The Back of the Envelope (a blog)

A brief note on the Block’s article “Addressing Preston Byrne’s MakerDAO criticisms”

I was made aware earlier today of a post in The Block, which has been paywalled, by Teo Leibowitz titled “Addressing Preston Byrne’s MakerDAO criticisms.” This piece focused on a number of points I made about MakerDAO during a podcast recording.

I was a little surprised to learn the piece was being published, as I was in The Block’s offices yesterday afternoon recording the Block’s inaugural crypto-legal podcast with my good friend Stephen Palley. I was not aware that I was being interviewed by anyone other than Stephen Palley. Neither was Palley. I certainly was not being interviewed by Leibowitz, who was present in the room, and with whom I exchanged a handshake and perhaps five words over the course of two hours.

To wit, Mr. Liebowitz critiqued remarks of mine that were not yet on the record and in so doing, was front-running the podcast.

This is not Palley’s fault; he is one of my closest and most trusted professional friends and learned about Leibowitz’s article only after it was published, as I did.

To say that I am annoyed with Leibowitz and The Block is an overstatement. It takes a lot to do that. I am, however, disappointed.

Leibowitz was sat about twelve feet away from me at about 7 O’Clock. He was listening intently to our conversation, and as will be evident from the podcast when it is released, he was even invited to join that conversation. He did not do so. Instead, he published a piece in the Block, behind a paywall, in which the perhaps 23-year-old Leibowitz “takes exception to [Preston Byrne’s] empirical misunderstandings of the MakerDAO mechanics,” primarily by reference to two two-year-old, and therefore a little dated, blog posts of mine written at the end of 2017 and in January 2018, tracing the key points I alluded to during the podcast.

For context, I live about 100 miles from New York City, in the countryside. I drove myself to New Haven, took a two hour train ride into the city, schlepped downtown in a cab, did the podcast free of charge, and then repeated the journey back home to assist with making content for an early-stage startup I like and to support my friend who produces it for them.

Adding insult to injury, Leibowitz’s rebuttal is fairly facile as well, and looks like it has been taken from the talking points of the stablecoin set, with whom I am advised he is closely acquainted, even friendly.

I think the majority of stablecoin people are dilettantes with barely enough brainpower among them to ignite a 20-watt bulb, so I don’t particularly care to repeat Leibowitz’s analysis in full or rehash my own, save to say that it is my belief, and the belief of every professional person I know and respect, that MakerDAO is a shitcoin and Dai is a trash fire. The language scheme promoters use to describe it is confusing (e.g. “stability fee” instead of “withdrawal penalty”), the promises they make are overblown, the representations they have made for the scheme have changed multiple times over the past 20-odd months to match the observed behavior of the scheme, and the behavior of the USD peg was and remains highly unnatural, with little evidence of an organic market and considerable evidence of artificial trading activity.

The second-layer solutions being built on top of it are amateurish, even reckless, and the investors funding these solutions and companies seeking to rely on them are as foolish as anyone who believes that repackaged Ether is safer than AAA-rated debt. Which is what these people actually believe.

Addressing the argument that Dai’s stability is supported by legitimate market making activity, Leibowitz’s rebuttal conveniently leaves out the fact that it is difficult to believe, based on the available data, that early “market making” bots were doing anything but wash trading. He writes:

Preston seems to take issue with market makers, who provide liquidity while capturing spreads. Market makers operate at volume in the Dai market. That this is the case is a) a positive for the MakerDAO ecosystem b) a signal of faith in the MakerDAO mechanisms.

In my 35 years of life the practice of market making has not escaped my notice. I do not take issue with market makers or market making. I take issue with the fact, as I explained on the podcast, that in January 2018, on Dai’s largest market, with daily volumes of $2.6 million, the loss of one bot eliminated all but $300 of volume, being 99.9998846% of the volume on that market. I especially take issue with the fact that Rune Christensen explained this away as “a bot going down” and gullible and inexperienced young grasshoppers such as Leibowitz accepted the explanation on faith without bothering to actually do any follow up. 20 months later, I’m still waiting for someone, anyone, to do the follow up.


I am advised by well-placed sources that the Block is willing to offer an apology in long-form. I do not require an apology. Nor do I want one. I am Catholic, and we prefer to exact penance with forgiveness.

In any case. The podcast will be coming out. Palley is a solid dude and my very close friend, and I will be going back on his podcast in the future, as will other interesting people in the crypto-legal space. So definitely give his content a listen. And keep reading the Block, too. Their content is good, their people, including this chap Leibowitz, are talented if unorthodox and they take a more critical view of the space than most. They raise the bar in that respect.

But without getting into too much detail about recent things they’ve said and done, they need to start behaving a little more professionally. I look forward to continuing to contribute on occasion to Palley and Nelson’s Crypto Caselaw Weekly and provide the Block with hard hitting and dynamic, yet tender and somehow ineffably heartwarming comment of a legal nature.

But to be clear, and to conclude, the article in the Block that has my name in the title is the other half of a conversation in which the author was an eavesdropper, had an opportunity to participate, and did not.

Coda – 18 hours later

Let’s be clear about what happened here. I gave an interview and most of my day over to the Block so I could help my friend, Palley, who writes a weekly legal column with them, generate some interesting legal content for his new podcast.

One of the Block’s reporters, who has 90% of his crypto portfolio in Ethereum, with the knowledge and consent of his editor, eavesdropped on that interview and then surreptitiously wrote a hit piece – on the Block’s own podcast guest – seeking to discredit my critique of a thing called “MakerDAO,” which is the closest thing Ethereum has to a killer app. It was released immediately, with my name in the headline, behind a paywall, ahead of the release of that podcast. In the podcast, which will no longer be released, I am highly critical of that “killer app.”

I forgave them for this.

Leibowitz now claims I’m making it all up.

Screen Shot 2019-09-13 at 3.03.15 PM.png


Sometimes you give people the benefit of the doubt and they disappoint you. In this instance, it didn’t take long: after receiving written apologies from the Block’s two editors Mike Dudas and Larry Cermak, and an (entirely unnecessary) apology from my friend Palley who was also deceived, the staffer went right back on Twitter and started firing pot shots to defend himself, rather than doing what he should have done, which is apologize.

It wasn’t Leibowitz’s interview, it was Palley’s. If Leibowitz wanted to discuss anything I was saying, one would hope he’d have enough self-confidence to discuss it face to face, as indeed he was invited to do. One should also hope that he would have the decency and courage to apologize directly instead of leaning on his two editors, one of whom is based in the Czech Republic and was asleep at all relevant times, to do so for him via Twitter DM.

Pity he didn’t.

Not Legal Advice, 9/9/19

This is Not Legal Advice.

Not Legal Advice is a new, weekly newsletter-thing I will be publishing every Monday where I discuss three (3) items of interest from the prior week in crypto or crypto-adjacent technology law.

This “newsletter” will be in public, on the blog. I will not do one by e-mail. You get enough e-mail, and I don’t want your e-mail address. So check back here manually every Monday. Or see the RSS link at the bottom of my homepage. Or don’t. Do whatever makes you happy. It’s your life.

I accidentally stabbed myself over the weekend whilst trying to pry apart frozen cheeseburgers with a very sharp knife. This led to a quick ER trip, a tetanus shot, and a Scooby-Doo themed band-aid. As a result, my left hand does not work, so this post will be short.

Down to business. This week:

  1. Binance Gets Serious
  2. The Marshall Islands: All Aboard the Lulz Boat
  3. ConsenSys Rediscovers LLCs

1. Binance Gets Serious

This early profile of Binance’s CEO in Bloomberg caught my eye when it was first published:

Zhao keeps the locations of Binance’s offices and servers secret — making it tough to determine which country has jurisdiction over the company — and he instructs employees to keep quiet about their affiliation with the exchange on social media. He said he never stays in one place for too long, living out of short-term rentals and hotels in Singapore, Taiwan and Hong Kong (where he prefers the Mandarin Oriental or the Ritz-Carlton).

Yikes. This is no way to run a business. Not that it’s slowed Binance down: despite a regulatory rebuke from Japan and being forced to withdraw from the U.S. markets in June, the overseas exchange has still grown into one of the largest exchanges on the planet, if not the largest, and last week announced the creation of a dollar-backed stablecoin in association with Paxos that obtained the blessing of NYDFS. Binance is also planning to return to U.S. markets with its own exchange in due course. 

If the Paxos scheme works, it solves a potentially very big problem for Binance. Overseas exchanges with checkered regulatory histories can have trouble getting solid access to U.S. and European banks. (Even exchanges with relatively good reputations for KYC and the like, such as Coinbase, have recently lost major banking relationships.)

Exchanges that can’t get access to USD or are relegated to the margins of the financial system have attempted numerous workarounds. These include the so-called “stablecoins.” The most prominent of these is Tether, which a number of overseas exchanges, including Binance, use to provide dollar liquidity to their markets.

I query how long Tether can last in this role, seeing as it is under investigation by the Attorney General of New York, and allegedly implicated in shadowy banking (not “shadow banking”) arrangements such as those allegedly conducted by Crypto Capital Corp in relation to which several federal indictments have come down. 

Stablecoins are, legally speaking, a nightmare. The crypto-collateralized or “algorithmic” versions of these products, when not outright Ponzi schemes, are usually structurally very flawed and doomed to fail for one reason or another. Among those that are redeemable at par for a unit of currency held in an insolvency-remote account, such as Paxos and Gemini’s (and now, apparently, Binance’s) offerings, there are some hairy aspects with current implementations around the travel rule and money transmission – particularly if the system is open and, e.g., runs on an ERC-20 that anyone can use, whether they’re KYC’d with you or not. If you want one that runs like a cryptocurrency, you’re going to create liability.

Nor is this a a problem unique to the stablecoins; it’s a regulatory failing common to the entire industry in multiple different contexts (it’s currently possible to withdraw from a Coinbase wallet direct-to-exchange, for example, without Coinbase or the exchange communicating with each other.) I can’t imagine FinCEN hasn’t noticed this, although the U.S. regulatory apparatus has been slow to make any major moves in this area. It’s still early in the stablecoin space.

Whether Binance’s new coin does what Binance needs it to do in terms of granting it access to U.S. dollar markets remains to be seen. This is a development to watch in any case.

2. The Marshall Islands: All Aboard the Lulz Boat

The “Minister In-Assistance to the President and Environment Minister” of the Marshall Islands, population 53,127, writes in CoinDesk:

Blockchain has given us the opportunity to finally acquire monetary independence in a way that reflects Marshallese values. We intend to grasp that opportunity, innovatively and responsibly.

First, the word “blockchain” when used in the singular always requires an article. “The blockchain crossed the street.” “A blockchain went to the mall.” Definite or indefinite, I don’t care.

Second, “Grasping that opportunity” means, at least in terms of what has already been made public about this scheme, launching a $30 million ICO. Flashing back to 2018, when this plan was first announced:

The government reportedly intends to use its ICO proceeds to bolster its coffers ahead of the termination of U.S. reparations payments, which amount to $30 million a year, meant to compensate islanders for the United States using site as a nuclear weapons testing ground in the 1940s and 1950s.

According to CTech, 70 percent of the funds raised will be used to offset gaps in the budget expected post-reparations. Ten percent will be devoted to sustainability projects related to climate change and green energy, and the remainder of the proceeds will be distributed to Marshallese citizens.

And who is orchestrating this scheme?

The bold plan is being spearheaded by Israeli fintech company Neema. It is the brainchild of CEO Barak Ben-Ezer who sought out sovereign nations that do not have their own currency to adopt the idea. The Marshall Islands, despite being a republic since 1982, uses the US dollar as its legal tender.

And what does Neema get from the arrangement, pray tell? Per The Conversation:

The Israeli company Neema will provide the technology and support to launch an initial coin offering (ICO) that is expected to raise $30 million, half of which Neema will keep.

Unless something major has changed from the last time this scheme crossed our desk, that means:

  • The Marshall Islands is launching its own cryptocurrency, the “SOV.”
  • The “SOV” will raise $30 million for government coffers.
  • $15 million of that will be paid to Neema, at least based on third party reviews of the scheme’s terms.
  • Note: charging $15 million for a glorified Dogecoin clone is outrageous.
  • The $15 million left-over after paying Neema will be put at the disposal of the Republic of the Marshall Islands.
  • 70% of that $15 million, or $10.5 million, will go directly into Marshallese government coffers.
  • 10%, or $1.5 million, will be allocated to sustainable energy projects.
  • 20%, or $3 million, will be distributed as a one-time welfare payment to the Marshallese people. That’s $56.46 per person.
  • The SOVs in circulation will be backed by $0 in a country that uses the U.S. dollar as legal tender.

Seems legit! I wonder what SOVs will be worth when they hit the exchanges?

Unsurprisingly, the IMF has threatened to cut the islands off if they proceed with the plan. Which the Marshall Islands shouldn’t. This plan should be abandoned and the Marshallese government should go back to the drawing board.

Marshall Islanders: if you’re reading this, you can do better.

3. ConsenSys Rediscovers LLCs

ConsenSys: everyone’s favorite inadvertently hilarious blockchain tech company. Admit it, behind the scenes, we’ve all had a giggle now and then at the stuff it puts out:

This would all be terribly funny if not for the fact that n00bs who haven’t been through the wars lack the experience to parse marketing from reality, the latter of which is that Ethereum breaks anytime anyone uses it in anything resembling production numbers for even a small app using traditional infrastructure. Ethereum is not going to scale to millions or billions of users or, if it does, it will be wholly centralized on AWS through offerings like Infura rather than being a standalone coin.

Unfortunately, unless and until Ethereum dies it’s likely that we will have to continue hearing from ConsenSys as the company has a rumored war chest in the hundreds of millions of dollars (of pre-mined Ether) which it can spend on disseminating pro-Ethereum propaganda from offices around the planet… and beyond:

Ethereum! In space!
Ethereum! In space!

Comedy gold. Nobody lives in space, and Planetary Resources doesn’t have a spaceship, but in “the months ahead” the Consensys Space Agency’s “deep space capabilities” at their secret orbital launch complex in Williamsburg will “help humanity craft new societal rule systems through automated trust.” Because when I’m on the surface of the fucking Moon, my first concern should be how my Cryptokitty- and Augur-backed multi-collateral Dai is doing on a decentralized exchange used by a few dozen bots.

Anyway. On the less-of-a-space-cadet side of CSys’ operations is a company called OpenLaw. OpenLaw is a so-called “spoke” of the “ConsenSys Mesh,” or what normal people would refer to as a “subsidiary” in the “ConsenSys AG Group” (the structure of the group is fairly opaque, so this is my best guess as to which entity is the parent).

OpenLaw is one of a handful of serious early entrants in the merger of blockchain tech and Legal Tech. Blockchains and legal make sense because verifying that things happened at certain times and in a certain order among adverse parties is more important to law practice than it is to most other disciplines.

Law practice is, however, ripe for disruption and there is a burgeoning industry aiming to do it. Early standouts in traditional-law-land include A16Z-funded Atrium and the mobile app DoNotPayLaw (which claims to be a “robot lawyer” while being owned by non-lawyers and not actually being a law firm… yikes). From blockchain-land, we have CSys’ OpenLaw, Peter Hunn’s Clause, which appears to be more or less a direct competitor to OpenLaw, and Monax, which I used to work for, which was initially an enterprise blockchain firm (indeed, it was the first) but now seems aimed more at on legal process management SaaS.

OpenLaw recently announced an offering called the “LAO.” “LAO” is shorthand for “Limited Liability Autonomous Organization. This is a play on the term “Decentralized Autonomous Organization” or “DAO.”

What’s a DAO, I hear you ask? Well, neo-cypherpunks have long wanted to rid themselves of corporations. They think one can achieve this with code and write software to this end. Because decentralization-uber-alles types are, most of the time, unfamiliar with the desirability and consequences of selecting a legally recognized form of incorporation, “DAOs” that do not follow a well-worn organizational form run the risk of having their legal classification chosen for them by a court or a regulator in the event of a dispute, such as an unincorporated association or a partnership.

It makes sense to organize as a corporation and use software to manage that corporation, as many corporations currently do. Letting the software or “decentralization principles” rather than legal reality dictate the corporate form, as many decentralization evangelists would prefer, is to put the cart before the horse.

A “LAO,” we are told, solves this. The issue is that the “LAO” launch announcement is in fact a proposal to incorporate and provide services for a LLC. They are one and the same, as I explain at length in this blog post.

Strangely, however, the LAO announcement did not contain the term “LLC.” I believe the reason for this is that the use of the name “LAO” makes what would otherwise be a fairly ho-hum Delaware LLC incorporation and corporate services business, like LegalZoom or Wolters Kluwer, seem more cutting-edge than it actually is.

tl;dr: the term “LAO” is branding woo-woo. It has no legal meaning. It’s just an “LLC that buys stuff from ConsenSys.” I pray to the One True Roman Catholic God that we are not forced to endure months or years of panel talks and crypto news articles about this fatuous acronym. Indeed, I hope to never hear or see it again as long as I live.

Not a ferret

Until next week!


The LAO, demystified

Today a new form of organisational governance is announced by OpenLaw, a subsidiary of the Brooklyn-based Ethereum fan club and sometimes software development company known as ConsenSys.

OpenLaw calls this allegedly new and improved beastie a “Limited Liability Autonomous Organization,” or “LAO.” 

They tell us:

One of the first substantive experiments with the use of smart contracts to manage and coordinate economic activity was The Decentralized Autonomous Organization (known as The DAO).

In early May 2016, The DAO was launched on Ethereum, animating the thoughts and imagination of developers and technologists around the globe. The DAO aimed to operate as a venture capital fund for the crypto and decentralized space. The lack of a centralized authority reduced costs and in theory provided more control and access to the investors…

…There is a strong argument that if The DAO didn’t collapse for technical or legal reasons the boom of the ICO market would have been tempered if not entirely unnecessary.

That’s not quite right.

The first time this was done was in 2014, where Casey, Tyler and I proposed linking a DAO – properly, just some software that automated organizational governance using a permissioned Ethereum template – to a private organization, specifically a 501(c)(6) non-profit trade association. ConsenSys now re-packages this as if it were their idea.

The 2016 DAO was not, as ConsenSys claims, some noble decentralized experiment on Ethereum that had the potential to save the world and forestall the ICO boom. The absence of any punishment for anyone involved in the DAO fiasco likely encouraged the ICO boom.

For those of you who are new around here, the 2016 DAO was a commercially illiterate trash fire that collapsed and took hundreds of millions of dollars with it. Anyone with half a brain figured out it was doomed before it even launched. I have absolutely nothing good to say about it and neither should anyone else. It seems to me that the only folks who were surprised it collapsed were the Ethereum “luminaries” on its own advisory board.

Moving on.

1. Structure of the LAO

After a lot of rambling about Coase’s Nature of the Firm and how reduction of transaction costs is next to godliness, OpenLaw tells us the following:

Using the tooling provided by OpenLaw, the LAO will be set up as a limited liability entity, organized in Delaware, using curated Smart Contracts to handle mechanics related to voting, funding, and allocation of collected funds. This entity will presumably limit the liability of LAO members and help clarify their relationship to avoid knotty questions related as to whether partnership law applies.

tl;dr – OpenLaw has discovered a Delaware corporation’s back office can be run with software. Carta does this today.

We will leave to one side, for the moment, what this structure’s effect will be on liability.

They continue:

This structure will also provide members of the LAO with tax flow-through treatment by the Internal Revenue Service, such that tax is not paid by both the entity and a person holding a beneficial interest in the LAO.

Hold the phone, they’ve discovered an LLC.

The proposal goes on:

Members will be able to purchase interests in the LAO and the proceeds from the purchase will be pooled and allocated by members to startups and other projects in need of financing, using a voting mechanism and tools similar to Moloch DAO… In order to comply with United States law, membership interests of the LAO will be limited and only available to parties that meet the definition of an accredited investor — although there are arguments that LAO membership interests may not be securities.

Those arguments are, of course, wrong. Although I suspect ConsenSys folks should prefer if the situation were otherwise. In a late-2018 interview in now-shuttered ConsenSys-owned online magazine BreakerMag, ConsenSys founder Joe Lubin spoke of his affinity for token launches:

The token launches, if they’re for our own companies, end up bringing capital into those companies, and if they’re consumer utility tokens, you could consider that revenue. There are a bunch of those that have brought in many tens of millions of dollars. And we also help third parties do token launches.

The U.S. Securities & Exchange Commission has since taken a very dim view of the idea of the “utility token,” as we have seen from a number of enforcement actions that first were made public in 2018 and continue to be made public at a fairly brisk pace.

So where we are, or at least where any reasonable person should be, is that the “LAO” will be selling membership interests, that these membership interests will be regulated, at least in the United States, as securities, and accordingly that the registration requirements under the Securities Act of 1933 will apply to their sale unless an exemption applies. Unsurprisingly the LAO proposal elects to adopt this approach.

The proposal continues:

 OpenLaw will help on an ongoing basis with any ongoing legal requirements and improve any tooling that may be necessary to maintain or enhance the LAO. However, OpenLaw will exercise no control over the LAO unless directed by the members.

This is a weird proposal. What OpenLaw is basically saying is that everyone in the transaction is going to be passive and OpenLaw will act as a corporate services provider.

This is similar to what one might see in a securitization, for example. In a securitization, a special-purpose entity/vehicle or SPV – usually a corporation rather than an LLC – is incorporated to be the legal owner of whatever the subject matter assets of the transaction might be. Two entities assume primary responsibility for the SPV’s continued existence: the corporate services provider, who shuffles paper and signs documents on its behalf, e.g., and the trustee, who is effectively God in that it decides how to enforce the terms of the transaction in relation to which the SPV has been created (but equally, and also like God, is extremely reluctant to interfere in corporeal affairs, except in the most serious of circumstances, and only then with express authorization from the beneficiaries whose interests the trustee represents).

LLCs are a slightly different ball game, so I am not sure that “exercising no control” over the LAO will actually work. LLCs are operated by managers – and if that manager is a co-owner, we refer to the manager as a “managing member” – who has authority to act on behalf of the LLC and also is liable for discharging certain duties, both to the LLC members and third parties with which it deals on their behalf. Manager-members owe all manner of fiduciary duties of fair dealing and disclosure to other members of the LLC.

Accordingly, this proposal can really only work if there is one LLC manager – OpenLaw or a delegate – or if all the LLC members are managing members, because I can’t see an LLC member who wants to be passive and keep their liability minimal stepping forward to assume these responsibilities on behalf of the rest of the crew. The buck has to stop with someone, at the end of the day, who assumes primary responsibility for the organization’s affairs (signing corporate filings, acting as the signatory on bank accounts, instructing counsel, replying to writs and subpoenas).

And then there’s this.

We also will be exploring on-chain verification of accredited status for the LAO using third-party oracle services (such as ChainLink) to streamline the onboarding process.

No. This is not how accredited investor verification works.

2. Ethernomics

Much like the original Moloch design, members of the LAO will be able to ragequit and immediately retrieve back their fair share of unallocated funds based on their economic contribution (regardless of voting weight). With this safety mechanism in place, LAO members will always have the option to opt-out of the LAO should they disagree with aspects of the LAO membership, investment portfolio or need to rapidly receive back their assets.

What does this mean, exactly? From Simon de la Rouviere:

Moloch DAO always leaves a door open. Every time there is a vote, one can decide to exit (“ragequit”), turning non-transferable voting shares into transferable “loot tokens”. If you destroy your loot tokens, you can exit with your proportional amount of the organization’s resources (“treasury”).

I’m not sure this makes sense in a corporate setting. Let us suppose the LAO has ten members, Alice, Bob, Carol, Darren, Errol, Frankie, Gerard, Harry, Iphraim and Jimmy that each invest 10 ETH into a LAO.

The LAO takes its first vote and unanimously agrees to invest 90 ETH into a hot new Ethereum startup, CryptoMarmots. On its second vote, the LAO wants to invest 10 Eth into another hot Ethereum Startup, ScamTrainCoin, but Jimmy decides this is a bad investment and quits.

Under this proposal, Jimmy would take 9 ETH worth of CryptoMarmots’ rewards/equity/whatever and 1 Eth, meaning the LAO would only control 81 ETH worth of CryptoMarmot rewards/equity/whatever and have 9 ETH in cleared funds to invest in ScamTrainCoin.

So: the LAO now has 81 CryptoMarmot and 9 Eth and 9 members, Alice, Bob, Carol, Darren, Errol, Frankie, Gerard, Harry, and Iphraim. A new member, Kendrick, joins with 10 Eth. What happens when the LAO decides to invest the 19 ETH it now has available to spend? Does Kendrick’s new contribution entitle him to 10% of the existing pool of assets and 10% of the voting power? If so, this strikes me a raw deal; why wouldn’t he just start his own LAO where he has 100% of the voting power? Equally, why should he be entitled to dilute the CryptoMarmot “reward token” holdings earned by the other members and held in the common treasury when he quits?

How is this more than layering an unnecessary corporate intermediary between a project that is selling tokens and the (presumably accredited) investors who wish to buy them, with potentially adverse tax consequences when compared to simply buying them outright? Seeing as the management magic of Tim Draper/Marc Andreessen/Naval Ravikant isn’t here, what’s the point of tying it up in a corporate that has no management talent whatsoever?

And most importantly, even without the investment talent, how is this not regulated as if the talent were there and this constituted an investment company requiring registration under the Investment Company Act of 1940?

Many questions.

Extending emerging Moloch designs further, LAO members can also continuously claim their fair share of profits provided by tokens received from projects that receive investment from the LAO, further incentivizing collective LAO diligence, voting participation, and membership stability.

Again, this also doesn’t make sense. Seeing as the LAO has chosen to operate itself as an LLC rather than a fund, it is likely that LAO members would insist on “continuously claiming their fair share of profits,” as the pass-through nature of an LLC means that each member’s proportion of profits will be taxed and reportable on the members’ own personal or corporate returns each and every year and possibly even quarterly. Seeing as tokens can fluctuate wildly in value, how are profits to the LLC to be calculated?

To accept funding, projects will submit an application and be required to create a Delaware legal entity and OpenLaw will provide a set of standardized documents to streamline the process. If the project is later stage, OpenLaw will work with the project to ensure that the LAO can provide funding, given the project or entity’s then-current legal structure.

Is OpenLaw planning on becoming a law firm as well?

Through this approach, a project can conceivably submit a request for funding and receive funding from the LAO in days. Below is a quick preview of how fast funding can be received.

Although it’s easy to make fun of investors, the fact is that the better ones are extremely skeptical and perform a ton of due diligence before deciding to pull the trigger on an investment. The slowness of funding from a VC firm is not a function of paper-based legacy systems causing delays. It is a human problem where people simply don’t want to give their money away unless you’ve generated sufficient FOMO/investor tingles.

Moving on:

The LAO and similar structures could lead to increased development of secondary trading for LAO interests either through private markets or potentially even on public exchanges, potentially leading to a future of publicly traded venture capital funds.

Maybe. But I’ll bet it won’t. There’s a reason VCs stay private, e.g. they don’t like or want the scrutiny that being public involves.

LAO in a nutshell: boiling down OpenLaw’s 3,000-word manifesto down to one sentence

We’re not looking at anything more complex than a Delaware LLC, with some weird corporate governance arrangements that probably don’t work, and funky tax consequences, that requires OpenLaw’s constant involvement/SaaS offering in order to function.

The marketing strikes me as typical Ethereum complexity theatre, lots of bespoke jargon and an absence of straight talk. I can discern no way that the LAO would be necessary for, let alone desirable for, the facilitation of venture investments from the perspective of an investor. Without active, third-party management, the LAO simply adds another layer of complexity (and risk!) where a normal equity crowdfunding platform would just let the investor buy the product directly, hold it directly, exercise his rights directly, and pay taxes on his own investment returns only rather than dealing with the calculation of a proportional share of the profits and losses of an LLC in which he has a minority stake.

It does have a set of pre-written investment documents written for it. It appears to be unapologetically marketed at the Ethereum community so it’ll probably attract some investment. It is unlikely to have any impact beyond that limited audience.

Cargo Cult Finance

On an entirely unrelated point, I am often asked what my opinion is about DeFi. I include all types of DAOs in this umbrella. Including, for example, MakerDAO’s DAI stablecoin.

My initial response is always the same, and it’s always exactly five words long:

DeFi is cargo cult finance.

What does this mean?

As put by Richard Feynman:

In the South Seas there is a cargo cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now. So they’ve arranged to imitate things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head like headphones and bars of bamboo sticking out like antennas—he’s the controller—and they wait for the airplanes to land.

They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.

And this is how that looks:


With that, dear reader, I bid you good evening.

XRP: the more things change, the more they stay the same

This week, I’ve written a guest post over at The Block in the Crypto Caselaw Weekly column:

Entrepreneurs in the crypto space, or in any space for that matter, are risk-takers and sometimes can be quite cavalier risk-takers. The importance for the legal practitioner advising entrepreneurs on the cutting edge is to be sufficiently confident with one’s handle on the technology or the marketplace that one can ensure that whatever folie à plusieurs has seized the imagination of the market does not also have a firm hold on you.

Read the whole thing.

Also read my blog post from last year, For the last time, Ripple Labs created XRP while you’re at it.