Before I get to the boring legal point, let me tell you a story from ancient times.
It is 2014.
Back then, in June, I co-founded one of the first (if not the first) permissioned blockchain companies with two others. (Yes, it was basically the first. Here’s the corresponding WSJ post by Mike Casey about us a year later.) There were three co-founders: Iraq war hero and legal hacker Casey Kuhlman, a brilliant quantum mathematician and LLL smart contract coder from the University of Guelph named Dr. Tyler Jackson, who at that time went by the considerably blander nom de guerre of Dennis McKinnon, and yours truly.
The project had its genesis in a competition, a bounty to be specific, announced shortly after the Bitcoin 2014 conference in Amsterdam by Bitcoiner and Hoppean anarchist Olivier Janssens. At or around the same time, Brock Pierce, then of Mighty Ducks fame and now of course known for his work with industry leading firm Blockchain Capital, had been elected to the Bitcoin Foundation’s Board of Directors. This was viewed in some circles as a controversial move; Pierce had been mixed up with some bad folks in Hollywood as a younger man, and opponents of his candidacy pointed to those associations from his youth as reasons to oppose his involvement with Bitcoin.
I have no dog in that fight. For the purposes of this story, though, what you should know is that Janssens, an opponent of Pierce’s, did. In fact, he was so incensed with Brock’s election that he announced a $100,000 bounty to replace the Bitcoin Foundation with computer code. Casey, Tyler and I quickly assembled a team to design, code, and publish a white paper explaining what, as far as we were aware, was the first Ethereum DAO, which we called Eris, which would allow users to carry out the functions of nonprofit organization and crowdfunding on a new, not-yet-live platform called Ethereum, specifically on proof-of-concept version 3 of that software.
Janssens, unimpressed with our use of a new blockchain platform that wasn’t called Bitcoin, awarded a $50,000 (not $100,000) grand prize to then-Bitcoin Core dev Mike Hearn for making a slide deck. (Hearn, famously, ragequit Bitcoin two years later during the 2016 bear market.) Janssens, graciously, also granted our team a second prize of $10,000 for our trouble.
That prototype later became the first permissioned blockchain client, and wound up doing things like automating the first commercial paper app for the R3 banking consortium and the first bond prototype deployed by Deutsche Bank.
Put another way: we set out to merge the crypto-verse with the real world. We failed, and to be frank most other experiments along these lines in the intervening decade have also, largely, failed.
While we were fairly unsuccessful at selling software profitably, our little ten-man shop was very successful at convincing banks that our prototypes worked, and for a couple of years competed, often successfully, with companies who cribbed our notes, got us on the phone pretending they wanted to invest, and then raised gajillions of dollars using their tradfi old person credentials to try to steal our thunder, like Blythe Masters’ Digital Asset Holdings and the R3 consortium. They were unoriginal, and trying to copy us was a bad idea, because we were way too early.
I tell this story to you now because I see it being relitigated in two spheres: first, the DAO sphere, where experiments with new types of organization frequently confuse the software for the organization. Second, in the so-called RWA, or “real world asset” space, where I see new entrepreneurs eager to follow-up crypto’s spectacular victory in the form of an ETF approval by building more bridges between our industry and traditional finance.
We learned some lessons in the past which you must re-learn, hopefully the easy way rather than the hard way. And one of those lessons is…
Merging RWAs and blockchains requires legal engineering
If you read our Eris white paper, we wrote – 10 years ago – that
“one of our overarching design goals [was] to continue to design and build DAOs in such a way that they abide in full compliance with legal and regulatory obligations. We set out below the types of functions we have incorporated in Eris version 0.1; we have built it to be coupled with a real-world legal entity, ideally a non-profit, so that such organisations can benefit from the significant efficiencies which blockchain and cryptographic technologies enable while still complying with the legal formalities and necessities of the jurisdictions in which they operate and any related enforcement mechanisms such as court orders.”
Remember when we’re writing this – 2014. This is before Ethereum-the-coin and DeFi even existed.
Post-ETF, I think the time of the on-chain RWA is likely now at hand. Some bright young thing is going to figure it out. Many will not. I have seen and continue to see many projects calling themselves “DAOs” which ignore the legal structuring part of the puzzle, print a token and sort of just hope that everything will work itself out in the end. Among these I count the first big DAO, the 2016 DAO, the one everyone calls “the DAO,” which came out two years after our DAO but which had completely fucked up legal plumbing which would have doomed the thing even without the reentrancy bug which put it out of its misery first.
Algorithmic stablecoins like Basis and its clone Luna were other projects which didn’t get the law right. I read their white papers and saw little more than cargo-cult versions of legal ideas demonstrating that the authors’ understanding of basic financial law and economics was roughly on par of that of a business studies freshman at a bottom-quintile university.
A lot of these twentysomething project founders hail from places like Stanford, Princeton, Google, and Jane Street but are dumb as a bag of hammers when it comes to, y’know, real life – see how Basis and Luna, in particular, dealt with “bonds,” “shares,” the Fed, taxation, and promises of “predictable rewards in all economic conditions,” etc. In due course, these projects, predictably, failed. Basis failed to launch and blew up in the hangar; when Luna blew up, it nearly brought our entire industry down with it.
As we start another crypto boom, I expect to see, and am seeing, many developers build and deploy incomplete new asset protocols or half-baked DAOs that are missing very basic things on the legal side. The hope is that the bull market will fix whatever their code hasn’t addressed. Take it from me: a bull market will not fix your incomplete project, it will just increase the magnitude of the consequences of doing things incorrectly. See: Do Kwon.
You can avoid making these mistakes. The lesson, of course, is that when you want to build something for someone other than a shitcoin degen (of which I consider myself one, at certain times of day) you have to do a lot more up-front design work and take into account the “real world” part of “RWA,” leaving nothing out.
To blockchain devs exploring the RWA space, my advice is this: remember that an RWA on a blockchain is a permissioned system on an unpermissioned system, a permissioned smart contract on an unpermissioned chain. The asset must have a rulebook all its own which is separate and distinct from the chain on which the asset lives.
That rulebook is, invariably, a legal rulebook. The smart contract must be responsive to court orders, and, as such, will almost certainly require an administrative override / “master key” which can rewrite the ownership of the asset or any aspect of its behavior on demand (while of course not deleting the intervening state changes, as this is impossible). Complying with the legal formalities including the override is the sine qua non for an application to be accepted by the marketplace.
As you’re building these things, make sure you have a lawyer on hand – in-house or external – who understands the asset class you’re working with very well, knows the rulebook for that asset class cold, and do not leave them in a legal function but rather move them to a business function for at least 50% level-of-effort: in other words, integrate that lawyer on your dev team very early on to ensure your specification matches the real-world requirements.
Do that, and you’re going to have a much better chance of building an application that revolutionizes the way in which those assets are owned and traded. Happy coding!
(Twitter thumbnail below since they killed link previews.)
