Among the 1,500 ICO’s announced or launched to date, a unique aspect of Swarm Fund – aside from having an actual product that’s ready for market – is our “liquid democracy” governance model.
We’ve been saying for a while that Swarm’s fundamental goal is to democratize investing. The way we’ll do that is by implementing liquid democracy to empower investors in a way the world of finance has never seen before.
Liquid democracy, in its simplest form, is a hybrid of direct and representative democracy. In a direct democracy system, everyone votes on every issue. In a representative democracy, such as the system in use in the United States, voters elect representatives, or delegates, to make decisions on issues for them.
The problem with direct democracy is that it can be cumbersome to administer, especially when decisions need to be made quickly. Challenges with representative government can be summed up in terms of “election year promises,” where delegates say one thing to get elected, and do another once in office.
Liquid democracy combines the best of both systems by allowing members to vote directly, or through a delegate, on any issue. The part that’s “liquid” about it is that even if a voter decides to delegate their vote to someone else, they can rescind that choice down the road, if they disagree with the delegate’s handling of an issue, or even if they just change their mind on a given topic.
What does all this mean for Swarm Fund? Well, for one, it means that in addition to being a decentralized capital marketplace that gives smaller investors access to high-return asset classes, the overall governance of the platform will reside with the users themselves, who will actually own it under a co-operative type framework. The structure will be similar to how member-owned credit unions and insurance companies are set up.
Then, once the ICO is complete, three of the five spots on the Swarm Fund board will be filled with either members of the Swarm, or managing partners of the initial pilot funds operating on the platform.
Who decides who holds these three seats? Swarm token holders who buy into the platform during the ICO.
Following the liquid democracy model, they’ll be able to vote directly for candidates, who will also be nominated by the Swarm, or delegate their votes to others, if they choose. Of course, those votes will also be weighted according to the number of Swarm tokens owned.
The two remaining board seats will be filled by Timo Lehes and Philipp Pieper, both of whom have been instrumental in bringing Swarm 2.0 to fruition. Their guidance will help ensure Swarm Fund gets up and running in line with its intended vision. While I’ll still retain veto power over major decisions on the platform, board seats will go up for a vote every six months, with nominations coming from members of the platform itself.
I’m sure some crypto purists might not see this as a truly decentralized governance structure in the spirit of the original blockchain vision. After all, the Bitcoin whitepaper was inspired, at least in part, by the actions of the centralized banks that helped create the global financial meltdown of 2008. The logic was, if the problem lay with the central authorities that controlled the system, the solution would come from removing those authorities from the system altogether.
The question then became why do we need institutions like banks for the investing process in the first place – taking fees from investors, just because they existed? Why not just use distributed software instead, which wasn’t “owned” by anyone, to allow investors, with the help of smart contracts, do the same thing?
And yet, many of the first iterations of Decentralized Autonomous Organizations, including The DAO, never truly fulfilled this vision. Instead, they still operated under a quasi-centralized structure that was controlled from the top, and not the members themselves. Instead of banks, crypto enthusiasts were giving money to software development teams, who became the new middlemen.
Swarm’s liquid democracy governance structure is specifically designed to avoid that scenario, while empowering people to move their money and investments, without relying on middlemen, lawyers and banks. Instead, members of the cooperative can rely on the distributed power of smart contracts and the blockchain to verify transactions, without the need for an overarching institution to keep tabs on what’s in every member’s account.
We believe Swarm’s governance structure maintains the least amount of centralized authority over the system as possible, while still ensuring a legally grounded basis for the platform. That includes the initial board structure, my veto vote, and review of proposals by the Swarm legal team so that we can continue to interface with existing regulatory systems.
But that’s where we feel our authority should end. Everything else should be decided by the members of the Swarm, through liquid democracy.
And yet, while I feel this model of liquid democracy and co-operative ownership does fit in with the overall vision of the blockchain, we didn’t just implement it out of some blind allegiance to blockchain philosophy, or as a rallying cry for crypto enthusiasts.
There’s a much more pragmatic aspect of this governance system that goes beyond members being able to elect a board, and eventually, even propose new fund ideas on the platform. Namely, since Swarm Fund is set up as a cooperative that is governed by its members, it also allows us to pass a key provision of the Howey Test.
Because members who buy the initial Swarm utility token will be actively involved in the governance of the platform through liquid democracy, profits from the system won’t be coming from a third party – they’ll derive from the members’ actions themselves. That’s a critical aspect under Howey.
Swarm SUN sub-tokens, on the other hand, will enable members on the platform to invest directly into the pilot funds themselves, and thus, may be classified as securities.
It’s also this thought-through structure of having a utility token, as well as specific fund sub-tokens, that helps us pass another part of the Howey Test. Namely, by having the original token and the sub-token, we can distinguish the utility from the security. It is the essence of a bright line test.
That’s why we won’t be excluding U.S. citizens and residents from the initial utility token round, as we’re seeing so many ICO’s do in the current environment. U.S.-based investors will be able to buy in just like anyone else.
During the intervening time between Swarm 1.0 and now, we’ve put in a lot of legal legwork to make sure Swarm Fund not only provides a disruptive, dis-intermediating model to democratize investing, but that it’s also set up in a way that should help weather the regulatory unknowns that are a fact of life in the current crypto environment, while achieving compliance with the regulatory guidance that’s been given to date.
Whereas many ICOs have been developing their technology first, and then rushing to market to raise as much coin as quickly as possible via legally questionable frameworks, we’ve taken the opposite approach. We set up a clear governance structure and legal model first, made sure that it interfaced with various regulatory regimes in different parts of the world, and then sought confirmation that we were not violating U.S. security laws by bringing it to market.
The thing that sets Swarm apart, in terms of its liquid democracy governance structure, then, is that it’s not just another crypto utopian vision. Although our liquid democracy governance and ownership model does align with the original, decentralized vision of the blockchain, it is also a pragmatic business solution for the questions facing the crypto space today.
We believe that by addressing the regulatory and governance issues crypto has struggled with to date by implementing liquid democracy under a co-operative ownership structure, we bring a legitimacy to the space that’s been sorely lacking in recent months.
And we’re doing it by putting power back in the hands of the Swarm.