The Chinese government is reportedly launching an “ultra-large-scale blockchain infrastructure platform for the Belt and Road Initiative.” The platform will support the implementation of cross-border cooperation projects along the Belt and Road Initiative and provide the base for developing applications that showcase collaboration across borders. ‘Ultra-Large Scale Blockchain Infrastructure Platform’ The Chinese government has reportedly […]
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ceτi AI, a pioneering decentralized artificial intelligence infrastructure provider, is thrilled to announce the successful launch of its CETI token. Founded by a team of visionaries led by Dennis Jarvis (formerly of Bitcoin.com and Apple), ceτi AI is on a mission to democratize access to AI by building a globally distributed, high-performance, intelligent, and scalable […]
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In an exclusive interview with Colin Butler, Global Head of Institutional Capital at Polygon Labs, Butler brings a unique and informed perspective to the table, discussing various pivotal aspects shaping the future of blockchain and cryptocurrency. This interview explores the impact of traditional financial instruments like ETFs on the crypto market, the significant strides made in institutional DeFi in 2023, the evolving role of tokenization in institutional adoption, and Polygon’s strategic position in this rapidly changing landscape. His answers offer a comprehensive look at the current state and future prospects of blockchain technology in the institutional domain, highlighting both the challenges and opportunities that lie ahead.
Butler highlights 2024 as a critical year for institutional adoption of tokenization. He emphasizes the maturity of the underlying infrastructure, capable of supporting immense financial values. The focus is on the significant improvement in security, particularly with Zero-Knowledge technology, which is crucial for traditional finance (TradFi) institutions to engage with blockchain and cryptocurrencies. The integration of ETFs and similar products is expected to significantly enhance trust and legitimacy in cryptocurrencies. Butler foresees a broader investor base, increased market stability, and reduced volatility driven by deeper involvement from traditional financial institutions.
He discusses the challenges and future of tokenization. He mentions the need for institutions to improve infrastructure and supply to meet the growing demand. He predicts rapid growth in areas like tokenized funds and structured products, with physical assets like real estate and art being slower due to inherent challenges.
Butler is uniquely positioned to comment on the institutional perception of DeFi, as the below interview highlights.
You’ve mentioned that big institutions are now tokenizing real-world assets and the implications of on-chain assets becoming institutional in the form of ETFs. Can you elaborate on how this trend might evolve in 2024?
I see 2024 being an extreme inflection point for the institutional adoption of tokenization. The underlying infrastructure is now in a state capable of securely supporting the billions, if not trillions, of dollars worth of value that traditional financial institutions bring with them.
Security has been the blocker to date; you only have to look at the broader crypto and DeFi ecosystems to see the impact of security defects and the potential for significant monetary losses as a result. However, with the implementation of Zero-Knowledge technology, a level of security is in place that even the most hesitant of TradFi proponents can get on board with.
What impact do you foresee ETFs and similar products having on the broader crypto market and investor confidence?
As TradFi deepens its crypto involvement, we’ll witness a substantial increase in overall trust and legitimacy of cryptocurrencies as an asset class. Crypto products will appeal to a broader range of investors, including those who have been previously skeptical. With increased confidence and more consistent investment flows will come greater market stability and a reduction in the volatility characteristic of the crypto markets to date.
You predicted that 2023 would be a pivotal year for institutional decentralized finance (DeFi). What developments have you seen this year that reinforce or challenge this prediction?
2023 was a year of clear progress. We saw the launch of Clearpool’s institutional borrowing platform, allowing lenders to set their own stablecoin loan terms. JPMorgan’s deposit tokens suggest a growing interest from traditional financial institutions in blockchain solutions, though within a regulated framework.
The integration between legacy financial systems and blockchain is a complex one. There has been major advancement and interest, certainly, but also a recognition of the remaining hurdles, particularly around regulation. BlackRock’s embrace of Bitcoin and cautious stance with DeFi epitomizes the institutional desire for clarity amidst regulatory complexities.
How do you think the progress made in 2023 will shape the institutional DeFi landscape in 2024?
With the massive improvements brought by layer-2 networks and ZK technology, we’ve seen the Ethereum network successfully update to a more efficient and cost-effective infrastructure that can make DeFi protocols accessible and appealing to institutional users.
In 2024, I think we’ll see a shift in the user base of DeFi from primarily retail to more institutional participants, driven by the development of more sophisticated financial tools like derivatives. Furthermore, the entry of large entities like BlackRock into DeFi will pave the way for new standards and frameworks that make DeFi a clear win for traditional finance more broadly.
Considering your belief in tokenization as a world-changing phenomenon, what do you think are the key drivers for its widespread adoption by institutions?
I think the institutions building these products need to go out and sell them. You can lay out all of the benefits: 24/7 trading, access to vehicles and assets for which you had no prior access etc. But does this create an order of magnitude better solution that people can clearly see like in front of them? It’s tough to say.
Until now the infrastructure hasn’t existed for the technology to be accessible by the average person, as a result, demand has been low. While the benefits for tokenization are undeniable, the supply and infrastructure has to exist for widespread adoption. That’s the challenge we face as an industry. We’re small in every leg of the stool: infrastructure, supply, and demand. We need institutions to continue to grow their infrastructure and, in time, demand will grow in tandem with supply.
How do you see tokenization evolving in the next year, especially in terms of new asset classes or innovative use cases?
In 2024, I see tokenization growing rapidly in some areas but slowly in others.
Tokenized funds will continue to grow over the next three to six months. Next I see structured products, such as currencies, being tokenized more regularly and private credit will come soon after. These are the most logical use cases for tokenization and because they’re digital the transition on-chain should be fairly smooth.
Bonds and equities are likely to come next. But the last to be tokenized is going to be physical assets like gold, real estate, art, wine, etc. While these physical assets have heaps to gain, due to them not being digital, the transition will take a lot longer. There are a lot of challenges we face to tokenize physical assets, some of which may never be solved.
As the Global Head of Institutional Capital at Polygon Labs, how do you see the platform fitting into and influencing the institutional adoption of blockchain technology?
If you’re an institutional investor you want two things: high liquidity and security. The Polygon networks give you both.
Investors can tap into the entire Ethereum ecosystem through the Polygon networks, providing access to high liquidity. And, the development and adoption of zero-knowledge tech in the Polygon network will increase the security of transactions.
I believe that due to these two factors, institutional investors will be looking towards the Polygon protocols, more often than not, when looking to invest in blockchain technology.
Can you share any insights or case studies where Polygon has been instrumental for institutions in adopting blockchain?
This year Hamilton Lane, one of the leading global investment funds, started allowing individual investors to access their $2.1 billion flagship fund through tokenization on the Polygon PoS network. This reduced the minimum investment required from $5 million to just $20,000. This collaboration between Hamilton Lane and Securitize went so well that they later started offering a new fund with a $10,000 minimum investment.
But this isn’t one case study in isolation, South Korea’s largest financial group, Mirae Asset Securities, also trusts the Polygon network for their adoption of Web3 technologies.
While ABN AMRO became the first Dutch bank to register a green bond on the blockchain, using the Polygon network. And, JPMorgan used the Polygon PoS network as part of the Singapore CBDC project.
The Polygon protocols are playing an instrumental role in institutional adoption of blockchain technology by providing infrastructure that can handle the flow of billions of dollars.
Given your role in educating the institutional investment community about blockchain, what are the key areas of focus or common misconceptions you address?
There’s a common misconception that blockchain and cryptocurrency, particularly Bitcoin, are synonymous. But blockchain encompasses much more than just cryptocurrencies. It’s a foundational technology that offers tokenization, smart contracts, and a wide array of applications.
The transparency offered by public blockchains is a significant feature, often underestimated in their ability to provide real-time visibility into transactions and analyze the risk of each platform’s transactions as they occur. Contrary to popular belief, the incidence of illicit activities in these businesses is minimal, as shown by the analysis of transaction inflows into mainstream exchanges.
Another common misconception is that blockchains are inherently limited by low transaction speeds and scalability issues. Scaling solutions like the Polygon networks for Ethereum are crucial developments in making blockchain technology more viable for widespread institutional use.”
How do you approach the challenge of balancing technical depth with approachability in these educational efforts?
I think it’s important to explain things in as simple terms as possible. Although blockchain emerged thanks to several impressive technological innovations, notably advanced cryptography, it’s important to draw analogies with familiar examples and portray blockchain as an evolution of existing financial systems rather than a radical departure.
For instance, smart contracts can be likened to automated versions of self-executing contractual clauses much like an escrow service in traditional finance, but with automation and predefined rules. Fundamentally, a blockchain is a digital ledger, similar to accounting ledgers in traditional banking, but more advanced and transparent. This ledger records transactions securely, akin to how banks record financial transactions, but with increased transaction speed, and enhanced transparency. The most important aspect of blockchain education is to show how it enhances and improves upon current processes. It didn’t emerge out of nowhere. It came about to solve some of the limitations faced by traditional finance.
According to the country’s government, Belgium plans to accelerate the development of a European blockchain infrastructure during its presidency of the Council of the European Union in early 2024.
The proposal aims to facilitate the secure storage of official documents like driving licenses and property titles.
The development of a public blockchain for pan-EU infrastructure is among the four priorities of Belgium’s upcoming presidency, the country’s Secretary of State for Digitization, Mathieu Michel, told Science|Business on Nov. 21. The remaining three initiatives will take on the matters of artificial intelligence (AI), online anonymity and the skills necessary for the digital economy.
Related: German parliament member ’staunch opponent’ of digital euro, all in on Bitcoin
Michel suggests rebooting the European Blockchain Services Infrastructure (EBSI) project, which was established by the European Commission in 2018 in collaboration with the European Blockchain Partnership, comprising the 27 EU member states plus Norway and Liechtenstein:
“That is a technical project. If we want to build a common infrastructure, it has to become a European project and a political project.”
The renewed EBSI would be renamed Europeum and used for public administration tasks, such as verifying driver’s licenses and other documents across the EU. According to Michel, the project could also support the digital euro infrastructure.
The official said it is important to use a public blockchain developed by EU member-states, not private alternatives:
“In terms of security, transparency, and privacy, the blockchain can give control back to the citizen of the data that belongs to them.”
At the moment, Italy, Croatia, Poland, Portugal, Slovenia, Luxembourg, and Romania have already signed up for the Europeum plan. The head office of the project will be in Belgium.
The process of regulatory consolidation around crypto and blockchain is moving steadily. In early November, 47 national governments issued a joint pledge to “swiftly transpose” the Crypto-Asset Reporting Framework (CARF) — a new international standard on automatic exchange of information between tax authorities — into their domestic law systems.
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Sadek Wahba, chairman and managing partner of I Squared Capital Advisors LLC, during the 2023 CERAWeek by S&P Global conference in Houston, Texas, US, on Wednesday, March 8, 2023. The global energy industry is facing a welter of uncertainty and change — driven by the effects of the global pandemic; shifting geopolitics and a war launched by one of the world’s major energy powers; high energy prices; supply chain and infrastructure constraints; and economic instability.
Bloomberg | Bloomberg | Getty Images
The demand for infrastructure improvements is going to continue to grow as more people move to cities in coming decades.
Also, the coming decades are critical in the global effort to respond to climate change. Energy efficiency is going to become a bigger priority for builders, bringing new technology, challenges and opportunities for investors.
Taken together, “The sector as a whole is on an upward trajectory,” said Sadek Wahba, the founder and chairman of I Squared Capital, a global infrastructure management company that currently manages around $40 billion worth of investments in infrastructure projects in over 50 countries.
Wahba, who is also member of President Biden’s National Infrastructure Advisory Council, shared with CNBC how investors can get in on this trend.
“The entire electric grid needs to be completely revamped,” Wahba said.
Utility companies will sometimes do this kind of build out, but utility stocks are not “100% correlated to infrastructure” because they have a lot more parts than building infrastructure
So the best way to benefit from this demand for a new electric grid is to invest in the specialized construction companies that build it, Wahba told CNBC.
“That’s an area which I think will be very interesting because there will be a lot of work, it requires specialization, it has relatively high barriers to entry,” Wahba told CNBC. “It’s not anyone who can build these transmission distribution lines. You need to have the training, you need to have the licensing, you need to get environmental permitting, there are safety issues.”
Wahba is also bullish on the electrification of urban transportation. New York City is in the process of implementing a congesting pricing plan for drivers coming into central Manhattan. If congestion pricing becomes more widespread, that will make electric urban transportation a desirable investment, Wahba said.
High-voltage power lines at sunset.
Yelantsevv
Another area that Wahba says is “very interesting” is the technology that will support new infrastructure growth.
“It’s a derivative of investing in infrastructure, right. It’s not investing in infrastructure directly,” Wahba told CNBC.
For instance, in the case of congestion pricing, cities will need systems to measure and record when drivers are on the road and implement the credit card processing and payment systems to collect such a tax.
“All the technology around infrastructure services, I think is an area which is going to grow exponentially,” Wahba told CNBC.
Demand will also grow for echnology products that improve the efficiency of buildings and adapt to changing conditions in real time, Wahba said. “No one goes to Burger King or Chipotle or whatever and the temperature changes based on the number of people in the room, but the technology exists to do that,” he told CNBC. “You can save millions of dollars that way.”
Another derivative of a the trend towards energy efficiency is exponential growth in cybersecurity, Wahba said. More infrastructure systems are going to become digitized, which means those systems increasingly become vulnerable to cybersecurity attacks.
“Digitalization is inevitable, because we need that digitalization to be able to improve the efficiency of our infrastructure and to be able to grow,” Wahba told CNBC. “Digitalization means more efficient, more efficient means less cost. Less cost means less impact on the budget, less capital required to invest in infrastructure. But it also means much more vulnerability to attacks.”
The danger of hackers with bad intentions getting into infrastructure systems is especially scary.
“What if I control the HVAC system of the hospital? And no one has the ability to control it except me. Think about surgery, operation rooms. What if I control the power generation backup of a hospital? What if I take control of a wastewater company and I have the ability to control the amount of waste that goes into the water system because I physically have control of the equipment?” Wahba said.
“So cybersecurity is going to become a big, big issue over the coming years. Because the more technology we adopt in the management of our infrastructure, our airports, our ports, our hydro plants, the more they become vulnerable,” Wahba said.
The digitization of infrastructure will also grow demand for fiber optic cables and data centers, but those stock prices are already trading at relatively high prices already because of interest in artificial intelligence and the move to 5G mobile networks, Wahba said.
The publicly traded market for infrastructure investments is actually extremely limited in the United States, Wahba said. Most of the infrastructure in the US is constructed by states, cities, and municipalities and funded via the municipal bond market.
That’s not how it is in the rest of the world, however.
In the United Kingdom, individual investors can put money in the water company, Wahba said. “You and I can buy Charles de Gaulle Airport in Paris: that’s 50% owned by the government and 50% listed,” Wahba said. “You and I can’t buy stock in JFK. Now, we want to because we think it’s an interesting investment that gives you a long term cash yield and so on. But, that that simply does not exist in the US.”
But Wahba says that needs to change in the US.
“That is the dilemma we have in the US: we need to widen the ownership of infrastructure assets, precisely to create a market and to create capital flowing into that sector,” Wahba said.
Making more of our infrastructure systems publicly investable would make them better. “Wider ownership creates more competition, more competition creates more efficiency, more efficiency creates lower pricing for consumers,” Wahba said.
If more of U.S. infrastructure were to be privately owned and available for public investment, then there would have to be a strong regulator to keep that private company from raising prices too far. Otherwise, privatizing infrastructure “is a recipe for disaster,” Wahba told CNBC.
One place in the United States where infrastructure is generally privately owned is the energy sector.
“Overall, our energy sector is the most sophisticated, the most advanced in the world. So, you may not believe that, but it’s true,” Wahba said. Now, the transmission grid system is not well functioning, but the “power generation system, look, what we’ve done is amazing. We have the most sophisticated integrated power system. That is a fact.”
America is in the midst of an infrastructure renaissance.
Powered by the $1.2 trillion Infrastructure Investment and Jobs Act — otherwise known as the bipartisan infrastructure law — states are rebuilding their roads and bridges, refurbishing ports and airports, and upgrading their electric, water and broadband utilities.
The work is long overdue, and it is badly needed. Not only is infrastructure essential to our daily lives, it is also a key to economic competitiveness. That is why it plays such an important role in CNBC’s annual America’s Top States for Business rankings.
Infrastructure is the second most important category — after Workforce — under this year’s methodology. We consider roads, bridges, railroads, ports, airports and utilities. We gauge the reliability of the power grid and broadband connectivity. We rate the states on sustainability — where is the most renewable energy, and which states are most at risk of floods, wildfires, and extreme weather? We consider which states have the most space available for development, and which have the most population within a day’s drive.
Some states need the new federal help much more than others — America’s Worst States for Infrastructure. But these states are already leading the way, with America’s best infrastructure.
Aerial image of office towers in Richmond, Virginia. Interstate 95, other elevated roads and railroad tracks overlap in the foreground.
Halbergman | E+ | Getty Images
2023 Infrastructure score: 231 out of 390 points (Top States grade: B)
U.S. population within 500 miles: 120,826,520
Bridges in poor condition: 4%
Roads in unacceptable condition: 13%
Broadband access: 91.2%
Power outages per year: 7.2 hours
Road near Halstead in Kansas.
Mixmotive | Istock | Getty Images
Being in the geographic center of the nation would mean a lot less were it not for the fact that Kansas has impeccable roads and bridges. Ninety-five percent are in good condition, according to U.S. Department of Transportation data, which means you will enjoy a breezy 19.6-minute average commute to work. Kansas also scores well for sustainability, with low risk of floods. The state gets 47% of its energy from renewable sources. The new infrastructure law allocates nearly $58 million for energy projects in Kansas over the next two years.
2023 Infrastructure score: 231 out of 390 points (Top States grade: B)
U.S. population within 500 miles: 43,062,013
Bridges in poor condition: 5%
Roads in unacceptable condition: 5%
Broadband access: 87.1%
Power outages per year: 5.7 hours
Denver International Airport lit during the early morning.
Tvirbickis | Istock | Getty Images
2023 Infrastructure score: 231 out of 390 points (Top States grade: B)
U.S. population within 500 miles: 17,399,420
Bridges in poor condition: 5%
Roads in unacceptable condition: 16%
Broadband access: 91%
Power outages per year: 3 hours
Aerial view from a drone down to large solar thermal power station in the dry desert landscape to the horizon. Nevada, USA.
Mlenny | E+ | Getty Images
Despite climate extremes including heat, drought, wildfires and mountain snow, Nevada’s power grid is among the nation’s most reliable, according to U.S. Department of Energy data. The average customer is without power for just 102 minutes per year. The state’s largest electric utility, NV Energy, recently won approval for a $333 million natural gas power plant near Las Vegas to address growing demands. But environmental groups criticized the project, in a state that gets just one-third of its power from renewables. The infrastructure law has thus far allocated more than $155 million for energy projects in Nevada.
2023 Infrastructure score: 235 out of 390 points (Top States grade: B+)
U.S. population within 500 miles: 51,904,491
Bridges in poor condition: 1%
Roads in unacceptable condition: 5%
Broadband access: 92.1%
Power outages per year: 1.7 hours
Clemson University in Clemson, South Carolina.
Denistangneyjr | E+ | Getty Images
The Palmetto State is a leader in internet connectivity. South Carolina’s broadband office, created in 2021, recently announced a partnership with Clemson University to improve access in rural parts of the state. Researchers are constantly measuring and mapping connectivity statewide, to ensure that no South Carolinian is unconnected. The state has already received $5 million for broadband under the bipartisan infrastructure law, and it is in line to ultimately receive at least $100 million.
2023 Infrastructure score: 240 out of 390 points (Top States grade: B+)
U.S. population within 500 miles: 90,868,564
Bridges in poor condition: 5%
Roads in unacceptable condition: 11%
Broadband access: 91.6%
Power outages per year: 2 hours
The Taiwan Semiconductor Manufacturing Co. facility under construction in Phoenix, Arizona, US, on Tuesday, Dec. 6, 2022.
Caitlin O’Hara | Bloomberg | Getty Images
Arizona is emerging as one of the biggest winners in the U.S. crusade to revitalize the domestic semiconductor industry, with Taiwan Semiconductor Manufacturing Company’s $40 billion investment in the state. The Grand Canyon State’s infrastructure is a big reason why. For one thing, Arizona has plenty of space available for development, according to data from commercial real estate firm CoStar Group. The state also boasts the second-most reliable power grid (behind Alabama), with the average customer losing power for only about an hour per year. The state has received nearly $82 million for clean energy and power projects thus far under the infrastructure law.
2023 Infrastructure score: 241 out of 390 points (Top States grade: B+)
U.S. population within 500 miles: 42,351,524
Bridges in poor condition: 1%
Roads in unacceptable condition: 13%
Broadband access: 88%
Power outages per year: 1 hour
Highway overpass cutting across a blue sky and grassy landscape in Cuyahoga Valley National Park, Ohio.
Kat Clay | Moment | Getty Images
2023 Infrastructure score: 245 out of 390 points (Top States grade: A-)
U.S. population within 500 miles: 139,114,704
Bridges in poor condition: 5%
Roads in unacceptable condition: 15%
Broadband access: 94.3%
Power outages per year: 4 hours
Train cars on rails passing through Lafayette, Indiana.
Education Images | Universal Images Group | Getty Images
The Hoosier State is one of the nation’s leading states for rail. Nearly 300 million tons of freight traveled on Indiana rail lines in 2021, according to the most recent U.S. Department of Transportation figures available. While the state is not quite as strategically located as neighboring Ohio, it still lives up to its other nickname — the Crossroads of America. Indiana is also home to key ports on Lake Michigan and the Ohio River. The bipartisan infrastructure law has sent $8 million for ports and waterways to Indiana thus far.
2023 Infrastructure score: 253 out of 390 points (Top States grade: A-)
U.S. population within 500 miles: 111,201,365
Bridges in poor condition: 5%
Roads in unacceptable condition: 6%
Broadband access: 88.8%
Power outages per year: 4.8 hours
Aerial Point of View of Music City, Downtown Nashville, Tennessee from the North Side of the Cumberland River near Nissan Stadium.
Jeremy Poland | E+ | Getty Images
Though recent years have brought devastating headlines about flooding and tornadoes, on a relative basis, there is less risk of extreme weather in the Volunteer State. Tennessee is another state that sits in a sweet spot location-wise, with ready access to population centers in the South, Midwest, and Mid-Atlantic. The state’s power grid is not as reliable as it should be, but help is on the way in the form of $393 million for power and clean energy under the infrastructure law.
2023 Infrastructure score: 254 out of 390 points (Top States grade: A-)
U.S. population within 500 miles: 107,334,805
Bridges in poor condition: 4%
Roads in unacceptable condition: 9%
Broadband access: 93.5%
Power outages per year: 5 hours
The Aveda solar array in Blaine, Minnesota, is wildlife friendly, accented by several acres of new landscaping to create a natural pollinator habitat underneath the panels.
Michael Siluk | Universal Images Group | Getty Images
2023 Infrastructure score: 254 out of 390 points (Top States grade: A-)
U.S. population within 500 miles: 33,103,729
Bridges in poor condition: 4%
Roads in unacceptable condition: 6%
Broadband access: 91%
Power outages per year: 2 hours
A bike rider rides the lakefront trail in front of the Chicago skyline.
Brian Cassella | Chicago Tribune | Tribune News Service | Getty Images
Like many big cities, Chicago’s commercial real estate market suffered during the pandemic, and it has yet to fully rebound. But that means there is ample real estate for companies looking for space. It is not just Chicago, and it is not just storefronts and office space. The Land of Lincoln has a wealth of land available for development. But the state’s roads and bridges are dismal — commuting times here are among the longest in the country — and its water utilities need considerable work. Illinois stands to receive more than $11 billion for road improvements under the infrastructure law, and it has received $752 million for water projects thus far.
2023 Infrastructure score: 258 out of 390 points (Top States grade: A)
U.S. population within 500 miles: 90,393,237
Bridges in poor condition: 9%
Roads in unacceptable condition: 22%
Broadband access: 93.9%
Power outages per year: 2.1 hours
Hartsfield-Jackson Atlanta International Airport
Jeff Greenberg | Universal Images Group | Getty Images
How big and vital is Atlanta’s Hartsfield-Jackson International Airport? In 2015, it became the first airport in the world to surpass 100 million passengers in one year. Traffic peaked at a record 110 million passengers in 2019. The pandemic changed everything the following year, but ATL is soaring back. Traffic rose 24% last year from 2021 levels to 94 million passengers, easily qualifying the airport as the world’s busiest. The infrastructure law has already sent Georgia more than $302 million for its airports to help manage all that growth. After you arrive in the Peach State, you will find plenty of room to thrive. Office space and vacant sites are abundant. And roads and bridges are in good shape in America’s most solid state.
2023 Infrastructure score: 274 out of 390 points (Top States grade: A+)
U.S. population within 500 miles: 79,385,978
Bridges in poor condition: 2%
Roads in unacceptable condition: 6%
Broadband access: 93%
Power outages per year: 2.4 hours
Over the past few years, blockchain technology has paved the way for a new governance model known as the decentralized autonomous organization, or DAO. Built with the philosophy of doing away with a centralized hierarchy that fully controls all decision-making within a given company, DAOs flip the traditional corporate structure on its head, giving shareholders the power to vote on proposals for the organization’s future.
Unfortunately, this hasn’t played out too well in practice. Early attempts have been fraught with issues, many of which boil down to the fact that these systems aren’t quite as decentralized as they seem. Fortunately, DAOs can be built in a way that delivers on the promises of their predecessors, and it’s time to see this shift in action.
DAOs seem like an idea whose time has come. At first glance, the notion of an organization that grants voting power to every member seems highly equitable. It is also in line with the general sentiment behind the creation of blockchain technology. However, just because these organizations are designed to be decentralized doesn’t mean that’s how they operate in the field. In fact, the term DAO is often thrown around loosely, with the reality of a given organization being much less decentralized than they advertise.
In many cases, a relatively small number of governance token holders actually control a significant portion of the voting power. This can happen either because they have deep pockets or, in the case of an exchange because they control a massive amount of user funds. There are also times when the DAO community only has superficial control over lesser aspects of a project, making the entire practice more or less an empty gesture.
Even worse, sometimes centralized development teams make decisions regardless of the voting outcomes from the community because the DAO has no tangible means of enforcing their will. When users start to see their voice eroded by issues like these, it can lead to “voter apathy,” which lowers participation, further exacerbating the problem of centralization.
The bottom line is that architecture that is promoted as decentralized is, in some cases, anything but — effectively removing the main benefits that DAOs can bring. There are, however, ways to address these issues.
A shift to purely decentralized DAO management is one of the first changes every DAO should implement. This means no core group of developers who have the majority of minted tokens or unchecked power to go against the community’s will. Any contributor should be allowed to submit and vote on upgrade proposals. These suggestions should be forwarded to the community as a whole, independent of any other entities, allowing all participants to have a voice. Additionally, infrastructure needs to be built to enforce these decisions once they are made — removing the power of the developers to go over the community’s head.
Of course, delegating roles and tasks will still be essential, but the DAO community can also decide this. Work can be posted publicly, and anyone can offer to take up the task. Ultimately, other members can vote on which candidate is best suited, divvying up work in a meritocratic way.
Another critical element of a functional DAO framework is transparency. This isn’t to say that how individuals vote should be fully public, but there needs to be clear access to voting results and verifiable steps to implement those decisions. There also need to be clear communication channels that allow all members, developers, and other stakeholders to access the latest news and information concerning the project, as well as all rules that define the DAO itself. Having this level of transparency built in from the ground up will be essential for building trust and loyalty among members, making it very difficult for any actors on the network to abuse power.
To truly make community-controlled governance effective, there needs to be an ongoing conversation on the evaluation of DAO performance and ongoing enhancements. These structures should never be truly “finished,” as extenuating circumstances in the future may always prompt the need for evolution and change. New risks may emerge, or economic conditions may develop unforeseen. However, this is precisely what makes true decentralized governance so powerful. When the community is informed and has a voice, it can respond organically to new challenges and needs.
The DAO model can bring this technology to a global audience. Any business or project could be run in such a fashion, and it would finally break these systems away from the hierarchical approach that has led to failures and corruption. Giving true democratic power to an entire community and promoting transparent practices is the future of DAOs, and it’s time for these organizations to make the shift.