Bas Wisselink, board member at the Nxt Foundation on regulation for blockchain technology, assesses which governance model could be best for distributed ledger tech...
The last five years has seen blockchain technology gain considerable recognition from within the mainstream financial services sector and move away from its disruptive underground origins. As more and more blue chip organisations trial blockchain technology and software, questions relating to corporate governance will become increasingly relevant.
The question facing many people within the industry is how to erect a framework that enables creativity and input from participants, but at the same time ensures trust in the system isn’t eroded.
At the Nxt Foundation, we actively communicate the benefits of open source software and why it works. Many people are not aware that open source has a respectable track record when it comes to governance. It has a variety of methods for engaging communities that are all too often overlooked.
Governance
All large blockchain platforms have begun as grassroots initiatives, usually started by one developer or a small core group of developers. Often, it is hard to pinpoint who started the project because a lot of initial developers operated under pseudonyms. The only large projects that didn’t follow this model are ethereum and bitshares, which had a corporate structure when starting, but still tried to incorporate open source development practices.
Governance is of course an issue in such a setup. This is particularly pertinent for software that aims to replace parts of financial institutions where large value is at stake and the creation and maintenance of the software is a topic of interest, and especially when the security of the software and the reaction speed to malfunctions and bugs is of the essence.
Another problem facing a lot of open source initiatives is their project management structure. A common misunderstanding of the open source process is that it is completely anarchistic and has no structure. Historically, this is not true. All successful open source projects have generated extensive, if sometimes unorthodox project management structures, as well as subdivisions tasked with marketing and outreach and sales.
Now that the demand for blockchain solutions is on the rise, we see that many projects are taking steps to professionalise their organisations. I will look to outline the structure of a few of the well-known and used platforms, including the consequences of their solutions so far.
Types of governance
Governance for open source distribution often falls within a spectrum, at one extreme there are centrally led projects where most of the contributions are provided by one or a few core developers, at the other end of the spectrum there lies a more or less fully open submission model where many people are encouraged to contribute to the project. Alongside this lies the governance that can take the form of a closed system or a fully participatory model, and most government models will fall between these extremes.
Nxt’s corporate governance model operates on a hybrid basis between ethereum and bitcoin. Bitcoin operates on the assumption that the interests of various groups interacting on a peer-to-peer protocol will lead to decisions that benefit the whole. It is not corporately led, but corporations are part of the integral governance structure. Ethereum, on the other hand, is an open source project that has a corporate organisation attached from the start.
Ethereum’s development is in the hands of a small group of core developers, although it is unknown who they are exactly. The ethereum project is supported by the Ethereum Foundation, which seems to be in charge of most of the core coding.
On the level of governance, ethereum has much the same structure as bitcoin, working on the assumption that developers, miners and entrepreneurs will maintain a balance that is stable and good for the whole.
The NXT model shares characteristics of both bitcoin and ethereum, with the same partnership between developers and entrepreneurs.
Nxt was created in 2013 by a developer who went by the pseudonym ‘BCNext’ (BitCoinNext). After the project was started and a community had formed, the BCNext developer withdrew, handing over the project to the community. A core group of developers soon formed, part of which is still working on the Nxt software to this day.
Like bitcoin, Nxt never raised large amounts of funding, nor formed a formal corporation at the start. It was developed with just $5,000 in 2013 and now has a market capitalisation of over $30 million. The informal structure of Nxt’s organisation allowed a wide range of people to join the community and work on projects within an open model from the start.
Some from the community with an entrepreneurial background recognised the need for a more formal entity for the project to connect with real world businesses and in 2014 started the Nxt Foundation initiative, which in 2015 led to the incorporation of non-profit organisation Stichting Nxt in the Netherlands.
The Nxt Foundation has evolved as needed over time, and now consists of five Europe-based people with complementary skills in sales, marketing and business development and software.
The foundation acts as promotor and point of contact for anything that concerns the public blockchain version of the Nxt software, manages the community around it, initiates development of applications, engages in research and thought leadership, and provides structured feedback from users to the core development team.
The Nxt Foundation specifically does not incorporate core developers into its board, because this could lead to conflicts of interest which it wants to avoid.
The Nxt Foundation has a programme to professionalise the way public Nxt software is managed, and it engages regularly with the core developers to make sure users are aware of the production cycle that the software is going through so adjustments can be made.
The Nxt Foundation also serves as a filter between the core team and the community and users if needed. Due to the fact that the foundation members have a background in group dynamics, marketing and sales, they can ensure that information is distributed in a coherent manner, as well as provide useful feedback back to the core team in a way that is useful to them. The foundation also advises, asked and unasked, the core development team about issues that may arise among users. To this end, it has set up the first ever helpdesk for its blockchain product.
One result from the feedback the Nxt Foundation gave to the core development team is their move to offering licences for corporate users who wish a customised private version of the Nxt software and the development of a new type of blockchain based on Nxt, which will be called Ardor.
The Nxt Foundation is also always looking to collaborate in initiatives to professionalise our emerging industry, and is an affiliate member of both the Linux Foundation and the Hyperledger Project.
The blockchain technology sector is still in its infancy, the manner with which it develops sound corporate governance models that are trusted and respected within the financial services sector. Already there are a variety of governance models for blockchain initiatives that have had some degree of success, whereas others are trying to break new ground. The Nxt Foundation incorporates second generation blockchain technology that learns from the past and encourages standardisation and certification collectively informed from the industry.
The bitcoin community has historically always resisted such efforts, citing them as outside interference intended to curb innovation. Our governance models, which are in the end based on what our users want, are what will in the end eventually decide.
