Saturday, December 2, 2017

My Thoughts on the Tezos Issue

As a long time forum lurker in the Tezos community and having read the Goodman whitepaper back in 2015, I’ve always admired and respected what the project is attempting to achieve. It’s a nice blend of governance, formal methods and functional programming. Given that Arthur is French, I can forgive the obvious mistake of using Ocaml instead of Haskell (yes I’m biased), but I’ve been a bit puzzled by the crisis that has befallen the project.

First a brief summary of my understanding of Tezos. It’s a cryptocurrency that is seeking to define itself in terms of three subprotocols say <Network, Transaction, Consensus>(0) and then describe these subprotocols in a machine understandable format. Then they introduce an on-blockchain voting mechanism V that allows holders of Tezos tokens to propose a new <Network, Transaction, Consensus>(k) to fork the ledger. Should it pass this becomes the new Tezos.

It’s an elegant idea and one that promotes discussion on two axises. First, the notion of formal specification of a cryptocurrency. There have been numerous attempts to do this academically as a whole via IC3 or in part via Bartoletti et. al’s work, but building a system around it is both ontologically really interesting as well as practical for cross comparisons. IOHK has pursued less ambitious work via collaborating with Alex Chepurnoy on Scorex.

Second, there is the idea of creating an ideal voting system that is both secure and fair as well as incentivized enough to expect reasonable participation of the eligible voters. Here we are confronted with who are actually eligible and what is reasonable. Who and how people get to vote are more important than what is being voted on.

As fun as it is to discuss the technology or ideas, the vogue topic is a governance crisis at Tezos. They apparently opted to have a fairly strange structure where capital pools in one place and is precommitted to buy IP from another place to benefit some group. Semantics and other vagaries aside, a fight in the heavens and some bad press have spilled out into the public domain yielding threats of lawsuits and some small class action lawsuits.

It’s somewhat ironic- in a dark Irish way- that the venture focusing most on governance is running into a governance crisis, but the good news is that it’s actually completely solvable. It appears the structures chosen were designed for the following reasons:

  1. Ensure insiders get fair compensation for their early work and risk taking
  2. Minimize regulatory risk
  3. Protect project capital in a safe jurisdiction
  4. Provide project oversight that is independent of the will of a single group      

Well as people aren’t getting along it seems that the structures are deadlocked. Trying to fire people isn’t going to make things any better. Furthermore, the longer the fight goes on the more angry (i.e. more tortuous) the Tezos buyers will be. Calls for refunds will convert into class action participants. A rush to deliver Tezos to market as a bastardized product won’t likely solve the problem. Nor will hiding behind purchasing agreements that claim everything is a donation, we have no relationship with you and expect nothing. People wouldn’t threaten to sue if there wasn’t some intention at the end of the rainbow.

So to clean up the mess here’s what I would do if I was the arbitrator. First, there is a loss of faith and trust in the Tezos Foundation. Whether this is fair or unfair is completely irrelevant. Funds from the Foundation and its assigns need to be transferred to an independent trust subject to an audit that covers both accounting and conduct. The audit report must be made public alongside all contractual obligations of Tezos Foundation with third parties and employment agreements.

Next, in terms of the IP transfer. The sale of software isn’t a bright idea. Transfer pricing considerations aside, there is software and there is specification. Tezos is a concept that can be formalized on paper in a machine understandable way. Then there is the software that actually runs the concept. Arthur and company should write formal specs and sell the specs to the Foundation.

Then the Foundation can submit a request for bids from software development firms to build Tezos from this spec and accept the best three bids. There is well more than enough capital in the foundation to diversify the development and it de-risks the project from over-reliance on a single vendor. A third party could be retained such as the Gallium team at Inria to select the top three. They are some of the most qualified in the world for such a task.

The best part of this process is that the community can have a lot of input about their expectations in terms of communication, accountability and transparency of the development process. With ETC, we have made it a point to always broadcast our development standups on a weekly basis on youtube via hangouts. With Cardano we have monthly counters and weekly reports. These metrics could be built into contracts.

Finally, there is the issue of liquidity. Tezos buyers are trading futures at the moment. I’d recommend issuing an ERC20 token that will be an airdrop target and getting it listed on as many exchanges as possible. This will provide liquidity for those who have lost faith and allow new actors to enter the ecosystem through the secondary market. It also reduces pressure considerably to deliver a product for the sake of delivering one thus a more natural process can take place.

As a parting note, there has been a lot of tough press about the project. I’ve personally gotten some and I understand how hard and frustrating it can be. But also understand that the investigative journalists didn’t raise a quarter billion dollars. Tezos did. They also didn’t start the board fight.

So it would be good to hold a media roundtable with Johann and the rest of the foundation board as well as the other relevant parties and let the media ask their questions. Silence and obfuscation are only going to promote deeper inquiry and more aggressive stories.

At the end of the day what is driving the stories is a concern that people who bought the token are being defrauded or treated unfairly in some way. The only way to clean this up is to explain why they are not. Hiding solves nothing.        

I doubt my opinion matters much, but thanks for reading and I hope it all gets resolved.



  1. Many nice ideas here.
    However, many of them could be combined with (and simplified into) the following:
    The Foundation could just do its purposed job, and fund Tezos development by Arthur's team (besides funding other initiatives that contribute to Tezos ecosystem and growth).

    1. Don't you think giving all the funds to a single development team puts the project at risk?

    2. You believe software projects should be processed in triplication?
      Isn't that an great waste of resources?
      And then, in the end, you just throw way two of the three?

    3. If Parity was the only client, then 100 percent of all multisig accounts in Ethereum would be broken. A monoculture is very bad for a cryptocurrency.

    4. I don't think there's any good evidence that development will stay centralized to one team, it's only that way now because DLS' holds all the IP at the moment but once it's been freely released under an unrestrictive license other folks will likely start to work on it as well. Right now doesn't seem to be the time to have new teams come in and work on something they're completely unfamiliar with.

      Anyways, despite all the legal mess and what's frankly fighting over a giant pot of money, I think overall it was still a positive thing that it was available to folks all around the world at launch. If Cardano had been similarly available I think more people would have been able to participate.

  2. Board governance failures and conflict of interest are unfortunately too common in this space, but the best thing is to always come to a compromise that benefits the fiduciary duty towards token holders.

    A frank assessment, I hope the relevant parties read this and gain clarity from it.

  3. With hindsight, the red flag was "DLS' shareholders will receive 8.5% of contributions made during the fundraiser. In addition, DLS' shareholders will receive a 10% allocation of the tokens in the genesis block, placed in a smart contract that will vest monthly over 48 months"

    As far as i understand -- and i might be wrong as this wasn't made completely transparent -- DLS (owned predominantly by the Breitmans) stands to receive 8.5% of contributions just for having the network run correctly for 3 months.
    that's around $30M of short term incentives...

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