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On January 10 2019, I made a presentation at the Blockstack “Decentralizing The World” event in Hong Kong. I’m posting my entire presentation as speaker notes. You can also see the slideshare link below.

INTRO

Good morning and thank you Blockstack for inviting me to this special event to talk about the Layers of Decentralized Governance, and greetings to Hong Kong and its tech community. I must confess, this is my first trip to your wonderful city, and I wished I had come earlier.

DISCLOSURES

First, by way of disclosures, I am involved in a number of activities in this sector, whether I’m invested in or advising companies, these are the key one. Some of you know me as the author of The Business Blockchain, the first book to explain the blockchain in a business language. Actually, that book has now been translated into 10 languages, and the first language was the simplified Chinese, published by CITIC, and the 2nd and 3rd were Japanese and Korean, so the Asian interest is very strong.

Let me make a 2nd confession.

We know very little about decentralization, let alone governance models behind them.

Today, in this field, there is a lot more theory than practice, and there are a number of experiments that are dominating. And that makes it exciting to observe and follow.

We are still newbies in trying to apply, learn, push the envelope, fail, stumble, iterate and we are eager to show that decentralization has a future.

DECENTRALIZATION AS RAISON D’ETRE

Of course, decentralization has a future. It’s the raison d’être of the blockchain. The blockchain is the best tool we have today, to implement a future where decentralization can flourish.

STONE AGE

You know, the stone age didn’t end for a lack of stones. So, if you think of centralization as being the opposite of decentralization and where are mostly today, we can’t wait for centralization to die, before embarking on decentralization. We must let decentralization take control of its own destiny.

CENTRAL SYSTEMS FLAWS

There is a school of thought that believes that for a every centralized business that exists today, there is probably a decentralized version of the same that offers a new set of benefits the central version didn’t have.

One could argue – there is nothing wrong with central systems,- think Web-based businesses mostly, but also some monopolies that share the same characteristics, as a starting point. And some of them have grown to be quite large and influential in our lives. The challenge is that many of these central systems or businesses have developed flaws as they grew. Some of them are perceived to be unfair, corrupt, untrustworthy, evil, abusive, inefficient, expensive, or useless.

The reality is that- few of these systems don’t have at least one of these flaws.

INCENTIVES TO MOVE

So, because of these flaws as weaknesses, these systems are giving us an incentive to move to decentralization.

But the incentive must be strong for users to move. There is a psychology of change that is prevailing here, and it goes like this:

People are risk-averse in the domain of gains, and they are risk-seeking in the domain of losses. Let me repeat it.

People are risk-averse in the domain of gains, and they are risk-seeking in the domain of losses.

This means that- you aren’t going to move users or people to try something new if they are currently happy with what they are using, and you just tell them it is “better”. But if someone is currently experiencing a loss, a pain, a defect, a deprivation, or something negative, and you come in and propose to them a solution that doesn’t give them these pains or losses, the motivation to move are much greater and they would gladly do it.

Example- if it is sunny outside, and I approach someone offering them a better shirt than the one they are wearing, they probably won’t be willing to switch it, but if it’s raining and cold outside, and you’re standing there, wet and shivering, and I come to you, and offer you an umbrella or a coat, even if they aren’t the best umbrella or the coolest coat, you will probably agree to take them in order to reduce your suffering.

So, you can’t just say – we’re going to have a decentralized twitter, decentralized facebook, decentralized messaging, etc. just because it’s decentralized. Right now, the best value proposition the blockchain has for this, is that the data is stored on decentralized network that can’t be easily taken down or hacked, and they are censorship resistant, so the government can’t ask for that data, and the companies that run them can’t abuse what they do with that data, because they don’t really own it.

So, the users that you will mostly attract and that will gladly move to a decentralized solution are ones who have suffered a loss or are not happy with the current system they are using.

Question- How many of you have been personally the victim of a data breach caused by a company where you use their service? Ok, of those of you that raised their hands, keep your hands up only IF you were caused some material harm, so please lower your hands if there was no harm that you know of.

See – we haven’t been hit so much yet such that the pain to move away from the Facebooks and other systems is not that great. But if we were hit, we would move in spades.

DECENTRALIZATION UNUSUAL BEAST

Decentralization is an unusual beast.

DECENTRALIZATION IDEAL

And getting to decentralization is full of compromises.

Decentralization maximalists want everything to be on-chain, including the governance aspects. You could say that in an ideal world, we’d have everything decentralized and on-chain, but that world doesn’t exist today. Except the DAO, and it crashed.

Let’s be careful with everything being on-chain. For example, blockchain transactions are irreversible by design. But decision-making wants optionality and flexibility. You cannot replace human judgement with automated logic which is what smart contracts are.

So, we need to design the right balance between different degrees of decentralizations and on-chain vs. off-chain linkages. And that is btw the essence of a good design for blockchain architecture.

DECENTRALIZATION AS COMMUNITIES

Decentralization and open source projects are communities. They are a living organism.

Success will be directly related to the vibrancy and well functioning of the community that is behind them.

Peter Hintjens has written a book called Social Architecture: Building Online Communities, where he names the 20 tools covering all aspects of a community, and the way you use that toolbox is to either measure an existing community or to design a community to help you focus your efforts to where it will be most useful.

All of these apply to the blockchain decentralization projects, protocols, platforms and products that are being conceived today. More specifically, I’d like to draw attention to a few of these characteristics that we must pay attention to (in bold):

–        Strong missions – the stated reason for the group’s existence

–        Free entry – how easy it is for people to join the group

–        Transparency – how openly and publicly decisions are made

–        Free contributors – how far people are paid to contribute

–        Full remixability – how far contributors can remix each others’ work

–        Strong protocols – how well the rules are written, and Good protocols let strangers collaborate without up-front agreement.

–        Fair authority – how well the rules are enforced

–        Non-tribalism – how far the group claims to own its participants

–        Self-organization – how far individuals can assign their own tasks

–        Tolerance – how the group embrace conflicts

–        Measurable success – how well the group can measure its progress

–        High scoring- how the group rewards its participants

–        Decentralization – how widely the group is spread out (here it looks like the author is thinking of “being distributed” as the key factor)

–        Free workspaces – how easy it is to create new projects

–        Smooth learning – how easy it is to get started and keep learning

–        Regular structure – how regular and predictable the overall structure is

–        Positivity – how far the group is driven by positive results

–        Sense of humor – how seriously the group takes itself

–        Minimalism – how much excess work the group does

–        Sane funding – how the group survives economically

SIMULTANEOUS IMPACT

See, the blockchain excels when its impact is being applied simultaneously along the 4 dimensions that it is supposed to address: Technical, Business, Social and Legal. If you only tinker with one of these variables, and ignore the others, your success will be more limited, and that applies not just to the implementation parts, but also for the motivation to get there. You could get away with tackling 3 of the 4 aspects, but 4 will get you covered the best.

DEFENSE MECHANISM

Decentralization, when it’s well implemented is a defense mechanism. It becomes less vulnerable to attacks and offers protection for privacy, security and autonomy.

GOVERNANCE SEGMENTS

So let’s dive into the governance aspects and cover the landscape, as I see it.

Let’s answer the question: where are we applying governance? The reason for this segmentation is that – there is No One Size Fits All. Each one of these segments presents a different set of challenges, drivers and considerations.

Blockchains is where a lot of activity has been, but we should think of the emerging Peer-to-Peer networks as another important segment. An example is OpenBazaar, a decentralized protocol for e-commerce. These typically have a built-in protocols as their engine of sorts, but there is also another category – Protocols and these are sometimes not requiring their own P2P network, but they are to be implemented on top of existing blockchains. Example 0x which runs on the Ethereum blockchain. A 4th category that is emerging is everything seen as a Dapp/App or Platform. And finally, the last frontier of decentralization (arguably), using the blockchain as a tool for social and political change.

DIFFERENT PRIORITIES

So this is my Toolbox list for Decentralized Governance, the layers to think about, and they are different for each segment.

So, if you are a blockchain, you want to optimize for preventing Sybil attacks and a sound consensus process that never fails.

If you are a P2P Network, the priority shifts to installation, self-incentivization and the economics viability of the network.

Protocols – It’s about adoption, nurturing the ecosystem, and providing value to it.

Dapps/Apps/Platforms – Network effects to guarantee success, development of the platforms, and support.

Socio-Political Change – Inclusiveness, Fairness, Wealth distribution.

DIVERSE STAKEHOLDERS

So, once you have focused on these priorities, the other big factor is – Who are the stakeholders that will be interested in defining or participating in your governance. And this list is important. As a reference point, the current governance of companies today includes the board, the company’s management, and the shareholders mostly. But in the world of the blockchain, that list expands and includes new elements such as users, developers, regulators, node operators and even influencers as governance participants in addition to the investors and organizations. And even under these categories, there are new elements- the organizations we are seeing now are Foundations/Councils and in the investor category, we have token holders, not just equity owners. Users also are token holders and they can vote with their token to influence the future of decentralized organizations. Today, users vote with their buying power or they voice their dissatisfaction, but that’s an indirect participation.

MAPPING SEGMENTS TO STAKEHOLDERS

Now, if you put all of this together, what do we have. Think of this matrix where you have on one side the various stakeholders, and on the other the type of decentralization construct you are targeting, and in the middle the Toolbox priority list. So you need to optimize your governance to cover these aspects, without making it more complicated than necessary.

EXPERIMENTATIONS

At the beginning of my talk, I said that we are living in a period where there is a lot of experimentation today with blockchain governance models. Here is a list of some of the interesting tools that are being tried:

Liquid democracy – Form of democracy where the electorate has the option of vesting voting power in delegates instead of voting directly themselves. And they can withdraw it too. (Example of application is D-POS blockchains, Delegated Proof of Stake)

Quadratic voting – Popularized by Glen Weyl in his book Radical Markets (a favorite book of Vitalik Buterin), it’s a form of decision-making where participants cast their preference and intensity of preference. Voters are given a budget to vote, say 10 votes, and they can elect to use 5 of these votes for 1 issue, and the rest on others, so you are voting with a weighting factor.

Futarchy – Form of government proposed by economist Robin Hanson, in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect.

Token Curated Registries – Pioneered by Mike Goldin at ConsenSys, is a way to curate lists with intrinsic economic incentives for the token holders to curate the list’s contents judiciously.

Foundations, Councils and Associations are additional forms of governance structures being added to the experimentation mix.

EXAMPLES

0x – Trying to gradually decentralize the evolution of the 0x protocol

ZCash  – Aiming to find the right balance between ZCash the founding entity and the foundation.

Aragon – Is itself a governance tool, at the heart of which is a set of smart contracts that are coding actions on-chain. They have a governance process too.

Melonport – Here the focus is on Councils that steer the direction.

Blockstack – Recently announced their march towards decentralization in October and are in the process of doing it.

None of these are perfect. All are trying to a few things, and will be expected to iterate and make changes to things that don’t work, but they are some of the leading examples.

Everyone is trying to eat their own dog food, or a version of it. If it doesn’t kill them, then it must be good. But the dog food may not taste the same ….

ARE WE DECENTRALIZED YET?

There was a website that put this chart together. It was an attempt to visualize the various blockchains in terms of the decentralization aspects such as the number of nodes, voting powers, number of wallets, ….

These were not perfect, but it’s a good attempt- at least asking the right question.

DECENTRALIZATION APPLIANCE

It is becoming easier and easier to become part of the decentralized future. Of course, if you’re technical you can download the DAppNode to connect your computer to blockchains such as Ethereum or Bitcoin (maybe later Blockstack?). But you can also buy a cheap box, the decentralization appliance and you just plug it in and it’s always connected. Almost like a TV is always there to receive the signals. Starting price is $400.

DILEMMA – WE ARE STILL DEFINING DECENTRALIZATION

Some blockchains who don’t fully espouse the ideal decentralization architecture of Bitcoin or Ethereum try to water it down, and define decentralization in their own terms, so they focus on the Peer to Peer aspect of transactions validations.

GOVERNANCE AS TOOL – NOT WEAPON

So if you want to experiment with decentralized governance, let it be a tool, and not a weapon. When you look at some of the unfortunate contentious forks that have happened, that’s the equivalent of a separation from the original projects.

Do not hide under the pretext that open source projects are not real companies and that decentralization ethos has to take over above all common sense.

GOVERNANCE vs. GOVERNING

The role of governance is to ensure that there is good governing. Think of the Queen of England vs. the Prime Minister. The Queen doesn’t really govern. She ensures the prime minister is governing properly according to the UK constitution.

12 ISSUES AND CHALLENGES

In Closing, let me highlight some thoughts to keep in mind, and ones that I believe in.

  1. Token isn’t always needed
  2. In decentralization, economic incentives matter
  3. It is not just about voting
  4. Decision-making by consensus is not ideal
  5. Communities alone shouldn’t govern
  6. Premature decentralization of governance
  7. Does Code = Governance?
  8. Transparency / Openness in Self-governance
  9. One size doesn’t fit all
  10. Large gap in governance UI’s (it is still very technical to participate)
  11. Legal and moral aspects of unstoppable P2P networks (who is responsible?)
  12. Obsession with self-governance (DAO was not a standard)

Decentralized governance doesn’t have to be complicated. It needs to be simple, embedded and reliable.

Some software tools and products being developed as decentralized solutions may not have a strong case for being that way. Many of them are just discrete capabilities that have a given functionality, so decentralization governance for them would be a detriment, rather than a benefit.

We must always ask what the purpose of governance is.

SMALL PROBLEMS FIRST

“In decentralized systems, problems can be solved early and when they are small.” (quote from Nassim Taleb from his book, Skin in the Game)

THE BIG PICTURE

Let’s keep in mind that the big picture is the blockchain economy, which includes a direction towards decentralized data, content, storage, computation and protocols. It also includes a set of transactional functionality related to work, rewards, earnings and spendings; and it is meant to target any industry, including the future of nations, law, and government.


BETTER FUTURE

Hopefully, the blockchain can lead us to a new world that is better than the current one, just as the web has brought many benefits to our lives in the past 25 years.

THANK YOU

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In 1997, during the early Internet years, under the direction of Clinton-appointed Internet Czar Ira Magaziner, the US government released a seminal report called Global Framework for Electronic Commerce. Its central thesis was known to be described as the “Do no harm” policy. It consisted of a series of specific recommendations for not taxing, regulating, or restricting the (then) embryonic and key promise of the Internet: global electronic commerce. The report did not just prescribe a US policy, but it was also called for all countries to consider the same approach, because it was recognized that electronic commerce had no boundaries, and its success was inter-dependent on global cooperation.

The Internet “should be a place where government makes every effort . . . not to stand in the way, to do no harm,” Clinton said.

Although more than 20 years-old, that report is a fascinating re-read as a context for what is currently going on with the blockchain. I encourage you to spend the 10 minutes it takes to read and assimilate the content of that report if you are seriously interested in this topic.

Had it not been for that policy, the US could have created new taxes for e-commerce, regulated it with new regulations, imposed duties, restricted the type of information transmitted, controlled standards of developments, and imposed licensing requirements on service providers. Luckily, they didn’t do that.

Without any doubt, that position was the right call. What followed that period was a massive explosion of growth in the US around Internet infrastructure, technologies, and applications, arguably a contributing factor to why the US became a super-power in Internet related businesses, ahead of other countries. (It took China at least another decade to eventually catch-up and produce their own versions of Internet companies based on what worked in the US)

For context and to drill on that point, let me highlight some key passages from that report.

For this potential to be realized fully, governments must adopt a non-regulatory, market-oriented approach to electronic commerce, one that facilitates the emergence of a transparent and predictable legal environment to support global business and commerce. Official decision makers must respect the unique nature of the medium and recognize that widespread competition and increased consumer choice should be the defining features of the new digital marketplace.

As use of the Internet expands, many companies and Internet users are concerned that some governments will impose extensive regulations on the Internet and electronic commerce. Potential areas of problematic regulation include taxes and duties, restrictions on the type of information transmitted, control over standards development, licensing requirements and rate regulation of service providers. Indeed, signs of these types of commerce-inhibiting actions already are appearing in many nations. Preempting these harmful actions before they take root is a strong motivation for the strategy outlined in this paper.

Governments can have a profound effect on the growth of commerce on the Internet. By their actions, they can facilitate electronic trade or inhibit it. Knowing when to act and — at least as important — when not to act, will be crucial to the development of electronic commerce.
And the Principles embodied in the report are very interesting:
1/ The private sector should lead

For electronic commerce to flourish, the private sector must continue to lead. Innovation, expanded services, broader participation, and lower prices will arise in a market-driven arena, not in an environment that operates as a regulated industry.

Accordingly, governments should encourage industry self-regulation wherever appropriate and support the efforts of private sector organizations to develop mechanisms to facilitate the successful operation of the Internet.

2/ Governments should avoid undue restrictions on electronic commerce.

“Unnecessary regulation of commercial activities will distort development of the electronic marketplace by decreasing the supply and raising the cost of products and services for consumers the world over. Business models must evolve rapidly to keep pace with the break-neck speed of change in the technology; government attempts to regulate are likely to be outmoded by the time they are finally enacted, especially to the extent such regulations are technology-specific.

Accordingly, governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities that take place via the Internet.”

3/ Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce.

4/ Governments should recognize the unique qualities of the Internet.

The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. These same characteristics pose significant logistical and technological challenges to existing regulatory models, and governments should tailor their policies accordingly.

We should not assume, for example, that the regulatory frameworks established over the past sixty years for telecommunications, radio and television fit the Internet. Regulation should be imposed only as a necessary means to achieve an important goal on which there is a broad consensus. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.

5/ Electronic Commerce over the Internet should be facilitated on a global basis.

The Internet is emerging as a global marketplace. The legal framework supporting commercial transactions on the Internet should be governed by consistent principles across state, national, and international borders that lead to predictable results regardless of the jurisdiction in which a particular buyer or seller resides.

Enter the blockchain. Fast forward to 2018 and into 2019. Where are we?

The analogies are striking, but the US government or its regulatory bodies actions are lagging.

They don’t seem to have recognized that the blockchain shares similar characteristics as the Internet and e-commerce of the mid-90’s. Today, blockchain technology is immature, and it needs to spread its wings instead of getting them clipped because it wants to venture into uncharted waters.

Two years ago, there was a ray of hope.

In April 2016, then CFTC Commissioner Giancarlo (now he is the Chairman) gave an enlightening speech at the DTCC 2016 Symposium where he called regulators to heed the lessons of the Internet and adopt a similar stance as the policy enumerated in the Global Framework for Electronic Commerce in 1997. He even suggested that regulators of all sides come together and agree on “uniform principles”.

His speech is must read, and here are some key passages:

Regulators have a choice in this regard. I believe we can either follow a regulatory path that burdens the industry with multiple onerous regulatory frameworks or one where we come together and set forth uniform principles in an effort to encourage DLT investment and innovation. I favor the latter approach.

Similarly, “do no harm” is the right approach for DLT. Once again, the private sector must lead and regulators must avoid impeding innovation and investment and provide a predictable, consistent and straightforward legal environment. Protracted regulatory uncertainty or an uncoordinated regulatory approach must be avoided, as should rigid application of existing rules designed for a bygone technological era.

Unfortunately, judging by what has actually happened since that speech, Chairman’s Giancarlo’s calls seem to have gone on deaf ears or were not taken seriously, and not from a lack of goodwill on his part.

Unsurprisingly, the largest headwinds have come from the SEC who has taken it upon themselves to be the Grinch of blockchain regulation. They are stealing the lion’s share of the regulatory thunder, and throwing the baby with its bath water.

The blockchain is at risk of a “Do Harm” strategy primarily based on how the SEC is approaching it.

Instead of displaying hope, optimism, and open-mindedness for innovation, the SEC has been leading by fear, issuing a series of mixed actions, publishing obscure statements, and sending cryptic messages to the industry via occasional speeches. They have divided and conquered the blockchain industry by stringing its participants along, with a very stubborn starting point that all tokens are securities by default, while being very nebulous on what actually is a non-security.

At the macro level, the opposite of what happened in 1997 is actually taking place today. In 1997, the US led the world in thought and in practice, pertaining to electronic commerce regulation. Today, other nations are taking the lead at adopting progressive policy and regulatory implementation for blockchain technologies.

For example, the Japanese Financial Services Authority (FSA) has already received 190 cryptocurrency exchange licenses applications, and currently reviewing them. Switzerland has published a well-defined token classification framework, and they continue to be a friendly jurisdiction for the Foundation model to govern ICOs, having cracked the code on how to manage the process. Singapore, Gibraltar, Malta and Cayman Islands, although being smaller jurisdictions have also made positive strides that are encouraging to entrepreneurs and the blockchain ecosystems they engender.

Sadly, the US which has the best tech startup environment finds itself handicaped by unfriendly regulatory actions. These other jurisdictions have a legal advantage but they cannot replicate the vibrancy and experience depths of the US startup ecosystem.

The SEC needs a history lesson by reviewing the Global Framework for Electronic Commerce and its impact. By his own admission, incoming chairman Clayton noted he didn’t get any questions about the blockchain during his confirmation hearings in March 2017, which points to the greenness of his organization towards the topic. Evidently, they are by no means experts, and have not done their homework studying the topic while they have rushed to form judgement without a deep understanding of it. Even the CFTC who has had a markedly more advanced knowledge on the topic is still trying to go deeper into it, witnessing their recent RFI asking 25 questions about Ethereum.

In the field of blockchain, where is the US global leadership?

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As I see it, the blockchain industry is still sorting itself out, and trying to find its real footing. It is meandering its way forward. There are few truths that can hold. The rest is speculation, promotion, fake claims, and wishful thinking. It may sort itself out in 2019, and I’d be happy to be proven wrong, but I predict another year of confusion before a more solid trajectory in 2020 and forward.

I read a lot of everyday about the blockchain, perhaps 300-400 stories, daily, via OnCoins. I’m not going to enumerate them item by item, but I feel that while while half of what is published is true and positive, the other half just doesn’t make sense, is more promotion than realization, plain rhetoric or just insignificant. The old proverbial trick is to know which is the good versus the bad half, as it’s not that obvious. At the end, you have to tune out a lot of what’s out there.

One reference point is the Web and its evolution between 1993 and 2000, its critical formation years. During that period, many bad ideas, poor projects and weak teams were coming to the scene, just as they are with the blockchain, today. For the Web, its crash brought real lessons about what works and doesn’t work. Subsequently, the quality of projects coming out post-recovery, after 2002 were less insane and more realistic.

For the blockchain to take a positive step forward in 2019, we need to see more results from its promises, some of which include:

  • Faster and more scalable blockchains. It is more challenging to achieve transaction speeds for the larger blockchains like Bitcoin and Ethereum, because their decentralization footprint is way more established than most others that are trying to emulate them. Sure you can lower the bar on your decentralization architecture or governance in order to achieve transactional speeds equivalent to databases, but it’s a bit like cheating on the dogmatic principles of blockchains.
  • More end-users in Dapps or blockchain apps. Apps that can offer an intuitive user experience, coupled with a compelling use case will show the way, but we are still waiting for many of them. Recently, I tried to tally the blockchain apps with more than 1 million users, but the list was short.
  • More developers from mainstream. We still need easier middleware that can bring the 10 Million+ Java/Web developers into the blockchain fold. Maybe some standards will emerge that might facilitate that, but as of today, getting into blockchain technology still requires hoop jumping and compromises that average developers are not happy to partaking in.

Generally, I’m still worried that we are trying to take the blockchain into areas where it doesn’t belong and where the value proposition is weak.

The Web took a few years to sort itself out, as it settled into 5 major use cases that weren’t so obvious early on. They were:

1/ Communications

2/ Publishing

3/ Online Communities

4/ E-Commerce (includes e-services)

5/ Social Interactions

In retrospect, that’s only 5 cases. But they were clear, concise, and moved everything forward around them.

We need the blockchain to eventually settle into few application areas that are compelling and exciting. I can’t say that we have the same clarity as the web, today. But so far, here are some broad flavors of activity:

  1. Blockchain technology (as base layers) That one won’t count later, as it will be granted.
  2. Financial transactions (as payments or transfers)
  3. Reclaiming the Web (everything under the decentralized rubric)
  4. Exotic token utility (like staking, voting, prediction markets, etc.) This area is definitely still sorting itself out.
  5. Native assets (think CryptoKitties, CryptoMonsters, and everything possible with them like gaming)
  6. Replicated assets (also called security tokens, that’s everything to do with digitizing and anchoring known assets into a blockchain to facilitate their movement)  

The blockchain doesn’t need a dozen categories of applications, but fewer more compelling ones that can in turn drive millions of use cases.

Just like the thin edge of wedge analogy, a narrowing of the range of applications is more desirable.

The blockchain is not a hammer for every nail.

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 An important derivative outcome of blockchain technology is the laying out and propagation of peer to peer networks that cannot be (easily) taken down, a feature also known in the crypto circles as being “censorship resistant”. Just as the Internet is that unstoppable mega network, these smaller networks are supposed to run for ever and ever, due to their decentralized architecture serving as a base foundational layer.

P2P networks are not new to the blockchain. The original and quintessential P2P network is Napster, as its first nemesis. Unfortunately, Napster had to be taken down in 2001 due to legal pressures, after amassing 80 million users at its peak, because it contributed to illegal music downloads. Out of its remnants, BitTorrent emerged, and it is to this day an active network for file sharing.

Lately, in the blockchain world, the Bitcoin network became the first poster child of natively decentralized peer to peer networks, serving as the infrastructure layer for an alternative global financial system to exchange digital value. Bitcoin’s success has given a new resurgence to the viability of the peer-to-peer network as a viable infrastructure method for the proliferation of technical and functional protocols. As a result, a number of aspiring and existing P2P networks have slowly emerged, and beginning to assert their footprints in our online world.

We need to understand these peer-to-peer blockchain networks as living organisms. They are in part technology infrastructure, and in part social architecture because they rely on humans who have to first agree on cooperation as a key success factor for their ongoing evolution. These networks depend on the commitments of a large number of participants (nodes) to contribute a variety of resources that are later consumed by users.

Are We Decentralized Yet?

There used to be a website titled “Are we Decentralized Yet?” tracking key metrics pertaining to the actual decentralization purity of the top blockchain protocols and technologies. The listed parameters were:

  • Incentivized miners/voters?
  • # of entities in control of >50% of voting/mining power
  • % of money supply held by top 100 accounts
  • # of client codebases that account for >90% of nodes
  • # of public nodes

Although that table isn’t a perfect dashboard for decentralization, as some of these metrics could be argued upon as being the true harbingers of decentralization, it illustrates nonetheless the diversity and variety of being decentralized.

Sadly, the site isn’t operational anymore, perhaps due to the costs of pulling on-chain data, normalizing it, processing it and storing it. Keeping track of P2P is not easy. That is why some protocols have their own explorers who must do specific active/passive crawling in order to arrive at accurate counts.

If we look at the public number of nodes as one of the most visible metric, here is an updated sample, including new ones not on that referenced table:

  • Bitcoin: 10,205 nodes (Source: Bitnodes)
  • Ethereum : 9,901 nodes (Source: Ethernodes)
  • OpenBazaar: 18,000 nodes per month (Source: private communication)
  • ZCash: 173 nodes (Source: Zcha Explorer)
  • IPFS: 2,000 nodes (Source: IPFS link, estimate)

These numbers appear small relative to the overall sheer size of the web (and their true potential), but they are large enough to depict a real and valid direction for this trend.

When you peel some of the layers of these peer to peer networks, 4 important characteristics jump out:

  1. The number of nodes is self-growing (on-boarding is typically permissionless)
  2. Each node is self-incentivized (the economic model should reward nodes)
  3. The overall progression should self-governing (ensures resiliency and survivability)
  4. A degree of anonymity is typically inherent (makes it difficult to pinpoint single origin of work)

There is a need to emphasize that the incentives part is a powerful sustainability factor. Incentives ensure the long term viability and self-sustainability of the network, while making it even more resilient. And a distributed self-governance makes the network more anti-fragile because it doesn’t depend on a single entity or person to dictate its evolution. As for the anonymity factor, it is required to protect those at risk who can’t defend themselves if they make their voices heard.

Legal and Search Implications To Consider

One implication is that eventually there will be enough data on these alternative P2P networks such that traditional Googling for information will miss the mark on revealing decentralized content. We might need new types of crawlers, or Google will need to update their own tentacles, with the caveat that this type of decentralized discovery will be more difficult to achieve.

Then comes to mind moral, ethical and lawfulness aspects. What if these unstoppable networks are used for bad things? What is the remedy (if any) for removing the bad stuff, punishing the originators, or holding responsible the creators?

Similar arguments have been made about the Internet,- that it was enabling the bad guys, the anarchists and the illegals to conduct their business. Who knows how many bad things were happening on the Internet- from pornography to terrorists communicating, to other types of crimes facilitated by it. One could argue that bad guys and bad stuff will always be there, and if it’s not via the Internet, or the blockchain or unstoppable P2P networks, they will always find a way.

Yet, we aren’t stopping the Internet, but just as Napster was forced to stop illegal downloads, there are cases where courts can impose their will on Internet services. For example, earlier this year, Craigslist was forced to take down their Personals section, because a US Congress Bill classified them as “promoting or facilitating the prostitution of another person”, and they could have faced fines and prison terms of up to 10 years, had they not complied. Ironically, a user can Google for similar services and end-up at the same place, yet Google was not touched by that Bill.

The future of viable P2P networks can’t be stopped, because they are necessary infrastructure for the next generation of decentralized protocols, functional capabilities and applications.

For example, you could imagine a decentralized application having to rely on multiple P2P networks,- one being a blockchain to validate transactions, another being a decentralized identity network, and a third being a P2P storage network.

Still, these important questions remain: will unstoppable P2P networks be used as a tool or weapon, for good or for bad, and to promote just or corrupt causes?

Let’s hope that the dominant usages of P2P networks emerge on the right side. Let them become powerful new tools for enacting forces of good, and promoting the causes that need it the most.

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For the blockchain, 2018 is ending with a marked contrast to how it started, no matter how optimistic you care to be. That’s because the largest mindshare has been on the price of tokens and cryptocurrencies. That is an unfortunate frame of reference, because it symbolizes the velocity of hype, more than enlightens on the real measures of progress in the industry.

It would be an interesting experiment if we could ban or hide all media (including social) stories related to crypto trading for the first 3 months of the new year, and only focus on discussing the projects and technologies that are being built, without any references to the price of Bitcoin, Ether, XRP or any others. Not even a word about ICOs. This experiment would give us more clarity about the real work that is actually taking place.

I am fortunate enough about continuously gaining insights from this industry from being constantly exposed to it first-hand, deep in the trenches, interacting with the technologists, entrepreneurs, financiers, lawmakers and regulators across a global geography. As I reflect on where we are, entering the New Year, here is a list of prescriptive thoughts for the various entities in the space focusing on what they can do, or how they can think, in order to give us lot more hope for a prosperous evolution.

Startups

Going to market is not easy. Many blockchain startups continue to underestimate what it takes to bring a new product to the market and put it in the hands of users. Refine the value proposition of your offering. How unique is it? What value does it really offer? Why blockchain? Why should a user switch to, or start using your product? Are your user interface and user experiences really intuitive, or are the barriers to entry too high? Have you assessed the size of the potential market and specifically identified and understood the profiles of your target audience?

Technologists

Whether you are working on (or enhancing) a protocol, infrastructure, middleware technology or applications, delivering what you promised within the deadlines is key. Do not hide under the pretexts that decentralization is messy and open source projects take time to materialize. Yes, the consensus process is key to the base technical layers of the blockchain, but if we applied consensus to all decision-making or to how we manage for results, the world would be in a very bad place, and most businesses would be bankrupt. Cut to the chase, make the tough decisions, and hold people accountable to their deadlines, including yours. If you are not that type of leader, then put someone else in charge that you trust.

Marketers and PR Companies

Clarity in marketing communications is important, but do not go overboard with marketing jargon, hyperbolic statements, non-genuine endorsements, aggressive outreach, and chest pumping. Smart marketing is about finesse, accuracy, credibility, and education. Shouting from the rooftops is like wolf howling. It is not a long-lasting form of communication, and certainly doesn’t stick in the market’s mind. Remember, the key objective of marketing is to get into the minds of the people you want to influence, and there is so much you can do when pushing your way into it. The best results occur when you create the conditions for the market to be pulled towards you.

ICOs

If you were lucky to have raised funds with an ICO process, count your blessings, because they end there. You are now just like a startup. So, just behave like one, and don’t forget: valuations matter. The price of your token will come back to bite you if you don’t let that token prove its real utility in the hands of users and developers. The token must add real value to the network, and if it doesn’t, then refine your assumptions and find the right token-to-market fit. One last thing, get some real mentors to mentor you, not the advisors you put on your website to fake legitimacy for your projects. Self-accountability is overrated, and it will get discounted.

Regulators

Don’t kick or stab the wounded while they are down or have not had a chance to stand up. The blockchain, tokens, cryptocurrencies and decentralized trusted p2p networks are a new thing that doesn’t fit the old paradigms you have built your practices on. Put on some new lenses, and show us your creativity in innovation, not in enforcement. Imagine if we had kept the old dirt and gravel roads, and we were fining cars for creating dust in the air, instead of laying asphalt on the roads. If regulators are responsible for consumer safety, then they should lay out some asphalt because the cars are different now.  Electronic trading was not as revolutionary as the blockchain, so it was able to adapt to existing frameworks, but the blockchain is more fundamentally different, therefore it needs a new framework.

Wall Street Institutional Investors

Stand back. The crypto markets aren’t totally ready for you. Most valuation correlation metrics are hyperbolic and wishful at best. We know you like quantitative models, but all you can do now is speculate. I wished you would stop pretending you are “investing” because all you want to do is flip. Flipping is not what early technologies need, because it betrays them too early. The mature cryptocurrency instruments are few, maybe Bitcoin, Ether and XRP and another handful, but until there are measured real correlations between real metrics and market caps, institutional firepower might destroy more than build confidence.

Venture Capitalists

Good news. There is less FOMO now (Fear Of Missing Out)! It’s (almost) back to business as usual. Back to finding the startups and companies to invest in, but first, do your homework, and understand the blockchain and its potential from a first principles viewpoint. Form your own and original investment thesis or tact, instead of following others’ who have been thinking about it 5 years longer than you have. By copying someone else’s approach, you are only fooling yourselves and your limited partner investors. Good news though,- the blockchain investment landscape is rich, varied and offers new opportunities.

Average Consumer

I wished you didn’t put that 5 or 10K you had painfully saved into some cryptocurrency during 2018, after what your aunt, uncle, cousin, niece, taxi driver or nephew told you it was going to the moon. Unfortunately, the institutional investors and mainstream media headliners fueled the frenzy too early, which spilled over into the mainstream creating a false reality. My advice- take the loss, and keep your day job. There will be new, safer opportunities, as the market matures. In the meantime, use cryptocurrency to understand it, not to trade it. Pick a consumer app that depends on cryptocurrency and become a user. Some examples to pick from: Steemit, OpenBazaar, CryptoKitties, Kik. [Disclosure: I’m an investor or holder in them]

Large Companies

Admit it, you didn’t plan for the blockchain. It just appeared and foiled your strategic plans, but you still haven’t changed your strategic thinking about it. You know you can only disrupt so much of your business, so your initial instinct is to box the blockchain into its own corner, where it can do no harm, while you might have paid some lip service to it, in the meantime. Regardless, the only way you will find the right and best use cases for the blockchain is by allowing your best people to be a part of it. And I challenge you to insert the blockchain lexicon in your strategic planning, even if the exercise is unnatural.

I might have been utopic in my prescriptive wishes, and perhaps my words were rough while making these points, but there is no better medicine than tough words to meet a tough and harsh reality.

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I’ve already written on Tokenomics and related token classifications in this June 2017 article that quickly became a reference point throughout the industry, Tokenomics – A Business Guide to Token Usage, Utility and Value.

In light of the evolution of the blockchain market, I hope we can re-classify tokens in a way that is simpler, and takes into account the recent developments in what has been commonly labelled as “security tokens”.

For background, let’s define a cryptographically-enabled token as a cryptocurrency with a purpose. No matter what its purpose is, the token has the same properties as cryptocurrency. It can be exchanged and its ownership can be transferred on a blockchain, from one peer to another, without the involvement of a central party. The token holder or owner can be a person, an organization, or an autonomous computer program, also referred to as a smart contract.

I’m a big fan of simplicity. With that mind, I think we should settle on the following simple classification for tokens.

Utility Tokens

This includes all types of work-related tokens (passive or active; by computers or humans), i.e. ones where there is an earning and spending equivalent to some valuable activity. It also includes the payment function in cases where that’s all what the token does. My previous article on Tokenomics provides a good depth of coverage on the utilitarian aspect of tokens, except for the “earnings” role which could be interpreted as an asset token that yields a dividend.

Asset Tokens

This is where the commonly named “security tokens” fall. I’m not a big fan of the term “security tokens” because it is a legal classification, and doesn’t say much about the inherent functionality that is represented by such tokens. Plus, for some tokens, it has been an escape route from the SEC’s grips for seeing everything as a security token. In the asset token case, the owner of the token is certainly a human or organization, and the token represents an ownership of sorts in something that is valuable at the time of the transaction. In most cases, the token represents something that already exists in the real world, eg. a physical property, or a share in a company. What the blockchain adds is a new form of liquidity and ownership exchange, mostly centered on efficiency of transfer.

Crypto Property

CryptoKitties are the best example of this new class of digital property that is non-fungible, unlike the previous two above which are fungible. You don’t need a particular token to represent this new form of asset, but you might need one if the creator decides to associate one with it. For example, a given crypto property might be worth 2 ETH or 1 NEWTOKEN if NEWTOKEN is the currency of choice for this specific asset. This NEWTOKEN is different from an Asset Token because it represents an asset that is stored on a blockchain the minute it is born or created. A crypto property has no physical or digital equivalent without a blockchain. It is not something you can take out of a drawer or pull out of your pocket. It is new and therefore native to blockchains.

This isn’t a regulatory framework, nor was I discussing the legal implications for complying with the issuance and operations of these types of tokens. That is beyond the scope of this post.

However, I’d like to emphasize that the Utility Token and Crypto Property aspects are the most innovative concepts that are newest to us. Therefore, we should continue to question whether existing security laws should be squarely applied to them without an updating of sorts.

When technology and markets evolve, regulators need to figure out when to rigidly enforce adoption of old rules, and when to evolve themselves, especially if existing regulation hasn’t been updated for decades. Otherwise, regulation could stand in the way of continued innovation, wealth creation, talent development, and industry growth.

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In light of the recent price drops in the financial crypto markets this week, I feel compelled to make some comments.

Everyone is wondering what is going, and why are crypto prices falling so precipitously.

In August of this year, we were already at a market cap of $190B, down 77% from the January 2018 highs, as I outlined in this post, The Long Blockchain Crash. In retrospect, that was an early warning for what has happened this week, as total market cap touched $145B and is about where we were in early October 2017. In essence, the gains of the past 12 months have been erased so far.

There is no doubt that prices will eventually settle towards a given bottom (not zero), then we will begin to see the better coins rise again, hopefully less aggressively than before. But the question on my mind is whether the current crash will also flush out some of the bad elements and habits inside the blockchain market. Bad things always take longer to get un-done.

Undoing the Mess

The blockchain market was messy. It is full of cowboy attitudes. We pushed the limits on what tokens could do. And we pushed the limits on how much money was needed. We conflated everything by extrapolating into the future without a real foundation of the present.

Being Humble Again

If we rewind to where we were in 2017, we were more hungry and more humble. Will we return to being more grounded as the dust settles? Yes, ICOs provided a good economic windfall for people and projects, but money doesn’t solve everything. For some people, too much money changes them for the worse, instead of for the better.

Regulatory Storms

Regulatory headwinds and uncertainties have always been prevalent, but the recent SEC actions have turned into deadly storms, with casualties. In retrospect, the SEC is exploited the decentralized nature of the blockchain ecosystem, and poked at its weaknesses. There is no single, strong voice for the industry that has the power to face regulators cohesively, despite a few advocacy groups that were doing their best, given the circumstances. In spite of these action, in my opinion, there is a silver lining because the SEC positions are much clearer now, if you read their recent public statement entitled Statement on Digital Asset Securities Issuance and Trading. And the Singapore authorities also updated their policy with ICO, via this update: Regulator’s Column: What SGX expects of listed companies conducting an Initial Coin Offering (ICO). Both of these updates from two of the most important regulators in the space point to increased clarity, which is a positive.

Security Tokens Expectations

Security tokens are not going to solve it everything, and they are not a boon for getting some of the prospective utility tokens out of the hot water they put themselves in. You still need to have a successful model behind these tokens, and the challenge of getting market traction is not diminished. So, they aren’t going to save everything. This short article does a good job explaining it, Security Tokens Don’t Solve The Regulatory Mess of Utility Tokens.

Accountability Evasion

ICOs lack of transparency is still there. The mess has already been done. For live projects that took money in the past 24 months, now is the time to show real progress. Most ICOs promised the moon and the skies, but few are delivering. The lack of accountability is for real, despite a denial. For those thinking about decentralized governance as the next step, that is not going to solve this accountability dilemma.

Hype vs. Reality

Projects need to curtail their announcements to actual achievements, not conflating their future with promises. We oversold everything. The White Paper is dead. I’ve stopped reading them a long time ago. White Papers are useful if you have truly devised an original technical contribution, but they are not to be used as a marketing ploy to impress and gain credibility.

Better Software

Blockchain software tools are still immature despite 3 of the top ones reaching over 1 million downloads (Metamask, Infura and Truffle, read my post, The Blockchain’s Magical Million Users Club). We are currently trying to do too much with blockchains. For many cases, maybe only 5% of a given application needs to touch a blockchain. Blockchains are not for everything. They are perfect for passing value in a peer to peer manner, but storing everything on the blockchain is still a daunting task.

Too Many Crypto Hedge Funds

I’ve said this many times before. Too many crypto hedge funds were formed too early in the cycle we are in. Many of them will shut down by end-of-year. November 15th was a key date for investors to give notice to hedge funds that they’d like their money back, so hedge funds started to liquidate their positions, precipitating this week’s crash.

What will come out of this last downturn in prices? My hope is that we return to the sobriety days of early 2017 when ICOs weren’t so easily concocted, and when realism preceded fantasy. The sin of irrational exuberance has already been committed. Now, we need to commit to rational reality.

The psychology of bad markets is difficult to pin down. I hope the aftermath of the current downturn makes many of us smarter, and encourages some of us to give-up trying. I hope it brings better products, results and projects to the market. In Web parlance, the real Blockchain 2.0 era has not really started.

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Numerous blockchain naysayers keep harping on a lack of users. But the fact is there are signs of real traction with a few dozen projects, protocols and applications that are breaking through the magical 1 million milestone across a number of usage related metrics.

I have compiled a list of million+ users in various areas of blockchain activity. Reaching 1 million is not always a true measure of success, but it is an indication that the growth trajectory may be on the right path.

For each of these listed below, 1 Million is a significant achievement, but as a whole the blockchain space hasn’t reached a significant critical mass in the scale of 50 Million+ active users from a single type of application or use case.

Here’s the list below, and the accompanying Google Sheets where updates and corrections can be added by anyone. I’m sure that I missed a few, but this Sheet will be continuously updated.

Infrastructure
  • Ethereum
  • Bitcoin
  • Number of mining computers
Development Tools
  • Infura
  • Metamask
  • Truffle
Apps and Services
  • Blockchain.info wallets
  • MyEtherWallet
  • MyCrypto
  • Exchanges with over 1 Million Accounts *
  • ICO participants
  • Ledger wallets
  • Brave browser
  • CryptoKitties
  • Jaxx
  • ShapeShift
  • Kin
  • Changelly
  • Blockfolio
  • Steem

There are additional projects that I suspect have million-mark metrics, but I wasn’t able to find it: Dogecoin, Monero, Dash, SafeWallet, LoomX, ZCash, Coinomi, Litecoin, IPFS.

If you have something to add or correct, please enter a comment on the Google Sheet or in the Disqus comments below.

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There is no shortage of innovation in the blockchain sector. Technological innovations were the starting points, led by developers. Now, we are seeing entrepreneurial innovations, led by creative entrepreneurs and financiers who are applying the technology in ways not thought of before.

In this post, I’m highlighting 6 applied innovations of the blockchain and token models, many of which border on being loopholes that are currently flying under the regulatory radars.

1) Create Your Own Currency

Traditionally, only governments created sovereign currencies. With the blockchain, anyone can design a currency by giving it a special purpose. Using Ethereum, a developer can create a new currency (now called token) in a few lines of code. The good part is that this has fueled billions of capital to fund startups and projects who created trillions of tokens, but this has also simultaneously lowered the quality bar on what gets funded.

2) Say the Smart Contract Issued the Tokens

Since typical regulatory frameworks prohibit companies from raising money from the public without substantial disclosures and due filing processes, one loophole is to structure the public ICO such that- technically, it is the smart contract that is the issuing party. This means that token buyers aren’t sending their money to an entity, but rather to a piece of software that holds it, and returns the equivalent number of tokens. Regulators are still scratching their heads around how to subpoena or arrest a blockchain smart contract.

3) Foundation Controls the Tokens

A common practice is to create a non-profit “foundation” that actually administers the receipt and use of the tokens, but then commissions another entity to develop the technology. There could be a variety of relationships between the foundation and the developer entity, and sometimes the foundation is created before, and sometimes after the ICO. Foundations offer a layer of legal protection, but the fog hasn’t completely lifted on them, and there are no standards for foundation structuring.

4) Adopt a Virtual Jurisdiction

The virtuality of the online world is now taken to the legal level. Traditionally, companies are created within the jurisdictions they are typically conceived from. Of course, we’ve had Delaware-type entities and Cayman-based funds as the precedent for choosing remote jurisdictions. With the blockchain, the leading new alternative jurisdictions are Switzerland (Zug), Gibraltar, Malta, Cayman and a handful of others. All you need is a local lawyer in that jurisdiction to get this done.

5) Air Dropping, Not ICOing

As I’ve described in an earlier post (Utility vs. Security Tokens: Why Not Both?), companies are now air dropping tokens (e.g. 20% of total distribution), while keeping a significant percentage as reserves (e.g. 60-80%). Then, they wait until the token starts trading upwards (assuming there is some speculative hype or real usage that drive it). At that point, they start selling their reserve tokens into the public markets to fill their treasury. In essence, it’s like getting the effects of an ICO without raising money from anyone, and flying under the suspicious radars of regulators.

6) Trade-Driven Mining

This practice is being popularized by new exchanges (Binance, Huobi, KuCoin), and it is well described in this article by Mohamed Fouda (How Asian Exchanges And Investors Are Making Huge Profits Through Trade-Driven Mining). As the author explains, the exchange token is distributed to users based on their trading volume, in essence subsidizing the transaction fee. By distributing their native token, the exchanges also drive the demand and price up, and they make their profits from the token appreciation in the market. In addition, to further tighten the supply/demand equation (which drives the token price even more up), some of them (e.g. Binance, KuCoin) are buying back and burning a significant number of their tokens from up to 10-20% of their profits, each quarter. This is the most machiavellian scheme I have ever seen in this space.

In my opinion, all of the above schemes equate to legal, or financial engineering prowess, and are less about product innovation. You can implement any of the above and still fail if you haven’t been able to develop a real product with substantial traction.

In the case of the trade-driven mining example, the scheme looks like a perpetual bribe for usage, almost like loyalty points that appreciate in value, so it is very attractive to users. Luckily for these exchanges, they do have a product that works.

Generically, one could extrapolate that model into any usage-driven token reward for any product, blockchain or not. Wouldn’t be nice if Apple had given you a token for every product you bought from them, and let that token appreciate in relation to their stock price? If that was the case, you would have received a x22 bump on that token price since the first iPhone was introduced, 12 years ago. Even with a less extreme case of appreciation, let’s take United Airlines whose stock appreciated x3 in the past 5 years. Anyone would have loved a 3x bump on their MileagePlus points, no? If a new credible and safe airline appeared on the scene tomorrow, with a fly-based mining reward scheme that is linked to their token appreciation, I’m sure it will instantly get filled with travellers.

That said, the jury is still out on the longevity of these practices. Entrepreneurs are always 3 to 4 steps ahead of regulators.

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