A New Governance Model for the New Web

10.25.2022-By — Joshua Eustis
  • Product
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Laconic Network was founded to develop crucial infrastructure for current and future generations of blockchains and Web3 applications. That's an ambitious mission, and one that demands significant technological innovation. Perhaps even more innovative, however, is the company's governance model—a unique organizational structure that, along with the Laconic token, underlies a scalable and sustainable project with the power to address the many operational, regulatory, and ideological challenges of Web3. 

Operational challenges

Laconic Network’s governance model addresses four primary operational challenges:

  • Network funding. The Laconic governance model funds initial network development and growth. But unlike most venture capital-funded businesses, Laconic avoids passive investment, instead requiring all founding members to make significant contributions of capital, engineering expertise, or both.

  • Network growth. To ensure timely continued growth, the Laconic Network must scale along with demand for Web3 data services—necessitating clear procedures for adding and removing Members and Service Providers.

  • Hardware operations. Laconic indexing and services are computationally expensive, requiring significant hardware and infrastructure investment. Laconic is creating a decentralized infrastructure network built for scalability and flexibility, and designed to deliver data to consumers at the highest possible service level.

  • Corporate governance. Clear and fair governance is essential to any decentralized project. The Laconic limited liability company agreement (LLCA) clearly specifies how stakeholders including Members, Service Providers, and data customers may participate in the governance process; proposal submission and voting processes; and proposal requirements for specific changes and updates.

Regulatory challenges

The governance model addresses three primary regulatory challenges: 

  • Making it clear that the Laconic LNT token is solely a loyalty point or prepayment for services—not a security or currency

  • Ensuring that on-chain private auction of membership interests in a Cayman Island LLC is fully compliant with US securities law

  • Protecting minority rights for all shareholders of Laconic LLC

Ideological challenges

As Web3 scales, Laconic Network aims to become an essential layer in service of verified blockchain data to applications. The company's governance model must be designed to:

  • Reward active Network participants through incentives for actions that help build and run the network, including becoming Members or Service Providers, writing Watchers, and consuming network data

  • Discourage attempts to speculate on, or otherwise passively profit from, the network

Corporate structure

The Laconic LLC structure lays out a flexible but binding legal framework for the company's relationship with Network Members. It also provides for treasury management and related off-chain governance solutions while the network is being built:

  • Laconic Network, as a corporate entity, is a Cayman Islands LLC made up of members who are themselves corporations. Members work together to build and operate the Network, for which they are required to act as Service Providers and Validators; as a Validator, each member controls a share of the Laconic Network Liquidity Pool. 

  • The corporation's purpose is to sell data in a way that provides purchasers with cryptographic evidence, which ensures reimbursement if a Service Provider fails to meet a quality of service guarantee. Each membership interest in Laconic LLC is indivisible and nontransferable, and represents an actual security per the S.E.C. definition of the term.

  • On-chain membership interests are determined based on a combination of each Member's capital accounts and individual Liquidity Pool shares—a structure designed to reward members for acting as Validators and Service Providers while promoting healthy competition. The Members’ treasury collateralizes the Network, protecting Service Providers and users.

  • Laconic Network currently has seven Founding Members, who brought the project into existence by funding its treasury and providing the engineering work to create the Laconic Stack and Laconic App. 

  • Founding Members have been selected to ensure enough initial Validators and Service Providers to run the hardware needed to index and serve data to end users.

  • Requiring that Members both fund the Network and provide technical services ensures that all Members are motivated to make the project successful. There is no passive investment—for example, from VCs who buy the token at a discounted price to fund the Network, then wait for a pump to sell. 

  • Selecting seven Founding Members supports accountability for a minimum viable level of decentralization. 

  • Members operate within multiple legal jurisdictions, preventing the Laconic Stack, Validators, and Service Providers from concentrating in too few data centers or cloud providers.

  • As demand for the services provided by Laconic Network increases, it will be necessary to add Members in order to increase the capacity and diversity of available Service Providers. 

  • As Members are added, Membership totals must always take the form of 6n+1—ensuring that simple majority votes will never be evenly split, and that Validators will never be paid for Byzantine fault tolerance (BFT) that they do not provide. 

  • New Members are added via auction. To participate in an auction, potential Members must prove that they are technically qualified and have the funds needed to buy a Membership Interest from one or more existing members.

  • To demonstrate their ability to operate the Laconic Stack at a level of quality comparable to that of existing Members, potential Members must participate in a testnet.

  • Potential Members who successfully complete the testnet are invited to a private auction of a lot of six new Membership Interests. Auction proceeds are added to the Liquidity Pool, minus a Seller’s Reward for existing Members. Seller’s Rewards, akin to mini liquidity events, provide additional financial motivation for membership. 

  • At some point in the future, Laconic LLC may choose to change the rules regarding membership and Validator participation.

  • As required by law, provisions exist by which Members may be voluntarily or involuntarily removed from the Network in order to maintain minority shareholder rights of the membership as a whole.

  • Members wishing to exit may sell their interest back to Laconic LLC, which will then auction it to a new potential Member. 

  • Members failing to fulfill Validator or Service Provider duties may be evicted by a governance resolution. 

The Laconic Network Token

Much of the mechanism design of the Laconic Network is encapsulated in the intended uses of the Laconic Network Token (LNT).

 LNT provides insurance to the Network's Service Providers and data consumers. Any prepayment for services, or any surplus services that data consumers have paid for but not used, may be redeemed for an asset of value. For Service Providers, LNT simplifies business operations, serving as a single asset representing claims against both a stablecoin and the native currency of the L1 on which they are required to operate. 

The LNT also provides guarantees to Network participants, in much the same way that initiating a retail transaction triggers an automatic temporary hold on the buyer's payment card, which is released when the purchase is completed. 

Note that  LNT’s purpose is to allow for refundable prepayment of services among a federation of Service Providers operating across multiple jurisdictions; the token does not exist in any other capacity. It is not a security, as it does not represent a financial interest in Laconic LLC; it can be redeemed only via authorized transfer within the Liquidity Pool, which is controlled by the Laconic Members. Membership Interests are, however, securities, as they represent both the financial interests and the governance stakes of the Members in Laconic LLC; one Membership represents one vote.

The LNT is considered a voucher for data retrieval, not a general-purpose currency. LNT is procured through the Liquidity Pool by trading 3CRV or ETH, and used to pay Service Providers for data transfers. LNT is also staked by Service Providers, and enables them to register on-chain as such. A reclamation function ensures that the full fixed supply of the token will remain constant and in use at all times, making it unsuitable for long-term holding or speculative investment. 

Governance

Corporate governance for Laconic LLC will be performed on chain, by voting parties who are both Members and Validators. Voting parties may vote on two types of resolutions:

  • Ordinary resolutions govern operational details of the network and require a ⅔ vote to pass.

  • Special resolutions are required to amend the governance articles or shut down the Network. Special resolutions must be passed by a unanimous vote.

Proposals may be submitted by any user of the Network who has more than the equivalent of $1000 USD escrowed as LNT.

New possibilities for organizational governance

Laconic’s primary goal is to make verifiable blockchain data available at scale to Web3 applications. The company also aims to embody the ideological goals of true decentralization and fair rewards for parties actively participating in the network as Members, Validators, Service Providers, or Watcher writers. The Founding Members have also thought extensively about the utility of the LNT token (as a voucher for data), its role in governance (none at all), and how to grow the network through Validator/Member auctions. Together, these choices yield a novel corporate governance model worthy of study by any organization with similar goals and challenges.

Read the full Laconic Limited Liability Corporation Agreement (LLCA) and Validator Service Agreement (VSA) on Github.

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