Part II - Our Current Governance Stack

Incremental decentralization vs. instant instability

Admittedly, OtoCo’s governance still has some way to go towards full decentralization.

1. Part of it is age: the project is very young (less than 2 years) and its liquid token younger still (less than 6 months). Some tech that will help enable our vision for business building as a massively multiplayer onchain role-playing game (MMPORG), including the equippability of NFTs, is embryonic still.

2. Another part is design: incremental decentralization is probably preferable over the risk of instant instability.1

   Presently, OtoCo still needs Otonomos as its main backer and builder. Otonomos’ developers are building OtoCo under a development grant, and two half-time employees on Otonomos’ payroll are seconded to OtoCo. Otonomos’ CEO spends about half his time on OtoCo too.

   In September, one full-time employee is set to join OtoCo’s U.S. development company as Product Lead, its first hire.

3. Third, the project is not rich: with initial funding of just over 1MM, we cannot afford to throw money at problems until we get it right, and purposefully want to keep a sense of runway that if we do take a wrong turn, the project can fail. We think this is a healthy dynamic that focuses the mind.

As a result, OtoCo is still rather centralized:

• The funds raised from the community are still held in a multi-sig wallet of OtoCo Labs Ltd in B.V.I., the special purpose vehicle that created and issued the OTOCO ERC20 token, of which one of the Otonomos entities, OtoCorp Ltd. in Bahamas, has the second key.
• All of the OTOCO ERC20 tokens are held in this wallet and none of the tokens have yet been allocated, except for the tokens claimed by stakers at the close of our OtoCo launchpool event on 22 March this year.
• OtoCorp Limited is also the sole Director of OtoCo Labs Ltd. and its CEO is its shareholder, as well as the shareholder of OtoCo Inc., the project’s U.S. devco.
• OtoCorp Limited itself is indirectly owned by Otonomos’ CEO via Otonomos Holdings, which is both sole Director and sole Shareholder of OtoCorp Limited.
• In May of this year, a Cayman Foundation has been readied to act as OtoCo’s community vehicle with all OTOCO token holders as beneficiaries (see below). The Foundation is Founderless and Memberless with OtoCo Labs Ltd. as its sole Director.

The OtoCo Foundation and its token-holder beneficiaries

As mentioned above, the first step towards gradual decentralization of OtoCo was made in May of this year with the activation of its Cayman Foundation.

According to its current Bylaws, the primary purposes of the OtoCo Foundation are to facilitate, support, promote, operate, represent and advance:

• the open-source development and adoption of blockchain-related technology and software (including, but not limited to the OtoCo project and code related thereto, and other items, software and other materials from time to time in its code repositories;
• each DAO Resolution (i.e. each validly passed proposal in accordance with the governance protocols of the OtoCo DAO);
• research and education materials concerning onchain entities, decentralized autonomous organizations (DAOs), open-source software, blockchain or distributed ledger technology-based digital assets, tokenization of securities, Non-Fungible Tokens (NFTs), staking and fundraising using blockchains, token issuance and distribution models, sovereign identity and attestation, and
• any necessary private use modes or commercial agreements or relationships in furtherance of any of the above.

The key to a Foundation generally is its ability to extend grants, which in the case of the OtoCo Foundation can consist of “assets and/or monies and/or paying for accounts, services, programs, events, incentives, researchers, contractors and/or vendors in support of any of the above Purposes [...].”2 Such grants include grants to cover the expenses of OtoCo’s main devco, but could in principle be extended to any organization or individual around the world.

The Foundation is also expected to designate a project-related software repository, which in the case of OtoCo is https://github.com/otoco-io.3

There is a further provision that prohibits the Foundation to “operate, solely control, have or take sole custody of any blockchain network instance, which may be evidenced by a control of a majority of such an instance’s validators, hash-power, or other consensus mechanism.”4

The Foundation is also allowed to earmark a “reasonable budget” for itself, including from the project’s native token.5

Section 5 of Article 1 is fundamental, stipulating that:

each holder of OTOCO Token(s) which are revocably contributed to or staked in the applicable designated governance contract of the OtoCo DAO is deemed a beneficiary of the Foundation (each, a “beneficiary”) and has the right to submit and vote on binding proposals (each valid proposal which is comprehensible, lawful, in keeping with the Purposes, and subject to the vote of the beneficiaries by way of the OtoCo DAO, and in accordance with and subject to any applicable thresholds, restrictions, guidelines and parameters in the code and pursuant to the governance protocols of the OtoCo DAO, a “Proposal), and each validly passed Proposal in accordance with the governance protocols of the OtoCo DAO, a “DAO Resolution”) and may receive benefits from time to time from the Foundation […].

More accessibly, the above means that the Foundation makes of each token holder a Beneficiary, which means tokenholders can receive benefits from the Foundation of any nature, including governance participation rights.6

Article 2 of OtoCo’s Bylaws then deal in more detail with what is termed “Proposals” and “DAO Resolutions”.

• Proposals can be submitted by each Beneficiary (i.e. token holder) in accordance with the DAO governance protocol, including any applicable thresholds, restrictions, guidelines and parameters in its code.
• A “DAO Resolution” is each validly passed Proposal in accordance with the governance protocols of the OtoCo DAO.

It is the key enabling clause that gives the Foundation the power to act upon validly passed Resolutions voted on by OTOCO token holders.

Since actions by a Foundation practically have to be performed by its Director(s), OtoCo backed up this enabling clause with a Special Resolution which obliges its Director, OtoCo Labs Limited in the B.V.I., to “use best efforts to implement and execute each DAO Resolution” as part of the Director’s fiduciary duties to the Foundation.

Article 5 of the Bylaws deals with the Director “Board” (even if only one is appointed) in more detail, stating clearly that “all corporate powers shall be exercised by or under the authority of the Directors collectively […] as directed or permitted by DAO Resolution, and the management and affairs of the Foundation and actions of the Directors pursuant thereto shall be governed by the OtoCo DAO in all respects […].”

In laymen terms, this means the Director can only ever execute DAO Resolutions, with little if no room for discretion.

Section 2 of Article 5 of OtoCo’s current Bylaws introduces further protections for the token holders by obliging the Foundation to appoint no less than three Directors from the date of the second anniversary of the Foundation’s existence, or 27 May 2024 in the case of the OtoCo Foundation.

Further sections of Article 5 then deal with the Board’s quorum and voting:

50% or more of Directors in office shall constitute a quorum for the transaction of business. The vote of 50% or more of Directors present at a meeting at which a quorum is present shall constitute the action of the Board of Directors, provided such action is pursuant to a DAO Resolution.

The above section may be relevant in a more traditional foundation but is largely irrelevant since Directors in a Foundation with tokenholders as beneficiaries have a fiduciary duty to execute all DAO Resolutions.

Director vacancies and removal is also dealt with via DAO Resolution.7

Sections 12 and 13 of Article 5 put financial protections in place, making Treasury actions subject to a DAO Resolution.

Article 6 deals with officers, employees and contractors.

Article 9 allows for the creation of “sub-DAOs”, subject to a DAO Resolution: decentralized autonomous organizations which further any of the Foundation‘s purposes and which may be wholly owned subsidiaries of OtoCo DAO and the Foundation, and to whom specific functions and responsibilities may be delegated.

Article 8 obliges the Director to prepare and submit an annual report to the Board which is to include a balance sheet of the Foundation and a revenue and disbursement statement., which may be in the form of the publicly visible blockchain address (and transactions thereto) of the OtoCo DAO.

In addition to all Directors, Supervisors too have information rights.

After further household clauses, Article 12 deals with “qualified code and governance deference” in case the DAO code would cease to function as expected, listing six Materially Adverse Exception Events (“MAEEs”), including a bug in the DAO code resulting in unauthorized use of accounts or private keys within the DAO, unauthorized use of an admin function or privilege of the DAO, inoperability, the majority concentration of the DAO’s voting power in a single entity, a legal order or “any other reasonably unforeseen event resulting in unauthorized or material unintended alterations to OtoCo DAO’s core functionality.”

Any of the above MAEEs would trigger an exception response involving first adding all Directors and Supervisors of the Foundation as multi-signatures to the DAO’s wallet(s) to secure its funds, and initiating the exception handling process of Art. 12 Section 4.

Finally, the Ouroboros clause: The Foundation can eat its own tail by altering, amending or replacing its Bylaws pursuant to a DAO Resolution.8

The Central Role of the Decentralized DAO

From the above, it is clear that the governance protocol of the OtoCo DAO plays a central role (pun intended) in OtoCo’s workings.

As with most Web3 projects that aim for (or claim) a decentralized setup, coin voting rules: liquid token holders sign at the top of the chain of command, with their edicts trickling down on the Foundation and passed on to grant recipients, including OtoCo’s own operational entities.

However, the arguments against the liquid token-holder-centric model are well known by now, going back to some of Vitalik’s early blogs9, and is a topic he (in his own words) has written about ad nauseam.10

In Part I, we proposed a way to enlarge the voting token holder community by creating a second “chamber” populated by non-transferable NFT governance award holders.

In Part III, we schedule for this bicameralism to be put in place no earlier than 4Q2023, for three reasons:

1. We want our internal development efforts to go to building solutions for our users first, with 2023 entirely dedicated to the dAppstore which should significantly increase OtoCo’s utility for the community.
2. During this Buidl stage, we justify our more central stewardship on the basis that the community relies on the initial team to lead the project and take all the necessary decisions (and hopefully avoid major mistakes!) before governance is placed fully in its hands.
3. We have a clear timeline for Foundation Director elections (May 2024) and a clear vision of how we want governance to work once OtoCo is fully decentralized.

Meantime…

In the meantime, after the forthcoming pledge of OtoCo Labs’ assets to the OtoCo Foundation (September 2022) and an initial liquid token allocation to the core team, the Foundation will be submitting a first series of Proposals, including a grant proposal to OtoCo Inc. to cover its working expenses.

There will also be a proposal asking what portion of OtoCo’s Treasury should be used to create an initial liquidity pool and on what decentralized exchange.

Finally, there will be a proposal regarding further funding options for OtoCo.

Pre-vote discussions will be mainly conducted on Telegram and Discord via polls, with onchain voting initially on otoco.eth’s snapshot.

In summary

• OtoCo is currently controlled by Otonomos and its founder via its/his shareholding and directorship in OtoCo’s entity stack, including the OtoCo Foundation.
• Any least we are open about it and don’t do faux decentralization, in the comfort that the community wants us to focus on building solutions for our users first, and on the basis that OtoCo need stewardship during this heavy Buidl phase.
• However, from the outset we put key protections in place for our initial liquid token holders, including Bylaws for the OtoCo Foundation that make every decision subject to an onchain vote.
• This transitionary setup will be in place until we built, tested and audited our design for a bi-cameral governance model based on joint voting by both liquid token holders and non-transferable NFT holders who earned participation rights under a governance award token minting mechanism scheduled to commence in 4Q2023.

In Part III, we provide a clear roadmap towards full decentralization and community governance of OtoCo with clear milestones along the way.