Ep. 169 – The future of governance and collaboration – insights from R3

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Alisa DiCaprio, is the Head of Trade and Supply Chain at R3 and also facilitates a lot of R3’s research. Whilst the concept of governance is familiar to many in the business community it has proven to be quite a challenge to blockchain business networks. In this podcast we discuss with Alisa, her latest research paper on the future of enterprise blockchain governance and collaboration. We cover some of the design and implementation of new business and technical models that will ensure that your blockchain journey is a success.

 

What is blockchain?

For Alisa, blockchain is just a database but what makes it different from other databases is that it’s decentralised that is global accessible. Like other digital technologies, blockchain requires the same adjustments to the global and commercial infrastructure.

 

Discussing the future of governance and collaboration

In July 2021, Alisa published a white paper entitled “The Future of Governance and Collaboration”.  R3 began itself as a banking consortium and thus gained from the get go experience on how to build and manage consortiums.  A lot of their consultations with companies building on Corda was about how do you manage a consortium?

What they realised is that when projects go wrong it often is not because of the technology but because of the decision making process that doesn’t work or something with regards to governance. So, the white paper was an effort to set out the different examples of where governance has worked and all the different choices that need to be made. It sets out the policies that need to be thought of, it defines what is governance, and the questions that need be asked when building on blockchain technology.

 

What is governance?

Governance refers to the processes and the rules that determine how a system makes decisions as it evolves. It is something that needs to be thought of as early as possible as it establishes the core capability for a sustainable business network to last from its inception to the future.

 

Are aspects of governance unique to blockchain?

In legacy technologies there are well defined areas for adjudication when things go wrong. As blockchain is a new technology it doesn’t have those well defined adjudication history nor a long lasting legal infrastructure. A lot of today’s rules and regulations don’t apply to blockchain, so for this reason, governance becomes very critical. It contributes to its reputation as a technology that works.

 

Why do blockchain projects fail due to governance?

For Alisa, there are two types of characters that are early blockchain builders:

  • Entrepreneurs
  • Established businesses that may have an innovation fund or some money to play with

Entrepreneurs who build on blockchain are usually new to the technology and are not necessarily thinking about establishing a governance structure. Established businesses which could be large companies or existing consortiums who are building on blockchain have an existing governance structure and they assume that it will work with blockchain and it doesn’t always.

 

How do traditional business networks differ from blockchain business networks?

Traditional business networks differ from blockchain business networks in three ways:

  1. Consortiums are considerably more common in the setup of blockchain business networks. The reason for that is because blockchain allows to innovate on a sector wide level rather than just a business level
  2. Blockchain business networks take a lot longer to implement than traditional business networks and also to change. Part of the reason is because it’s so new that it is unclear what the regulatory infrastructure is. You may need to establish a rulebook if the legislative component does not exist. And of course, there is a business culture change with suddenly the need to operate in a decentralised way.
  3. The role of the business network operator becomes a lot more important that it is in traditional networks

 

Moving from a small centralised consortium to a larger decentralised one.

In Alisa’s experience working with a small group of companies trying to affect governance isn’t necessarily easy. Each of those companies may be doing exactly the same process but they’re calling it different thing, they may not have a shared lexicon.

Establishing this shared lexicon and a flow that works for those initial companies is important but equally important is to make it palatable for every new member of the consortium that joins. Thus, it becomes very important that the decisions structure that is developed has the ability to change as the number of new members grows the consortium.

It is important not to lock in too many decisions early as the goal is to grow. You want other companies who join the consortium to see that the process that has been built is easier for them than the existing one and that they have a means to contribute to it.

One of the pieces of work Alisa did was to build the standards body that was initially started with the Marco Polo banks which has since been handed over to the International Chamber of Commerce, now rebranded as the Digital Standards Initiative (DSI). During her time, she surveyed all members to answer 10 – 15 questions, which included questions like:

  • How many people should be on the board?
  • Should founding members have special rights once the consortium expands?
  • Should there be a membership fee?

The output of that survey was used to help build the governance structure. What you don’t want to do is form a working group and ask these questions without having any idea what people incentives are. Because that means you’re working group meetings will take five hours and they’ll just be people yelling at each other.

Having that document enabled Alisa to enter meetings knowing what each players want and have a point to discuss together to establish a common governance.

 

Administrative governance

The administrative governance structure is the longer term business and commercial activities that are associated within the business network.

The body that administers these functions can be called the Business Network Governor (BNG). This is just a name, it can be a specific company, a group of companies, a board, or any structure. That entity is meant to facilitate the contractual relationship. It is generally responsible and accountable for establishing and maintaining governance policies, and accountable for their implementation and enforcement.

 

Choosing a legal entity and where it is domiciled?

Choosing a for profit or not for profit legal entity involves important choices such as how they generate revenue. For profits make their money by selling a product whilst a not for profit may generate its revenue from membership dues. Will membership dues be in a tiered way or just one price. Are they per individual members or via a corporate membership.

Choosing what type of legal entity has implications on the jurisdiction that legal entity is in and will influence the structure of that entity.

 

Policies

Negotiating policies amongst members of a consortium forces the entities to talk about things like how to onboard and offboard an entity. This can be very important especially when thing go wrong. Alisa gave the example with B3 (Brazilian Stock Exchange) about what happens to a misbehaving node.

B3 runs a blockchain network that essentially includes the entire sector. So, if a node is misbehaving, that raises the question, do you kick that node off the network? Because then if all the other companies in that whole entire sector are on the network, can you really exclude just one because then they don’t have access something that the rest of the industry does.

Offboarding is often a lot more complicated and something that isn’t thought off until something goes wrong.

Other policies to look at include: data privacy, data retention, prioritization of features, dispute management, inter-network policies, service level, legal contracting model, business model, data resiliency and system availability.

 

Technical governance

Technical governance includes the rules and processes that maintain the everyday functioning of the business network. Maintaining system integrity involves tactical decisions around shorter-term tasks like ensuring all of the nodes in the business network are upgrading at the same scheduled time. Technical governance is run by an entity called the business network which could be a number of different types of actors.

Due to some of the difficult decisions that the business network has to take it’s important that this is a neutral entity.  For example the off boarding policy is made by the administrative governor but its actual execution of the off boarding will be done by the network operator.

 

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This episode is brought to you by our friends and sponsors at R3. In this digital-first world, now more than ever, businesses need to modernize existing processes, systems and models – and enterprise blockchain provides the ideal solution for transacting directly and streamlining business operation.

Developed by R3, Corda is light years ahead of other blockchain platforms in terms of privacy, security, scalability and interoperability.  And–because Corda was built to meet the stringent requirements of highly-regulated industries, it can be used by firms of any type or size and in any industry.

Blockchain applications built on Corda can reimagine and increase the potential of existing business networks, enabling direct and trusted transactions that eliminate friction and accelerate growth.

Check out r3.com to find out more.

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