Colony Whitepaper Review
A framework for decentralized organizations
Throughout recent history, most companies and organizations have relied on centralized leadership and decision-making to be effective. Executives/management (leaders in an organization) motivate the “masses” (aka employees) to work toward a common goal that the leaders decided on. They motivate with incentives: positive incentives (money and power in the org.) encourage good behavior, while negative incentives (firing yo’ ass) discourage people from playing Minesweeper all day.
Colony proposes a system with the potential to run an organization without centralized leadership. The framework proposes the ability for peers, rather than management, to incentivize each other to work towards a common goal. The end goal is to create a distributed organization that is a true “meritocracy”. Wait — what’s a meritocracy again?
mer·i·toc·ra·cy
noun
Dictionary definition: Government or the holding of power by people selected on the basis of their abilityNick’s definition: Rewarding workers based only on the quality of their contribution to the cause
“Aha!” You say, “I knew that sounded familiar. My company is a meritocracy!”
To which I say: False! Your company is just one of those places where people pretend it’s a meritocracy. It’s actually politics masquerading as merit, because 99% of people are incapable of creating and upholding a real meritocracy.[1]
The Colony thinks they can change this, by building the framework on code rather than paperwork. Oh, and that magic word, the blockchain.
How will Colony work?
A “colony” is the name for a decentralized organization, or one without a small group of executives making decisions. Someday there could be thousands of colonies representing many different organizations.
Within a colony there are domains, tasks, and people. Imagine domains like parts of a company — marketing, sales, accounting, etc. Within each domain are groups of people who specialize in that area, and who work on tasks that fit their skills.
Sounds a lot like a regular company, right? Here’s the kicker: these people don’t need to know each other at all. They could use a fake name (a “pseudonym”, if you want to make it sound less ominous), never tell anyone a single detail about their personal life, and set a picture of Tina Fey as their profile pic. Why Tina Fey? Because she’s hilarious AND a hard worker.
You, a new member of this hip colony your friend told you about, contribute to the colony by completing tasks. In return, you are paid in reputation, colony-specific tokens, or other blockchain tokens like bitcoin (Aside: you technically can’t get paid in actual bitcoin. It would be other cryptocurrencies that run on the Ethereum blockchain — but they have value nonetheless!).
As you gain more reputation and colony tokens, you are able to do more in the colony. You can set tasks for others, you carry more weight in voting, and can generally have more influence on the distributed company. However, reputation decays over time to keep people from having undue influence without continual contribution to the colony.
This reputation system is the key to making colonies work. To keep things from running rampant, the companies rely on people who have proven their worth to steer the ship.
“Well that sounds like management and centralization of power all over again.”
To an extent, that’s correct. But you need some centralization for an organization to be effective. The groundbreaking innovation here is that influencers and managers are grown, not chosen. This is based purely on merit, represented mathematically by reputation points and tokens. In a mature colony with many members, it’s likely that no one will have significant influence over the entire colony.
There will be no CEO.
There will be no CEO. This has significant implications for everything we know about how to run companies. Yes, some de facto leaders will likely emerge in every colony, but their leadership will be based on merit. That makes them much more likely to gain respect and acceptance from the average contributor than if they were ordained CEO in a typical company.
That is a very high level picture of how a colony will work. It leaves out a ton of details, but I’m not trying to re-write the whitepaper here. You should check it out if you want to learn more.
The Common Colony
Now imagine that floating above your tiny colony (decentralized company) is a bigger colony known as the Common Colony.
The first main function of the Common Colony is to build and maintain the technological framework for the colony network. This structure allows the framework to evolve over time as needed, but only via community consensus. The founders of Colony are eating their own dog food, which is a good thing.
The second function will be Reputation Mining. All reputation changes within individual colonies are calculated in hash functions outside the blockchain, because…math. Calculating reputation changes on-chain would take up too much of Ethereum’s limited computational power, increasing transaction costs. Reputation miners in the Common Colony will compute reputation updates and relay chunks of information back to the chain with each block update.
The Common Colony will function like a normal colony, with a few exceptions. Initially, the founders will have significant control over the Common Colony. Any code changes will require sign-off from the Colony team. Over time, as the Common Colony hits specific (currently unnamed) milestones, the founding team will release control to the community. Eventually, the Common Colony will operate as a fully decentralized organization in the same manner as individual colonies.
Five Takeaways
- The incentive structure proposed for the Colony framework is solid, and the method for “calculating” reputation within a company could enable a true meritocracy. This has huge implications for creating a level playing field within companies, including the potential to significantly reduce the effects of organizational bias on personal success. This framework could solve problems such as:
— The gap between CEO and average employee pay. There would be no CEO, and everyone could be paid for their contributions to the colony’s projects and internal maintenance (voting — see point 3 below)
— Racial, gender, and many other types of bias. Cooperators can remain anonymous and be judged completely on work product.
— Improving incentives and speed of decision making vs. current open source projects - A decentralized colony will not work for every company. By nature, the colony will make decisions slower than a company with centralized management, because large decisions will have to be voted on by all stakeholders. This is a disadvantage when compared to companies with a “visionary” CEO who can make swift decisions and guide her company down the right path.
- This framework could greatly enhance the operational capabilities of organizations like charities or open-source companies. Fred Erhsam wrote a great blog post about the historical lack of incentives to work on protocols. Often, only a few people contribute to base layer protocols that are critical building blocks for structures like the Internet. Colonies give inherent monetary incentives to contribute to these causes.
- Running the economics of a colony sounds like a full-time job. I could see colonies needing an economist who is involved in decisions such as setting the total colony token allotment or choosing which other tokens will be allowed as payment to contributors. These types of decisions aren’t simple, and they can significantly affect a company’s incentive structure. Econ majors everywhere are rejoicing as they discover they can now actually use what they learned in college, AND get paid for it.
- Being decentralized won’t magically fix all the problems normal companies have. Colonies will still have to struggle with one of the toughest issues all companies deal with — prioritization of work. What should be accomplished, and when should it be done? As I mentioned in number 3, this will be made even more difficult at times due to decentralization of power. You can see this played out in the current struggle/drama about bitcoin’s Segwit2x hard fork. The bitcoin community has debated this scaling issue for multiple years. Major prioritization decisions like this will hopefully move faster in Colonies due to the built-in voting structure, but big decisions will likely still take longer than they would at a centralized company
Conclusion
The Colony framework has the potential to make a huge impact on specific types of organizations. A true meritocracy seems finally attainable using the proposed structure and incentives, and I’m excited to see where this project goes.
If you want to check out the whitepaper for yourself, you can find it here: The Colony Whitepaper
Feel free to leave any thoughts in the comments below.
[1] The only known case of a true meritocracy exists at Ray Dalio’s investment firm, Bridgewater Capital. I was convinced of this through the excellent podcast episode in which Tim Ferris interviews Ray about many things, including running a company based on merit. I highly recommend the episode. You can check that out here: Ray Dalio, the Steve Jobs of Investing
Q&A with Jack du Rose, Co-founder of Colony
Note from Nick: I’ve recently been talking with Yannick Roux of the excellent Token Economy publication. He and Stefano did this Q&A session with Jack, but haven’t had a chance to post it yet. I am moving this post to be a contribution to the Token Economy publication, so we thought it made sense to include the Q&A as a part of my post rather than make a new one. Enjoy!
Token Economy: How has your original vision for Colony changed since day 1? What have you learned about the opportunity for Colony that you didn’t know when you embarked on the trip?
Jack du Rose: The vision has remained largely the same, but the execution has changed a lot. It started as being a fairly opinionated and idiosyncratic application, and has ended up as a very generalised protocol for developers who wish to integrate decentralised collaboration and governance in their applications, and an application predicated on tried and tested project management modalities.
TE: Your personal background is fascinating, can you share how you went from designing expensive diamonds to building a protocol for decentralised organisations?
J: It started off as a way to make my jewellery company more self organising. We worked with a distributed team of expert subcontractors and the amount of manual coordination and tensions in incentives was kind of tiresome. I wanted to make that better and found it was actually a much bigger and more interesting problem than I initially imagined, and I sort of just fell down the rabbit hole.
I was interested at Bitcoin around the same time, mainly as a dumb speculator, and had thought that colored coins could be used to represent a company’s equity, but it wasn’t until I read Vitalik’s white paper Christmas 2013 that all the pieces really knitted together.
TE: Who do you expect to be your early adopters when you launch the network? What will they be able to accomplish with Colony?
J: Early adopters are really varied, but the easiest use case seems to be software projects, particularly open source or blockchain based ones. It will allow people to join, and contribute to an organisation in an ad hoc way, and earn ownership and influence over that organisation proportional to the value they contribute, and the expertise they demonstrate.
TE: Can you describe a world that runs on Colony? What does that look like to you?
J: Actually, we wrote a whole article about this!
TE: How does the protocol interact with the real world law? Can colonies get legal status? And, if not, is that something that you feel will be necessary at some point? Will the law have to adapt to decentralised forms of organisation instead?
J: Protocols can’t currently interact with real world law — a DAO (decentralised autonomous organisation) cannot have legal personality. It’s possible in the future that certain jurisdictions might see an opportunity in providing a legal wrapper for DAOs, but I think it’s a way off for those to be composed of pseudonymous entities. It’s clearly easier if those entities submit to KYC, and then there are some structures which may work well. The biggest challenges are really very boring — things like cross border tax and employment laws.
In both DAOs, and blockchain projects in general, I think in the future we’ll see two diverging directions emerge. Some will choose strong decentralisation, pseudonymity, and operating almost entirely on chain, with scant regard for ‘legacy’ notions of legality. Others (who have perhaps not had the foresight to give themselves a sufficiently robust pseudonym), will need/choose to follow the path of compliance with regulations.
TE: You received some criticism for your recent post where you said “if a project is willing to take a big legal risk in order to get their hands on your hard hodl’d ETH, then it suggests they are either desperate, greedy, or incompetent”. Their point being that you are building your own project onto and thanks to a technology that resulted from some teams taking such risk in the past. What’s your response to that? (Link to the post for reference)
J: A little, but overall the response has been very positive.
The TL;DR of the article is that any pre-functional utility token is likely to be considered a security under US law, therefore we’ve decided not to do our sale until we have a live network. This wasn’t well understood before, but now it is, so going forward people shouldn’t be doing public token sales if they don’t have a live and decentralised platform at the time they do the sale. For the why, read the article.
Nobody has so far offered an intelligent counter argument to the position expressed in the article. We’re keen to hear some as we’d love to be wrong.
In any case, your quote is provided without context and conveys a very different sentiment than is expressed in the article. Here’s the actual text:
There are those who have, despite their best and well meaning efforts, already issued tokens which may be deemed securities in the US. To protect them, and to ensure that the space in which we operate is given a light touch in the future, I propose we act to self-regulate now.
While we can put sales of the past down to well meaning naivety, the same cannot be said for those in the future.
Going forward, boycott public sales except for those which confer immediate utility within a live and fully decentralised platform. Don’t do it because it’s somehow righteous — it’s not — we think you should be free to be as smart or as dumb with your money as you like. Do it for your own rational self interest, because if a project is willing to take a big legal risk in order to get their hands on your hard hodl’d ETH, then it suggests they are either desperate, greedy, or incompetent.
In your question you reference the fact that the Ethereum Foundation conducted a pre-functional token sale, and we are only able to build Colony because of that fact. True, and I contributed to the Ether pre-sale, and I have contributed to many other token sales since. However, the Ethereum Foundation did a huge amount of legal due diligence before the sale. In fact, the sale was delayed so many times due to legal that it became a meme (the sale was perpetually “Two weeks” away).
Furthermore, the Ethereum Foundation had raised a substantial amount privately, had multiple public proof of concepts, and other implementations were being built in parallel by members of the community (such as the java implementation EthereumJ, built by Roman Mandaleil.)
But things have changed massively in those few short years, and many regulators have had opportunity to consider the facts, and decide on their position. That’s what we’re saying here. It wasn’t clear before, but now we have more information about how regulators are viewing token sales, so things are clearer. That being the case, people who wilfully choose to ignore that and do a massive, unnecessary cash grab for their pre-functional project are indeed fairly categorised as desperate, greedy, or incompetent.
TE: The timing of your post seems a little suspicious. Was it just coincidental that Marco Santori came out with the SAFT Project only a couple of days later? Why did you only come out of the woods now?
J: Sort of. Timing is a coincidence, but position isn’t. Marco is our legal counsel, so the position we’ve expressed is as a result of the work we’ve done with him. We decided to write about what we’d decided to do and why because we’d spent months teasing that we were about to do a token sale and people were asking when our sale would be a lot.
We didn’t know Marco had been working towards the release of the ‘SAFT Project’ though.
When we open sourced our SAFTE earlier this year I asked Marco to review the blog post in advance. We learned then that he was working on a SAFT himself, but we didn’t know that it was for Coinlist (as Coinlist hadn’t been announced), or that it would be released publicly.
So while I felt a little bad we’d unwittingly stolen a little of his thunder, I am pleased that his announcement reinforced the position we’d taken a few days earlier.
TE: Is your view of the world aligned with what’s presented in that whitepaper? What are some flaws of the SAFT model as presented, where can it be improved?
J: I haven’t had opportunity to read his SAFT paper yet, but as our view of the world is from the work we’ve been doing with Marco, it stands to reason it will be aligned.
So, bearing in mind that I don’t know the specifics of Marco’s SAFT, I would say that the limitation I see in a SAFT, is the reason why the one we created is a SAFTE. The E is for Equity: A Simple Agreement for Future Tokens or Equity.
It’s pretty hard in the early stages of a project to know whether issuing a token is really the right thing to do as the decision made my localethereum recently demonstrates. I think the ability to fall back to equity in the event that there is not a token issuance is an important protection for investors.
TE: How are you funded so far?
J: Personally, and of course, by using our SAFTE!
TE: Well that’s all we have — thanks for your time!
J: Thank you, enjoyed the talk.
I’m Nick, a product manager and learner of all things blockchain in my spare time. I hope to write more reviews like this, with the goal of making blockchain whitepapers more approachable for the average person. If you enjoyed reading this, I’d appreciate you sharing it with others who might enjoy it as well.
