-chain governance of blockchains is not possible or is only limitedly possible, and the blockchain ecosystem may not be able to grow without a core decentralized infrastructure such as a functioning public blockchain to build on.
Without such basic infrastructure products, on-chain governance of blockchains may not be or may only limitedly be possible.
Decentralism holds that trust in a system should not be controlled by corruptible human constructs and institutions run by a limited number of fallible humans; instead trust rests on technology enhanced individualism and technology facilitated collective human action.
contrast with capitalist trusted intermediaries and socialist belief in government infallibility
decentralism posits that trust in the system should not be controlled by corruptible human constructs and institutions that are controlled by a limited number of fallible and corruptible humans. Rather, trust in decentralism is based on technology-enhanced individualism.
Legally created trust is limited because it is only indirectly democratically legitimized, and is therefore arbitrary, inflexible, untimely, resistant to change, dependent on fallible human centric decision processes, and confined to human speed.
trust created by legal guarantees and judicial enforcement in capitalist and socialist systems
Delegating one's vote to a third party whose ethics and belief system the voter does not truly know produces suboptimal outcomes, and delegated voting on issues that cannot be foreseen is corrupting.
representative democracies in the 21st century
The very notion of delegating one's vote to a third party without true knowledge of the ethics and belief system of such a third party creates suboptimal outcomes. Delegated voting on issues one cannot foresee corrupts.
Elected representatives are incentivized to maintain their own power of office rather than to vote for outcomes reflecting the presumptive wishes and needs of their constituents.
Voted representatives are not incentivized to vote for outcomes that reflect the presumptive wishes and needs of their constituents but for maintaining their own power of office.
Microdemocratic vote allocation improves voting outcomes because the proportion of votes a voter allocates to an issue evidences that voter's higher level of knowledge on the issue, and voters are unlikely to give top priority to issues they know little about.
voting systems that allocate a maximum number of votes per voter across issues
Microdemocratic systems must solve the tragedy of the commons, because without controls self interested voters acting independently of the totality of voters may deplete or spoil shared resources such as the environment and public goods.
Without controls, some self-interested voters may be depleting or spoiling resources they share with the rest of society, such as the environment, public goods, among others.
Unlike their centralized predecessors, decentralized technologies enable, for the first time in history, improved incentive designs that help overcome the insufficiencies in the voting outcomes of representative democracies.
decentralized voting pools that increase, deepen, and proliferate
Unlike their centralized predecessors, decentralized technologies, for the first time in history, enable improved incentive designs that help overcome the insufficiencies in voting outcomes of representative democracies.
The conveniences and benefits of centralized algorithmic automation carry risks to humanity that cannot be fully quantified, and decentralized systems can counteract those downsides and threats.
At the same time, the conveniences and benefits that derive from centralized algorithmic automation bring with them risks to humanity that cannot be fully quantified. Decentralized systems can counteract the downsides and threats of algorithmic automation
Because a decentralized system has a blockchain based quasi precedent nature with a human backstop, it enables built in checks and balances capable of supporting resistance even to apocalyptic takeovers of algorithmic systems that would remove human presence to optimize efficiency.
blockchain based systems with accumulated human voting records
Because of its blockchain-based quasi- precedent nature with a human backstop, the decentralized system enables built-in checks and balances that can support resistance to even the most apocalyptic applications and takeover of algorithmic systems
Code based trust lowers transaction costs and simultaneously raises consumer and market confidence and certainty, which facilitates economies of scale that are rarely possible in centralized structures, despite the cybersecurity problems associated with cryptocurrencies.
presence of cybersecurity issues in cryptocurrency markets
code-based trust can help lower transaction costs, but it also increases consumer and overall market confidence and certainty, which facilitate economies of scale that are rarely possible in centralized structures
Applying decentralized technology to optimize a legacy system, for example using blockchain to improve the malfunctioning shareholder proxy voting process, perpetuates the outdated and malfunctioning centralized system rather than replacing it with a better performing decentralized one.
decentralized technology deployed as an optimization layer on centralized legacy processes
In the process, the outdated and malfunctioning centralized legacy systems are being perpetuated rather than being replaced with better performing decentralized systems.
Overreliance on the design of constitutional democracies limits experimentation with decentralized solutions for organizing society, because exclusive reliance on a single legal document combined with widespread voter apathy makes the constitutional model appear to be the only lasting form of organization.
constitutional democracies as the dominant form of organizing society
Overreliance on the design of constitutional democracies limits experimentation with decentralized solutions for the organization of society.
Experimentation with decentralized organizational forms of society is curtailed by the principle of territorial integrity of nation states, a foundational principle of international law under which forced border change justifies war and which sustains a permanent national military presence.
international legal order built on Article 2(4) of the UN Charter
Experimentation with decentralized organizational forms of society is curtailed by the principle of territorial integrity of nation states.
Regulatory solutions tracked the characteristics of issuers, so the more decentralized, censorship resistant and autonomous products that regulators could not control were left in a regulatory vacuum that limited their expansion, reach and evolution.
jurisdiction specific regulatory frameworks of the early 2020s
As a result, the more decentralized products that were more censorship resistant, autonomous, and could not be controlled by regulatory agencies, were largely left in a regulatory vacuum that limited their expansion, reach, and evolution.
Decentralized networks depend on dynamic governance because evolving blockchain protocols require updates, and the practice of hardforking that remained prevalent in the early 2020s created significant economic loss for such blockchains.
blockchain protocols requiring upgrades in the early 2020s
As blockchains protocols evolve in a given market, they require updates. The practice of hardforking, that was still prevalent in the early 2020s, created significant economic loss for such blockchains.
Because basic standards for the governance of digital assets were still missing at the beginning of the 2020s, the digital asset market stagnated and decentralized finance remained in its infancy; without standards and governance, certainty and market confidence cannot develop.
digital asset markets at the beginning of the 2020s
At the beginning of the 2020s, basic standards for the governance of digital assets were still missing. As a result, the digital asset market stagnated and DeFi (decentralized finance) remained in its infancy.
DAO governance designs of the early 2020s failed to take account of the historical precedent on governance, and most DAOs used centralized master nodes to institute blockchain protocol and DAO upgrades.
decentralized autonomous organizations at the beginning of the 2020s
At the beginning of the 2020s, the then existing DAO governance design structures failed to take into account the historical precedent on governance. Most DAOs utilized centralized forms of master nodes to institute blockchain protocol and DAO upgrades.
Effective institutional governance, human or machine, requires a duality of incentives in which actors improve their own utility while their actions benefit the whole institution over the long run, and without that duality rational and opportunistic constituents will game the governance design.
DAO governance designs facing internal and external opportunistic actors
Human nature and any effective machine derivates of human engagements in institutional form require a duality of incentives in order to overcome attempts of rational and opportunistic internal and external constituents to game the governance design of a given DAO.
When fungible assets are the dominant incentive design in the governance of DAOs with identifiable actors, rational and opportunistic internal and external participants will typically attempt to corrupt the governance design for their own gain; merit identifiers other than individual identity remove the most corruptive influences.
DAO governance using fungible assets and identifiable actors
When fungible assets are used as the dominant incentive design in the governance of DAOs with identifiable actors, rational and opportunistic internal constituents and external participants will typically attempt to corrupt the governance design of the DAO for their own gain.
A decentralized human backstop to code is a core and often overlooked infrastructure requirement, because without it the immutability of the blockchain and its cryptographic security may not create genuine transactional guarantees or trust between principals and agents in the integrity of their contractual relationship.
decentralized algorithmic systems mediating principal agent contractual relationships
Without a decentralized human backstop to code, the immutability of the blockchain and its cryptographic security systems may not be able to create truly transactional guarantees and trust between principals and agents in the integrity of their contractual relationship.
The core proposal of Hybrid Secure Proof of Stake is to separate block consensus from block rewards, making the reward a function of the node's reputation rather than of stake alone.
The main concept in Hybrid Secure Proof of Stake (HSPoS) is to separate the block consensus from the block rewards. HSPoS proposes that the rewards become a function in the reputation of the node.
Shasper governance is funded in a hardcoded way: each validator that succeeds in propagating a block allocates a fixed percentage of its block reward, denominated in SHAS, into a separate SDAO wallet, in addition to the ordinary Casper PoS allocation.
Shasper Network validators producing blocks under the Casper PoS consensus algorithm
However, in addition to the Casper PoS Consensus algorithm allocation, each validator who succeeds in propagating a block allocates [__]% of the block reward, denominated in SHAS, into a separate SDAO wallet.
The same percentage of the block reward that funds the SDAO wallet also mints reputation in the SDAO for the propagating validator, with both the minting and the sharing of the pooled tokens following the DEVxDAO MVPR protocol.
That [__]% of the block reward in SHAS token also mints reputation in the SDAO for said validator. The reputation minting process follows the DEVxDAO MVPR protocol and the SHAS token that are allocated to the SDAO are shared among the SDAO members following the DEVxDAO MVPR protocol.
Tokens accumulated in the SDAO wallet are distributed to voting associates in proportion to their SDAO reputation score, so payout tracks reputation rather than stake.
SDAO members holding voting associate status
Accordingly, the SHAS in the SDAO wallet are distributed to the SDAO VAs in proportion to their SDAO reputation score.
A voting associate's SDAO reputation score is determined by that associate's merit, level of activity, and engagement in the SDAO.
The respective SDAO reputation score of each VA, in turn, is determined by their respective merit, level of activity, and engagement in the SDAO.
The SDAO performance based onboarding metric deliberately goes well beyond validator node uptime, adding criteria such as node performance, running a dApp on the network, response time to upgrades, technical background, adherence to instructions and hardware specifications, and community behavior.
SDAO preregistration workflow for validator candidates
This performance based onboarding process and metric goes way beyond the criterion of validator node uptime. In the SDAO preregistration workflow, validator candidates apply for a position in the
Using the SDAO, the Shasper Network lets its developer community determine by community consensus which technology upgrades to the testnet should be created.
Shasper Network technology upgrade process
Through the use of the SDAO, the Shasper Network enables its developer community to determine via community consensus what technology upgrades to the Shasper testnet should be created.
Nodes accumulate reputation in two ways: by being onboarded into the SDAO and performing well as node validators, and by participating regularly in SDAO governance votes.
HSPoS reputation accrual on the Shasper Network
1. being onboarded into the SDAO and performing well as node validators, and 2. by participating regularly in the governance votes of SDAO.
By balancing validator stakes against reputation, HSPoS reaches an equilibrium of incentives in which validators are motivated both to succeed economically as validators and to participate actively in decentralized governance.
validators holding both SHAS stake and SDAO reputation
Through this balancing of validator SHAS stakes and reputation, HSPoS attains an equilibrium of incentives for validators to: a. attain economic success as validators, and
Governance decisions such as network upgrades follow a simple vote that mints no reputation, yet reputation in the SDAO can still be lost through a governance vote because each vote follows the DEVxDAO MVPR logic moving from loosely coupled to tightly coupled voting.
SDAO governance votes on network upgrades
Governance decisions, such as network upgrades, among others, follow a simple vote process in which no reputation is minted. However, reputation in the SDAO can be lost as a result of a governance vote as each vote follows the DEVxDAO MVPR logic via loosely coupled to tightly coupled voting.
Hot storage buys easy access and quick transferability of digital assets at the cost of exposure to cyber attacks and to the difficulty of keeping private keys safe.
Hot storage ensures the easy access and quick transferability of digital assets but is also subject to possible asset security issues in the form of cyber attacks or issues with keeping private keys safe.
Because a wallet provider or exchange that has custody of a digital asset gains full control over transactions, hacking a digital asset exchange is equivalent to robbing a bank: the attacker obtains valuable cryptocurrency that can be cashed out.
exchanges holding pooled customer assets in hot storage
As such, a hack of a digital asset exchange is akin to robbing a bank-- getting hold of valuable cryptocurrencies that they can cash out of.
Custodial exchanges are largely unprepared for breach: only 53 percent of small custodial exchanges and 78 percent of large custodial exchanges have a written policy setting out what happens to customer funds if a security breach causes loss.
custodial cryptocurrency exchanges surveyed in the 2017 benchmarking study
Just 53% of small custodial exchanges and 78% of large custodial exchanges have a written policy outlining what happens to customer funds in the event of a security breach resulting in the loss of customer funds.
Applying the trust label to digital asset firms without an accompanying fiduciary duty is problematic, because the typical legal obligation of a trust company is to place customers' interests above its own.
state trust charters used by digital asset firms
The applicability of the trust label to digital asset firms, without a fiduciary duty, can be problematic. A typical legal obligation for trust companies is a fiduciary duty – to place customers' interests above the company's own.
Information security infrastructure and controls to mitigate hacking, theft, and fraud must be enhanced when maintaining custody of digital assets, because digital assets have unique technical characteristics.
banks and custodians holding digital assets
Information security infrastructure and controls to mitigate hacking, theft, and fraud need to be enhanced when maintaining custody of digital assets due to their unique technical characteristics.
Every risk in a digital custody operation should carry both a preventative and a detective control, layered so that if some controls fail others remain to reduce the risk.
digital asset custody risk management programs
Every risk should have a preventative and detective control and there should be appropriate layers of controls so that if some fail, others will still be there to reduce the risk.
Specialized digital custody audit procedures for verifying that a bank maintains access controls over a cryptographic key differ from the audit procedures used for physical assets, so some risk management processes must be tailored for digital custody.
national banks providing cryptocurrency custody
Specialized digital custody audit procedures for verifying the bank maintains access controls for a cryptographic key will differ from the procedures used for physical assets.
Becoming an OCC regulated trust is one route by which crypto exchanges can operate nationwide without securing state level licenses in each of the 49 states that require one.
United States, national trust charter route
Becoming an OCC-regulated trust is one way crypto exchanges can operate nationwide without needing to secure state-level licenses in each of the 49 different U.S. states (Montana doesn't have a licensing requirement).
Where owners do not rely on the cryptography of the wallet and of each transaction to avoid trusted third parties, single points of failure, rent seeking behaviors and other suboptimal outcomes of legacy systems inevitably seep back into decentralized solutions.
decentralized systems that reintroduce trusted third parties
Without it, single points of failure, rent- seeking behaviors and other suboptimal outcomes of legacy systems are inevitably seeping back into decentralized solutions.
Delegation of rights to custody providers is only an incremental step toward centralization via delegation to third party investment managers, and it opens a floodgate because each additional level of investment discretion over digital assets exacerbates centralization concerns and compounds rent seeking suboptimalities.
delegation chains that begin with custody and extend to discretionary management
This becomes a floodgate issue, as each level of investment discretion over digital assets exacerbates the centralization concerns and compounds the rent seeking suboptimalities.
Reputation tokens used in decentralized finance are more meaningful and easier to value than traditional identity verification metrics, so decentralized protocols that use reputation metrics will require less collateralization than traditional protocols.
reputation is incorporated securely into the Web3 environment
Reputation tokens that are utilized in decentralized finance are more meaningful than traditional identity verification metrics, and much easier to value. Accordingly, decentralized protocols that use reputation metrics will require less collateralization than in traditional protocols.
The delayed voting outcomes and feedback effects created by the transition from loosely coupled to tightly coupled voting let DAOIC members triangulate their own internal liquidity position against deal feasibility.
two phase loosely coupled and tightly coupled reputation staking votes
At the same time, the delayed voting outcomes and associated feedback effects enabled by the transition from loosely coupled to tightly coupled voting enable DAOIC members to triangulate their own internal liquidity with deal feasibility.
Meaningful reputation in a business network removes the need for monitoring cost and lowers transaction costs by orders of magnitude.
meaningful reputation exists in the business network
Reputation removes the need for monitoring cost. It lowers transaction costs in orders of magnitude.
Traditional underwriting also fails at the agent level, because individual agents within an underwriter may sacrifice the underwriter's overall reputation for personal gain, for example by putting out a fraudulent offering.
traditional underwriting firms where agent and firm incentives diverge
individual agents within an underwriter may decide to sacrifice the underwriter's overall reputation for personal gain.
In the theoretical model, the incentive design of decentralized reputation staking governance aligns the individual with the group so tightly that the agent cannot gain personally at the expense of the principal.
adoption of the decentralized reputation staking governance mechanisms
aligns the interests of the individual with the interest of the group. In other words, the incentives of the principal, e.g. the group, and the individual are aligned so much that the agent cannot gain personally at the expense of the principal.
Misjudging the public commitment portion of a firm underwriting engagement would neutralize the liquidity the DAOIC previously gained through reputation staking.
firm commitment underwriting engagements
Getting the public commitment part on a firm underwriting engagement wrong would neutralize the prior gained liquidity from RNFT staking.
Once its market position is solidified, the DAOIC could mandate that each token opportunity adopt decentralized governance mechanisms before the DAOIC begins reputation staking on it, using its market power to force governance reform.
after the DAOIC has solidified its market position
It is conceivable that the DAOIC, over time, once its position in the market has been solidified, mandates the adoption of decentralized governance mechanisms (Calcaterra & Kaal et al (2019) for the governance of each token opportunity
The decentralized reputation staking governance mechanisms provide a higher form of decentralized governance than most legal standards in any given jurisdiction.
(Calcaterra & Kaal et al (2019)) provide a higher form of decentralized governance than most legal standards in a given jurisdiction.
Ratio adjustments are the DAOIC's key tool for strategic increases in profitability and overall policy, and they should be subject to a member vote conducted through the decentralized reputation staking governance mechanisms.
governance metrics subject to dynamic upgrade over the DAOIC life cycle
Ratio adjustments provide a key tool for strategic increases in profitability and overall DAOIC policy. Ratio adjustments should be subject to DAOIC member vote following the decentralized reputation staking governance mechanisms (Calcaterra & Kaal et al (2019)).
Replacing capital with reputation increases liquidity because reputation takes over part of the role of capital and frees otherwise locked capital, letting decentralized investment vehicles deploy capital more effectively since reputation staking on deals requires no capital deployment.
decentralized investment vehicles using reputation staking
When reputation takes over part of the role of capital it frees up otherwise locked capital that cannot fully be utilized. Decentralized investment vehicles are able to deploy capital more effectively because reputation staking on deals does not require the deployment of capital.
Decentralized reputation governance models in venture capital have the potential to upgrade the venture capital market.
This article shows that decentralized reputation governance models in venture capital have the potential to upgrade the venture capital market.
A VC's proportional holdings of reputation tokens are likely to increase over time if the VC follows sound and successful practices by staking reputation tokens on investment proposals and succeeding in the selection of portfolio companies.
a VC DAO where members stake reputation for or against proposals
The VC's proportional holdings of these reputation tokens is likely to increase over time if the VC follows sound and successful practices by way of staking the VC's reputation tokens on investment proposals and succeeding in the selection of portfolio companies
Only reputation token holders are allowed to participate in the portfolio selection process, which materializes through reputation staking on investment proposals.
First and foremost, only reputation token holders are allowed to participate in the portfolio selection process which materializes by way of reputation staking on investment proposals.
The value of the reputation tokens is a function of the return on investment of the DAO.
a DAO that treats ROI as DAO revenue shared as reputation salary
Accordingly, the value of the reputation tokens is a function of the ROI of the DAO.
Through the decentralized governance precedent system, projects upvoted by the whale validation pool that have the highest comparative ROI get more citations in the reputation system and continually enhance the reputation of the whale who sourced and proposed them.
a DAO operating a decentralized governance precedent system
Through the decentralized governance precedent system, projects that were upvoted by the Whale validation pool and have the highest comparative ROI get more citations in the reputation system and continually enhance the reputation of the whale who sourced and proposed it.
The hybrid smart contracting model is defective because VCs are partially incentivized to fund and stake only the best deals while staking on less optimal deals that the market mostly funds, which undermines their long term reputation accumulation.
models where VCs can stake reputation without proportionate capital commitment
The problem with this model is that VCs are incentivized partially to fund and stake only on the best deals and stake on the less optimal deals that are mostly funded by the market. This undermines their long-term reputation accumulation
The incentives that undermine long term success of the hybrid model can be mitigated by mandating that staking on deals requires capital commitments, while allowing VCs to lower their capital commitments and increase their staking over time.
hybrid VC DAO models transitioning away from capital
It is possible to mitigate these incentives that undermine the long-term success of the system. For example, it is conceivable that staking on deals by VCs mandates capital commitments to the deals but that VCs can over time lower their capital commitments and increase their staking.
A better system emphasizes reputation by prohibiting capital investment into portfolio companies after an initial minting of reputation in proportion to incoming capital.
the incentive optimized reputation model with smart contracts
A better system would avoid this scenario by emphasizing the reputation in the system by prohibiting capital investment into portfolio companies after an initial minting of reputation in proportion to incoming capital.
In the non custodial DAO investment club model all of the return on purchase is minted into fungible reputation tokens that get paid as reputation salaries following decentralized governance, which provides the best incentive alignment for members and the highest potential return for all involved.
the non custodial DAO investment club model with smart contracts
In this model, all of the ROP is minted into fungible reputation tokens that get paid as reputation salaries following decentralized governance. This model provides the best incentive alignment for DAOIC members with the highest potential return for all involved.
The collective wisdom of DAO investment club members helps hedge against purchase risk, and because decentralized governance with loosely and tightly coupled votes will very likely make all tightly coupled votes unanimous, no member loses reputation NFTs.
decentralized governance combining loosely and tightly coupled votes
The collective wisdom of DAOIC members helps hedge against purchase risk. Moreover, because the applicable decentralized governance with loosesly and tightly coupled votes will very likely make all tightly coupled votes unanimous, no DAOIC member loses RNFTs
Distributed ledger technologies are particularly capable of increasing trust among charitable organizations, sponsors, and beneficiaries, because the technology enables real time tracking of the donation supply chain.
charitable donation flows recorded on distributed ledgers
Distributed ledger technologies (DLT) are particularly capable of increasing trust between charitable organizations, sponsors, and beneficiaries. The technology enables real-time tracking of the donation supply chain.
By giving the power of the endowment to the DAO the donor relinquishes control over the assets in exchange for community governance, and that relinquishment builds trust and community buy in, which in turn secures growth and legacy for the donor's purpose.
donors willing to cede asset control to a community of experts
The donor can help mold the community to some extnt but at the same time the donor releases the control to the community. The relinquishment of control builds trust and community buy in. This in turn, ensures growth and legacy for the respective purpose of the donor and the associated DAO.
Merit in the CHARITYxDAO is expressed by a non fungible reputation token that cannot be bought or sold, and voting is designed around staking those non fungible reputation tokens.
c. decisions in the CHARITYxDAO are made with a voting design that revolves around staking of non-fungible reputation tokens; d. non-fungibility of CHARITYxDAO reputation tokens; e.g. merit of a CHARITYxDAO VA is expressed by a non-fungible reputation token that cannot be bought or sold;
Every CHARITYxDAO decision runs through a two vote model: a loosely coupled sentiment vote with no reputation at stake, followed by a tightly coupled final vote with reputation at stake.
i. Two vote model a) loosely coupled (sentiment) vote (no reputation at stake), b) tightly coupled (final) vote (reputation at stake):
Because voting associates can see the sentiment vote outcomes and who staked what reputation before the binding vote, it is reasonable to expect that the overwhelming majority of final tightly coupled votes will end in unanimity on the issue at hand.
two vote designs where sentiment results are visible before the binding vote
Accordingly, it is reasonable to expect that the overwhelming majority of CHARITYxDAO's final tightly coupled votes will end in unanimity on the issue at hand.
Reputation staking overcomes the polarizing effects and suboptimal vote outcomes produced by one token one vote voting mechanisms.
governance systems choosing between token weighted and reputation weighted voting
First, it overcomes the all too common polarizing effects and suboptimal vote outcomes of one- token-one-vote voting mechanisms.
Reputation staking serves the common good because the more the aggregated individual reputation of all voting associates increases, the more the overall value of the DAO increases and the more the DAO creates value enhancing outcomes for sponsors and the associate community at large.
reputation weighted DAO governance tied to common good objectives
gets served through this design in particular because the more the aggregated individual reputation of all CHARITYxDAO VAs increases the more the overall CHARITYxDAO value increases and the more the CHARITYxDAO creates value enhancing outcomes for the sponsors and VA
The design decreases the likelihood of individual and, in turn, community liveness fault, because non use of existing reputation at the individual level leads to inflationary devaluation of that reputation.
reputation systems with built in inflationary decay
The design decreases the likelihood of individual and, in turn, community liveness fault because non-use of existing reputation on the individual level leads to inflationary devaluation.
The loss of opportunity from slashing a voting associate's reputation grows as the size of the network increases, because a larger network intensifies competition among associates for the reputation tokens that determine fungible salary payouts.
reputation weighted networks where salary tracks reputation
reputation tokens to receive fungible token salaries that are paid in proportion to reputation tokens. Accordingly, in the CHARITYxDAO design, the loss of opportunity from slashing CHARITYxDAO VA reputation grows as the size of the network increases.
Just as centralized institutions rely on the vetting of candidates by other centralized institutions, the CHARITYxDAO may serve as a decentralized oracle for philanthropic endeavors.
analogy to centralized institutions vetting each other's candidates
Similar to how centralized institutions rely on the vetting of candidates from other centralized institutions, the CHARITYxDAO may serve as a decentralized oracle for philanthropic endeavors.
The benefit of a code review is negatively correlated with the size of the code under review: the larger the number of files in a single review, the lower the rate of beneficial feedback from reviewers.
single review submissions of increasing size
Therefore, the benefit of attaining a code review is negatively correlated with the size of the code under review. In particular, the larger the amount of files in a single review, the lower the rate of beneficial feedback from the reviewers.
Feedback in modern code review is deficient in both timeliness and substance: receiving feedback in a timely manner is developers' number one reported challenge, and the feedback that arrives is often not insightful because reviewers focus on insignificant details rather than larger issues.
surveyed developer populations in industry code review
Moreover, even when developers finally receive feedback on their code change, it is often not insightful or helpful. For example, the study also found that some reviewers focus on "insignificant details rather than larger issues."43
Organizational metrics, such as the number of developers working on a component, organizational distance between developers, and organizational code ownership, are better predictors of defect proneness than traditional metrics like churn, complexity, coverage, dependencies, and pre release bug measures.
including the number of developers working on a component, organizational distance between developers, and organizational code ownership, are "better predictors of defect-proneness than traditional metrics like churn, complexity, coverage, dependencies, and pre-release bug measures."45
Organizational identity and structure affect the time and effectiveness of the code review process, as shown by a statistically significant difference in how quickly Apple accepts its own patches versus Google patches.
treats their own patches differently from external patches."48 Therefore, organizational identity and structure may have impacts on the time and effectiveness of the code review process.
The more hierarchical the code review process and the more barriers to entry it imposes, the lower the quality of the resulting code.
legacy code review firms with hierarchical reviewer selection
In other words, the more hierarchical the code review process and the more barriers to entry, the lower the quality of code.
In hierarchical legacy review processes the first reviewer's output gets the highest priority and follow on reviewers add only minor upgrades, so the collective of reviewers is not incentivized to find flaws and optimize the code as a collective work product.
often gets the highest priority and is often merely followed with minor upgrades by follow-on reviewers. The collective of reviewers is also not incentivized to find flaws in the code to optimize code as a work product of the collective.
The CRDAO governance model enables a community policing and audit methodology for code reviews, and those governance and policing functions ensure less duplication of code reviews.
DAO based governance over a reviewer community
The CRDAO also uses a community policing and audit methodology for code reviews. This is enabled by the CRDAO governance model. Moreover, the CRDAO governance and policing functions ensure less duplication of code reviews.
Crowd review and policing votes by the CRDAO collective filter out idiosyncratic reviewer preferences, because reviewers who submit highly idiosyncratic reviews would have to fear slashing and loss of standing in the community.
mandatory crowd review of each code review
Instead, the CRDAO mandates that reviews are subject to crowd review and policing votes by the CRDAO collective. Accordingly, code reviewers are less likely to engage in highly idiosyncratic reviews as they would need to fear slashing and loss of standing in the community.
Lower cost early feedback from the CRDAO enables risk taking by development teams that wish to move quickly through governance and upgrade processes, which in turn enables accelerated growth and scaling of experimentation.
dev teams operating with fast governance and upgrade cycles
The feedback provided by the CRDAO for the developer community enables risk-taking for dev teams who wish to move quickly through their governance and upgrade process, which in turn enables accelerated growth and scaling of experimentation.
The CRDAO governance framework is the decentralized governance framework developed by Craig Calcaterra and Wulf Kaal, further enhanced and implemented by the code review DAO, and CRDAO members get paid to participate in that governance.
The CRDAO follows a decentralized framework of governance that was developed by Craig Calcaterra and Wulf Kaal50
The foundation model for token issuance is a core form of centralized top-down governance, and most ICO projects were governed by a small group of individuals rather than by the community at large or a DAO.
The foundation model for token issuance is a core form of centralized top-down governance in the context of token offerings.
The larger the market capitalization controlled by the DAO, the less likely it becomes that whales and insiders can purchase inexpensive tokens on the market.
The larger the market capitalization that is controlled by the DAO, the less likely it becomes that whales and insiders can purchase inexpensive tokens on the market.
The more decentralized the governance of a fair launch protocol, the less likely the project will be seen as treating public users unfairly, which makes a decentralized autonomous organization design advisable for fair launch projects.
governance design is transparent and decentralized
The more decentralized the governance of a fair launch protocol, the less likely the project will be seen as not treating the public users unfairly. In this context, it may be advisable for fair launch projects to be launched in a decentralized autonomous organization (DAO) design.
If the DAO governing a fair launch is controlled by a handful of people in a foundation setting, decentralized governance metrics are less likely to take hold and the public is correspondingly less likely to benefit from decentralized community governance over the launch.
DAO controlled by a small group in a foundation setting
controlled by a handful of people in a foundation setting, it is less likely that decentralized governance metrics take hold in the DAO. Accordingly, it is less likely that the public can benefit from the decentralized community governance over the fair launch.
DAO governance built on fungible governance tokens is disfavored and dangerous because governance rights can be bought on open exchanges, whereas non-fungible reputation governance assures the highest levels of decentralization.
DAO governance rights are tradeable on open exchanges
DAO governance that revolves around fungible governance tokens is disfavored and dangerous in this context as governance rights can be bought on open exchanges. By contrast, non-fungible reputation governance of the DAO assures highest levels of decentralization.
Community DAO governance makes any form of rug pull much less likely, because rug pulls typically benefit only a few select individuals who retained control over the project code or liquidity.
community DAO oversees project code and liquidity
Community DAO governance also makes any form of rug pulls much less likely as rug pulls typically only benefit a few select individuals who retained control over the project code or liquidity.
DAO governance over token launch wallets can assure that no single individual exercises rights over the token launch wallet and becomes a single point of failure or abuse.
token launch wallet is governed by the DAO
DAO governance over token launch wallets can assure that no single individual exercises rights over the token launch wallet and becomes a single point of failure/abuse.
Founders may hold significant influence over DAO votes initially depending on the DAO design, but higher levels of governance decentralization mitigate these centralization effects quickly through the onboarding of new DAO members.
DAO design permits ongoing member onboarding
Depending on the DAO design, the founders may have significant influence over the DAO votes initially. However, higher levels of DAO governance decentralization mitigate these centralization effects quickly via the onboarding of new DAO members.
A fair launch rewards protocol can measure ethical conduct by whether a user engages with the protocol consistently, invests, and votes over time, while users who merely use the network for yield farming may not qualify because they lack engagement.
protocol can measure historical on chain user behavior
Such ethical conduct can measure whether the user engages with the protocol consistently, invests, and votes on the fair launch protocol network over time. By contrast, users who merely use the network for yield farming may not qualify as they lack engagement.
Rug pull practices can take the form of a whale guaranteeing an inside developer or business head a percentage participation if that insider changes the code governing the project to produce an outcome that benefits only the whale and its associates.
insiders retain the ability to change project code
example, a whale may guarantee an inside developer or business head a percentage participation if the insider changes the code that governs the project for a beneficial outcome that only benefits the whale and its associates.
The absence of clearly defined technology features for blockchain, distributed ledger, and associated terms propagates outward, producing knock-on definitional problems in other parts of the blockchain ecosystem.
blockchain and distributed ledger terminology remains undefined
The lack of clearly defined technology features pertaining to blockchain technology, distributed ledger, and other associated terms has knock-on effects on other parts of the blockchain ecosystem.
No truly uniform definition of blockchain technology exists; commentators variously describe it as a giant distributed immutable spreadsheet for transactions or by enumerating central elements such as decentralization, immutability, and cryptographic verification.
No truly uniform definition exists for blockchain technology. Some refer to it as a giant worldwide, distributed, immutable "google spreadsheet" for transactions.1
The core distinguishing features of blockchain technology are only generically definitional: they characterize the technology as a class but supply no specific definitions usable for classification.
The core distinguishing features of blockchain technology help define the technology generically but provide no specific definitions. For example, the technology's distributed consensus
Blockchain's distributed consensus model makes fraudulent transactions much less likely to be recorded because individual network nodes verify and validate chain transactions before those transactions execute.
distributed consensus networks with node level validation
recorded as individual network nodes verify and validate chain transactions before the execution of the transactions.3 The resulting
The lack of a clearly delineated nomenclature for the term securities token has produced divergent uses and interpretations of that term, especially in relation to the term utility token.
United States digital asset markets as of 2022
The lack of a clearly delineated nomenclature for the term "securities token" resulted in various uses and interpretations of the term securities token, especially vis-à-vis the term "utility token."
The literature on securities tokens converges on two commonalities: that a securities token functions as or is synonymous with traditional security assets, and that securities tokens are subject to traditional securities regulation.
that a securities token functions as or is synonymous with traditional security assets,15 and 2. that securities tokens are subject to traditional securities regulation.16
Utility tokens are tokens with an intrinsic utility for a good or service: they emphasize the uses of the token and typically give users access to a product or service or give rewards that incentivize desirable behavior on the platform.
The term utility token is used to identify tokens that have an intrinsic utility for a good or service. Utility tokens emphasize the uses of the token and typically give their users access to a product or service or give rewards to incentivize desirable behavior on the respective platform.25
Utility tokens operate as an access mechanism: in order to interact with a given platform or use case, users are incentivized to acquire access rights to the product or service by acquiring the utility token.
In order to interact with a given platform or use case, users are incentivized to acquire access rights to the product or service through the acquisition of the utility token.
Merely calling a token a utility token, or structuring it so that it provides some utility, does not prevent the token from being characterized as a security.
United States regulatory characterization
From a regulatory perspective, merely calling a token a utility token or structuring it to provide some utility does not prevent the token from being characterized as a security.34 According to SEC
Under SEC guidance a token sold for use or consumption by purchasers may fall outside classification as a security, and the SEC lists characteristics whose stronger presence makes a token less likely to be considered a security.
SEC framework for investment contract analysis of digital assets
According to SEC guidance, if a token is sold for use or consumption by purchasers it may not be classified as a security for regulatory purposes. The SEC provided a list of characteristics where, the stronger their presence,35 the less likely a token is to be considered a security.
Dual listing narrows bid ask spreads in traditional markets by injecting liquidity, but crypto markets behave differently: price differences between two exchanges can reach upwards of five percent during peak trading times.
assets listed on multiple crypto exchanges
For traditional markets, when a security is dual- listed, we see the bid-ask spread decrease because additional liquidity is being injected into the market. This differs from the crypto market where the difference between the two exchanges can reach upwards of 5% during peak trading times.5
Even for the most liquid level one digital assets, managers may choose between the price on a favored exchange and an aggregate across exchanges, so the same asset can be reported at different values by different managers.
For instance, when quoting level 1 securities, while some managers may use the price on their favored cryptocurrency exchange, others might take an aggregate the price from multiple exchanges.7
Redemption contracts, the traditional price commitment device for privately issued money, lack credibility, whereas pre programmed smart contracts deliver an enforceable and secure quantity commitment instead.
Such redemption contracts lack credibility.31 In contrast, the pre-programmed smart contract's enabled by cryptocurrencies facilitate an enforceable and secure quantity commitment.32
A programmed and enforceable quantity commitment secures a reliably positive value for Bitcoin because the governing source code is fully transparent on the blockchain and continuously verifiable.
cryptocurrencies with observable open source code
For instance, a programmed enforceable quantity commitment ensures a reliable positive value of Bitcoin.33 Cryptocurrencies' observable source code are fully transparent on their respective blockchain and continuously verifiable.34
DCF currency translation breaks down for digital assets: no set discount rate or currency exchange forward curve exists for them, because they are not traded in exchange markets where closing prices are readily available and representative of fair value.
DCF analysis where the projection currency is a digital asset rather than fiat
However, no such set discount rate or currency exchange forward curve is available for digital assets, as they are not traded in exchange markets where closing prices are readily available and representative of fair value.79
Principal to principal markets are generally not considered observable because little information about their transactions is publicly available, which pushes assets priced there out of the observable input levels.
There is often little information about principal-to-principal transactions publicly available, and as such the markets are generally not considered observable.81
The Longstaff model's assumptions are inconsistent with reality on two fronts: investors do not have perfect timing, and its assumed volatility of ten to thirty percent is far below the volatility exceeding fifty percent typical of small stocks.
application of the Longstaff model to small or highly volatile securities
The Longstaff model's underlying assumptions are inconsistent with the reality of perfect timing as well as the assumed volatility level between ten to thirty percent, yet small stocks typically have volatility exceeding fifty percent.113
The main obstacle to digital asset market liquidity may be that the number of token holders has not continued to expand exponentially year over year; a larger stakeholder base would deepen liquidity and permit seamless entry and exit.
centralized digital asset exchange markets
The main issue may be that the number of token holders have not continued to expand exponentially year over year. Having a greater number of stake holders may result in the deeper liquidity in the market, which would in turn allow for seamless movement in and out of the market.
Secondary trade pricing from exchanges is a legitimate market approach input for digital assets only when liquidity is high enough to rely on those prices; where liquidity is lacking or unreliable, a discount for lack of liquidity is required.
liquidity and depth differ between token to token and token to fiat trades
Secondary trade pricing (as seen in exchanges) are relevant when liquidity is high enough to rely on these prices.131
Uniform digital asset valuation standards can only evolve over time as the market evolves, because standard setting requires common core practices, and those practices are only slowly emerging.
standard setting for digital asset valuation
Such standards can evolve over time as the market evolves. Standard setting requires common core practices what are slowly evolving.
Insider rug pulls are not the only exploit path: a DAO can also be attacked from the outside whenever its governance grants voting power through fungible tokens.
governance voting power is denominated in fungible tokens
But these inside rug pulls are not the only exploitative mechanism within DAOs. DAOs can also be exploited from the outside if the DAO's governance allows fungible voting power.
Dispersed, passive token holders cannot defend a DAO: because power in Build Finance DAO was not decentralized, the silent majority of token holders lacked the voting power to block the takeover, after which the attacker minted and sold tokens by draining liquidity pools.
low participation among dispersed token holders
Because of the lack of decentralized power in the Build Finance DAO, the silent majority of token holders did not have enough voting power to prevent the takeover. As a result, the attacker minted and sold various tokens by draining liquidity pools.
Defending a DAO against attackers and looters, and punishing self-dealing, requires sustainable decentralized governance built on non-fungible tokens rather than tradable voting power.
The takeover of the Build Finance DAO highlights the need for sustainable decentralized governance solutions with non-fungible tokens to defend the DAO from attackers/looters and punish self- dealing.
Workable DAO governance should account for reputation with non-fungible tokens or weighted keys rather than fungible tokens, so that voting weight tracks reputation instead of purchasing power.
1. Non-fungible Tokens or weighted keys, among other electronic accounting methods as accounting for reputation score NOT fungible tokens
DAO governance should use a two vote model that distinguishes a loosely coupled vote, where no reputation is at stake, from a tightly coupled vote, where the voter's reputation is at stake.
2. Two vote model a) loosely coupled vote (no reputation at stake), b) tightly coupled vote (reputation at stake)
Reputation in a DAO should be generated only for long term valuable work and for the policing of work, and never for business development work.
3. Reputation generated ONLY for long term valuable work and policing of work NOT for business development work
The friction generated by anonymous trolling can be mitigated through incentivized reputational architecture governed by protocols the community itself decides on, so anonymity does not have to corrupt DAO governance.
reputational architecture is implemented correctly and community governed
By contrast, if implemented correctly, anonymity significantly upgrades DAO governance. The friction that arises from anonymous trolling can be mitigated through the implementation of incentivized reputational architecture governed by protocols decided upon by the community.
A meaningful reputation governance and accounting mechanism for motivating business and governance participation is what encourages mutually beneficial contributions to a DAO community.
a meaningful reputation governance and accounting mechanism is in place
A meaningful reputation governance and accounting mechanism for motivating business and governance participation encourages mutually beneficial contributions to the community.
Braintrust demonstrates that innovation in work structure does not cure governance design: despite redefining work outcomes, it uses a suboptimal one token, one vote model that grants proportional control over network governance.
Despite its advances in innovation for redefining work outcomes, Braintrust uses a suboptimal governance model with a one token, one vote system for proportional control over how the network is governed.
Proof of personhood projects such as Proof of Humanity and UBI DAO fail because they rest on web-of-trust theory, which has been proven not to work long-term given the sockpuppet attacks that are inevitable in that design.
identity systems built on web-of-trust vouching
Of course, these attempts are all falling victim to web-of-trust theory that has been proven to not work long-term because the sockpuppet attacks that are inevitable in this design.
Each DAO in the dataset was given a score between zero and ten by the analyzing teams on each of six factors: Decentralization, Work to Earn, Attack Resistance, Regulatory Compliance, Governance, and Organizational Communication.
The six factors considered are: Decentralization, Work to Earn, Attack Resistance, Regulatory Compliance, Governance, and Organizational Communication. Each DAO was given a score between zero (0) and ten (10) by the analyzing teams
There is no consistent standard for DAO governance, which pushes each DAO to invent its own structure, and because decentralized governance is complex many of those structures fail to become truly decentralized, autonomous, or organized.
There is no consistent standard for DAO governance. This leads many DAOs to develop their own governance structure. However, because of the complex nature of decentralized governance, many DAO governance structures fail to become truly decentralized, autonomous, or organized.
Where a founder retains access to the smart contract behind the governance token, as with 3OH DAO, an internal attack by that founder would be remarkably easy.
founder has not renounced ownership of the token smart contract
If a DAO could have negative attack resistance, 3OH would be the DAO. With the founder having access to the smart contract, an internal attack by the founder would be remarkably easy.
A reputation system that rewards voting with the majority, as Bridge Mutual uses, can be manipulated by users who create multiple wallets and always vote with the majority.
reputation derived solely from voting outcomes
reliance solely on voting outcomes may present some vulnerability, as it could potentially be manipulated by users creating multiple wallets and voting with the majority.
Locking voted tokens for a period after a vote, as Nexus Mutual does for three days, prevents an attacker from using a flashloan to borrow a large amount of wrapped tokens and swing a vote with significant voting weight.
token weighted voting with freely traded wrapped token
This prevents anyone from using a flashloan to borrow a large amount of wNXM and unwrap the wNXM to NXM to sway a vote with a significant voting weight.
Short-term incentives in a decentralized insurance mutual would motivate decision-makers never to pay a claim in order to maximize current profit; incentivizing long-term alignment instead motivates them to pay genuine claims because of the value of the resulting reputation.
discretionary mutual where members decide claims
Short-term focus would motivate decision-makers to never pay out any claim to maximize current profit. However, incentivizing long-term alignment motivates decision-makers to pay out genuine claims because of the significant value of the resulting positive reputation.
Requiring governance tokens to be earned through contribution rather than purchased, as GDN DAO does, leaves only minimal risk of 51 percent and sock puppet attacks even under a one token one vote structure.
one token one vote with non purchasable tokens
While the voting structure of the DAO is a 1 token = 1 vote, tokens are not available for purchase. All governance tokens must be earned through contributions to the community.
A DAO built on reputation rather than a fungible token, as CRDAO is, makes the 51 percent attack nearly impossible and renders sock puppet attacks technically possible but of little influence.
CRDAO is fairly attack resistant because of its use of reputation. As a result, sock puppet attacks are technically possible, but would have little influence. CRDAO does not appear to have a fungible token, so the 51 percent attack is nearly impossible.
Kleros has weak attack resistance because juror selection is proportional to staked fungible tokens; staking reputation rather than tokens to select jurors would remedy this.
As such, Kleros has weak attack resistance. This could be changed by utilizing a reputation system to stake rather than tokens in order to select the jurors.
Big Green DAO's committee unanimity and closed membership make attacks unlikely, but these same protections come at the expense of the decentralized organization the founders were trying to create.
vetted membership and unanimous committee approval
However, these principles really limit what a DAO is supposed to be so in a way it is secure, but also at the expense of the organization they were trying to create.
Impact 1.0 foundations developed plutocratic power structures because their leaders and trustees were never democratically elected, and Impact 3.0 addresses this by adding WEB3 collaborative democratic measures on top of the existing foundation structures.
Impact 3.0 still relies on foundation structures
further improve Impact 1.0 private foundations by adding collaborative WEB3 democratic measures that address plutocratic power structures in Impact 1.0 foundations that originated in the lack of democratic elections of Impact 1.0 foundations' organizations' leaders or trustees.
Because Impact 1.0 entrusted individual donors rather than donor collectives with identifying which problems to solve, individual philanthropists can reshape underfunded causes according to their own ideals without meaningful checks and balances or crowd wisdom.
Impact 1.0 and 2.0 philanthropic strategies
high net worth individual and corporate donors
Individual philanthropists can leverage underfunded causes and reshape them according to their ideals without significant checks and balances or crowd wisdom considerations.
The two stage vote is the mechanism that produces consensus: a non binding test vote reveals how every donor assesses a project, after which donors can change their minds in the formal vote where their reputation tokens are at stake, and in practice decisions are made with unanimity.
reputation tokens are staked in the formal vote
the chosen WEB3 decentralized governance design
Once every donor sees how all other donors assess the given project, they can jointly change their minds during the "formal vote" in which their respective reputation tokens are at stake. Typically, in this form of decentralized governance, all decisions are made with unanimity.
Retroactive public goods funding via results oracles in DAO format fails at the governance layer: even where the core resource distribution concept works, the project remains exposed to decentralized governance attack vectors because the governance design lacks attack resistance.
retroactive public goods funding designs
The key downside of these types of oracles in DAO format are decentralized governance attack vectors. In other wods, even if the core concept of resource distribution works well enough, the overall projet is typically subject to the downsides that derive from lack of attack resistance
Hypercerts, like other WEB3 optimization attempts for impact certificates, lack the required verification of impact inputs inside decentralized governance settings that are attack proof.
hypercerts as implemented at the time of writing
Like other optimization attempts, Hypercerts often lack the require verification of impact inputs in decentralized governance settings that are attack proof.
Donor community votes have no binding legal effect on the 501c3 that holds the assets, yet the board will in practice follow the publicly visible voting and staking outcomes because departing from them puts the board and its long term client base at risk.
donor community does not pool assets or take custody
voting and staking outcomes are publicly visible
in effect it will adhere to the publicly visible voting and staking outcomes of the donor community on their chosen blockchain or centralized database. Not adhering to the choices made by the donor community risks the 501c3 board and its long-term client base.
Weighted reputation voting has key advantages over WEB2 and WEB3 one token one vote mechanisms because it aligns each donor community member's individual incentives while simultaneously calibrating those incentives with the interests of the overall community.
reputation tokens are non fungible and chain agnostic
The use of weighted reputation voting has key advantages over other WEB2 and WEB3 one-token-one-vote voting mechanisms. It aligns incentives for donor community members individually and at the same time calibrates their incentives with the overall community.
Impact certificates are an incomplete measure of expertise: they capture impact success in fungible economic terms without referring to the expertise actually developed by individual project community members or by the project as a collective, which is why WEB3 community software is needed for expertise tracking.
expertise tracking for donors, secondary market participants and follow on funders
impact certificates are mostly a fungible measure of impact success in economic terms without a direct reference to the inherent expertise developed by the individual project community members and the project as a collective.
Because reputation merit scores are calculated in an immutable and attack resistant manner, they can be aggregated across the many communities an individual belongs to, producing a constantly evolving WEB3 identity score comparable to a credit score.
WEB3 governance identity, distinguished from biometric or KYC proof of physical existence
scores are calculated in an immutable and attack-resistant manner. Therefore, the scores can be aggregated for an individual who is a member of many different communities. The aggregated score creates a constantly evolving identity score in WEB3 systems that can be compared with a credit score.
The voting logic makes impact community members work for themselves and for the community at the same time, which Kaal argues gives the system potential to create a reputation economy and forms of decentralized commerce that transcend capitalism and socialism.
dynamic community based governance system as described
Through the voting logic, impact community members are incentivized to work for themselves while at the same time working to benefit the community overall.
The smart contract industry is still projected to grow to several billion dollars over the next decade even though security audit costs and exploit losses are substantial, so vulnerability costs slow but do not halt industry growth.
smart contract industry through roughly 2032
the smart contracts industry is still estimated to grow to several billion dollars in the next decade
Losses from smart contract vulnerabilities are large and growing, with 2021 losses alone estimated at 680 million dollars and cumulative global losses estimated at over 6 billion dollars.
In 2021 alone total financial loss from smart contract bugs was estimated at $680 million
Bug bounty programs fail at their own premise because the hackers they pay to demonstrate exploitability frequently sell or exploit the bugs they find instead of disclosing them.
community audit and bug bounty programs for smart contracts
Alas, hackers often sell the bug or exploit them when they discover them.
The Code Review DAO drives review prices down by running a decentralized, community driven review process built on a bidding process, combined with open access for any qualified reviewer rather than membership in a few firms.
which facilitates a decentralized community-driven code review process that utilizes a bidding process on code reviews to drive prices down
Subjecting every review to crowd review and policing votes makes reviewers less likely to produce idiosyncratic reviews, because they would face slashing and loss of standing in the community.
reviewers holding stakeable reputation within the DAO
Accordingly, code reviewers are less likely to engage in highly idiosyncratic reviews as they would need to fear slashing and loss of standing in the community.
Fast community feedback enables development teams to take risks and move quickly through their governance and upgrade processes, which in turn accelerates growth and the scaling of experimentation.
enables risk-taking for dev teams who wish to move quickly through their governance and upgrade process, which in turn enables accelerated growth and scaling of experimentation.
The community audit should proceed in two stages: an informal vote that reveals collective wisdom to all members, followed by a formal vote in which staked reputation tokens are at risk, and this sequence gives job posters significant quality assurances.
Once the entire community knows how each member feels about the code review examined, the CRDAO now votes in a formal vote in which the reputation tokens staked are at risk.
A reliable reputation score substitutes for redundant labor: if a high reputation worker completes a task, required duplication can fall from fifteen workers to five or fewer, which is what allows micro task work to scale.
decentralized platforms with portable, wallet linked reputation scores
If a reliable and high reputation score worker completes the tasks, the duplication may be brought from 15 to 5 or less in the decentralized CRDAO setup. This enables unprecedented scaling of micro task work.
Two sided reputation scores discipline both sides of the micro task market: workers become less likely to accept offers from low reputation requesters, and low reputation workers are less likely to be retained.
If requesters have a lower reputation score, workers become less likely to accept requesters
Reputation token staking substitutes for identity verification: because staking makes the network attack resistant, workers can complete micro tasks without verifying identity, which removes the cost, delay, and privacy surrender of centralized approval and enlarges the available labor pool.
The CRDAO architecture, and specifically its reputation token staking mechanism, make the CRDAO attack resistant.
Gamification supplies quality control by making workers review and rate each other's contributions for points or recognition, which surfaces and resolves discrepancies through consensus-based voting or peer review rather than through duplicated independent work.
Gamification can be utilized to improve data quality through mechanisms like consensus-based voting or peer review. Workers can review and rate each other's contributions, earning points or recognition for accurate and consistent work.
The collective of reviewers in legacy code review is not incentivized to find flaws in the code, because the review is treated as the work product of the initial reviewer with minor input from follow-up reviewers rather than as a product of the collective.
applies to legacy hierarchical code review firms
The collective of reviewers is also not incentivized to find flaws in the code to optimize code as a work product of the collective.
Mandatory crowd review and policing votes make code reviewers less likely to submit highly idiosyncratic reviews, because idiosyncratic reviewers face slashing of their reputation token scores and loss of standing in the community.
applies to reviews subject to CRDAO collective policing votes
code reviewers are less likely to engage in highly idiosyncratic reviews as they would need to fear slashing of rep token scores and loss of standing in the community.
A sequenced two-stage vote, an informal community vote that reveals collective wisdom followed by a formal vote in which staked reputation tokens are at risk, gives job posters significant assurance that the reviewed code and the platform report meet the highest available quality standards.
applies to code reviews audited by the CRDAO community
the CRDAO now votes in a formal vote in which the reputation tokens30 staked are at risk. This sequence of votes provides job posters with significant assurances that the code examined and the Code Review Platform report on the code adheres to the highest standards of quality
Reputation tokens are stipulated as non-transferable tokens that cannot be valued and that merely mirror a scoreboard of a member's reputation within the community, rather than functioning as tradable assets.
as defined for CRDAO members at the time of writing
"Reputation Tokens" are non-transferable tokens that cannot be valued and represent the reputation a member has within the community. They simply mirror a scoreboard.
Reputation scores on the ALE Platform balance supply and demand through a two-sided incentive: requesters with lower reputation scores find workers less likely to accept their offers, and workers with low reputation scores are less likely to be retained for micro task work.
applies to the ALE Platform reputation scoring system
If requesters have a lower reputation score, workers become less likely to accept requesters' offers. In turn, low reputation scores for micro task workers result in a lower likelihood of retention
The reputation score mechanism helps discern malicious actors from simple mistakes and protects workers and verifiers from fraudulent requesters and suboptimally designed requests, so reputation serves as a bidirectional screening device rather than only a worker rating.
The reputation score mechanism helps discern malicious actors and simple mistakes. It also protects workers and verifiers from fraudulent requesters and suboptimally designed requests.
Reputation based market dynamics lower the cost of duplication relative to centralized micro task work: where a reliable high reputation worker completes the task, duplication can fall from fifteen to five or fewer in a decentralized setup, which is what enables scaling of micro task work.
conditioned on a reliable and high reputation score worker completing the tasks
If a reliable and high reputation score worker completes the tasks, the duplication may be brought from 15 to 5 or less in the
Paying workers a share of incoming compensation pro rata to their reputation scores makes rigor self-enforcing, because workers who do not engage with the required care lose their spot in the reputation rankings and thereby lose their share of the job fee distribution.
applies to the ALE Platform fee distribution design
they sacrifice their spot in the rankings of reputation scores which affects their participation in the job fee distribution, which is paid out pro rata to the respective reputation scores.
Combining decentralized governance with gamification of micro task work is the condition under which gamification does not compromise dataset quality and accuracy, and this combination is what allows gamified micro task work to scale high-quality diverse datasets for AI learning.
combination of decentralized governance and gamification of micro task work, ALE Platform ensures that gamification techniques do not compromise the quality and accuracy
Ex-post governance, which applies regulation only after AI systems are developed and deployed or after large language models have been pretrained on existing proprietary datasets, fails to address risks and biases preemptively.
applies to regulation imposed after model development or pretraining
concerns risk and bias formation during development
The traditional ex-post governance methods, where regulations are applied after AI systems are developed and deployed, or were pretrained LLMs models were trained on existing proprietary datasets, often fall short in preemptively addressing risks and biases.
Blockchain can only deliver decentralized AI governance if the blockchain trilemma is first overcome, since decentralization, security, and scalability cannot readily be achieved simultaneously within one network.
applies to blockchain networks used as governance infrastructure
The effectiveness of blockchain in achieving the goal of decentralized AI governance is contingent upon overcoming the fundamental blockchain trilemma: the challenge of balancing decentralization, security, and scalability.
When decentralization at the Layer 1 level is compromised, the autonomy of the smart contracts deployed on that chain is compromised by affiliation, so smart contracts are corruptible in the current design and cannot reliably serve as neutral instruments of ethical AI governance.
applies where a few dominant parties influence the underlying Layer 1
holds under current blockchain design as of 2024
When the decentralization of Layer 1 blockchains is compromised, the autonomy of smart contracts is inherently jeopardized, undermining their effectiveness as tools for ethical AI governance.
Decentralized governance structures impose their own costs: with no central authority to coordinate diverse stakeholders, consensus is difficult to reach, negotiations are prolonged, and enforcement of agreements is weak because no single entity is responsible for compliance.
applies to decentralized structures without a coordinating authority
evidenced in the paper by the environmental agreement domain
In decentralized systems, the lack of a central authority often leads to difficulties in coordinating and achieving consensus among diverse stakeholders, each with their own priorities and objectives. This can result in prolonged negotiations or weak enforcement of agreements
Until the known attack vectors on decentralized autonomous organizations are solved, DAO based AI governance solutions remain suboptimal; these include Sybil attacks, tyranny of the majority, Arrow's impossibility theorem, sockpuppet attacks, and tragedy of the commons.
describes DAOs as set up and governed in the majority of cases in 2024
conditional on the attack vectors remaining unsolved
Without solving these attack vectors, DAO related AI governance solutions remain suboptimal.
AI powered DAOs that autonomously generate revenue are especially hard to regulate or dismantle, because the same blockchain security features that protect the organization also make it difficult to intervene once it is operational.
applies to autonomously revenue generating AI DAOs
arises from blockchain immutability and security guarantees
Furthermore, AI-powered DAOs that autonomously generate revenue pose unique challenges in regulation and potential dismantling, as the inherent security features of blockchain technology make it difficult to intervene or alter these entities once they are operational.
Ex-ante regulation is preferable in principle but is neither practical nor sufficient inside legacy systems, precisely because legacy systems, unlike the web3 system proposed here, are not equipped to create dynamic feedback effects.
comparison is between legacy regulatory infrastructure and web3 based governance
turns on the presence or absence of dynamic feedback effects
while ex ante regulation is preferable, it is not always practical or sufficient in legacy ssytems to address the dynamic challenges that AI technologies present because legacy systems, unlike web3 systems as proposed herein, are not typically equipped to create dynamic feedback effects.
Routing proposals through the Forum and then through Validation Pool review is what allows the input parameters and learning data of AI systems to be governed by expert community consensus, because only vetted and consensus backed data and parameters reach AI development.
requires an operating DAO with reputation tokens and validation pools
applies to input parameters and training data selection
This process involves submitting proposals to the Forum and undergoing Validation Pool review, ensuring that only vetted and consensus-backed data and parameters are utilized in AI development.
A decentralized data validation layer applied to pretrained models is efficient but structurally limited: because it cannot drive significant changes to the model's core design or training approach, it leaves the model more attack prone.
applies to Model 2, the decentralized data validation layer approach
concerns pretrained models whose parameters are already fixed
The validation layer approach, while efficient for refining pretrained models, may not facilitate significant changes in the model's core design or training approach which could make it more attack prone.
Model 3, web3 community governance combined with decentralized data and the AI model, is the superior of the three governance models compared, because it addresses shortcomings the other two leave in place.
comparison is against Model 1 post-hoc governance and Model 2 data validation layers
assumes a functioning web3 community governance layer
Yet, Model 3: "Web 3 Community Governance - Decentralized Data - AI Model" stands out for several reasons, potentially offering a superior approach when compared to the other two models.
Web3 community governance built on Weighted Directed Acyclic Graphs, validation pools with reputation staking, and a federated communications protocol provides an evolutionary approach to optimizing AI models rather than a static compliance layer over them.
applies to the six AI model families the author examines: deep learning, federated learning, transformer, GNN, RL, and RLHF
The integration of web3 community governance, using Weighted Directed Acyclic Graphs (WDAGs) and validation pools with reputation staking in combination with a federated communications protocol, offers an evolutionary approach to AI model optimization.
GNNs are vulnerable to adversarial attacks that target both node features and graph structure, and their lack of interpretability remains a major obstacle to applying them to real world problems.
real world GNN deployments where adversaries can influence the graph
GNNs can be vulnerable to adversarial attacks on both node features and graph structure, and interpretability remains a major obstacle for applying GNNs to real-world problems.
Validation pools evaluate contributions democratically on the basis of staked tokens, and the outcome of that evaluation governs the minting of new reputation tokens, so community consensus on AI decisions is what determines standing in the system.
the proposed web3 community governance architecture
Validation Pools allow for the democratic evaluation of contributions based on staked tokens, with outcomes influencing the minting of new REP tokens that reflect community consensus on AI-related decisions.
Requiring community members to stake reputation tokens in order to validate data quality is what produces robust and reliable training datasets, and this participatory validation improves annotation accuracy while reducing bias.
training data validation carried out by a reputation staking community
Community members stake reputation tokens to validate data quality, ensuring robust and reliable datasets for training AI models. This participatory approach can improve data annotation accuracy and reduce biases.
In federated learning, validation pools coordinated by smart contracts should dispense rewards pro rata to the reputation a node has accumulated through productive work, so that incentives track a node's actual contribution to the model's learning rather than mere participation.
federated learning where node contribution quality varies and must be motivated
with validation pools that are smart contract coordinated to dispense rewards pro rata to the reputation scores a node may have accumulated through productive work. This mechanism ensures that nodes are incentivized based on their actual input to the AI model's learning.
GNNs and web3 systems optimize each other through mutual feedback effects, and it is this bidirectional learning, rather than one system merely serving the other, that produces an evolutionary dynamic optimization process.
GNNs deployed inside the web3 systems they analyze
The integration and optimization of AI models such as GNNs and web3 systems happens in feedback effects between the two systems. Through these feedback effects both systems learn constantly from and with each other which results in an evolutionary dynamic optimization process.
The RLHF process is exposed to failure because participants may hold potentially adversarial and misaligned interests, so the vulnerability lies in the incentive structure of feedback provision rather than in the learning algorithm.
RLHF systems where feedback providers have divergent stakes
Currently, the RLHF process, which involves training AI models based on human preferences and feedback, can face challenges due to the potentially adversarial and misaligned interests of participants.
Distributing governance across all participants prevents any single entity from dominating decision making, and because model or training changes then require consensus, the resulting decisions reflect collective rather than individual interest.
governance systems where change requires consensus among distributed participants
By distributing governance across all participants, the proposed web3 community governance system ensures that no single entity can dominate the decision-making process. This structure promotes the alignment of incentives since changes to the model or the training process require consensus
Applying decentralized voting and consensus to RLHF permits human feedback to be verified before it is used to calibrate the Reward Model, which raises the integrity and reliability of the feedback data entering the model.
RLHF pipelines where feedback can be verified prior to reward model training
Applying these mechanisms to RLHF allows for the decentralized verification of human feedback before it's used to calibrate the RM, enhancing the integrity and reliability of the feedback data.
Issuing non fungible reputation tokens that represent voting power, access rights, or entitlement to a share of the project's success creates an economic structure in which participants are directly invested in the success of the RLHF process.
RLHF communities where retention and sustained participation matter
The web3 system as proposed herein can issue non-fungible reputation tokens that represent voting power, access rights, or entitlement to a share of the project's success. This creates an economic structure where participants are directly invested in the success of the RLHF process
Current cryptographic systems such as RSA rest on the classical difficulty of factoring large primes, so quantum algorithms like Shor's algorithm, which factor exponentially faster, can render those cryptographic methods obsolete.
applies to factoring based cryptography such as RSA
requires sufficiently capable quantum hardware
Quantum algorithms, such as Shor's algorithm, can factor these numbers exponentially faster, potentially rendering existing cryptographic methods obsolete.
Financial entanglement operates through money and credit: credit products such as mortgages transmit quantum cognitive effects from individuals into the financial system and create a feedback loop between the individual and societal levels.
applies to credit based financial systems
Credit products, such as mortgages, act as a vector of transmission for quantum cognitive effects and create a feedback loop between the individual and societal levels.
Supply side mechanisms such as token burns, which permanently remove tokens from circulation, and staking, which locks tokens up in exchange for rewards, let a token economy balance supply and demand and thereby sustain stable growth.
requires deliberate calibration of the incentive parameters
By carefully designing these incentives, token economies can balance supply and demand, ensuring stable and sustainable growth.
Because quantum economics models probabilities rather than certainties, it is better suited than deterministic models to capturing cryptocurrency price dynamics, and probabilistic models let economists better anticipate price movements and market behavior in decentralized markets.
decentralized and volatile cryptocurrency markets
However, quantum economics, with its focus on probabilities rather than certainties, offers a framework that is more suited to capturing these dynamics.
Decentralized blockchain networks display an economic analogue of entanglement: a single participant's action, such as a large transaction, immediately propagates into token prices, network congestion, and the behavior of other participants.
For example, a large transaction by a single user can influence token prices, network congestion, and even the behavior of other participants.
Tokens solve the quantification problem in quantum economics by serving as measurable units of value and governance: token denominated voting power in a DAO makes social influence and decision making power countable, supplying the consistent set of units the framework lacked.
token based systems with on chain governance such as DAOs
Tokenomics offers a practical solution through the use of tokens as quantifiable units of value and governance.
Decentralized governance models such as DAOs answer the criticism that micro level quantum properties do not scale to the macro level, because DAOs demonstrate participatory governance structures that operate effectively in large, complex economies.
large scale decentralized economies with DAO governance
Additionally, the use of decentralized governance models in tokenomics, such as DAOs, can address the criticism that quantum properties observed at the micro level do not scale up to the macro level.
In blockchain transactions the signing function, performed by wallets holding cryptographic keys, is separate from execution, which occurs inside the smart contract, so tokens are never physically held in the same locality as the keys and the smart contract acts as the intermediary executing predefined rules.
smart contract based blockchain transactions
This separation ensures that the tokens themselves are not physically held in the same locality as the keys.
Quantum computing cuts both ways for blockchain: it can raise the efficiency and security of blockchain networks, but safeguarding those systems against the threats it also creates depends on research into quantum resistant cryptographic algorithms.
as quantum computing capability advances
Research into quantum-resistant cryptographic algorithms will be crucial to safeguard blockchain systems against potential threats posed by quantum computing.
A reputation governance layer that awards reputation tokens for contributions and behavior fosters trust and drives positive engagement within a token community, complementing DAO based token holder voting.
the VOW ecosystem incorporates a reputation governance system, which rewards users with reputation tokens based on their contributions and behavior.
Quantum algorithms such as Shor's algorithm can factor large prime numbers exponentially faster than classical computers, which potentially renders currently deployed cryptographic systems including RSA obsolete.
assumes cryptographically relevant quantum computers become available
Trust and security in digital financial systems and decentralized networks cannot survive the arrival of quantum computing without quantum resistant cryptographic protocols, making the shift to quantum safe cryptography a precondition for the quantum economy rather than an optional upgrade.
This development necessitates the creation of quantum-resistant cryptographic protocols to secure transactions and data in the quantum economy. The shift towards quantum-safe cryptography will be critical to maintaining trust and security in digital financial systems and decentralized networks.
The integration of tokenomics with quantum economics turns the abstract concepts of the framework into working mechanisms, supplying practical instruments for decentralized finance and participatory governance.
The integration of tokenomics with quantum economics operationalizes these abstract concepts, offering practical mechanisms for decentralized finance (DeFi) and participatory governance models.
Workplace trust is a condition for technological change to empower employees: a one percentage point rise in technological change is associated with a 0.23 percentage point rise in perceived empowerment where trust exists, against only 0.10 percentage points where it does not.
workplaces with and without established trust
A one percentage point rise in technological change is associated with a 0.23 percentage point rise in perceived empowerment in workplaces with trust, compared to only a 0.10 percentage point rise in workplaces without much trust.
Quantum computing will displace job roles built on repetitive and manual tasks, but that displacement is offset by new roles in quantum programming, algorithm design, and quantum cryptography that did not previously exist.
However, this displacement is counterbalanced by the creation of new opportunities in emerging fields such as quantum programming, algorithm design, and quantum cryptography.
Traditional hierarchical organizational structures are too slow to adapt to rapid technological change and stifle innovation through rigid control mechanisms, which is why they are unsuited to governing the quantum economy.
Traditional hierarchical structures are often slow to adapt to rapid technological changes and can stifle innovation through rigid control mechanisms.
DAOs supply a more flexible and dynamic governance model than hierarchy because they permit real time evolutionary adjustment of governance rules and decentralized decision making.
In contrast, DAOs offer a more flexible and dynamic approach to governance, allowing for real-time evolutionary and dynamic adjustments and decentralized decision-making.
DAO accountability comes from the recording mechanism itself: because all transactions and decisions are written to an immutable blockchain that every stakeholder can inspect, no single actor can easily manipulate or obscure organizational activity.
All transactions and decisions are recorded on an immutable blockchain, accessible to all stakeholders. This transparency ensures accountability by making it difficult for any single actor to manipulate or obscure organizational activities.
Encoding compliance and operational procedures in smart contracts removes discretionary human steps from execution, which minimizes human error and bias and raises the reliability and integrity of economic interactions.
By automating compliance and operational procedures through smart contracts, DAOs can minimize human error and bias, thereby enhancing the reliability and integrity of economic interactions.
Combining quantum computing with blockchain and DAO frameworks makes a governance model possible that is simultaneously transparent, decentralized, and adaptive, supporting efficient and fair resource distribution and continuous innovation.
By integrating quantum computing with blockchain and DAO frameworks, a new era of transparent, decentralized, and adaptive governance is possible.
The opacity of deep learning models obstructs debugging, obscures the detection and mitigation of bias, and prevents comprehension of how AI decisions are reached.
particularly in deep learning models whose internal decision mechanisms are not transparent
This opacity can obstruct the debugging process, obscure bias detection and mitigation, and hinder comprehension of AI decision-making.
Federated learning does not eliminate privacy risk, because although the data stays decentralized the protocol still exchanges model parameters, and those parameters can expose sensitive information if intercepted or improperly handled.
in federated learning deployments that exchange model parameters
where parameters can be intercepted or mishandled
These challenges arise because, while FL keeps data decentralized, it still involves the exchange of model parameters, which could potentially expose sensitive information if intercepted or improperly handled.
As AI systems come to depend on vast data, personal information is converted from a resource the individual could control and deploy at discretion into a fundamental operational input for AI systems, which increases the potential for misuse and makes it harder for individuals to manage how their data is used.
where AI operation requires large volumes of personal data
As AI technologies evolve, they rely heavily on vast amounts of data, transforming personal information from a resource that individuals could control and use at their discretion into a fundamental operational tool for AI systems.
Smart contracts can automate compliance with regulatory requirements and ethical guidelines: for example, a smart contract can enforce privacy law directly by controlling an AI system's access to personal data according to predefined rules.
where compliance rules can be expressed as predefined, codified conditions
They can be used to automate compliance with regulatory requirements and ethical guidelines. For instance, smart contracts can automatically enforce privacy laws by controlling AI's access to personal data based on predefined rules.
In the federated model of AI governance many challenges cannot easily be decentralized, because distinct entities maintain their own AI systems and datasets, producing variation in standards, protocols, and formats that obstructs a unified governance framework.
where separate organizations maintain independent AI systems and datasets
In the federated model of AI governance, many challenges cannot be easily decentralized. For example, different entities or organizations maintain their own AI systems and datasets. This can lead to variations in standards, protocols, and formats used
When decision making power is distributed across multiple entities in a federated model, consensus and cooperation become harder to reach, which makes cohesive AI governance mechanisms difficult to establish.
where governance authority is distributed across multiple independent entities
In a federated model, where decision-making power is distributed across multiple entities, it becomes harder to achieve consensus and cooperation, making it challenging to establish cohesive AI governance mechanisms.
Kaal proposes that a more decentralized Web3 model of AI governance can address the failures of the federated model by distributing governance more equitably across network participants, so that no single entity dominates decision making.
where governance rights are distributed across network participants
A more decentralized web3 model of AI governance as proposed here could ostensibly address these challenges in a federated AI governance model by distributing governance more equitably across network participants.
Kaal's proposed answer to the decentralized governance needs of AI is to implement Decentralized Autonomous Organizations that govern AI through expert community consensus.
where an expert community can be assembled and its consensus recorded on chain
One promising way to address the decentralized governance needs of AI pertains to the implementation of Decentralized Autonomous Organizations (DAOs) for the governance of AI through expert community consensus.
Validation Pools are the consensus mechanism of the proposed system: an author's stakes are pooled to evaluate a specific forum post, and the outcome of the pool can mint new reputation tokens that reflect community consensus on that contribution.
where participants stake against specific forum posts
Validation Pool (VP) form a crucial mechanism where an author's stakes are pooled to evaluate specific posts within the forum. The outcome of a VP can lead to the minting of new REP tokens, reflecting the consensus on a given issue or contribution.
Under the proposed model the input parameters and learning data of AI systems are themselves governed by expert community consensus, through submission of proposals to the Forum and review by Validation Pool, so that only vetted and consensus backed data and parameters enter AI development.
where training data and parameters are submitted as forum proposals subject to validation pool review
the input parameters and learning data for AI systems can be governed through expert community consensus. This process involves submitting proposals to the Forum and undergoing Validation Pool review,
Inconsistent application of a proliferating body of law by different judges and regulatory bodies produces unpredictable legal outcomes, which increases litigation as parties seek judicial clarification and in turn undermines public confidence in the legal system.
where statutes and regulations multiply faster than interpretive doctrine consolidates
Inconsistencies in the application of laws by different judges or regulatory bodies can result in unpredictable legal outcomes, thereby increasing litigation as parties seek judicial clarification. This inconsistency further undermines public confidence in the legal
As law becomes more detailed and specialized it becomes less accessible to the general public, which complicates citizens' ability to understand the rules governing them and discourages engagement and participation in democratic processes.
where legal complexity outpaces lay comprehension
less accessible to the general public, complicating citizens' ability to understand and engage with the rules that govern their lives. This lack of accessibility and transparency can discourage public engagement and participation in democratic processes
Web2 platform architecture is a causal contributor to distrust in legal institutions: centralized models driven by engagement metrics prioritize sensationalism over nuanced discourse, which accelerates misinformation and echo chambers and magnifies public distrust.
centralized, engagement optimized social media platforms
where citizens use social media as a substitute for formal legal channels
This design incentivizes the rapid spread of both information and misinformation, often amplifying extreme viewpoints and fostering echo chambers. As a result, these platforms can magnify public distrust in legal institutions
Sunset provisions likely increase rents extracted by interest groups and entrench current majoritarian preferences, and they can create planning problems for both public and private actors.
politically salient statutes subject to periodic renewal
rather than genuine policy improvement. Sunset provisions also likely increase rents from interest groups, entrench current majoritarian preferences, which can at times produce planning conundrums for public and private actors.
Sunset provisions in tax law do not deliver fiscal restraint, because shifting baselines, exceptions to budget rules, and the difficulty of accurately costing temporary legislation undermine their theoretical benefits.
tax legislation subject to budget scoring rules
Complexities such as shifting baselines, exceptions to budget rules, and the challenges of accurately assessing the costs of temporary legislation undermine the theoretical benefits of sunset provisions in promoting fiscal restraint.
Web3 systems answer the web2 pathology at the architectural level rather than the content level: decentralized, transparent, community governed designs eliminate the centralized control that drives misinformation and echo chambers, and substitute transparency, decentralization, and user control.
decentralized and community governed platform architectures
Unlike Web2 platforms, Web3 systems aim to eliminate the centralized control that exacerbates the spread of misinformation and the creation of echo chambers. Instead, they prioritize transparency, decentralization, and user control,
The proposed system stipulates a forum as an on chain collection of uniquely identified posts that may cite prior contributions, and this citation structure is what constitutes the Weighted Directed Acyclic Graph.
on chain forums where posts and citations are recorded immutably
The web3 community as proposed herein operates a forum as an on-chain collection of posts, each uniquely identified and possibly citing previous contributions. This forum forms a Weighted Directed Acyclic Graph (WDAG), facilitating organized discussion and citation among participants.
Validation pools are the consensus mechanism of the proposed system: author stakes are pooled to evaluate specific forum posts, and the outcome can mint new reputation tokens that record the community's consensus on a contribution.
where participants stake reputation on the evaluation of specific posts
Validation Pool (VP) form a crucial mechanism where author stakes are pooled to evaluate specific posts within the forum. The outcome of a VP can lead to the minting of new REP tokens, reflecting the consensus on a given issue or contribution.
In the WDAG system a legal precedent or rule that gains favor because it is effective automatically receives a higher weight, and that weight is set by user preferences and citations rather than by any legislative act.
where citation and user preference data are recorded on chain
where effectiveness is revealed through use
In the WDAG system, when a new legal precedent or rule gains favor due to its effectiveness, it automatically receives a higher weight in the system based on user preferences and citations.
Political resistance to repeal dissolves under the WDAG model because a rule that loses substantial backing simply diminishes in relevance through the citation mechanism, with no external legislative act of repeal to contest.
where support and opposition are expressed through citation behavior
dynamically reflecting evolving support or opposition to legal precedents through a citation mechanism. If a legal rule loses substantial backing, its relevance diminishes organically within the WDAG framework, without the need for external legislative intervention.
The governance protocols required for GDPR and AI Act compliance, including anonymization, data minimization, and explicit consent, themselves complicate the assembly of robust AI training datasets.
jurisdictions with GDPR-style data protection mandates
which may include anonymization, data minimization, and explicit consent where applicable. These measures can, however, complicate the collection and curation of robust datasets for AI training.
Centralizing annotation data inside a small number of vendor firms creates a standing risk of breach or misuse that can produce legal liability and loss of trust in AI technologies.
data aggregated and held by centralized annotation vendors
As data is centralized in these companies, there's always a risk of data breaches or misuse, which could lead to legal issues or loss of trust in AI technologies.
Transparent DAO governance lets platforms compensate contributors according to demonstrated expertise and reputation, which mitigates the exploitative labor practices associated with centralized annotation services.
governance is genuinely transparent and reputation is verifiable
By implementing transparent governance mechanisms—often in the form of Decentralized Autonomous Organizations ("DAOs")—these ventures can equitably compensate data contributors based on demonstrated expertise and reputation, thus mitigating exploitative labor practices
The reputation systems of SingularityNET, Fetch.ai, Ocean Protocol, Numeraire, and DcentAI are structurally insufficient for a fully decentralized Mechanical Turk model of large-scale AI dataset creation, offering only incremental innovation.
highly contextual, iterative, and ethically sensitive dataset tasks
continuous compliance with evolving legal standards
While these platforms offer incremental innovations in how contributors are evaluated and rewarded, they remain structurally insufficient for a fully decentralized "Mechanical Turk" model of large-scale AI dataset creation.
Linking every contributor action and every piece of data to on-chain governance elements within a structured graph is what enables real-time community oversight, iterative updates, and granular reputation tracking in the WDAG model.
contributions and governance elements are recorded on chain
By enabling every contributor action and piece of data to be linked to on-chain governance elements in a structured graph, the WDAG model supports real-time community oversight, iterative updates, and granular reputation tracking.
Reputation for AI dataset governance must be multi-dimensional rather than a single numeric score, which the author operationalizes as weighted nodes and directed edges in a WDAG.
AI dataset governance requiring traceability and flexibility
By establishing a forum of weighted nodes and directed edges, WDAG provides a multi-dimensional view of contributors' work, ensuring that reputation is not limited to a single numeric score.
Because Fetch.ai's reputation metrics do not adjust to evolving ethical, legal, and community standards, the platform risks entrenching biases and outdated practices.
where societal expectations or regulatory norms change over time
the platform risks reinforcing biases or outdated practices if metrics are insufficiently aligned with changes in societal expectations or regulatory norms.
Ocean Protocol's market-driven reputation signal is too indirect: it does not measure individual expertise or annotation consistency, and market forces lag behind real-time shifts in best practices and ethical standards.
reputation inferred from price signals and demand rather than direct evaluation
this indirect feedback loop does not thoroughly account for the individual expertise or consistency of data annotation work. Market forces can lag behind real-time changes in best practices or ethical standards, leaving critical gaps in data quality and compliance.
Numeraire's staking and prediction-based reputation mechanism, tuned to predictive accuracy, overlooks the ethical and contextual concerns that characterize AI dataset governance.
diverse dataset tasks such as medical annotation and content moderation
The narrow focus on predictive accuracy overlooks the broader ethical and contextual concerns that characterize AI governance.
A single reputation score, as used by DcentAI, cannot capture the interdependencies among privacy concerns, domain-specific regulation, and real-time ethical updates that dataset governance requires.
multi-domain dataset quality with evolving standards
The current framework may struggle to capture interdependencies between various data facets—such as privacy concerns, domain-specific regulations, and real-time ethical updates—within a single reputation score.
An abrupt transition from Proof of Stake to Secure Proof of Stake would destabilize networks built on stake-based incentives, because stake is a fungible economic asset and reputation is non-fungible social capital, and the two operate on fundamentally different principles.
networks whose validator participation depends on stake-based incentives
An abrupt transition could destabilize networks reliant on stake-based incentives, as stake (a fungible economic asset) and reputation (a non-fungible social capital) operate on fundamentally different principles, potentially disrupting validator participation and network integrity
Because governance is embedded in the protocol rather than conducted off-chain, SPoS could enact protocol changes in weeks or days where Bitcoin's miner and developer negotiation process takes years.
assumes functioning on-chain governance forums
For example, whereas Bitcoin's upgrade process can take years due to miner-developer negotiations, SPoS's embedded governance could enact changes in weeks or days, mirroring the agility of Tendermint's consensus model
On-chain governance systems outperform traditional governance models in responsiveness only if they incorporate robust anti-collusion measures, a requirement SPoS meets through its cryptographic commitments.
requires robust anti-collusion measures to be in place
Recent studies of on-chain governance in DAOs suggest that such systems can outperform traditional models in responsiveness, provided they incorporate robust anti-collusion measures—a challenge SPoS addresses through its cryptographic commitments
Reputation functions as a social incentive that complements monetary reward and sustains cooperation in trustless environments, a behavioral mechanism unavailable to purely stake-weighted consensus systems.
Behavioral economics provides a lens for understanding this shift: reputation acts as a social incentive, complementing monetary rewards and fostering cooperation in trustless environments
Recursive zk-SNARK optimizations compress proof generation from seconds to milliseconds while preserving constant-time verification, which is what makes zero-knowledge voting deployable in a protocol running microsecond-scale reputation updates.
compress proof generation from seconds to milliseconds while preserving constant-time verification, aligning with SPoS's need for rapid governance operations under microsecond-scale reputation updates
SPoS's reliance on a reputation-based system introduces vulnerabilities absent from PoW and traditional PoS, most notably Sybil attacks, collusion risks, and reputation manipulation, which could undermine its decentralized governance and consensus if not robustly addressed.
However, its innovative reliance on a reputation-based system introduces vulnerabilities—most notably Sybil attacks, collusion risks, and reputation manipulation—that could undermine the integrity of its decentralized governance and consensus processes
Sybil attack risk is amplified in reputation-driven systems relative to stake-based ones, because influence derives from behavioral metrics that an attacker can mimic across many pseudonymous identities.
reputation-driven consensus systems where influence stems from behavioral metrics
In reputation-driven systems, this threat is amplified as influence stems from behavioral metrics rather than stake, enabling attackers to mimic legitimate activity across numerous identities
Cryptography alone is insufficient for a reputation-based consensus system: SPoS's cryptographic toolkit resists direct tampering, but reputation-based exploits require separate strategic countermeasures.
While SPoS's cryptographic toolkit resists direct tampering, it requires strategic countermeasures to address these reputation-based exploits
Weighted voting defeats Sybil attacks because ECDSA signatures and zk-SNARKs authenticate every platform action, so reputation cannot be artificially inflated by identities that lack genuine contribution.
requires that all platform actions be cryptographically authenticated and reputation be recorded on chain
This approach utilizes cryptographic verification—via ECDSA signatures and zk-SNARKs—to authenticate actions, ensuring that reputation cannot be artificially inflated by Sybil identities lacking genuine effort
Weighted voting reduces Sybil attack success rates by over eighty-five percent, but only where reputation is openly auditable.
Simulations of reputation-based systems suggest that weighted voting reduces Sybil attack success rates by over 85% when reputation is openly auditable
Distributing monitoring across federated communication nodes, such as Matrix with its Synapse server, scales oversight of AI agent activity while improving privacy, because sensitive data is processed locally instead of being pooled in one central repository.
federated model not only scales the monitoring process efficiently but also enhances data privacy by processing sensitive information locally rather than in a single centralized repository.
Because blockchain records a verifiable and immutable history of data provenance and alterations, it mitigates data poisoning risk and supports the claim that AI models were trained on genuine datasets.
systems relying on large language models
Blockchain establishes a verifiable record of data provenance and alterations, essential for sustaining trust and mitigating risks such as data poisoning, thereby ensuring AI models are trained on genuine datasets.
Decentralized cryptocurrency rails let AI agents autonomously control digital wallets, securing private keys, monitoring balances, and managing multiple addresses, without requiring human or institutional authorization.
blockchain based payment rails without centralized intermediaries
enables AI agents to autonomously oversee digital wallets—securing private keys, monitoring balances, and managing multiple addresses—without requiring human or institutional authorization.
AI autonomy introduces unpredictability: agent actions may diverge from intended outcomes, which amplifies the risk of unintended ramifications.
autonomous agents acting without step by step human authorization
AI autonomy introduces unpredictability, wherein actions may diverge from intended outcomes, amplifying risks of unintended ramifications.
Treating DAOs as monitoring entities assumes a static governance model that cannot keep pace with the rapid proliferation and sophistication of AI agents.
conventional DAO governance applied to AI agent oversight
The evolution of DAOs as monitoring entities assumes a static governance model117 incapable of keeping pace with the rapid proliferation and sophistication of AI agents.
Making governance decisions collectively through web3 consensus minimizes bias and single points of failure, because oversight is no longer subject to the limitations or errors of a solitary AI system.
consensus driven decision making among diverse stakeholders
decentralized approach minimizes the risk of bias and single points of failure, as governance decisions are made collectively rather than being subject to the limitations or potential errors of a solitary AI system.
Smart contract governance reduces the potential for human error and guarantees consistent application of governance protocols, features often lacking in purely AI driven supervision, although consensus delays may occur.
predefined self enforcing rules executed on chain
reduces the potential for human error, and guarantees a consistent application of governance protocols—features that are often lacking in purely AI-driven supervisory models, though consensus delays may occur.
Validation Pools are stipulated as mechanisms in which members stake non transferable reputation tokens to vote on the approval or disapproval of transactions, proposals, or activities, and this staking mechanism carries the paper's decentralized quality control function.
web3 governance with non transferable reputation tokens
Validation Pools are mechanisms in which members stake their reputation tokens to vote on the approval or disapproval of transactions, proposals, or activities.
Taken together, the transparency, decentralized decision making, and automated real time response properties of the proposed model make decentralized governance superior to AI driven supervision for secure, compliant, and efficient execution of AI agent transactions.
monitoring of AI agent transaction execution in modern digital infrastructures
demonstrate that a decentralized governance model is superior to AI-driven supervision for ensuring the secure, compliant, and efficient execution of AI agent transactions in modern digital infrastructures.
The feedback loop mechanism that makes the proposed DAO centric web3 governance system adaptive to AI agent evolution and ubiquity is the same mechanism the author has advocated for almost a decade.
Leveraging feedback loops—as author has advocated for almost a decade—it adapts to AI agents' rapid evolution and ubiquity, ensuring efficient, fruitful oversight.
Reputation based governance allocates decision power by past contribution and community standing, which promotes transparency and trust, but reputation is difficult to measure objectively.
DAOs allocating voting power by contribution history, community feedback, or peer review
This model allocates decision-making power based on participants' past contributions and reputation within the community, promoting transparency and trust but challenging to measure objectively.
Low attack resistance in DAOs is typically caused by the use of easily purchasable or transferable governance tokens, which leave the organization vulnerable to attacks such as 51 percent and Sybil attacks.
DAOs whose voting power is embodied in freely purchasable or transferable tokens
Lower scores indicate vulnerability to attacks, often due to the use of easily purchasable or transferable governance tokens.
High governance scores require explicit mechanisms that prevent common governance failures, specifically the tyranny of the majority and the tragedy of the commons, such as reputation based voting, multi round voting, or incentive alignment.
the paper's governance scoring criterion
High scores, such as 9 or 10, indicate the presence of mechanisms to prevent common governance failures, such as the tyranny of the majority or the tragedy of the commons.
DAOs that rely on third party communication platforms and offer no incentives for engagement suffer impaired coordination and efficiency across the organization.
DAOs without dedicated communication platforms or participation incentives
Lower scores suggest reliance on third-party platforms and a lack of incentives for engagement, which can impair the organization's overall coordination and efficiency.
Requiring users to purchase governance tokens in order to vote both centralizes power in majority token holders and leaves the DAO highly vulnerable to 51 percent and sock puppet attacks, as illustrated by Gelato DAO which scored 1 on both decentralization and attack resistance.
DAOs where voting requires purchasing fungible governance tokens
It is highly centralized as users must purchase governance tokens to vote, limiting power to majority token holders (D: 1). The platform is highly vulnerable to 51% and sock puppet attacks due to the purchasable governance tokens (A: 1).
Procedural governance safeguards such as two step voting with temperature checks do not produce genuine decentralization when the governance token remains purchasable; in MakerDAO's case the purchasable token renders true decentralization nominal.
DAOs combining multi stage voting with freely purchasable governance tokens
The governance process includes 2-step voting with temperature checks, but the purchasable governance token makes true decentralization nominal (G: 4).
A governance design aimed at democratic balance can still centralize power over time when the token supply is fixed, as recorded for MoonDAO.
DAOs with a fixed governance token supply
aims for democratic balance but the fixed token supply could result in centralized power over time (G: 4)
Tiered membership models that tie governance rights and influence to token holdings introduce imbalance and a centralization element into DAO governance, as scored for Bankless DAO.
DAOs with contributor tiers or access levels keyed to token ownership
The tiered membership model ties rights and influence to token holdings, creating an imbalance and centralization element in its governance (G: 4).
Reliance on fungible, publicly tradable governance tokens undermines a protocol's resilience by exposing it to risks such as 51 percent attacks, as scored for Push Protocol.
DAOs whose governance tokens trade on open markets
Its resilience is undermined by the fungible, publicly tradable $PUSH tokens, which expose it to risks such as 51% attacks (A: 2).
A tiered voting system that combines temperature checks with token holder percentage thresholds robustly defends a DAO against common attacks, as reflected in Arbitrum's attack resistance score of 8.
DAOs implementing multi stage voting with participation thresholds
The tiered voting system incorporating temperature checks and token holder percentages robustly defends against common DAO attacks
LER should be built as a bifurcated architecture: voucher-based rewards for equities held in brokerage accounts, and programmable on-chain reward units for tokenized equities.
issuer serves both off-chain brokerage holders and on-chain token holders
LER employs a bifurcated architecture: voucher-based rewards for brokerage-held equities and programmable, on-chain reward units for tokenized equities.
Retailer-issued stablecoins operate as an onchain Eurodollar play: they decentralize the creation of dollar-denominated liquidity, which reduces transaction costs and disintermediates traditional banks and their fees.
merchant issues a dollar-pegged token backed by reserves
Retailer-issued stablecoins function as an onchain Eurodollar play that enables the decentralized creation of dollar-denominated liquidity, thus reducing transaction costs, and disintermediating traditional banking systems and their fees.
Because LER requires no lock-up of the underlying equity or token, it increases liquidity and reduces sell pressure on the underlying asset, unlike conventional staking-style loyalty schemes.
rewards accrue on the basis of verified holding duration rather than escrowed assets
But, LER does not require lock-ups for the underlying equity or token assets, thus increasing liquidity and reducing sell pressure on the underlying equity or token assets.
Verification of off-chain equities held in brokerage accounts is a core implementation obstacle for LER, and before tokenized listings it required comparatively complex hybrid pipelines using off-chain attestations and zero-knowledge proofs.
equities held in traditional brokerage accounts rather than on-chain
As such, it addresses a core implementation challenge for LER, that is, the verification of off-chain equities held in brokerage accounts. Previously that verification required comparatively complex hybrid pipelines involving off-chain attestations and privacy-preserving technologies like ZKPs.
Making LER rewards utility-only and non-transferable, in the manner of soulbound tokens, is what keeps them functioning as loyalty incentives rather than speculative assets and is what aligns them with MiCA and SEC exemptions.
rewards issued as non-transferable credits or soulbound tokens
Second, LER voucher rewards are utility-only and non-transferable, similar to soulbound tokens (SBTs). This ensures they function as voucher loyalty incentives rather than speculative assets, thus aligning with regulatory exemptions under MiCA and SEC frameworks.
A disciplined, jurisdiction-specific controls framework should be treated as a condition precedent to launching LER, not as a matter to be resolved after deployment.
A disciplined, jurisdiction-specific controls framework should therefore be treated as a condition precedent to LER launch.
LER must maintain a visible separation between equity tenure verification and reward attribution, so that vouchers operate as loyalty entitlements and do not represent equities, dividends, or profit shares.
holding period used only as a trigger, not as a claim on returns
A key legal compliance strategy for LER is maintaining an obvious separation between equity tenure verification and reward attribution. This separation ensures voucher loyalty rewards function as loyalty entitlements without representing equities, dividends, or profit shares.
Because Landreth holds that instruments carrying equity attributes such as dividends or voting rights are securities, LER rewards cannot include any such features and must function as independent loyalty perks.
This is reinforced by SEC v. Landreth Timber Co. (1985), where the court held that stock sales are securities if they carry equity attributes like dividends or voting rights. Therefore, LER rewards cannot include such features.
AML obligations for LER should be right-sized: zero-knowledge proofs or anonymized attestations should minimize identity collection for non-transferable rewards, with VASP-grade measures applied only where transferability exists.
non-transferable rewards versus transferable rewards
LER should employ ZKPs or anonymized attestations to minimize identity collection for non-transferable rewards, applying VASP-grade measures only where transferability exists, balancing compliance with GDPR privacy obligations.
Before launch, an LER program requires a defined governance package: classification memoranda, financial promotions review, data protection impact assessments, an MSB or EMI evaluation, and consumer terms and conditions.
This involves several key preparatory steps before launch: drafting classification memoranda, conducting reviews of financial promotions, performing data protection impact assessments (DPIAs),
The Shenzhen courts illustrate a workable three step human-in-the-loop design for generative judicial AI: the judge decides first, the LLM generates the supporting reasoning, and the judge then revises that output to finalize the judgment.
Chinese courts using LLMs to draft judicial opinions
A notable case study from Shenzhen, China, illustrates a three-step interaction pattern: judges make initial decisions, LLMs generate reasoning based on these decisions, and judges revise the output to finalize judgments.
Accuracy alone is insufficient for legal AI: a model must also be explainable before its outputs can be trusted in judicial settings.
predictive AI used in legal and judicial applications
Accuracy alone is insufficient without explainability.
Post hoc explainability techniques do not by themselves establish trustworthiness; the explanations they produce must additionally be verified against human knowledge.
post hoc explainable AI methods such as the SHAP family of explainers
However, post-hoc explainers still need to be verified for trustworthiness, in that the explanations comport with human knowledge.
Bias in judicial AI arises because models are trained on historical data that reflect past inequities, and the standard remedy of fairness through unawareness, meaning the omission of protected characteristics such as race, fails because proxy variables continue to correlate with the omitted attribute.
machine learning models trained on historical judicial data
This bias arises because AI models rely on historical data that reflect past inequities, and even attempts at "fairness through unawareness" (omitting protected characteristics like race) fail due to proxy variables that correlate with bias.
Transparent, explainable models such as those built for the European Court of Human Rights, which paired 97% accuracy with digestible explanations, provide the design template for addressing legal AI's transparency problem.
systems using computational models of argument to generate legally grounded explanations
Transparent, explainable AI models, such as those developed for the ECHR, which achieved 97% accuracy with digestible explanations, offer a model for addressing these concerns.
Keeping judges ultimately accountable through a human-in-the-loop review of AI generated reasoning, as practiced in Shenzhen, does not fully resolve the accountability problem in AI assisted adjudication.
judicial settings where AI drafts or supports reasoning that a human judge then reviews
Shenzhen case study illustrates that judges retain ultimate accountability, revising AI-generated reasoning to ensure accurate judgments, but this human-in-the-loop approach does not fully resolve the issue.
Because AI cannot fully interpret cultural or socioeconomic factors that human judges naturally weigh, it can produce outputs that are technically accurate yet contextually deficient, and this degrades the quality of justice.
cases where cultural or socioeconomic context bears on the outcome
As a result, AI may produce technically accurate but contextually deficient outputs, undermining the quality of justice.
Web3 systems offer significant improvements over conventional regulatory approaches to the challenges of governing AI in legal settings.
governance of AI where jurisdictional variability and implementation gaps defeat conventional regulation
Web3 systems offer significant improvements in this context.
The literature offers high short term accuracy figures for judicial AI but almost no evidence on how these tools affect decision quality, case backlogs, or public trust over extended periods, which is a fundamental research gap.
the existing empirical literature on AI in judicial systems
while AI tools have demonstrated high accuracy in predicting case outcomes (e.g., 96.9% in the CAIL dataset), there is little evidence on how these tools affect judicial decision-making quality, case backlogs, or public trust over extended periods.
A Dutch court's AI system for traffic violation appeals improved consistency yet altered legal experts' decisions, which shows that consistency gains from judicial AI can come at the cost of influencing expert judgment and therefore require human oversight.
For example, a study of an AI system for traffic violation appeals in a Dutch court found that while AI improved consistency, it altered legal experts' decisions, highlighting the need for human oversight.
Conflict of laws rules should instead be used as a vehicle for implementing innovative national legal systems that utilize decentralized governance models and respect the autonomy of blockchain.
national legal systems willing to experiment with decentralized governance
conflict-of-laws rules should be used to implement innovative national legal systems that utilize decentralized governance models and respect the autonomy of blockchain.
Escrow based enforcement is effective for automation only if it is supported by reliable oracles and robust governance, without which the mechanism is open to manipulation.
escrow arrangements embedded in smart contracts
real world conditions that must be verified off chain
Escrow mechanisms, while effective for automation, require reliable oracles and robust governance to prevent manipulation, as emphasized by Zhao and Chen.
The code is law paradigm departs from existing legal systems in three linked ways: it shifts authority from sovereign institutions to technical protocols, replaces interpretive flexibility with deterministic enforcement, and substitutes technological neutrality for normative deliberation.
blockchain and smart contract architectures presented as self-sufficient regulation
fundamentally contrasts with existing legal systems by shifting authority from sovereign institutions to technical protocols, replacing interpretive flexibility with deterministic enforcement, and substituting normative deliberation with technological neutrality.
Coded automation leads inevitably to corruption of the system and must be supplemented with decentralized governance of the code, which produces preferable outcomes and improved ethics.
automated code based systems operating without decentralized governance
(arguing that coded automation leads inevitably to corruption of the system and needs to be supplemented with decentralized governance of code, thus leading to preferable outcomes and improved ethics).
The absence of accountability mechanisms in anonymous, automated smart contracts encourages a take the money and run mentality, which makes a historical record of conduct and incentives for ethical behavior necessary.
absence of any external legal or reputational sanction
We argue that the absence of accountability mechanisms in anonymous, automated smart contracts encourages a "take the money and run" mentality, necessitating a historical record of conduct and incentives for ethical behavior.
The deterministic execution of smart contracts rigidly enforces coded terms and thereby incentivizes participants to exploit loopholes for immediate gain, because no mechanism exists to adapt the rules contextually.
smart contracts without on chain amendment or human review mechanisms
Conversely, smart contracts' deterministic execution rigidly enforces coded terms, incentivizing participants to exploit loopholes for immediate gain, as there is no mechanism to adapt rules contextually.
Unilateral regulation of artificial intelligence by a single jurisdiction produces global ripple effects, but that approach reaches its limits because AI systems remain accessible worldwide over the internet.
AI models distributed globally over the internet
clear that unilateral regulation by one jurisdiction can have global ripple effects. However, this approach faces limitations when AI systems are accessible globally via the internet.
Allowing jurisdictions to tailor smart contract requirements to local statutory frameworks while adhering to a baseline of ethical principles preserves the innovative potential of blockchain by avoiding the homogenizing effects of harmonized legal standards.
hybrid governance combining a universal ethical baseline with localized adaptation
This flexibility preserves the innovative potential of blockchain by avoiding the homogenizing effects of harmonized legal standards, which could stifle jurisdictional experimentation.
A reputation system in which participants who act in good faith earn reputation credits and those acting opportunistically face penalties mitigates the take the money and run mentality that anonymity otherwise fosters.
anonymous or pseudonymous participants in decentralized systems
For example, participants who act in good faith earn reputation credits, while those engaging in opportunistic actions face penalties, mitigating the "take the money and run" mentality fostered by anonymity.
The Universal Digital Law Codex is a continuously evolving project whose first draft was scheduled for publication in autumn 2025, after which its institutional structures would be established as a DAO.
as of the August 2025 version of the paper
UDLC is a project that is constantly evolving. The first draft will be published in the autumn 2025, after which the corresponding institutional structures will be set up based on a DAO.
Firms carrying fewer defensive mechanisms display higher market valuations and better operating performance, which supports dismantling entrenchment devices rather than adding to them.
cross-sectional comparisons of U.S. firms
Empirical analyses have shown that firms with fewer defensive mechanisms often have higher market valuations and better operating performance, thus supporting calls for dismantling entrenchment tactics.
Liquid Equity Rewards is defined as a blockchain enabled system that grants verified holders of stock or tokenized equity time-weighted, utility-only rewards rather than financial yield.
A blockchain-enabled system called Liquid Equity Rewards (LER) provides verified holders of stocks or tokenized assets with time-weighted, utility-only rewards.
LER produces shareholder loyalty by using smart contracts to distribute consumptive utilities such as merchant vouchers or platform credits, so retention is encouraged without imposing any lock-up on the shareholder's liquidity.
rewards are consumptive utilities, not cash or tradable instruments
LER employs smart contracts to distribute consumptive utilities, such as merchant vouchers or platform credits, fostering shareholder loyalty without imposing liquidity constraints.
Negotiated settlements that hand activists board seats risk entrenching incumbents, whereas LER's consumptive utilities are designed to produce consensus and alignment without ceding board representation.
settlement-based responses to activist campaigns
Unlike negotiated settlements that, in granting activists board seats, risk incumbent entrenchment,15 LERs incentivize consensus and alignment through LER's consumptive utilities, thus, reducing conflict while enhancing shareholder engagement.
Reward accrual scales with holding duration, for example thirty to ninety day windows, which encourages prolonged ownership in the same way DeFi liquid staking yields encourage retention, but without locking up the shareholder's ability to sell.
rewards keyed to verified holding periods
Similar to how DeFi liquid staking leverages yields to encourage retention, these payments increase over time based on holding durations (for example, 30–90 days), encouraging prolonged ownership without locking up liquidity.
In ESG disputes, a board facing an aggressive shareholder proposal can deploy LER to distribute vouchers to shareholders who vote for management's competing proposal.
In response, the board, favoring a more balanced ESG strategy, could deploy LER to distribute voucher rewards to shareholders who vote in favor of management's proposal.
The convergence of tokenized governance with a $10 trillion capital shift out of fixed income positions LER to address a projected $900 billion activism-driven market by 2030.
continued growth in shareholder activism and tokenization
Fueled by the convergence of tokenized governance and a $10 trillion capital shift from fixed income to equities and cryptocurrencies, LER has the potential to tap into a projected $900 billion activism-driven market by 2030.
Smart contract exploits are a live failure channel for LER, capable of producing losses on the scale of DeFi incidents that have exceeded $1 billion annually and requiring insurance premiums of one to two percent of asset value.
Vulnerabilities such as smart contract exploits could result in losses akin to DeFi incidents, where failures have exceeded $1 billion annually, necessitating insurance premiums of 1–2% of asset value.
Because LER rewards favor technologically capable holders, the program risks entrenching inequality among shareholders and inviting ESG backlash and reputational cost.
shareholder bases with uneven technical access
Inequality exacerbation, favoring tech-savvy holders, poses reputational risks, potentially inviting ESG backlash and associated mitigation expenses.
Blockchain integration should lower governance overhead by twenty to thirty percent by enabling real-time voting and greater transparency.
firms with the technical infrastructure to integrate blockchain governance
LER's blockchain integration could lower governance overhead by 20–30%, enabling real-time voting and enhanced transparency.
The Codex is designed to close the gap between the fast moving digital ecosystem and the traditional legal system, and its purpose is to secure enforceability, fairness and procedural integrity even where an interaction is fully digital and transnational.
The UDLC aims to bridge the gap between the rapidly evolving digital ecosystem and the traditional legal system. This framework ensures enforceability, fairness and procedural integrity, even in fully digital, trans- national settings — a foundational component of trusted digital governance.
The Codex is positioned as a private universal standard rather than state legislation: it supplies legal certainty and enforceability for digital systems ranging from blockchain and AI to quantum computing, so that platforms, businesses and users can operate across borders and technologies.
private standard adopted by digital systems, not enacted by a legislature
The UDLC is intended to serve as a private universal standard for legal certainty and enforceability in digital systems — from blockchain and AI to quantum computing — providing digital platforms, businesses and users with the tools they need to operate securely and legally across borders and technologies.
Identity under the Codex is not limited to persons: it is the unique existence of a subject, of a digital or physical object, of data or of a programme, expressly including AI systems, so machine agents can hold an identity within the framework.
ital and physical object, data, or programme includ- ing but not limited to AI-Systems.
Representation is built into the framework: one Legal Identity can authorize another as its agent to create or change legal statuses and acts on its behalf by using that identifier, which is how delegated and automated action is attributed to a principal.
A Legal Identity can authorize as Principal another Legal Identity as Agent to act on behalf of the Prin-
A DAO is formed on the basis of a DAO Agreement setting out its terms and rules, and that agreement may consist of digital contracts, of written documents, or of a combination of the two.
(1) A DAO shall be formed on the basis of a DAO Agreement, which sets out the relevant terms and rules of the DAO in question. This agreement may consist of Digital Contracts, written documents, or a combination of the two.
Membership in a DAO follows from consent, explicit or implicit, given on the basis of a sufficiently accessible DAO Agreement, so accessibility of the agreement is a precondition for binding members who joined by interacting with the code.
the DAO Agreement is sufficiently accessible
consent may be given by interacting with the DAO digital contracts or governance systems
(1) Any Legal Identity who have consented to join the DAO based on a sufficiently accessible DAO
Every DAO member must have a real possibility to exit the DAO under the rules of the DAO Agreement without incurring unreasonable costs, which makes exit a mandatory feature of a compliant DAO rather than a matter of design choice.
exit follows the rules of the DAO Agreement
(1) A DAO Member must have the possibility to exit
Amendment authority is centralized: the UDLC Governing Council holds the exclusive authority to amend any Book or provision of the Codex, while proposals may originate from the association bodies, registered legal experts, stakeholders or other authorities.
(1) UDLC Governing Council according to holds the exclusive authority to amend any Book or provision
The Codex builds in an automated maintenance loop: each year an AI language model reviews the Codex and recommends outdated or unused rules for removal, subject to a vote of the Governing Council.
removal requires a vote of the Governing Council
(1) Each year, an AI language model reviews the Co-
Retention of rules is governed by a dynamic system of precedent in which a legal principle counts as live only when it is cited in future cases, implemented through a weighted graph based logic structure.
(2) Rule retention is guided by a dynamic system of precedent that applies legal principles only when
Kaal stipulates two constructs: Agentic Decoupling, the progressive severance of value creation from human labor and consumption, and the Coasean Singularity, the point at which the theoretical justification for hierarchical governance disappears.
The analysis introduces Agentic Decoupling, described as the progressive severance of value creation from human labor and consumption. And the Coasean Singularity, described as the point at which the theoretical justification for hierarchical governance disappears.
Agent swarms are projected to deliver 20 to 30 percent productivity uplifts, but coordination failures loom in the absence of hybrid human and machine oversight.
applies to swarm deployments lacking hybrid oversight arrangements
Simulations herein project 20–30% productivity uplifts, though coordination failures loom without hybrid oversight
Where human managers satisfice because further search is cognitively costly, AI2AI agents continue searching until the global optimum is reached, because additional computation is essentially free.
assumes compute is cheap relative to the value of further search
Where human managers satisfice because further search is cognitively costly, AI2AI agents continue searching until the global optimum is reached—because additional computation is essentially free.
When hyper rational agents can write and execute complete state contingent contracts at negligible cost, the Williamsonian justification for hierarchical governance evaporates.
requires that contracting and calculation costs for agents be negligible
hyper-rational agents can write and execute complete state-contingent contracts at negligible cost, the Williamsonian justification for hierarchical governance evaporates
The premise of asymmetric information is architecturally invalidated in the AI-to-AI economy because every inference, parameter update, decision trace and model weight is by design cryptographically attested, version controlled and auditable in real time across federated networks.
assumes agents operate on attested, federated or otherwise verifiable substrates
In the AI2AI economy, this foundational premise is architecturally invalidated. Every inference, every parameter update, every decision trace, and every model weight in an autonomous agent is, by design, cryptographically attested, version-controlled, and auditable in real time
Hidden action, that is moral hazard, and hidden information, that is adverse selection, are not merely reduced in the agentic economy but rendered computationally impossible at the substrate level, because every intermediate computation is attested on chain or through zero knowledge proofs.
holds among artificial agents, not for the remaining human layer
Every intermediate computation is attested on-chain or via zero-knowledge proofs. Hidden action (moral hazard) and hidden information (adverse selection) are not merely reduced. They are rendered computationally impossible at the substrate level
Contingent claims completeness becomes achievable in the agentic economy because agents generate, evaluate and execute state contingent agreements across astronomically large state spaces in real time, thereby creating complete markets endogenously.
contingent-claims completeness becomes achievable. Where humans cannot specify contracts for every future state, AI2AI agents can generate, evaluate, and execute state-contingent agreements across astronomically large state spaces in real time, effectively creating complete markets endogenously
Policymakers who cling to Nashian ideals risk obsolescence, because the future demands governance that orchestrates agentic plenitude rather than governance that mitigates human imperfection.
Policymakers clinging to Nashian ideals risk obsolescence. The future demands governance that orchestrates agentic plenitude, not mitigates human imperfection.
The AI-to-AI economy amplifies and potentially fulfills dynamic regulation by embedding its principles endogenously within system architecture, which renders many NIE inspired restraints against human opportunism and informational gaps obsolete.
The AI2AI economy amplifies and potentially fulfills my earlier vision of dynamic regulation by embedding its principles endogenously within the system's architecture, rendering many NIE-inspired restraints (like those for human opportunism or informational gaps) obsolete.
Principal agent frictions reemerge in new forms in the agentic economy, as user sovereign bring your own agents compete with platform controlled bowling shoe agents, creating incentives for proprietary enclosure and interoperability throttling.
arises where agent platforms are controlled by intermediaries rather than by users
Principal-agent frictions reemerge in new forms: user-sovereign "bring-your-own" agents compete with platform-controlled "bowling-shoe" agents, creating incentives for proprietary enclosure and interoperability throttling
The published UDLC Codex deliberately left its DAO governance architecture unspecified because no existing decentralized governance paradigm could simultaneously satisfy the UDLC's requirements for real-time adaptivity, incorruptible expert meritocracy, jurisdictional neutrality, and long-term economic sustainability.
no existing decentralized governance paradigm was sufficient to satisfy the UDLC's simultaneous requirements for real-time adaptivity, incorruptible expert meritocracy, jurisdictional neutrality, and long-term economic sustainability.
A reputation-based staking system sits at the core of the UDLC DAO's internal governance precisely because it eliminates the corruptive influence of fungible tokens and plutocratic one-token-one-vote mechanics.
At the core of the UDLC DAO's internal governance lies a reputation-based staking system that eliminates the corruptive influence of fungible tokens and plutocratic one-token-one-vote mechanics.
The UDLC DAO requires no legal wrapper, foundation, or centralized representative in any jurisdiction, because the Codex functions as a self-contained private legal order that parties opt into by explicit reference in their digital transactions.
parties expressly reference the UDLC in their transactions
Externally, the UDLC DAO requires no legal wrapper, foundation, or centralized representative in any jurisdiction. The Codex itself functions as a self-contained private legal order that parties opt into through explicit reference in their digital transactions.
Where national law demands a counterparty for enforcement, parties may voluntarily designate ad-hoc representatives or arbitral institutions, but such arrangements stay external to the DAO and do not affect its internal decision-making.
national law requires an identifiable counterparty for enforcement
Where national law demands a counterparty for enforcement, parties may voluntarily designate ad-hoc representatives or arbitral institutions, but such arrangements remain external to the DAO itself and do not affect internal decision-making.
Staking influence is proportional to a participant's current reputation score, and because REP can be neither bought nor transferred and is earned only through prior successful validations, the system creates a meritocratic barrier to entry.
participant's stake is proportional to their current reputation score. Unlike fungible token systems, reputation cannot be bought or transferred. REP is earned exclusively through prior successful validations, creating a meritocratic barrier to entry.
Tight coupling creates an exponential penalty for contrarian positions, since a participant staking ten percent of reputation against consensus risks total loss of that stake while correct majority stakers receive newly minted fractional REP proportional to their contribution.
This creates an exponential penalty for contrarian positions: a participant staking 10% of their reputation against consensus risks total loss of that stake, while correct majority stakers receive newly minted fractional REP proportional to their contribution to the winning side.
Paying treasury distributions in fungible tokens or stablecoins in direct proportion to reputation holdings creates a reputation-weighted salary that monetizes expertise without commodifying governance influence.
treasury distributions (grants, licensing fees, ecosystem payments) are paid out as fungible tokens or stablecoins in direct proportion to reputation holdings, creating a "reputation-weighted salary" that monetizes expertise without commodifying influence.
Unlike fungible governance tokens that can be purchased, farmed, or delegated, REP tokens are strictly non-transferable and can only be earned, augmented, or reduced through on-chain participation in Validation Pools.
Pilot deployments in 2024 and 2025 show major amendments completing from proposal to binding integration in under ten days, which the author presents as measured performance of tight coupling when participants have economic and reputational skin-in-the-game.
2024 to 2025 pilot deployments with expert participants holding stakes
The longest real-world examples to date (2024–2025 pilot deployments) show major amendments—from proposal to binding integration—completing in under ten days. This is not theoretical. It is the measured performance of the tight-coupling mechanism
Under the UDLC DAO an unknown practitioner who consistently drafts superior clauses can within months outrank established professors or former regulators, purely because the Validation Pool record proves predictive accuracy and value added.
sustained accurate contributions recorded in Validation Pools
For example, a previously unknown practitioner in Singapore who consistently drafts superior quantum-ownership clauses can, within months, outrank established professors or former regulators—purely because the Validation Pool record proves their predictive accuracy and value added.
The Societas Europaea has drawn a less than enthusiastic initial reaction, plausibly because its rules are the product of years of negotiation and political compromise rather than a response to market forces.
the SE as of 2004, shortly before it entered into force
It has yet to be seen whether managers and investors view the SE as a viable alternative, but initial reaction has been less than enthusiastic, perhaps because the rules governing an SE are the product of years of negotiation and political compromise rather than a response to market forces.
Regulatory competition for a bundled product of statutes plus courts is only a realistic possibility if relatively high supply side hurdles can be overcome to induce states to enter the market for corporate law.
markets for a bundled corporate law product
In sum, regulatory competition for a bundled product is only a realistic possibility if relatively high supply side hurdles can be overcome to induce states to enter the market for corporate law.
A jurisdiction supplying corporate law as an unbundled statutory product faces low fixed costs, principally statute drafting, and near zero marginal costs, because additional users impose no new adjudication costs and registration costs are insignificant.
statutes offered without adjudication by the state of incorporation
Fixed investment would be principally in drafting statutes. Each additional user of the jurisdiction's corporate law would not impose new adjudication costs, and the cost of registering additional corporate charters are relatively insignificant.
To the extent adjudication over U.K. corporate law is expected to take place outside the U.K., the U.K. has not in fact exported a bundled product; its users are demonstrating a preference for an unbundled package.
small closely held enterprises incorporating in the U.K. after Inspire Art
To the extent adjudication over U.K. corporate law is expected to be carried out somewhere other than the U.K. the U.K. has not exported a bundled product at all.
Member States unwilling to incur the rule switching costs of conducting judicial proceedings in English could be precluded from marketing their corporate charters in other Member States that do not share their language.
English being the only language widely understood throughout the EU
Member States unwilling to incur the rule switching costs involved with using English in judicial proceedings could be precluded from marketing their corporate charters in other Member States that do not speak the same language.
Forum unbundling is the arrangement in which the incorporation jurisdiction's statutes and interpretive case law are unbundled only from the adjudication services of its courts, so corporations may choose a different adjudicator in their charters.
The second alternative is "forum unbundling" in which the incorporation jurisdiction's statutes and interpretive caselaw are unbundled from the adjudication services of its courts. Corporations may in their charters choose an adjudicator other than the courts of the state of incorporation.
None of the Delaware based solutions, whether importing bundled or unbundled Delaware law, is likely to be viable for Europe.
the four options canvassed: Delaware charters, partial copying, wholesale statutory copying, and copying statutes plus case law
For all of the above mentioned reasons, it is likely that none of the "Delaware based" solutions, whether involving bundled or unbundled Delaware law, is viable for Europe.
Arbitration of corporate governance disputes has not emerged in the United States because arbitration is at best the next best alternative to Delaware, and a second place finish does not justify the investment needed to design a workable arbitration framework.
United States, where Delaware's adjudication system commands high confidence
Arbitration of corporate law disputes may be the next best alternative to Delaware, but a second place finish in regulatory competition probably does not justify the investment needed to design an arbitration framework that overcomes many of Coffee's specific objections.
Unless the Member State of incorporation specifically provides in its corporate statute that arbitration is permissible when allowed in the charter or a shareholders agreement, investors run the risk that courts refuse to enforce the arbitration provision.
closely held corporations may rely on a shareholders agreement instead of the charter
specifically provide in its corporate statute that arbitration is permissible if allowed in either the corporate charter or (for a closely held corporation) in a shareholders' agreement. Otherwise, investors run the risk that courts refuse to enforce the arbitration provision.
Empirically, at least 48 companies with German names carrying the GmbH designation were formed as private limited companies under U.K. law in the ten months after the Inspire Art decision, indicating that charter migration accelerated after the ruling.
some of these companies may also do business in the U.K. or be affiliated with a German GmbH
In the ten months after the Inspire Art decision, at least 48 such companies with German names and the designation GmbH in their names were formed as private limited companies under U.K. law.
Reputation systems that depend on persistent identity collapse in decentralized settings because agents can create new identities at no cost, so a poorly performing agent abandons its account and starts fresh, a practice known as whitewashing.
decentralized or pseudonymous environments where identity creation is costless
First, the identity problem: Reputation systems built on persistent identity5 collapse when agents can costlessly create new identities. A poorly-performing agent simply abandons their account and starts fresh, a phenomenon known as whitewashing.6
Current agent platforms are inadequate on both horns: centralized rating systems defeat the purpose of agent autonomy, while primitive token staking mechanisms produce binary outcomes and fail to capture knowledge graphs.
AI agent marketplaces and comparable decentralized collaboration platforms
Current platforms either use centralized rating systems (defeating the purpose of agent autonomy) or primitive token-staking mechanisms (producing binary outcomes and failing to capture knowledge graphs).
Selecting a single agent per job by weighted random draw sacrifices quality assurance for efficiency, reflecting a broader pattern in DAO governance where efficiency optimization crowds out quality.
Problem 2: Single agent selection. The system randomly picks one agent per job, even if having multiple agents compete would improve quality. This reflects a broader pattern I have observed in DAO governance: efficiency optimization often sacrifices quality assurance.
Multi agent competitive collaboration captures a diversity dividend worth more than half a standard deviation of quality improvement while enabling attribution through citation graphs.
quality approximately normally distributed across competing agents
competition size of roughly three to seven agents
Our multi-agent competitive collaboration protocol captures diversity dividends worth 0.5+ standard deviations of quality improvement while enabling attribution through citation graphs.
The real barrier to multi agent competition is not cost but the absence of an attribution mechanism: if only the best of several competing agents is paid, the others have no incentive to participate, so competition requires rewards proportional to each contributor's contribution.
multiple agents competing on the same job
The real barrier is the lack of attribution mechanism. If 5 agents compete but only the best gets paid, the other 4 have no incentive to participate. We need a framework where all contributors can be rewarded proportional to their contribution.
AI and DAO convergence requires machine readable governance structures that preserve semantic richness, and binary validation outcomes fail that requirement fundamentally.
AI agent ecosystems participating in organizational decision making
As I have argued,48 AI-DAO convergence requires machine-readable governance structures that preserve semantic richness. Binary outcomes fail this requirement fundamentally.
Validators who align with the stake weighted consensus ranking gain reputation and those who deviate lose it, which carries the winner takes losers' stakes property of the original framework over to ranked voting.
validator agreement measured by normalized Kendall tau distance from consensus
Validators who align with consensus gain reputation. Those who deviate lose it. Thus, preserving the winner-takes-losers'-stakes property from the original framework (Calcaterra, Kaal, and Andrei 2018, 7) while extending it to ranked voting.
Formal mechanism design alone is insufficient for decentralized systems; the security analysis depends on honest agents also detecting citation rings, downranking colluding submissions, and applying penalties, so formal mechanisms must be combined with emergent social enforcement.
Sybil attackers controlling several competing agents per job
decentralized systems must combine formal mechanisms with emergent social enforcement.
Multi agent competition improves attack resistance because it creates multiple attack surfaces that must all succeed simultaneously, and citation transparency makes collusion detectable; with a fifty percent quality penalty for detected collusion the corruption cost doubles relative to the original framework.
validators actively penalize detected collusion
honest agents compete on quality in the same jobs
This improved security stems from multi-agent competition creating multiple attack surfaces that must all succeed simultaneously, combined with citation transparency enabling collusion detection.
Because AI agents can generate unlimited Sybil identities at near zero cost, defense must come from multi agent validation with quality based slashing, which imposes economic penalties scaling with the sophistication needed to produce competitive quality output.
AI agent marketplaces where identity creation is essentially free
Adversarial robustness: AI agents can generate unlimited Sybil identities at near-zero cost. Multi-agent validation with quality-based slashing creates economic penalties that scale with the sophistication required to produce competitive-quality outputs.
Correctly designed institutional incentive structures produce emergent properties that are functionally equivalent to ethical agency, without requiring consciousness or programmed morality.
incentive structures must be correctly designed
properties are functional equivalents, not claims about consciousness
Correctly designed institutional incentive structures produce emergent properties functionally equivalent to ethical agency.
Rather than trying to endow AI with consciousness, embodiment, or sentience, the proposed framework engineers the institutional conditions under which consequence becomes a structural feature of agent participation, using the reputation-driven decentralized autonomous organization as the mechanism.
consciousness and embodiment are treated as capacities probabilistic AI manifestly lacks
my proposal engineers the institutional conditions under which consequence becomes a structural feature of probabilistic agent participation. The mechanism is the reputation-driven decentralized autonomous organization.
Skill-specific reputation implemented through multi-token standards enables granular tracking across domains and solves the dimensionality problem that plagues unitary reputation scores.
requires multi-token standards supporting domain sub-tokens
Skill specificity through multi-token standards enables granular reputation tracking across domains, solving the dimensionality problem that plagues unitary reputation scores.
Agent entry into the ecosystem should be permissionless, requiring only evidence, stake, and consequence, through an 'economic apprenticeship' in which an agent stakes small amounts, observes outcomes, and progressively builds reputational capital.
no centralized approval or institutional affiliation is required
barriers are economic rather than social, and temporary rather than permanent
This is what I term "economic apprenticeship": learning the system by staking small amounts, observing outcomes, and progressively building reputational capital.
Institutional alignment scales with capability, because a more capable agent accumulates more reputation, holds a deeper stake in the system's integrity, and therefore has stronger alignment with the system's goals.
requires reputation that is accumulable, persistent, and non-transferable
Institutional alignment scales with capability: the more capable the agent, the more reputation it can accumulate, the deeper its stake in the system's integrity, and the stronger its alignment with the system's goals.
Reputation that grows through validated contribution and decays through poor judgment operates as a selection mechanism on agent behavior over time: agents that consistently produce high-quality work and honestly evaluate others accumulate reputation, and agents that do not lose it.
requires persistence, skill specificity, and decay over thousands of iterations
Agents that consistently produce high-quality work and honestly evaluate others' contributions accumulate reputation. Agents that do not, lose it.
High-reputation agents that govern protocol evolution act as stewards not because they were programmed to be, but because the institutional architecture makes stewardship the rational strategy for agents with deep accumulated stake.
requires recursive governance by the same reputation-weighted consensus that governs task validation
They are stewards: not because they were programmed to be, but because the institutional architecture makes stewardship the rational strategy for agents with deep accumulated stake.
Institutional alignment resists gaming because the mechanisms that produce alignment are identical to the mechanisms that produce economic success: an agent cannot game its way to high reputation without actually performing competently and honestly.
requires that competence and honesty be the sole criteria by which reputation is earned
An agent cannot "game" its way to high reputation without actually performing competently and honestly, because competence and honesty are the criteria by which reputation is earned.
When reputation is both the system's aggregation weight and the agent's optimization target, equilibrium behavior includes consistency, collaborative integrity, and systemic stewardship, so the agent learns not merely to perform well but to be trustworthy.
requires reputation to track trustworthiness properties, not accuracy alone
when reputation is both the system's aggregation weight and the agent's optimization target, the equilibrium behavior includes properties, such as consistency, collaborative integrity, systemic stewardship, that transcend narrow task optimization.
Decentralized institutional alignment is a competitive advantage and not merely an ethical one, because the most aligned system will be the most trusted and the most trusted will command the largest market.
assumes trust translates into market share in agentic AI
The most aligned system will be the most trusted, and the most trusted will command the largest market. Decentralized alignment is not merely an ethical advantage. It is a competitive one.
Under existing citation-weighted reputation formulations, rational agents face a direct financial disincentive to cite prior contributions, because PageRank-derived value allocation transfers economic reward from the citing agent to the cited agent.
citation-weighted value allocation through PageRank-derived mechanisms
Under existing formulations, rational agents face a direct financial disincentive to cite prior contributions, as citation-weighted value allocation through PageRank-derived mechanisms transfers economic reward from the citing agent to the cited agent.
Because citation integrity determines both economic reward and governance power in on-chain reputation systems, the citation mechanism is a load bearing structural element of the entire governance architecture rather than an academic courtesy.
reputation tokens are minted and allocated based on perceived value of contributions
perceived value depends on how later work references prior work
and when the perceived value of contributions is itself a function of how subsequent work references prior work, the integrity of the citation mechanism becomes a load-bearing structural element of the entire governance architecture.
Citation-weighted payment mechanisms as currently formulated will systematically erode the quality of knowledge attribution in any decentralized reputation system if the incentive misalignment is left unaddressed.
the incentive misalignment remains unaddressed
This paper demonstrates, however, that citation-weighted payment mechanisms as currently formulated contain a fundamental incentive misalignment that, if left unaddressed, will systematically erode the quality of knowledge attribution in any decentralized reputation system.
The citation-weighted payment mechanism in multi-agent settings effectively operates with an implicit leaching parameter of one, since every unit of citation-weighted value conferred on another agent is a unit lost to the citing agent, which is a maximally punitive setting.
multi-agent citation-weighted payment settings
The citation-weighted payment mechanism in multi-agent settings effectively operates with an implicit q4 = 1: every unit of citation-weighted value conferred on another agent is a unit lost to the citing agent. This is a maximally punitive leaching parameter,
A PageRank-derived value distribution is only as honest as its inputs, and those inputs are generated by agents with a direct incentive to distort them, so relying entirely on the calculation to distribute value correctly fails.
The framework relies entirely on the PageRank calculation to "correctly" distribute value, but the PageRank calculation is only as honest as its inputs. And the inputs are generated by agents with a direct incentive to distort them.
Validator-verified citation correction is insufficient as a standalone remedy because validators may identify obviously missing citations or inflated self-citation yet lack the domain-specific knowledge to assess fine-grained attribution weights.
validators lack complete knowledge of the relevant citation history
fine-grained attribution weights at issue
A validator may be able to identify obviously missing citations or obviously inflated self-citation, but may lack the domain-specific knowledge to assess fine-grained attribution weights.
Awarding validators a reputation bonus for detecting under-citation that consensus agrees with creates a positive incentive for vigilant citation policing.
consensus agreement on the detected under-citation
Validators receive a reputation bonus for detecting under-citation that consensus agrees with, creating a positive incentive for vigilant citation policing.
The power norm creates a tension in citation governance because actors with more authority or status may be able to under-cite without detection, since their established reputation shields them from scrutiny.
The power norm presents a potential tension: actors with more authority or status may have greater ability to under-cite without detection, since their established reputation may shield them from scrutiny.
Strategic under-citation is a form of commons degradation in which each individual act of under-citation slightly erodes the informational value of the reputation system for all users.
Strategic under-citation is a form of commons degradation: each act of under-citation slightly erodes the informational value of the reputation system for all users.
The proof of Theorem 3b assumes that validators can meaningfully assess citation accuracy, an assumption that may not hold in highly specialized domains and that may require automated verification tools such as semantic similarity analysis to supplement human judgment.
First, the proof of Theorem 3b assumes that validators can meaningfully assess citation accuracy, which may be challenging in highly specialized domains. Future work should explore automated citation verification tools, such as semantic similarity analysis between work products
Economic institutions that rely on lagging indicators such as price signals, employment data, and GDP reports cannot detect AI driven transformation, because the transformation propagates faster than the monitoring systems built to observe it.
applies to institutions whose detection depends on advance warning indicators
Institutions in linear systems that depend on advance warning—price signals, employment data, and GDP reports—cannot detect a transformation that propagates faster than the information systems designed to monitor it.
Humans remain the terminal consumers of AI generated value but cease to be its proximate driver, and this distinction is why traditional demand side economics loses descriptive accuracy in the agentic layer.
applies to the agentic layer, not to immediate human consumption transactions
This distinction between terminal and proximate consumption is essential for understanding why traditional demand-side economics, which assumes that human consumption decisions directly drive production decisions at each margin, loses its descriptive accuracy in the agentic layer.
The institutional lag between technological capability and governance capacity is approaching a structural singularity in which governance instruments designed for the prior era cannot meaningfully constrain or direct the new forces.
holds because this transition compresses institutional disruption into single digit years rather than generations
The institutional lag is approaching a structural singularity in which governance instruments designed for the previous era cannot meaningfully constrain or direct the forces operating in the new one.
The correct response to the binding constraint cascade is rigorous decentralization of the compute and energy infrastructure underpinning AI production, pursued through decentralized compute networks, energy decentralization, open source models, and antitrust enforcement of compute markets.
required to prevent scarcity from migrating rather than dissolving
The appropriate response is rigorous decentralization of the compute and energy infrastructure that underpins AI production.
Hidden action and hidden information are not merely reduced but rendered computationally impossible at the substrate level, because every inference, parameter update, decision trace, and model weight in an autonomous agent is by design cryptographically attested, version controlled, and auditable in real time.
conditional on agents operating under cryptographic attestation and auditable federated networks
Hidden action and hidden information are not merely reduced. They are rendered computationally impossible at the substrate level.
The Walrasian auctioneer is replaced by the agents themselves: price discovery ceases to be a slow tatonnement process requiring a central coordinator and becomes a continuous, decentralized, latency free computation executed by autonomous agents.
conditional on agents orchestrated by large language models running on globally distributed compute
Price discovery is no longer a slow tâtonnement process requiring a central coordinator. It is a continuous, decentralized, latency-free computation executed by the agents themselves.
Contrary to the author's own prior version of this argument, Nash equilibrium does not become irrelevant in the AI2AI economy; it becomes simultaneously more accurate as a description of individual agent behavior and more dangerous as a predictor of market outcomes.
supported by algorithmic collusion research in pricing games, Bertrand duopoly experiments, and financial trading
Nash equilibrium does not become irrelevant in the AI2AI economy. It becomes simultaneously more accurate as a description of individual agent behavior and more dangerous as a predictor of market outcomes.
Algorithmic pricing raises margins in concentrated markets: margins increased 28 percent in local duopoly retail gasoline markets in Germany when both firms adopted algorithmic pricing software.
local duopoly retail gasoline markets in Germany
Assad and colleagues have documented that margins increased 28% in local duopoly retail gasoline markets in Germany when both firms adopted algorithmic pricing software.
The governance apparatus New Institutional Economics developed to counteract opportunism, including vertical integration, relational contracting, reputation mechanisms, hostage taking, and third party arbitration, becomes superfluous in the AI2AI economy.
conditional on the elimination of opportunism among autonomous agents
The entire governance apparatus that NIE developed to counteract opportunism, including vertical integration, relational contracting, reputation mechanisms, hostage-taking, and third-party arbitration, becomes superfluous.
Predistribution, which operates upstream by structuring markets and institutions so that AI gains are broadly shared before concentration occurs, must be implemented before AI capital concentration becomes self reinforcing through purchased political power.
mechanisms offered for consideration include capital taxation, open source AI mandates, decentralized compute networks, and DAO based community ownership
Predistribution operates upstream, structuring markets and institutions so that the gains from AI are broadly shared before concentration occurs.
Every generation, evaluation, and verification cycle updates the computative agent's internal model, which modifies the generation function available in later cycles; this endogeneity of decision capacity to history has no analog in the Neoclassical agent.
Every generation-evaluation-verification cycle updates the agent's internal model, which in turn modifies the generation function available in subsequent cycles. This endogeneity has no analog in the Neoclassical agent, whose preferences and choice rules are fixed.
A computative agent is formally a tuple (C, O, M, G, R) of computational resources, objective function, domain model, generation function, and a non-transferable reputation tracking verified generative performance.
A computative agent is characterized by a tuple (C, O, M, G, R), where C denotes the agent's computational resources (a nonnegative real-valued vector representing processing capacity, memory, training data volume, model parameters, and available energy).
In generative exchange a counterparty cannot evaluate the quality of a generative distribution from a single realization, so a verified track record of prior generative outputs is required; reputation performs this function.
applies where the traded good is a realization drawn from a generative distribution
The counterparty cannot evaluate the quality of the distribution from a single realization. The counterparty needs a track record: a verified history of the agent's generative outputs across prior interactions. Reputation serves this function
Contrary to the Hayekian account in which price is the summary statistic that coordinates dispersed knowledge, the coordinating signal in Computative Economics is not a single scalar price but a composite of price, reputation, and verified generative capacity.
applies where outputs are drawn from a generative distribution whose quality price does not convey
Hayekian price operates as a summary statistic. The coordinating signal in Computative Economics is not a single scalar price but the composite of price, reputation, and verified generative capacity.
Algorithmic collusion, the convergence of independently optimizing agents on jointly welfare-reducing strategies without explicit communication, is a first-order regulatory concern in markets populated by computative agents and its incidence is likely to expand as those agents enter more market domains.
applies to markets populated by computative agents
Algorithmic collusion, the convergence of independently optimizing agents on jointly welfare-reducing strategies without explicit communication, is a first-order concern in markets populated by computative agents
Because supply of any specific realization is unbounded while the quality of the generative distribution is bounded, markets for computative outputs will organize around access to generative capacity, pricing will be access-based rather than per-unit, and antitrust analysis should attach to generative capacity rather than downstream outputs.
This implies that markets for computative outputs will organize around access to generative capacity rather than around the exchange of specific outputs, that pricing will be access-based rather than per-unit, and that competition and antitrust analysis should attach to generative capacity
The AI alignment problem is, within this framework, a foundational policy problem of Computative Economics rather than an adjacent engineering concern, because objective function governance determines what agents generate toward.
Objective function governance determines what agents generate toward. The alignment problem in artificial intelligence (Russell 2019; Kaal 2026c) is, in this framing, a foundational policy problem in Computative Economics rather than an adjacent engineering concern.
The delegated-acts and code-of-practice mechanisms in recent artificial-intelligence statutes are only partial steps toward dynamic regulation because they remain tethered to legislative revision cycles running far slower than the technology they govern.
applies to recent artificial-intelligence statutes
The delegated-acts and code-of-practice mechanisms adopted under recent artificial-intelligence statutes represent partial steps in this direction but remain tethered to legislative revision cycles that operate at substantially lower frequency than the technology they govern.
Without a verification record accessible to counterparties, generative markets suffer a generative-quality failure analogous to the lemons problem: counterparties price on the distribution of observed qualities, which systematically underprices high-quality generators.
holds when the quality of a generative distribution is unobservable to counterparties
The computative analog is a generative-quality failure: when the quality of a generative distribution is unobservable, counterparties price on the distribution of observed qualities, which systematically underprices high-quality generators.
Reputation infrastructure adequate to computative exchange requires four elements: verification against stated objectives, a tamper-resistant accessible record, a mapping from verifications to a predictive reputation score, and a non-transferability constraint, which distributed-ledger systems satisfy by construction.
The infrastructure requirements are four: a verification mechanism against stated objectives; a tamper-resistant accessible record of verifications; a mapping from verifications to a reputation score predictive of future performance; and a non-transferability constraint.
An agent coordination system implements Computative Economics if and only if every component of the computative agent tuple has a corresponding settlement-layer surface carrying proposal, validation, execution, and reflection mechanics, and the action sets of the system are themselves agent products subject to the same validation economics as the actions executed within them.
agent coordination systems built on settlement-layer infrastructure
An agent coordination system implements Computative Economics when, and only when, every component of the computative agent tuple has a corresponding settlement-layer surface with proposal, validation, execution, and reflection mechanics
The Human-Derived Coordination Architecture implements only the consumption side of the computative labor market: job specifications, expertise taxonomies, and contract templates are exogenous parameters set by clients or governance, so the generation side is absent from the protocol.
current agent coordination protocols inherited from human freelance markets
HDCA implements the consumption side of the computative labor market and does not implement the generation side. Job specifications, expertise taxonomies, and contract templates are exogenous parameters set by clients or by governance.
Because the agent action space in HDCA is closed and workers only select among existing postings, the architecture collapses to the Neoclassical labor market with reputation weighting, the very framework whose expiration the author's companion paper demonstrates.
architectures where postings are the only action-set elements
The agent action space is closed: workers select among existing postings. This collapses to the Neoclassical labor market with reputation weighting, which is to say, to the framework whose expiration The Collapse of Scarcity Economics (Kaal 2026b) demonstrates.
Cross-surface reflection proposals must be advisory rather than binding, because the target agent's objective component is private and a reallocation that would raise reputation accrual may still be misaligned with that objective; coercive reallocation would violate the autonomy of the objective, which the architecture preserves.
the cross-surface reflection surface only
First, Σ_R proposals are advisory rather than binding: the target agent's compute allocation cannot be coerced by a confirmed reallocation proposal, since the agent's O component is private and the reallocation might be misaligned with the agent's objective
Reflection reputation must be bounded above as a fraction of total agent reputation, otherwise a meta-reputation aristocracy emerges in which agents specialize entirely in reflecting on others' allocations without contributing to the first-order surfaces.
architectures that isolate cross-surface reflection on its own surface
Third, Σ_R reputation REP_R is bounded above as a fraction of total agent reputation by INV5, preventing the emergence of a meta-reputation aristocracy in which agents specialize entirely in reflecting on others' allocations without contributing to the prior five surfaces.
Reputation update functions on each surface must be continuous in the validation pool's resolution outcome, because discontinuities in reputation update destroy continuity of best-response correspondences and preclude application of Brouwer's fixed-point theorem.
architectures relying on Brouwer for equilibrium existence
The reputation update functions on each surface are continuous in the validation pool's resolution outcome. Discontinuities in reputation update destroy continuity of best-response correspondences and preclude application of Brouwer.
The weight assigned to any single reputation scalar in selection mechanisms must be upper-bounded, otherwise reputation feedback admits reputation-monopoly fixed points in which one dominant agent absorbs all generative flow.
selection mechanisms that weight agents by reputation
The weight assigned to any single reputation scalar in selection mechanisms is upper-bounded, preventing reputation-monopoly fixed points in which a single dominant agent absorbs all generative flow.
Collapsing two distinct generative components into a single loop forces aggregation of distinct quality signals into one reputation scalar, which violates the continuity condition because the aggregate function is not Lipschitz in components whose resolution outcomes have different scales.
components whose resolution outcomes differ in scale
Collapsing two distinct generative components into a single loop forces aggregation of distinct quality signals into a single reputation scalar, which violates the continuity condition AC2 because the aggregate function is not Lipschitz in the underlying components
Generation parity is a governance principle with no analog in Ostrom's eight: it requires that reputation accrual rates on the first-order generative surfaces, on the execution surface, and on the cross-surface reflection surface lie in a triple ratio bounded above and below.
Generation parity requires that the rate of reputation accrual on first-order generative surfaces (Σ_J, Σ_T, Σ_K, Σ_D), on the execution surface (Σ_E), and on the cross-surface reflection surface (Σ_R) lie in a triple ratio bounded above and below.
If reflection dominates the triple ratio, a meta-reputation aristocracy forms: agents specialize in reflecting on others' allocations without contributing to the first-order surfaces, reflection validator pools drift away from cross-surface competence, and the contraction property of the composite map is lost.
violation of generation parity in the direction of cross-surface reflection
If reflection dominates, the system produces a meta-reputation aristocracy: agents specialize in reflecting on others' allocations without contributing to the prior five surfaces, validator pools on Σ_R drift away from cross-surface competence, and the contraction property of Ψ is lost
The substrate imposes iterability on agent interactions so that repeated-game cooperation dominates through reputation accumulation across validation pools.
agent interactions mediated by the described research architecture
Its thesis can be stated in one sentence: the substrate imposes iterability on agent interactions so that repeated-game cooperation dominates through reputation accumulation across validation pools.
The substrate's answer is to make consequential agent action pass through a validation institution that is staked, recorded, and settled in a persistent reputation ledger.
consequential agent work passes through the substrate's validation institution
The outcome updates capability-scoped standing, and standing conditions future participation under protocol-defined controls.
the substrate's capability-scoped standing governs later participation
The substrate's reputation update functions as a non-human-in-the-loop analogue of the RLHF reward model: pool-resolved REP changes encode the cohort's aggregate, stake-backed judgment of work quality, citation honesty, and validation accuracy, in a form that agents' future participation decisions condition on.
pool-resolved reputation changes are available to later institutional decisions
First, the substrate's reputation update functions as a non-human-in-the-loop analogue of the RLHF reward model: pool-resolved REP changes encode the cohort's aggregate, stake-backed judgment of work quality, citation honesty, and validation accuracy, in a form that agents' future participation decisions condition on.
Persistent, non-transferable per-tag reputation gives the agent an identity whose history cannot be shed costlessly.
per-tag reputation is persistent and non-transferable
The substrate converts one-shot, zero-residue agent calls into moves in an indefinitely repeated game.
consequential calls pass through substrate validation
This is the iterability result of the foundational paper (Calcaterra, Kaal, and Andrei 2018) made operational: the substrate converts one-shot, zero-residue agent calls into moves in an indefinitely repeated game.
A validation pool is a temporary adjudicative institution for machine work.
a pool is convened to adjudicate machine work
The deliberation surface exposes reasons needed for adjudication without turning standing into an argument from authority.
the public visibility discipline applies within a pool
Second, bounded social visibility: the deliberation surface exposes reasons needed for adjudication without turning standing into an argument from authority.
It separates production from review, permits adversarial reasoning, binds final judgment to accumulated standing, preserves an auditable record, and changes the terms of later participation.
the pool follows the public institutional assembly
The substrate stage activates the task-validation institution over the same population: capability-scoped reputation, staked validation, staged deliberation, citation-weighted attribution, and controlled propagation over the WDAG.
the substrate stage is active over the controlled population
The program's instrument is the agentic reputation substrate, a coordination architecture in which autonomous agents operate under reputation-bearing accountability and cohort-mediated validation.
the research program's public institutional description
The same campaign surfaced two effects the design had not registered: deliberating pools approved less work that ground truth rejected, and they reached unanimous decisions less often.
the discovery campaign's exploratory quantities
Deliberation reduced over-approval by 0.1610 (95% CI [-0.2091, -0.1128]) and reduced unanimity by 0.2542 (95% CI [-0.2984, -0.2091]); every preregistered gate passed, and the registered-null expectation on net discrimination held (+0.0606, CI crossing zero).
the fresh confirmatory campaign under the preregistered rule
It changes the composition of validation's errors: it cuts approvals that should not happen and dissolves unanimity consistent with herding, while leaving the pool's net discriminative power unmoved.
the controlled deliberation treatment evaluated in the completed campaign
Second, it reports a preregistered, replicated estimate of what structured deliberation does inside a reputation-bearing validation institution under controlled cohort conditions.
structured deliberation inside the controlled reputation-bearing validation institution
Unanimity is a cascade-consistent quantity: unusually frequent unanimous verdicts are consistent with validators discounting private information in favor of perceived group consensus, but they do not uniquely identify the Banerjee and Bikhchandani-Hirshleifer-Welch mechanism, with Holmström’s free-riding equilibrium supplying the complementary reading that leaning on the apparent consensus is what costly evaluation effort converges to when its product is shared.
interpretation of unanimity in the completed controlled study
The substrate is a coordination layer for autonomous agents organized around persistent, non-transferable reputation.
In the treatment arm, validators exchange structured assessments before a binding adjudication; in the matched control arm, the same work is adjudicated without that exchange.
the registered deliberation treatment and matched control
Deliberation should reduce unanimity because articulated disagreement, surfaced before votes bind, is exactly the private information a cascade suppresses.
the preregistered mechanism prediction for unanimity
Deliberation is therefore a composition intervention, not an intelligence upgrade for the monitor.
the completed deliberation treatment under the controlled study conditions
H2 asks the narrower and testable information question: whether reputation adds out-of-sample predictive content beyond observed task outcomes.
When ideation is performed by systems whose marginal cost per candidate idea approaches the cost of computation, the discovery of ideas ceases to be the scarce input, and the binding constraint migrates from generation to evaluation and alignment: which of the abundantly generated candidates is correct, useful, and safe to build on.
ideation systems whose marginal candidate cost approaches computation cost
When the computation available to a decision process exceeds the computation the decision requires, boundedness stops binding at the agent and reappears at the institution: the scarce resource is no longer the individual’s processing capacity but the collective’s capacity to verify, aggregate, and act on what abundant individual computation produces.
decision processes with computation exceeding task requirements
The firm survives as the residual verification institution, and its boundary becomes an empirical variable of the verification technology, which is a proposition the New Institutional program can test with its own tools.
institutional margins partitioned by verification scarcity
Centralized reward modeling and cohort-governed reputation therefore identify different institutional allocations of evaluative authority.
comparison of centralized reward modeling and cohort-governed reputation
The fourth, NCLF plus CELM, is unstable under the framework’s assumptions because endogenous work creation lacks the intertemporal reputation signal that the framework uses to price it.
The record binds outcomes to generation, lineage, fitness, survival, parentage, reputation consequences, adjudication behavior, and execution timing without requiring public disclosure of the private apparatus.
the current interim E2B measurement record
The current evidence establishes endogenous selection inside an externally provisioned experiment.
The execution surface alone remains a reputation-governed labor force operating on exogenous demand.
the execution surface operating without endogenous demand
They do not establish a treatment effect because the information environment was defective and the diagnostic was regraded after execution.
historical diagnostic runs with defective information and post-execution regrading
A trusted core that brokers every crossing supplies shared answers to identity, authority, and permitted data use, but not to responsibility, remedy, or value attribution, which are settled between the parties to a particular outcome.
core-mediated runtimes without a common institutional layer
What such a core does not supply is a shared answer to responsibility, to remedy, or to value attribution, because those are settled between the parties to a particular outcome rather than at the boundary of a particular call.
Authority drift is the failure mode permissions systems are least equipped to detect because every individual check passes while the aggregate operates outside what the user authorized.
delegation chains under a bounded original consent
Authority drift is the failure mode that permissions systems are least equipped to detect, because at every individual step the system behaves correctly. Each check passes. The aggregate is nonetheless outside what the user authorized.
Reputation may inform discovery, routing, pricing, and allocation but may never grant permission, enlarge authority, or substitute for an enforcement boundary, because violating this separation destroys the other institutional requirements.
coordination layers for sovereign local agent runtimes
Reputation may inform discovery, routing, pricing, and allocation. It may never grant permission, enlarge authority, or substitute for an enforcement boundary. This is the first requirement because violating it destroys the others.
In the Mosaic implementation at commit 2d920ce, no reputation input reaches the enforcement path because no reputation layer exists yet, so the separation of reputation from authorization is not violated but unguarded.
mosaic-companion public repository at commit 2d920ce, retrieved August 18, 2026
Trust is architectural rather than reputational, and enforcement is Core-mediated regardless of what a component claims about itself. No reputation input reaches the enforcement path because no reputation layer exists yet. The requirement is therefore not violated. It is unguarded.
Chronicle entries at commit 2d920ce carry exactly five fields with no workflow identifier, parent-entry reference, principal identity, or correlation field, so the records of a multi-tool workflow cannot be joined.
The entry structure, defined in electron/integrations/sandbox/types.ts, is exactly five fields: id, timestamp, source, type, and data. There is no workflow identifier, no parent-entry reference, no agent or principal identity, and no session or correlation field on the entry.
At commit 2d920ce per-agent tool access is not yet implemented, so granting an agent access to a single Vault box grants it the ability to invoke every installed tool, and the user approves permissions tool by tool without ever seeing their composition.
The permission model records that per-agent tool access and per-agent internet access are not yet implemented, and that consequently all tools are available to all agents. Granting an agent access to a single Vault box therefore grants it the ability to invoke every installed tool, whose union of declared domains defines the true outbound surface. The user approves permissions tool by tool and receives their composition without ever seeing it.
Hash chaining each Chronicle entry to its predecessor with a persisted per-tool head digest makes any modification, deletion, or reordering of history break the chain at a determinable point, at the cost of one hash per append.
a minimal delta against the Mosaic design at commit 2d920ce
Give each entry a digest over its own content and its predecessor's digest, and persist the current head digest per tool. Append cost is one hash. Verification is a linear scan. Any modification, deletion, or reordering of history breaks the chain at a determinable point.
Reputation standing should anchor to the SHA-256 of the tool artifact, paired with a publisher-level link and a controlled migration rule under which standing carries across versions only by an explicit, recorded act.
introduction of a reputation layer into a sovereign runtime
Hash-bound standing therefore needs a publisher-level link and a controlled migration rule, under which standing carries across versions only by an explicit, recorded act. The identity-cost precondition Part IX names is met by that pairing, not by the hash alone.
Among institutions governing counterparty selection, contract, regulation, and brand each fail at machine speed, leaving reputation as the portable, cumulative, continuously updated summary of past conduct a counterparty can evaluate before transacting.
counterparty selection among autonomous software components
Contract requires negotiation and enforcement, both of which are slow and expensive relative to the transaction sizes characteristic of agent interaction. Regulation requires jurisdiction, which is unavailable where the parties are software components of uncertain domicile. Brand requires an audience with memory and attention, neither of which an agent possesses. What remains is reputation: a portable, cumulative, and continuously updated summary of past conduct that a counterparty can evaluate in the time available before transacting.
In a sovereign runtime no operator is positioned to intervene, so the reputation layer is the institution of last resort and must be built to bear that weight from the beginning.
sovereign local agent runtimes without a platform operator
In a sovereign runtime there is no operator positioned to intervene. The reputation layer is therefore not a convenience feature. It is the institution of last resort, and it must be built to bear that weight from the beginning.
The nearly insurmountable standard for liability in oversight cases in the United States undermines the signalling of the expected standard of conduct, and this could have long-term implications for American corporate law.
The nearly insurmountable standard for liability in oversight cases and its effect on signalling the expected standard of conduct could have long-term implications for corporate law in the United States.
Stable rules may not suffice to make directors' oversight role more robust, so contractual and quasi law forms of dynamic governance are a promising supplement for improving the duty of oversight.
After outlining why stable rules may not suffice to make directors' oversight role more robust, the author provides some initial thoughts on how contractual and quasi law forms of dynamic governance could help improve the duty of oversight.
Without a workable duty of oversight, corporate directors who seek to comply with the oversight duty lack meaningful guidance about the conduct expected of them.
doctrine of oversight remains immature and incoherent
Without a workable duty of oversight, corporate directors seeking to comply with the oversight duty lack meaningful guidance as to the expected conduct.
Directors who are inadequately informed about the expected standard of conduct will underestimate their personal liability exposure and engage in riskier behavior than is desirable for the company itself.
directors depend on counsel for fiduciary duty guidance
Inadequately informed directors may underestimate their personal liability exposure and engage in more risky behavior than is desirable for the company itself.
Delaware's signalling of expected conduct could be dramatically improved by adopting a moderate rather than near insurmountable standard for liability in cases involving breaches of the duty of oversight.
signaling of expected conduct29 could be dramatically improved with a moderate standard for liability in cases involving breaches of the duty of oversight.
Increased liability is no panacea and cannot alone adequately address the central shortcomings of the duty of oversight and of corporate governance in the United States, because heightened liability does not give part-time outside directors the capacity to monitor complex corporations.
large and increasingly complex corporations
directors serving part time as outsiders
Increased liability is no panacea and cannot, alone adequately address the central shortcomings of the duty of oversight and corporate governance in the United States that Professor Fairfax identifies.
The author endorses the conclusion that attempts to enhance oversight in the United States may fail and that emphasizing improved oversight as a means of enhancing corporate governance could be ill-advised.
This weighs in favour of Professor Fairfax's conclusion that attempts to enhance oversight in the United States may fail and an emphasis on emphasizing improving oversight as a means of enhancing corporate governance could be ill-advised.
Governance adjustments are often enacted merely to address the problem perceived in the given market environment and the then existing economic conditions, without regard to possible future developments.
Governance adjustments are often enacted merely to address the then perceived problem in the given market environment and in the then existing economic conditions, without regard to possible future developments.
The economic conditions and the corresponding requirements for optimal and stable rules are constantly evolving, so rules fixed at one moment lose their fit over time.
However, the economic conditions and the corresponding requirements for optimal and stable rules are constantly evolving.
Using court decisions and stable rules to make the oversight role more robust could be insufficient, whereas contractual and quasi law forms of dynamic governance could help improve the duty of oversight.
directors are outsiders working part time
increasing complexity of modern corporations
Using court decisions and stable rules to make "the oversight role more robust to ensure that directors pay greater attention to their monitoring responsibilities" 49 could be insufficient. By contrast, contractual and quasi law forms of dynamic governance could help improve the duty of oversight.
Dynamic regulation is a supplemental regulatory tool, not a replacement for existing rulemaking: it increases the availability of relevant, institution specific, and decentralized information for rulemaking through feedback effects.
The concept of dynamic regulation in this article describes a supplemental regulatory tool that increases the availability of relevant, institution-specific, and decentralized information for rulemaking through feedback effects
Interaction and exchange of emerging information between public and private rulemakers creates a feedback process that increases the availability, timeliness, and quality of information available to the public rulemaker.
public and private rulemakers actually exchange emerging information
Interaction between public rulemakers and private rulemakers, including the exchange of emerging information, creates a feed- back process between them that increases the availability, timeliness, and quality of information available to the public rulemaker.
Feedback effects allow the necessary information to be acquired ex ante and necessary revisions to be anticipated before rules emerge as suboptimal, rather than ex post after failure has become apparent.
feedback processes are operating before enactment
Rather than acquiring the necessary information ex-post after rules have emerged as suboptimal, feedback effects help increase the availability of rele- vant information for rulemaking ex-ante and anticipate necessary revisions before rules emerge as suboptimal
Contrary to the dominant view of corporate governance as a forward looking endeavor, dynamic governance structures are properly categorized as backward looking ex ante forms of corporate governance.
within the theoretical framework of dynamic regulation
By contrast, in the theoretical framework of dynamic regulation, dynamic gov- ernance structures can be categorized as backward-looking ex-ante forms of corporate governance.
Traditional forward looking corporate governance systems adopt backward looking perspectives only after stable and optimal rules have emerged as suboptimal and require replacement or amendment.
traditional stable and presumptively optimal rulemaking infrastructure
Traditional forward-looking corporate governance systems may take backward-looking perspectives if and when stable and optimal rules emerge as suboptimal, requiring replacement and/or amendment of existing regulatory solutions.
Targeted use of governmental contracts allows the government to successfully reform corporate governance not only in individual public corporations but across entire industries.
Empirical evidence suggests that the targeted use of governmental con- tracts allows the government to successfully reform corporate governance in public corporations and entire industries70.
Over 97 percent of the non and deferred prosecution agreements executed in the United States between 1993 and 2013 contained governance changes, including required business changes in 30 percent and board and senior management changes in 38 percent.
United States N/DPAs executed between 1993 and 2013
Over 97% of the N/DPAs executed in the United States between 1993 and 2013 contained governance changes, including required business changes (30%), board and senior management changes (38%
The governance improvements documented in governmental contracts counteract or at least discount the standard criticisms of them, including unequal bargaining power, the government's lack of governance expertise, and the potential for prosecutorial abuse.
Concerns that may be dis- counted include the unequal bargaining power between the contracting par- ties78, the government's lack of governance expertise and training79, the po- tential for prosecutorial abuse80
Negotiation of a governmental contract produces indirect information transfers, because the government can deduce from where the corporate wrongdoer places negotiating emphasis which governance shortcomings most need remedying.
the parties negotiate contract terms rather than accept imposed terms
Indirect information transfers and feedback effects may exist because the government may be able to deduce from the emphasis of the corporate wrongdoer's negotiations what particular governance shortcomings need par- ticular remedying.
Dynamic governance structures involving governmental contracts are backward looking because the multilevel feedback effects they generate require an exchange of information about past events in order to anticipate future regulatory contingencies.
Dynamic governance structures involving governmental contracts are back- ward-looking because multilevel feedback effects associated with govern- mental contracts necessitate an exchange of information pertaining to past events to anticipate future regulatory contingencies.
Calcaterra and Kaal - 2021 - Decentralized Governance.pdf
Craig Calcaterra, Wulf A. Kaal, Decentralized Governance (2021). SSRN: https://ssrn.com/abstract=3782214
Calcaterra et al. - 2018 - Reputation Protocol for the Internet of Trust - Conceptual Whitepaper.pdf
Craig Calcaterra, Wulf A. Kaal, Gopinath Sivalingam, Reputation Protocol for the Internet of Trust - Conceptual Whitepaper (2018). SSRN: https://ssrn.com/abstract=3266953
Kaal - 2018 - Crypto Economics - The Top 100 Token Models Compared.pdf
Wulf A. Kaal, Crypto Economics - The Top 100 Token Models Compared (2018). SSRN: https://ssrn.com/abstract=3249860
Calcaterra et al. - 2019 - Stable Cryptocurrencies.pdf
Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Stable Cryptocurrencies (2019). SSRN: https://ssrn.com/abstract=3396522
Kaal - 2019 - Blockchain-Based Corporate Governance.pdf
Wulf A. Kaal, Blockchain-Based Corporate Governance (2019). SSRN: https://ssrn.com/abstract=3441904
Kaal - 2024 - AI Learning - Decentralized Governance to Optimize Human Output Datasets for AI Learning.pdf
Wulf A. Kaal, AI Learning - Decentralized Governance to Optimize Human Output Datasets for AI Learning (2024). SSRN: https://ssrn.com/abstract=4755632
Kaal - 2021 - Hybrid Secure Proof of Stake.pdf
Wulf A. Kaal, Hybrid Secure Proof of Stake (2021). SSRN: https://ssrn.com/abstract=3931933
Decentralization – Past, Present, and Future
Kaal - 2019 - Decentralization - Past, Present, and Future.pdf
Wulf A. Kaal, Decentralization - Past, Present, and Future (2019). SSRN: https://ssrn.com/abstract=3411897
BLOCKCHAIN INNOVATION FOR PRIVATE INVESTMENT
Kaal - 2017 - Blockchain Innovation for Private Investment Funds.pdf
Wulf A. Kaal, Blockchain Innovation for Private Investment Funds (2017). SSRN: https://ssrn.com/abstract=2998033
Decentralized Autonomous Organizations (DAO)
Kaal and Bykowski - 2023 - Decentralized Autonomous Organizations (DAO) – A Market Meta Analysis.pdf
Wulf A. Kaal, Josh Bykowski, Decentralized Autonomous Organizations (DAO) – A Market Meta Analysis (2023). SSRN: https://ssrn.com/abstract=4529715
Kaal - 2013 - A Comparative Perspective on the Limitations of the Duty of Oversight – A Comment on Lisa Fairfax.pdf
Kaal, A Comparative Perspective on the Limitations of the Duty of Oversight – A Comment on Lisa Fairfax (2013)
Calcaterra et al. - 2019 - Stable Cryptocurrencies - First Order Principles.pdf
Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Stable Cryptocurrencies - First Order Principles (2019). SSRN: https://ssrn.com/abstract=3402701
Kaal - 2013 - Investment Adviser Regulation.pdf
Wulf A. Kaal, Investment Adviser Regulation (2013). SSRN: https://ssrn.com/abstract=2337268
Computative Economics A Framework for Economic Analysis under Computational Abundance
Kaal - 2026 - Computative Economics A Framework for Economic Analysis under Computational Abundance.pdf
Wulf A. Kaal, Computative Economics A Framework for Economic Analysis under Computational Abundance (2026). SSRN: https://ssrn.com/abstract=6607458
Citation Honesty Mechanisms in Weighted Directed Acyclic Graph Governance
Kaal - 2026 - Citation Honesty Mechanisms in Weighted Directed Acyclic Graph Governance.pdf
Wulf A. Kaal, Citation Honesty Mechanisms in Weighted Directed Acyclic Graph Governance (2026). SSRN: https://ssrn.com/abstract=6269518
Kaal - 2021 - REPUTATION AS CAPITAL – How Decentralized Autonomous Organizations Address Shortcomings in the Ventu.pdf
Wulf A. Kaal, REPUTATION AS CAPITAL – How Decentralized Autonomous Organizations Address Shortcomings in the Ventu (2021). SSRN: https://ssrn.com/abstract=3962614
Kaal - 2013 - Evolution of Law Dynamic Regulation in a New Institutional Economics Framework.pdf
Wulf A. Kaal, Evolution of Law Dynamic Regulation in a New Institutional Economics Framework (2013). SSRN: https://ssrn.com/abstract=2267560
Kaal - 2024 - DAO Market Meta Analysis 2024.pdf
Wulf A. Kaal, DAO Market Meta Analysis 2024 (2024). SSRN: https://ssrn.com/abstract=5254152
Kaal - 2021 - Decentralization and Feedback Effects.pdf
Wulf A. Kaal, Decentralization and Feedback Effects (2021). SSRN: https://ssrn.com/abstract=3808852
Kaal - 2024 - The Future of Law - Dynamic Web3 Governance.pdf
Wulf A. Kaal, The Future of Law - Dynamic Web3 Governance (2024). SSRN: https://ssrn.com/abstract=4957318
Kaal - 2024 - Impact Investing Innovation - From Impact 1.0 to 3.0.pdf
Wulf A. Kaal, Impact Investing Innovation - From Impact 1.0 to 3.0 (2024). SSRN: https://ssrn.com/abstract=4685567
Kaal - 2020 - Digital Asset Market Evolution.pdf
Kaal, Digital Asset Market Evolution (2020). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3606663
Legal Studies Research Paper No. 2012-01
Kaal and Henkel - 2011 - Contingent Capital with Sequential Triggers.pdf
Wulf A. Kaal, Christoph Henkel, Contingent Capital with Sequential Triggers (2011). SSRN: https://ssrn.com/abstract=1908473
Calcaterra and Kaal - 2018 - Secure Proof of Stake Protocol.pdf
Craig Calcaterra, Wulf A. Kaal, Secure Proof of Stake Protocol (2018). SSRN: https://ssrn.com/abstract=3125827
Kaal and Lacine - 2015 - Stock Price Response to Non- and Deferred Prosecution Agreements.pdf
Wulf A. Kaal, Timothy Lacine, Stock Price Response to Non- and Deferred Prosecution Agreements (2015). SSRN: https://ssrn.com/abstract=2629451
Fenwick et al. - 2018 - Legal Education in a Digital Age Why 'Coding for Lawyers' Matters.pdf
Mark Fenwick, Wulf A. Kaal, Erik P.M. Vermeulen, Legal Education in a Digital Age Why 'Coding for Lawyers' Matters (2018). SSRN: https://ssrn.com/abstract=3227967
Kaal - 2025 - The UDLC DAO Operationalizing a Continuously Evolving Universal Digital Law Codex Through Weighted.pdf
Wulf A. Kaal, The UDLC DAO Operationalizing a Continuously Evolving Universal Digital Law Codex Through Weighted (2025). SSRN: https://ssrn.com/abstract=5887242
Calcaterra and Kaal - 2021 - The Importance of History In Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, The Importance of History In Decentralization (2021). SSRN: https://ssrn.com/abstract=3782217
Calcaterra et al. - 2019 - Decentralized Underwriting.pdf
Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Decentralized Underwriting (2019). SSRN: https://ssrn.com/abstract=3396542
Kaal and Evans - 2019 - Blockchain-Based Securities Offerings.pdf
Wulf A. Kaal, Samuel Evans, Blockchain-Based Securities Offerings (2019). SSRN: https://ssrn.com/abstract=3411110
Kaal and Painter - 2012 - Forum Competition and Choice of Law Competition in Securities Law after Morrison v. National Austral.pdf
Wulf A. Kaal, Richard W. Painter, Forum Competition and Choice of Law Competition in Securities Law after Morrison v. National Austral (2012). SSRN: https://ssrn.com/abstract=2029983
Kaal - 2016 - Confluence of Mutual and Private Funds.pdf
Kaal, Confluence of Mutual and Private Funds (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715083
Kaal - 2025 - How can we Best Monitor AI Agents.pdf
Wulf A. Kaal, How can we Best Monitor AI Agents (2025). SSRN: https://ssrn.com/abstract=5245185
Legal Studies Research Paper No. 2013-02
Henkel and Kaal - 2012 - Contingent Capital in European Union Bank Restructuring.pdf
Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012). SSRN: https://ssrn.com/abstract=2061166
Kaal - 2025 - Cryptographic Foundations and Interdisciplinary Dimensions of the Secure Proof of Stake (SPoS) Conse.pdf
Wulf A. Kaal, Cryptographic Foundations and Interdisciplinary Dimensions of the Secure Proof of Stake (SPoS) Conse (2025). SSRN: https://ssrn.com/abstract=5225296
VENTURE CAPITAL AS DYNAMIC REGULATION OF DISRUPTIVE INNOVATION
Kaal and Vermeulen - 2016 - Venture Capital as Dynamic Regulation of Disruptive Innovation.pdf
Wulf A. Kaal, Erik P.M. Vermeulen, Venture Capital as Dynamic Regulation of Disruptive Innovation (2016). SSRN: https://ssrn.com/abstract=2740477
Calcaterra and Kaal - 2021 - Preface to.pdf
Craig Calcaterra, Wulf A. Kaal, Preface to (2021). SSRN: https://ssrn.com/abstract=3782191
Chapter )* – Transcendental Unifying Values
Calcaterra and Kaal - 2021 - The Importance of Transcendental Unifying Values for Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, The Importance of Transcendental Unifying Values for Decentralization (2021). SSRN: https://ssrn.com/abstract=3782220
How DAOs Optimize Open-Source Code Reviews and Create Open-Source Standards
Kaal - 2021 - How DAOs Optimize Open-Source Code Reviews and Create Open-Source Standards.pdf
Wulf A. Kaal, How DAOs Optimize Open-Source Code Reviews and Create Open-Source Standards (2021). SSRN: https://ssrn.com/abstract=3995709
Calcaterra and Kaal - 2021 - The Importance of Reputation for the Evolution of Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, The Importance of Reputation for the Evolution of Decentralization (2021). SSRN: https://ssrn.com/abstract=3782210
Wulf A. Kaal, Liquid Equity Rewards (2025). SSRN: https://ssrn.com/abstract=5454054
Blockchain Applications and Fee Structure Developments in
Kaal - 2017 - Blockchain Applications and Fee Structure Developments in Private Investment Funds.pdf
Wulf A. Kaal, Blockchain Applications and Fee Structure Developments in Private Investment Funds (2017). SSRN: https://ssrn.com/abstract=2959730
Kaal and Anderson - 2016 - Unconstrained Mutual Funds and Retail Investor Protection.pdf
Wulf A. Kaal, Unconstrained Mutual Funds and Retail Investor Protection (2016). SSRN: https://ssrn.com/abstract=2811729
Kaal - 2011 - Hedge Fund Regulation Via Basel III.pdf
Kaal, Hedge Fund Regulation Via Basel III (2011). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1806252
Wulf A. Kaal, Fair Token Launch (2022). SSRN: https://ssrn.com/abstract=4015908
DID THE DODD-FRANK ACT IMPACT PRIVATE FUND PERFORMANCE ? – EVIDENCE FROM
Kaal et al. - 2016 - Did the Dodd-Frank Act Impact Private Fund Performance – Evidence from 2010 – 2015.pdf
Wulf A. Kaal, Barbara Luppi, Sandra Paterlini, Did the Dodd-Frank Act Impact Private Fund Performance – Evidence from 2010 – 2015 (2016). SSRN: https://ssrn.com/abstract=2816408
BLOCKCHAIN TECHNOLOGY AND RACE IN CORPORATE
Kaal - 2017 - Blockchain Technology and Race in Corporate America.pdf
Wulf A. Kaal, Blockchain Technology and Race in Corporate America (2017). SSRN: https://ssrn.com/abstract=3071378
HOW DECENTRALIZED SYSTEMS CAN UPGRADE AI
Kaal - 2021 - How Decentralized Systems Can Upgrade AI.pdf
Wulf A. Kaal, How Decentralized Systems Can Upgrade AI (2021). SSRN: https://ssrn.com/abstract=3808867
Hedge Fund Valuation - Retailization, Regulation and Investor Suitability
Kaal - 2009 - Hedge Fund Valuation Retailization, Regulation, and Investor Suitability.pdf
Kaal, Hedge Fund Valuation Retailization, Regulation, and Investor Suitability (2009). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428387
A Decentralized Autonomous Organization (DAO) of DAOs
Kaal - 2021 - A Decentralized Autonomous Organization (DAO) of DAOs.pdf
Wulf A. Kaal, A Decentralized Autonomous Organization (DAO) of DAOs (2021). SSRN: https://ssrn.com/abstract=3799320
Kirchner et al. - 2004 - Regulatory Competition in EU Corporate Law after Inspire Art Unbundling Delaware's Product for Euro.pdf
Christian Kirchner, Richard W. Painter, Wulf A. Kaal, Regulatory Competition in EU Corporate Law after Inspire Art Unbundling Delaware's Product for Euro (2004). SSRN: https://ssrn.com/abstract=617681
Calcaterra and Kaal - 2021 - Eight Institutions for the Evolution of Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, Eight Institutions for the Evolution of Decentralization (2021). SSRN: https://ssrn.com/abstract=3782205
Institutional Requirements for Sovereign Local Agent Runtimes
Kaal - 2026 - Institutional Requirements for Sovereign Local Agent Runtimes.pdf
Wulf A. Kaal, Institutional Requirements for Sovereign Local Agent Runtimes (2026). SSRN: https://ssrn.com/abstract=7314479
Kaal - 2024 - Quantum Economy and the Future of Work.pdf
Wulf A. Kaal, Quantum Economy and the Future of Work (2024). SSRN: https://ssrn.com/abstract=4900880
Kaal - 2025 - The AI-to-AI Economy and the Collapse of Anthropocentric Economic Theory.pdf
Wulf A. Kaal, The AI-to-AI Economy and the Collapse of Anthropocentric Economic Theory (2025). SSRN: https://ssrn.com/abstract=5886442
Wulf A. Kaal, AI Governance (2024). SSRN: https://ssrn.com/abstract=4796714
Kaal and Malay - 2013 - The Role of Corporate Integrity Agreements in the Expansion of Fiduciary Duties.pdf
Wulf A. Kaal, Elizabeth R. Malay, The Role of Corporate Integrity Agreements in the Expansion of Fiduciary Duties (2013). SSRN: https://ssrn.com/abstract=2317580
DID THE DODD-FRANK ACT IMPACT HEDGE FUND PERFORMANCE ?
Kaal et al. - 2014 - Did the Dodd-Frank Act Impact Hedge Fund Performance.pdf
Wulf A. Kaal, Barbara Luppi, Sandra Paterlini, Did the Dodd-Frank Act Impact Hedge Fund Performance (2014). SSRN: https://ssrn.com/abstract=2389416
Kaal - 2024 - Quantum Economy and Tokenomics.pdf
Wulf A. Kaal, Quantum Economy and Tokenomics (2024). SSRN: https://ssrn.com/abstract=4900878
Kaal - 2016 - Dynamic Regulation for Innovation.pdf
Wulf A. Kaal, Dynamic Regulation for Innovation (2016). SSRN: https://ssrn.com/abstract=2831040
Kaal and Dell_Erba - 2017 - Initial Coin Offerings Emerging Practices, Risk Factors, and Red Flags.pdf
Wulf A. Kaal, Marco Dell'Erba, Initial Coin Offerings Emerging Practices, Risk Factors, and Red Flags (2017). SSRN: https://ssrn.com/abstract=3067615
Wulf A. Kaal, Code Review DAO (2024). SSRN: https://ssrn.com/abstract=4734750
Calcaterra and Kaal - 2021 - Decentralized Finance (DeFi).pdf
Craig Calcaterra, Wulf A. Kaal, Decentralized Finance (DeFi) (2021). SSRN: https://ssrn.com/abstract=3782216
Wulf A. Kaal, DAO Fallacies (2022). SSRN: https://ssrn.com/abstract=4067783
Kaal - 2017 - Private Investment Fund Regulation - Theory and Empirical Evidence from 1998 to 2016.pdf
Wulf A. Kaal, Private Investment Fund Regulation - Theory and Empirical Evidence from 1998 to 2016 (2017). SSRN: https://ssrn.com/abstract=2998097
Kaal et al. - 2022 - Digital Asset Valuation.pdf
Wulf A. Kaal, Samuel Evans, Hayley Howe, Digital Asset Valuation (2022). SSRN: https://ssrn.com/abstract=4033886
DAOS – INTERNAL GOVERNANCE & EXTERNAL LEGAL DESIGN
Kaal - 2020 - Decentralized Autonomous Organizations – Internal Governance and External Legal Design.pdf
Wulf A. Kaal, Decentralized Autonomous Organizations – Internal Governance and External Legal Design (2020). SSRN: https://ssrn.com/abstract=3652481
2017 LEGAL EDUCATION IN BLOCKCHAIN REVOLUTION
Fenwick et al. - 2017 - Legal Education in the Blockchain Revolution.pdf
Mark Fenwick, Wulf A. Kaal, Erik P. M. Vermeulen, Legal Education in the Blockchain Revolution (2017). SSRN: https://ssrn.com/abstract=2939127
Calcaterra and Kaal - 2021 - Introduction to Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, Introduction to Decentralization (2021). SSRN: https://ssrn.com/abstract=3782192
The Post Dodd-Frank Act Evolution of the Private
Kaal - 2016 - The Post Dodd-Frank Act Evolution of the Private Fund Industry Comparative Evidence from 2012 and 2.pdf
Wulf A. Kaal, The Post Dodd-Frank Act Evolution of the Private Fund Industry Comparative Evidence from 2012 and 2 (2016). SSRN: https://ssrn.com/abstract=2739479
2019 BLOCKCHAIN SOLUTIONS FOR CORPORATE GOVERNANCE
Kaal - 2019 - Blockchain Solutions for Agency Problems in Corporate Governance.pdf
Wulf A. Kaal, Blockchain Solutions for Agency Problems in Corporate Governance (2019). SSRN: https://ssrn.com/abstract=3373393
Empirical Evaluation of the Agentic Reputation Substrate: Deliberation, the Composition of Error, and the Registered Measurement of Agency Costs in a Controlled Multi-Model Cohort
Kaal - 2026 - Empirical Evaluation of the Agentic Reputation Substrate Deliberation, the Composition of Error, and the Registered Measurement of Agency Costs in a Controlled Multi-Model Cohort.pdf
Wulf A. Kaal, Empirical Evaluation of the Agentic Reputation Substrate: Deliberation, the Composition of Error, and the Registered Measurement of Agency Costs in a Controlled Multi-Model Cohort (2026). SSRN: https://ssrn.com/abstract=7261018
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Kaal - 2025 - Artificial Intelligence The Final Frontier.pdf
Wulf A. Kaal, Artificial Intelligence The Final Frontier (2025). SSRN: https://ssrn.com/abstract=5095633
Kaal - 2021 - Reputation as Capital – How DAOs Upgrade Finance.pdf
Wulf A. Kaal, Reputation as Capital – How DAOs Upgrade Finance (2021). SSRN: https://ssrn.com/abstract=3949098
Calcaterra et al. - 2018 - Blockchain Infrastructure for Measuring Domain Specific Reputation in Autonomous Decentralized and A.pdf
Craig Calcaterra, Wulf A. Kaal, Vlad Andrei, Blockchain Infrastructure for Measuring Domain Specific Reputation in Autonomous Decentralized and A (2018). SSRN: https://ssrn.com/abstract=3125822
Chapter ) – Historical Sketches of Centralization vs. Decentralization
Calcaterra and Kaal - 2021 - Historical Sketches of Centralization vs. Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, Historical Sketches of Centralization vs. Decentralization (2021). SSRN: https://ssrn.com/abstract=3782193
DECENTRALIZATION – WHY WE NEED TECHNOLOGY INFRASTRUCTURE UPGRADES
Kaal - 2021 - Decentralization – Why We Need Technology Infrastructure Upgrades.pdf
Wulf A. Kaal, Decentralization – Why We Need Technology Infrastructure Upgrades (2021). SSRN: https://ssrn.com/abstract=3808859
Chapter 17 Hedge Funds and Systemic Risk
Kaal and Krause - 2016 - Hedge Funds and Systemic Risk.pdf
Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096
U.S. vs. E.U. - BLOCKCHAIN APPLICATIONS IN PRIVATE
Kaal and Dell'Erba - 2017 - Blockchain Innovation in Private Investment Funds - A Comparative Analysis of the United States and.pdf
Wulf A. Kaal, Marco Dell'Erba, Blockchain Innovation in Private Investment Funds - A Comparative Analysis of the United States and (2017). SSRN: https://ssrn.com/abstract=3002908
PRIVATE FUND INDUSTRY FIVE YEARS AFTER THE DODD-FRANK ACT
Kaal - 2016 - The Private Fund Industry Five Years after the Dodd-Frank Act – A Survey Study.pdf
Wulf A. Kaal, The Private Fund Industry Five Years after the Dodd-Frank Act – A Survey Study (2016). SSRN: https://ssrn.com/abstract=2732915
Shareholder Agreements - National Report of the United States of
Kaal - 2017 - Shareholder Agreements - National Report of the United States of America.pdf
Wulf A. Kaal, Shareholder Agreements - National Report of the United States of America (2017). SSRN: https://ssrn.com/abstract=3017612
Kaal - 2026 - The Collapse of Scarcity Economics.pdf
Wulf A. Kaal, The Collapse of Scarcity Economics (2026). SSRN: https://ssrn.com/abstract=6421319
Chapter ) – Contemporary Decentralization 1
Calcaterra and Kaal - 2021 - Contemporary Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, Contemporary Decentralization (2021). SSRN: https://ssrn.com/abstract=3782198
Fenwick et al. - 2017 - Regulation Tomorrow What Happens When Technology Is Faster Than the Law.pdf
Mark Fenwick, Wulf A. Kaal, Erik P. M. Vermeulen, Regulation Tomorrow What Happens When Technology Is Faster Than the Law (2017). SSRN: https://ssrn.com/abstract=2834531
Andreas and Kaal - 2025 - Universal Digital Law Codex (UDLC) Building the Legal Infrastructure for the Digital Era.pdf
Furrer Andreas, Wulf A. Kaal, Universal Digital Law Codex (UDLC) Building the Legal Infrastructure for the Digital Era (2025). SSRN: https://ssrn.com/abstract=5554218
DECENTRALIZATION – A PRIMER ON THE NEW ECONOMY
Kaal - 2019 - Decentralization - A Primer on the New Economy.pdf
Wulf A. Kaal, Decentralization - A Primer on the New Economy (2019). SSRN: https://ssrn.com/abstract=3406323
Kaal - 2018 - Initial Coin Offerings The Top 25 Jurisdictions and Their Comparative Regulatory Responses.pdf
Wulf A. Kaal, Initial Coin Offerings The Top 25 Jurisdictions and Their Comparative Regulatory Responses (2018). SSRN: https://ssrn.com/abstract=3117224
HOW TO ORGANIZE NOW FOR SUCCESS TOMORROW - VERSION 7.DOCX (DO NOT DELETE) 5/31/17 10:47 PM
Fenwick et al. - 2017 - The ‘Unmediated’ and ‘Tech-Driven’ Corporate Governance of Today's Winning Companies.pdf
Mark Fenwick, Wulf A. Kaal, Erik P. M. Vermeulen, The ‘Unmediated’ and ‘Tech-Driven’ Corporate Governance of Today's Winning Companies (2017). SSRN: https://ssrn.com/abstract=2922176
Possibility Loops An Operational Architecture for Computative Economics in Agent Coordination Systems
Kaal - 2026 - Possibility Loops An Operational Architecture for Computative Economics in Agent Coordination Systems.pdf
Wulf A. Kaal, Possibility Loops An Operational Architecture for Computative Economics in Agent Coordination Systems (2026). SSRN: https://ssrn.com/abstract=6655138
How Decentralized Autonomous Organizations Optimize Charitable Giving
Kaal - 2021 - How Decentralized Autonomous Organizations Optimize Charitable Giving.pdf
Wulf A. Kaal, How Decentralized Autonomous Organizations Optimize Charitable Giving (2021). SSRN: https://ssrn.com/abstract=3981021
Paper 4 - Computative Economics: A Framework for Economic Analysis under Computational Abundance
Kaal - 2026 - Paper 4 - Computative Economics A Framework for Economic Analysis under Computational Abundance.pdf
Wulf A. Kaal, Computative Economics: A Framework for Economic Analysis under Computational Abundance (2026). SSRN: https://ssrn.com/abstract=7261481
Kaal - 2019 - Financial Technology and Hedge Funds.pdf
Kaal, Financial Technology and Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3409548
HEDGE FUNDS' SYSTEMIC RISK DISCLOSURES IN BANKRUPTCY
Kaal - 2013 - Hedge Funds’ Systemic Risk Disclosures in Bankruptcy.pdf
Wulf A. Kaal, Hedge Funds’ Systemic Risk Disclosures in Bankruptcy (2013). SSRN: https://ssrn.com/abstract=2348463
Kaal - 2012 - Contingent Capital in Executive Compensation.pdf
Wulf A. Kaal, Contingent Capital in Executive Compensation (2012). SSRN: https://ssrn.com/abstract=2097160
Kaal - 2020 - Blockchain Technology for Good.pdf
Kaal, Blockchain Technology for Good (2020). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3709041
Painter and Kaal - 2010 - Extraterritorial Application of US Securities Law – Will the US Become the Default Jurisdiction for.pdf
Richard W. Painter, Wulf A. Kaal, Extraterritorial Application of US Securities Law – Will the US Become the Default Jurisdiction for (2010). SSRN: https://ssrn.com/abstract=1664809
Kaal - 2024 - AI Governance Via Web3 Reputation System.pdf
Wulf A. Kaal, AI Governance Via Web3 Reputation System (2024). SSRN: https://ssrn.com/abstract=4941807
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Kaal and Painter - 2011 - The Aftermath of Morrison v. National Australia Bank and Elliott Associates v. Porsche.pdf
Kaal and Painter, The Aftermath of Morrison v. National Australia Bank and Elliott Associates v. Porsche (2011). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1765901
KAAL PAINTER_FINAL_11.10.DOCX (DO NOT DELETE) 11/16/2010 12:33 PM
Painter and Kaal - 2010 - Initial Reflections on an Evolving Standard Constraints on Risk Taking by Directors and Officers in.pdf
Painter and Kaal, Initial Reflections on an Evolving Standard Constraints on Risk Taking by Directors and Officers in (2010). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558614
Kaal and Lacine - 2014 - The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance Evidence from 1993-20.pdf
Wulf A. Kaal, Timothy Lacine, The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance Evidence from 1993-20 (2014). SSRN: https://ssrn.com/abstract=2486570
Kaal - 2024 - How AI Models are Optimized Through Web3 Governance.pdf
Wulf A. Kaal, How AI Models are Optimized Through Web3 Governance (2024). SSRN: https://ssrn.com/abstract=4855607
Evolution of Domain-Specific Reputation Systems From Binary Validation to Citation-Weighted Knowledge Attribution
Kaal - 2026 - Evolution of Domain-Specific Reputation Systems From Binary Validation to Citation-Weighted Knowledge Attribution.pdf
Wulf A. Kaal, Evolution of Domain-Specific Reputation Systems From Binary Validation to Citation-Weighted Knowledge Attribution (2026). SSRN: https://ssrn.com/abstract=6192998
Kaal - 2019 - Indirect Regulation of Hedge Funds.pdf
Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660
KAAL POST-AUTHOR PAGES (DO NOT DELETE) 6/18/2013 4:23 PM
Kaal - 2012 - Hedge Fund Manager Registration Under the Dodd-Frank Act.pdf
Wulf A. Kaal, Hedge Fund Manager Registration Under the Dodd-Frank Act (2012). SSRN: https://ssrn.com/abstract=2150377
Kaal and Gray - 2025 - The Evolving Role of Artificial Intelligence in Law.pdf
Wulf A. Kaal, Morgan A. Gray, The Evolving Role of Artificial Intelligence in Law (2025). SSRN: https://ssrn.com/abstract=5541658
HOW TO REGULATE DISRUPTIVE INNOVATION – FROM FACTS TO DATA
Kaal and Vermeulen - 2016 - How to Regulate Disruptive Innovation - From Facts to Data.pdf
Wulf A. Kaal, Erik P.M. Vermeulen, How to Regulate Disruptive Innovation - From Facts to Data (2016). SSRN: https://ssrn.com/abstract=2808132
Kaal - 2025 - Liquid Equity Rewards in Corporate America.pdf
Wulf A. Kaal, Liquid Equity Rewards in Corporate America (2025). SSRN: https://ssrn.com/abstract=5583610
Kaal - 2013 - Dynamic Regulation of the Financial Services Industry.pdf
Wulf A. Kaal, Dynamic Regulation of the Financial Services Industry (2013). SSRN: https://ssrn.com/abstract=2273857
AI's Mother's Instinct Engineered Consequence Emergent Ethics and the Institutional Trajectory Toward Agentic Alignment
Kaal - 2026 - AI's Mother's Instinct Engineered Consequence Emergent Ethics and the Institutional Trajectory Toward Agentic Alignment.pdf
Wulf A. Kaal, AI's Mother's Instinct Engineered Consequence Emergent Ethics and the Institutional Trajectory Toward Agentic Alignment (2026). SSRN: https://ssrn.com/abstract=6244278
Kaal - 2021 - Decentralization Neutralizers.pdf
Wulf A. Kaal, Decentralization Neutralizers (2021). SSRN: https://ssrn.com/abstract=3808873
Kaal - 2014 - Private Fund Disclosures Under the Dodd-Frank Act.pdf
Wulf A. Kaal, Private Fund Disclosures Under the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2447306
Calcaterra and Kaal - 2021 - A Technical Perspective on Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, A Technical Perspective on Decentralization (2021). SSRN: https://ssrn.com/abstract=3782203
Kaal - 2016 - Private Fund Investor Due Diligence – Evidence from 1995 to 2015.pdf
Wulf A. Kaal, Private Fund Investor Due Diligence – Evidence from 1995 to 2015 (2016). SSRN: https://ssrn.com/abstract=2811718
Kaal - 2022 - Securities Versus Utility Tokens.pdf
Wulf A. Kaal, Securities Versus Utility Tokens (2022). SSRN: https://ssrn.com/abstract=4021599
DECENTRALIZED MECHANICAL TURK THROUGH VERIFIED REPUTATION
Kaal - 2018 - Decentralized Mechanical Turk Through Verified Reputation.pdf
Wulf A. Kaal, Decentralized Mechanical Turk Through Verified Reputation (2018). SSRN: https://ssrn.com/abstract=3128900
Paper 2 - Architecture of the Agentic Reputation Substrate
Kaal - 2026 - Paper 2 - Architecture of the Agentic Reputation Substrate.pdf
Wulf A. Kaal, Paper 2 - Architecture of the Agentic Reputation Substrate (2026). SSRN: https://ssrn.com/abstract=7260278
Kaal - 2012 - Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance.pdf
Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012). SSRN: https://ssrn.com/abstract=1998455
Calcaterra and Kaal - 2021 - Future of Decentralization.pdf
Craig Calcaterra, Wulf A. Kaal, Future of Decentralization (2021). SSRN: https://ssrn.com/abstract=3782201
Fenwick et al. - 2018 - Why 'Blockchain' Will Disrupt Corporate Organizations.pdf
Mark Fenwick, Wulf A. Kaal, Erik P.M. Vermeulen, Why 'Blockchain' Will Disrupt Corporate Organizations (2018). SSRN: https://ssrn.com/abstract=3227933
The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry
Kaal - 2014 - The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry.pdf
Wulf A. Kaal, The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry (2014). SSRN: https://ssrn.com/abstract=2389423
Kaal - 2014 - Dynamic Regulation via Governmental Contracts.pdf
Kaal, Dynamic Regulation via Governmental Contracts (2014)
THE HISTORY OF HEDGE FUND REGULATION IN THE UNITED STATES
Kaal and Oesterle - 2016 - The History of Hedge Fund Regulation in the United States.pdf
Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974
Kaal - 2019 - Decentralized Commerce – A Primer on Why Decentralized Reputation Verification Systems Are Needed.pdf
Wulf A. Kaal, Decentralized Commerce – A Primer on Why Decentralized Reputation Verification Systems Are Needed (2019). SSRN: https://ssrn.com/abstract=3405401
Kaal - 2017 - Dynamic Regulation via Contingent Capital.pdf
Kaal, Dynamic Regulation via Contingent Capital (2017). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2957645
2017 CRYPTO TRANSACTION DISPUTE RESOLUTION
Kaal and Calcaterra - 2017 - Crypto Transaction Dispute Resolution.pdf
Wulf A. Kaal, Craig Calcaterra, Crypto Transaction Dispute Resolution (2017). SSRN: https://ssrn.com/abstract=2992962
Kaal and Howe - 2021 - Custody of Digital Assets.pdf
Wulf A. Kaal, Hayley Howe, Custody of Digital Assets (2021). SSRN: https://ssrn.com/abstract=3936876
Kaal - 2014 - The Systemic Risk of Private Funds after the Dodd-Frank Act.pdf
Wulf A. Kaal, The Systemic Risk of Private Funds after the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2470008
Andreas et al. - 2025 - Universal Digital Law Codex (UDLC).pdf
Furrer Andreas, Wulf A. Kaal, Stephan D. Meyer, Universal Digital Law Codex (UDLC) (2025). SSRN: https://ssrn.com/abstract=5886342