How to Fix the EOS Constitution - A Comparison of the EOS Constitution v Company Constitution
By Brenda Saveluc and Alyssa Tran of BlackGold Legal, with huge thanks to Nathan Rempel and the inimitable Fred Schebesta.
Why?
So why compare the EOS Blockchain constitution (“EOS Constitution”) with a traditional company constitution (“Company Constitution”)? Other than just for the hell of it, we thought it would be interesting to see how the constitution of a semi-decentralised organisation such as the EOS blockchain stacks up against a company constitution we’re familiar with in Australia (and which in one form or another has been used for at least the last few decades). The EOS constitution borrows a lot of traditional ‘legal’ concepts and language, so we’re curious to see how it might be used in a new context.
Bear in mind that block.one raised $4bn for the EOS initial coin offering (ICO), making it the largest ICO to date. This is not an insignificant project, so how the project is managed and governed is important to a lot of people – not only investors who bought tokens but also block producers and users of the token. The EOS journey has not been a walk in the park so far, especially from a governance perspective. There have been articles lately on troubles with the governance model within the EOS blockchain – one pretty poignant example came at the launch of the EOS main net in June 2018 due to the EOS Core Arbitration Forum’s failure to officially respond immediately (story here).
What is the purpose of a constitution?
Simply put, a traditional company constitution is a set of fundamental principles that govern how a company is run. It is designed to ensure the directors (who run the company day to day) and shareholders (who own the company) don’t go rogue and that they abide by the rules when dealing with important matters that affect the company. There is a pretty clear delineation of rights and responsibilities:
the directors run the company – they have to act in the best interests of the company, and in return they receive directors fees / salary.
shareholders own the company – they own the company but do not run it, have limited liability, and in return they receive profits from the company (hopefully anyway).
It is pretty standard for a company to adopt a constitution when it is incorporated. If a company doesn’t adopt its own constitution, then the replaceable rules in the Corporations Act will be the default position.
Similarly, the EOS Constitution sets out some basic principles that govern how members using EOS blockchain should act.
Both constitutions are like a private contract between the members of the company and members of the blockchain.
Company Constitution – important parts
Every company constitution is different and there is no right or wrong way to draft a constitution. For our purposes, we will take a look at some common threads in most company constitutions.
1. Director and shareholder duties and powers
A traditional company constitution will normally set out what each director and shareholder can and can’t do (including their roles, duties, powers and any restrictions to which they may be subject). For example:
The company is to be managed by the directors, and the directors must always act in the interests of the company;
What kinds of decisions require a majority of directors to agree and which decisions need to be approved by shareholders. A constitution might also set out how disputes are resolved;
How a director can be appointed and/or removed;
How to call a meeting of shareholders and how shareholders can vote on resolutions.
2. Shares and dividends
The Company Constitution usually sets out specific rules on the following:
The different classes of shares that can be issued in the company, including voting rights, preferential dividend distributions, redemption rights and so on;
Mechanisms for issuing, selling and transferring shares; and
Restrictions on the issue, sale and transfer of shares; and
Policies on the distribution of dividends.
EOS Constitution – main tidbits
The EOS Constitution is much simpler than a traditional company constitution, but it is interesting that it uses quite a lot of legal terminology. It outlines some broad principles in terms of how members should behave when dealing with each other, but it is quite ‘light touch’ and doesn’t really give clear guidance for specific governance mechanisms or how decisions in the EOS ecosystem should be made.
Importantly, especially in light of the comparison between the EOS blockchain and a traditional company structure, there is no differentiation made between the ‘owners’ of the EOS blockchain and the members that might be responsible for operating the blockchain. There is no concept of ‘directors’ and ‘members / owners’.
Taking a look at some specific provisions:
Overall, our impression is that the EOS Constitution, and generally its governance model, leaves quite a lot to be desired. The concepts and notions behind the EOS framework are innovative and interesting, and the delegated proof-of-stake (DPoS) model that it operates on tries to address some of the perceived difficulties with a pure proof-of-stake and proof-of-work models. The DPoS model mirrors some traditional corporate governance principles – specifically the ‘one share, one vote’ structure which means that the more EOS tokens you hold, the more votes you can cast.
In trying to find a balance between traditional corporate governance frameworks and the ‘decentralise-everything-and-crypto-anarchy-forever’ mentality amongst many blockchain tech fundamentalists, the structure currently in place to govern the EOS blockchain has somehow fallen short in all respects. We think it is interesting that even Dan Larimer (block.one CTO) has said that he wants to scrap the current constitution and start again.
It seems that the rights of EOS token holders are relatively few, especially when compared to those of an ordinary shareholder in a company. An EOS token holder’s right of recourse is basically to the ECAF and its arbitrators – both of which still operate within the EOS ecosystem (as opposed to a separate, independent body like a judicial system). It is also clear that block.one has designed the EOS blockchain and its tokens with a view to not involve themselves in the ecosystem (maybe as a risk mitigation strategy).
It will be interesting to see how the EOS constitution evolves. Block.one has proposed version 2.0 of the constitution but this has not yet been adopted. Frankly, we think that version 2.0 doesn’t fix a lot of the fundamental issues present in version 1.0. We are going to take a stab at writing our own EOS constitution – so keep a lookout for part 2!
What have your experiences been with dealing with ECAF? Does it actually work a lot better than we think? Let us know in the comments.