COUGAR PAW N’ SHOP 2

PART 2 - Rising Action

The year is 2023, two furries dressed as Cougars, or Cougars dressed as humans (you never can tell) walk into a pawnshop and demand they take their farm as collateral for a pawn loan.  The pawnshop owner is frazzled. “I can’t do that, '' he says with a thick Eastern European drawl.  I only take physical things, jewelry and power tools, bicycles and shit.  Things I can sell in the store if you don’t come back for your redemption of the loan. What should the Cougars do?

The two cougars pondered a moment how they can pawn their farm and use for a decentralized loan, but they were at an impasse. So they went to the legal engineering guild at lexdao.chat and started catbrainstorming. The first thing they figured, after consultations with their pussy-cat lawyer, Matt Felaine, was that they would need a legal entity and a shell holding company to own the real estate.

Create a legal shell and form an incorporeal organization

To form a legal entity in the real world can differ wildly. It can go from a few people agreeing, with a handshake and an idea to form a business and an “unincorporated” general partnership rises from the ether. Or it can be more regimented and file the paperwork, registration fees, and filing documents with the state to form a corporation, LLC, LLP, etc. There are services that make this process easier such as Stipe Atlas or many folks will hire an attorney and accountant to aid this process.

Creating an on-chain entity may or may not reduce paperwork, but it will still require adherence to state and federal laws and regulations. This is why it is important to speak to a lawyer and an accountant early in the process to assess structure and risk. Using a smart contract platform, the cougars could create a corporate entity, such as an LLC, and customize the governance rules, issue ownership tokens, and file all the necessary information the same way as above and it is a real world entity. These on chain organizations often just create the “consensus” mechanism using digital signatures on chain. So rather than sit around an oval table and raise hands and enter into a paper ledger, the consensus is recorded on a distributed ledger. In a way, KaliCos are similar to Stripe Atlas, but for on chain (internet native) organizations.

What is the difference between a LLC and a Corporation (Inc.)?

An LLC is a type of legal entity which is similar to a corporation in many ways, but also has some key differences. A corporation has more formal requirements, such as annual meetings, board of directors, reporting requirements and shareholder voting. An LLC typically offers its owners more flexibility and fewer formal requirements. In other words an LLC is governed by its operating agreement which lays out the relationship between its members and to an extent the outside world. LLCs combine aspects of both corporations and partnerships, building on their predecessor—the General and Limited Partnership. LLC’s also have more flexibility with how they decide to separate the economic benefits and the governance rights. Another primary benefit of the LLC when compared to the corporation is that LLC’s can pass their profits and losses through to their owners and not pay taxes at the corporate level, rather their entity level taxation is at the individual level like a partnership.

Why is having a legal shell necessary?

A legal shell is necessary to provide a layer of liability protection from outside parties and delineate the responsibilities that are owed amongst the members, shareholders, officers, directors, etc. It is the legal entity that owns the asset(s) and can govern decisions over the asset and the economic benefits from the asset. So back to our Cougars, thy need to arrange their business operations on the farm, assign tasks to each member, and protect their financial investments from liability. This is what they mean limited liability, in that liability does not reach to the individual.

Forming a LLC with Code-Deference

The Cougars wanted to use a blockchain to govern certain of their entities parameters. They used a process referred to by Gabriel Shapiro as Qualified Code Deference, not to be confused with vas deferens, with an example here. In other words, they are using software to govern certain aspects of their business, such as reaching “consensus.” Rather than sit around an oval desk and follow Robert’s Rules of Order, they use Cryptographic signatures and follow Moloch’s rules of disorder. They have the ability to program consensus mechanisms. Like many boolean features, they operate in an ‘if this, then that way’. One could say that the first codified law, was very similar in reference to The Code of Hammurabi.

In a similar fashion if the Cougs want to buy a couch, an end table and some lamps from someone using Treasury assets, then it must go through the consensus mechanism. Proposals are often optimistic in nature, in that they pass with a minimum overall participation, unless they are opposed. As an example, the parameters can be set that they require 25% overall participation AND a simple majority 50%+ (in favor of) to pass a proposal that moves tokens from the Treasury.

Participation from these smart governance structures are often criticized for low turnout, but it can be assumed that votes that are not cast are also “optimistically” in support of the proposal to the extent that the minimum parameters are met. It is easy to get high participation, but passing controversial proposals to “steal” the treasury or throw a party by hiring Andrew W.K.

Additionally, these internet organizations also contemplate being governed asynchronously. Async organizations allow distributed groups to read consensus in a way that better straddles timezones. Rather than having an in real time meeting and voting procedure, the consensus can be set by code. The proposal time is over 5 days and if it attracts enough votes then it can be processed. Otherwise it fails. It is necessary for decentralized and flat organizations to be able to coordinate over large geographic distances and without set times.

Creating an on-chain entity is a powerful way to extend organization formalization and structure to global realms. It allows for a tighter control on the assets, procedures and coordination within the organization, while also admitting more flexibility than traditional legal structures. The Cougars were able to codify the consensus rules onto a blockchain, making them immutable and global, while still complying with local laws and regulations. On-chain organizations can also create a risk-based operating environment, while still leveraging traditional legal contracts. Knowing how to use the right legal and technical tools is the first step towards creating an on-chain entity.

In this process the legal entity is still created in the real world, but certain aspects of it are managed using a digital codebase. They sent their legal documents to the county to form their LLC, and the smart contract code they wrote handles the details of managing their farms asset, the redemption of their treasury, and handles their company books and consensus mechanisms.

Cougars as Models

We really started this experiment with the expectation of at most being hand models, but we are seeing lots of interest in people wanting to organize, form an entity, to own and manage real estate using blockchain tools to manage certain aspects. These Cougars are on the catwalk.

Among many of the concepts we’re exploring with real property rights on the Blockchain: is it technically and legally possible to conduct the equivalent of a pawnshop loan on real property, using blockchain and digital orgs (LLC’s), and existing laws? Should we try to finance or sell our farm we bought using DeFi rails?

Check out the Farm and the leasehold we have at the Cotton Exchange here.

We aim to educate and entertain.  We are also exploring the use of other tools, such as machine learning AI such as Midjourney and OpenChat AI used to help draft portions of this article. Want to see the details on the farm, check out the TATR NFT for the farm. Catchup with the first part here.