Regulation-Proof, Self-Funding DACs
In the last year, we have seen a myriad of new coins, projects and businesses use countless different methods to launch their product and raise capital. In the beginning, coins were all mined, and this gave no advantage to the person or organisation launching it. In no time, we saw the idea of pre-mining a coin before launch, which also came with much criticism and endless debates about “fairness” and what the sweet spot was between: funding the developers and pure money grab. When Proof of Stake came along, we saw a more IPO style distribution that allowed the devs to receive funds in exchange for issuing out shares of the new coin/project/DAC. We saw the AGS “auction a day for 200 days” donation type of crowdfunding. We also saw ethereum’s pre-sale model where you were simply purchasing the fuel required to run a decentralized application whenever it was set to launch. Each method is an attempt at maximizing the funds received while issuing out shares as fairly as possible all while avoiding potential problems down the line (mainly regulatory).
But this is new territory. The crypto world is operating in a grey zone as far as regulations go. Regulatory uncertainty is the name of the game. To make things more complicated still, most of these projects are instantly global. As if dealing with your own local, provincial/state and federal government wasn’t enough, you now have to deal with the governments of each individual internet user (as exemplified by the NYDFS’s proposed BitLicense). Entrepreneurs and developers must navigate the still uncertain regulations of local and foreign governments. This is a huge barrier to entry to new projects. The fees associated with legal counsel and regulatory compliance can be mind boggling. And once paid for still do not guarantee anything! Regulations can change on a whim.A new approach
Delegated Proof Of Stake (DPOS), the consensus mechanism behind BitSharesX, allows for a new approach. One that is much safer, cheaper, simpler and way more democratic than anything that came before it. Regulation-Proof, Self-Funding, Decentralized, Autonomous Companies (RPSFDACs just flows off the tongue doesn’t it?). Required is only a slight tweak to the current BitSharesX software. That tweak, which has already been implemented in the BitShares Toolkit by none other than Daniel Larimer, is to allow the 101 Delegates to set arbitrary pay rates. Delegates in BitSharesX make their income from transaction fees only. This new version, which will be spearheaded and tested by BitShares Music, will allow delegates to make more than just the transaction fees, they will be able to do additional rounds of funding, as long as the shareholders agree and vote for it. In other words, as many companies already do in the real world, delegates will be able to raise capital to fuel growth by diluting shareholder percentages while growing the value of each individual share.The walkthrough: Launching BitShares Music
The BitShares Music blockchain is to be launched with almost identical code as BItSharesX with the exception of the delegate’s ability to set a pay that is higher than the transaction fees. Any other modifications to the blockchain (that will turn it into a music specific DAC) can be done after it has launched.
The shares of the music DAC (called Notes) will be issued out with 45% going to BitShares PTS holders, 45% going to BitShares AGS holders and 10% going to the BitShares Music Foundation. The Notes in control of the foundation are to be used to fund development of the core of the BitShares Music ecosystem. It will handle all things that are necessary but unpopular or considered boring. Note holders then vote for delegates that will, through Note dilution, fund high profile additional work that the community understands and demands. Whatever they thinks would grow the value of the BitShares Music network faster than the salaries would dilute it. Whenever either the Foundation or the delegates have an expense that cannot be paid for in Notes, they simply do like everyone else, and sell from one of the popular exchanges to claim their bitcoin or fiat.The problems solved
One of the best reasons, from an entrepreneurial standpoint, to do it this way are regulations. With this method, there is no crowdfunding. No one is asking money in exchange for something in the future. The BitShares Music Foundation is simply taking the toolkit and launching a DAC. People download the client for free and can start using it immediately. If you happen to be a PTS or AGS holder, you can import your private keys, as you probably did with BitSharesX, to claim your extra Notes. All in all, the BitShares Music Foundation merely launched a piece of P2P software. It never asked anyone for money. If ever it needs to raise capital, it can inflate the note supply and sell some notes on an exchange. Same with the delegates.
This method of skipping the pre-sale/fundraiser avoids expensive attorney fees, setting up of a trust fund, setting up a non-profit corporation, etc. It saves an immense amount of time and money which can both be placed where it counts: getting the actual product out, rather than burning it all navigating the dangerous waters of global regulations.
Aside from the regulatory benefits of not asking for money first and promising to deliver something later is that it turns this into a “pay as you go” or “pay as you prove yourself” model. BitShares Music (or anyone else using this model) is not raising 10 million dollars up front, storing it (risk of theft here!), and then trying to spend the money accordingly, all while hoping it is enough to get the product to market. The Foundation simply launches the blockchain and sells off Notes whenever there is an expense it needs to cover. If it (or the delegates) must inflate to do so, as long as the Note holders/voters agree to it, it will be done.
Another problem solved by the dilution model of DPOS is that the founders are no longer required to know the future, an impossible feat in itself, even harder in the Bitcoin world! If the percentage of shares kept by the founders ended up being too low to cover all costs, the project could lose steam and die off. If the percentage at launch were too high, the result could be a non-decentralized blockchain which could initially mean less supporters/investors to the project. It could also mean there would be a central point of failure to that project. In all cases, there would be a big risk of forking the chain.
Not only is the BitShares Music Foundation not sitting on a large sum of money collected in advance from the Bitcoin community, but in the event of an unforeseen cost, it can (with the agreement of the Noteholders) set up another round of funding to cover it.
With this model, power gradually gets more and more decentralized. Every time dilution occurs is because there is an expense to be paid that would increase the value of the network down the line. When that expense is paid for in Notes, it means Notes are distributed from the Foundation or the Delegates, to the new recipient. When an expense is paid for in any other form (USD, Bitcoin, Euro) those newly “minted” notes are sold on an exchange to whoever is on the bid side of the trade.
In both cases, everyone, including anyone considered a whale sees their overall percentage of ownership of the DAC go down slightly. Everyone’s piece of the pie shrinks slightly to make room for the new Noteholder that is to bring value to that pie through whatever work he was just paid to do. Percentage goes down, but the value of each share should go up. In every case, the noteholder should end up benefiting from this new better, faster, stronger network.
At first, as with all start ups, power will be in the hands of the entrepreneurs building the business. It is to be expected that the BitShares Music Foundation have a big role in what is being developed at first. But the more expenses are paid, the more Notes are spread around. Remember, with BitShares, sending shares also means sending voting power.
As the DAC matures, dilution will be less and less necessary, until it becomes a thing of the past. Noteholders will simply stop voting for the delegates that have an inflationary policy and maybe even reverse the trend and vote for delegates that will burn 90% of their pay from transaction fees. The point is the Noteholders will decide which direction they want the DAC to go.
And finally a bonus benefit of this strategy is that no one except the already experienced PTS and AGS holders will need to import their private keys into the client. In the pre-sale models where people send funds in advance, there has to be some way to identify and give the correct people their respective shares. This can be a huge hassle and barrier to adoption, especially for those that kept their funds in an exchange during snapshots.
So to sum up the benefits of this new strategy:
Avoids costs of regulations and future risk associated with having a multiple jurisdiction, grey zone “IPO”
Pay as you go. No need to get all funds up front
No need to know the future!
No central point of failure (no big pool of money managed by a single entity)
Power rests in the hands of the shareholders
Gradual and steady decentralization of power
New Notes are used to grow the value of the chain faster than dilution can shrink it
Dilution stops once it is no longer needed. The process can even be reversed
No need to teach new adopters how to import private keysDACs are getting even easier to launch
All in all, I think the BitShares core team really hit the nail on the head with this one. Although they will tell you that corporations issuing new stock and diluting the total amount of shares to pay for expenses is nothing new, they have taken a proven financial concept and tied it into the new DAC ecosystem. This is yet again lowering the barrier to entry and opening up the gates to the free market even wider. Regulation-proof, self-funding, decentralized, autonomous companies are going to be nearly unstoppable. A bright future is upon us.
On this same Topic, Bytemaster just posted this today:https://bitsharestalk.org/index.php?topic=9452.0;topicseen