DAO governance discussion

[KeeJef]

There has been quite a few comments in #36 raising the possibility of governing part or all of the Session token/SENT through a DAO, I'm starting this issue to track that discussion.

[M1ingithub]

Well guess I'll open:

https://imgur.com/a/9F7KW1V
This is OPTF CEO giving a response to DAO. I argue that he is ultimately wrong in his analysis that DAO would be classified as security under Australian law.

CORPORATIONS ACT 2001
All references are to Corporations Act 2001
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/index.html

Securities are defined SECT 92
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s92.html

Voting interests and voting shares are defined under SECT 9
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#voting_interest

Managed investment scheme is defined under SECT 9
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#managed_investment_scheme

Disclosing entities are defined under 111AC
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s111ac.html

ED securities are defined under 111AD
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s111ad.html

ACNC ACT
All references are to ACNC act
http://classic.austlii.edu.au/au/legis/cth/consol_act/acanca2012523/

Tax concessions are outlined under SECT 20.5(2)
http://classic.austlii.edu.au/au/legis/cth/consol_act/acanca2012523/s20.5.html

Entitlement for registration under ACNC act is defined under SECT 25.5
http://classic.austlii.edu.au/au/legis/cth/consol_act/acanca2012523/s25.5.html
(Relevant subtypes column 2, rows 2 and 7)

Governance standards are defined under SECT 45.10
http://classic.austlii.edu.au/au/legis/cth/consol_act/acanca2012523/s45.10.html

CHARITIES ACT 2013
All references are to charities act
http://classic.austlii.edu.au//au/legis/cth/num_act/ca2013104/

Charity is defined under SECT 5
http://classic.austlii.edu.au//au/legis/cth/num_act/ca2013104/s5.html

Public benefit is defined under SECT 6
http://classic.austlii.edu.au//au/legis/cth/num_act/ca2013104/s6.html

Charitable purposes are defined under SECT 12
http://classic.austlii.edu.au//au/legis/cth/num_act/ca2013104/s12.html

PROBLEMS

• Interests of de facto shareholders/investors should be looked after in systematic manner.
  1. Mechanisms to reliably inform the investors should be in place.
  2. Mechanisms to enforce responsibility at organization level should be in place.
• Deviations from causes towards public benefit (column 2 of SECT25.5 of ACNC act) and charitable purposes (Charities act SECT12) result in losing tax exempt status.
• DAO arrangements to enforce investor interests by voting on membership or board composition could enforce profit motive onto the charity (OPTF).
• DAO voting rights enforcing investor interests and profit motive could constitute a security under corporations act SECT92.
• If DAO voting rights enforcing investors interests and profit motive constitute a security under SECT92, the arrangement could be classified as managed investment scheme (corporations act SECT9)
• If the arrangement would be classified as managed investment scheme, the DAO securities representing interests in the scheme could be classified as ED securities and thus OPTF would be classified as disclosing entity which can’t be a tax exempt and would have to follow different set of regulations. (corporations act SECT 111AC and AD)

PROBLEM SOLVING
Easy one first: there are no laws or regulations to prevent OPTF from providing the investors with accurate information, period. The choice to operate in darkness and without responsibility has been made: no accurate information to investors, attempts by few investors to inform others are squashed, and the CEO is habitually lying about current events as well as financials of OPTF. This has an effect on price: investors calculate information risk into their equation and deem it too risky to invest. Investors also see the blatant lies and make the decision to not invest in untrustworthy entity.
Solutions could include:

• Integrated off-chain and on-chain governance based on existing transparent supply chain models such as: https://www.researchgate.net/publication/356283324_Integrating_On-chain_and_Off-chain_Governance_for_Supply_Chain_Transparency_and_Integrity This has drawbacks in investing resources into development as well as making all processes heavier. Although a very promising model and surely adaptable to the circumstances, this is not viable solution for a 4M$ market cap coin.
• Lightweight solution would be DAO vote on investor oversight committee. Elected committee members would be appointed as non-voting members of OPTF and would receive privileges to OPTF records so these could be verified and investors could be informed reliably.
• A third solution would be hiring a professional auditor by DAO vote. Investors could pool their money into a smart contract and take a vote to hire a specific auditor which would be automatically approved by OPTF. Another way to finance this model could be from the reward pool directly into the smart contract.

The second one is much tougher. As outlined above, enforcing a profit motive onto a “charity”, will introduce multitude of legal problems with a risk of losing the tax exempt status. In order for the DAO to not be classified as managed investment scheme, it must not have these three qualities (paraphrasing the corporations act SECT9):

1. Investors contribute money or money’s worth as consideration to acquire rights (interests) to benefits that are produced by the scheme;
2. All contributions from investors are pooled or used for a common purpose to further produce benefits. Benefits may be financial or consist of rights or interests in property; and
3. The members of the scheme (investors) are not active in controlling the scheme’s day-to-day operations.

The problem is in potential loss of tax exempt status and further regulation on OPTF activities, but if you look at the stated lawful charitable purposes listed by OPTF: furthering education and human rights, anyone can see that these are not furthered beyond perhaps the surface level. When you strip away privacy features from the coin, the arguments for stated goals and purposes become weaker.

However

Number 2 is potentially the weak link that could constitute a loophole in the law. “All contributions from investors are pooled or used for a common purpose to further produce benefits. Benefits may be financial or consist of rights or interests in property” All contributions are not pooled, they are arguably not used to produce further benefits but to uphold and develop infrastructure in accordance with the charity’s stated goals and purposes and if there is motive to uphold the price, there is proven reason based on the whitepaper to uphold certain price level in order for the infrastructure to stay intact.

Thus, solutions could include:

• DAO vote on membership of OPTF as voting members.
• DAO to propose an address for governance rewards and a vote to release the funds to one of the proposed addresses.

Both of these would arguably introduce responsibility for OPTF towards investors.

[ghost]

To be able to go fast and do not waste time on sc dev for the DAO;
snapshot.org could be used to vote on importants decisions of the DAO. so technically it costs nothing to start a DAO.

[M1ingithub]

The proposal is about governance so we should consider the current state of governance which is through this document:
https://imgur.com/a/QiaDs8i

It’s the complete LAG Foundation constitution from 21.02.2018 and unless this constitution has been amended, it is still the current governing document of OPTF.

I would like to highlight this part:

Part 2 - Charitable purposes and powers
6. Objects and Purposes
The Company is established to be a charity for purposes beneficial to the community
generally and for the advancement of education. It will achieve these purposes through the
following activities:
(a) facilitating the development of an open source, highly secure, decentralised data
transmission network that allows individuals, business and government to freely
transact and communicate without the threat of malicious third party interference;
(b) ensuring the continuing development of the secure network by funding independent
development projects;
(c) providing education and support to developers seeking to build apps utilising the
secure network;
(d) ensuring the open source network is developed as a genuinely decentralised system
absent any external control or influence to ensure the independence, security and
longevity of the network;
(e) raising moneys to fund the activities and charitable objectives of the Foundation,
including through the offering of the Loki cryptocurrency; and
® all other such activities as are ancillary or incidental to the above purposes.

This is perhaps the most important part of the document. Without commenting anything on if OPTF activities are currently or historically been in line with these objects and purposes which are to guarantee the tax exempt status, only in regards to DAO, only the (d) is meaningful here.

There have been good reasons in the past to keep OPTF absent of possibility of external control or influence, but do these conditions still apply? Are the powers behind beldex and their 200M market cap a threat to OXEN in such way that their weight could sybil the project through DAO? If so, there are multitude of problems that should be taken into consideration when considering how this document should be amended and how DAO should be implemented. (d) is something that could be strengthened with right setup or weakened with a wrong one.

Easy logic and a good amount of early scientific proof of fairly novel invention exist to prove with a degree of certainty that DAO would add up to fundamental value of OXEN, establish a systemic strength and brand value. It’s assumable that this would have positive effect on price. So despite difficulties, there exists a motivation to govern OPTF through DAO in a way that would balance

• Risks regarding malicious outside influence
• Oxen holder interests
• Legal requirements
• Interests of current staff and members

Here’s a proposal for a model which would achieve these ends.

1. Devs and current OPTF members are the guarantors of project against sybil.
2. Devs hold weight.
3. They select others who hold weight and selections are open so that everyone can see who was selected by whom.
4. Together these weight holders hold 51% of the DAO votes.
5. All weight holders are represented at OPTF website by their own names, their powers are limited by constitution and their votes are public.
6. There are time intervals at which new selections take place so that all who have been selected on the last round can select one other.

Idea is that 51% of the power is with people who have expertise, non-malicious intent, their name is staked, and that this set of people can make decisions which are beneficial to the goals of the network. This way there would be, as the 6(d) requires, truly decentralized network absent of outside control.
If the DAO includes decision making mechanism which would have direct power on actions of OPTF, this set of DAO voters can be made to be bound by OPTF constitution to vote against unlawful or un-OPTF-constitutional decisions, thus among other things, guaranteeing the non-profit status. Also, if there is any danger that an entity with malicious intent attempts to use the DAO, this set of voters can collude to stop it. There can be rules or conditions which must apply in order to stay weight holder. There can be rules and mechanisms to enforce impartial selections such as all selections having to include a public reasoning how the selectee is optimal choice for a weight holder.

Even if there is no threat of sybil or malicious intent, set of expert decisionmakers who are bound to be regulated according to laws and constitution, can be used to guarantee non-profit status and give expert guidance to the project as well as guarantee interests of those who have invested most time and effort to the project.

49% of the DAO votes are distributed according to OXEN holdings. These votes are to represent the interests of the investors, but which are not even at 100% under one entity, enough to form a sybil against OPTF decision making.

I’m intentionally leaving some parts blank and if you are vigilant, you can see that there are lots of places in this model where things can be tweaked or changed around. So is with what should be done with DAO votes. These can be used for:

• Voting on resources
• Voting on OPTF membership
• Voting on decisions directly

The way in which OPTF constitution is amended is defined under clause 9

9. Amending the constitution
   9.1 Subject to clause 9.2, the members may amend this constitution by passing a Special
   Resolution.
   9.2 The members must not pass a Special Resolution that amends this constitution if passing it
   causes the Company to no longer be a charity.

General meeting is defined under 20, 21 and 70

20. Annual General Meeting
    20.1 A General Meeting, called the annual General Meeting, must be held:
    (a) within 18 months after registration of the Company; and
    (b) after the first annual General Meeting, at least once in every calendar year.

21.5 Notice of a General Meeting must include:

(a) the place, date and time for the meeting (and if the meeting is to be held in two or
more places, the technology that will be used to facilitate this);

(b) the general nature of the meeting's business;

(c) if applicable, that a Special Resolution is to be proposed and the words of the
proposed resolution;

(d) a statement that members have the right to appoint proxies and that, if a member
appoints a proxy:

General Meeting means a meeting of members and includes the annual General Meeting,
under clause 20.1;

Special Resolution means a resolution:
(a) of which notice has been given under clause 21.5(c); and

(b) that has been passed by at least 75% of the votes cast by members present and
entitled to vote on the resolution;

It would take 75% of these people to vote for DAO in general meeting:
https://imgur.com/a/xrJlOeS

Chris McCabe
Lucinda Lovegrove
Simon Harman
Jason Rhinelander
Alexander Linton
Dr Jason David Potts
Josh Jessop-Smith
Greg Valles
Robert Morris
Glen Lovsin
Suelette Dreyfus
Chris Pavlesic
Michael Bacina
Sam de Silva
Sam Williams