WHITEPAPER REVIEWS


Colony Whitepaper Review

A framework for decentralized organizations  

Nick Neuman

Throughout recent history, most companies and organizations have relied on centralized leadership and decision-making to be effective. Executives/management (leaders in an organization) motivate the “masses” (aka employees) to work toward a common goal that the leaders decided on. They motivate with incentives: positive incentives (money and power in the org.) encourage good behavior, while negative incentives (firing yo’ ass) discourage people from playing Minesweeper all day.

Colony proposes a system with the potential to run an organization without centralized leadership. The framework proposes the ability for peers, rather than management, to incentivize each other to work towards a common goal. The end goal is to create a distributed organization that is a true “meritocracy”. Wait — what’s a meritocracy again?

mer·i·toc·ra·cy
noun

Dictionary definition: Government or the holding of power by people selected on the basis of their ability

Nick’s definition: Rewarding workers based only on the quality of their contribution to the cause
“Aha!” You say, “I knew that sounded familiar. My company is a meritocracy!”

To which I say: False! Your company is just one of those places where people pretend it’s a meritocracy. It’s actually politics masquerading as merit, because 99% of people are incapable of creating and upholding a real meritocracy.[1]

The Colony thinks they can change this, by building the framework on coderather than paperwork. Oh, and that magic word, the blockchain.

How will Colony work?

A “colony” is the name for a decentralized organization, or one without a small group of executives making decisions. Someday there could be thousands of colonies representing many different organizations.

Within a colony there are domains, tasks, and people. Imagine domains like parts of a company — marketing, sales, accounting, etc. Within each domain are groups of people who specialize in that area, and who work on tasks that fit their skills.

Sounds a lot like a regular company, right? Here’s the kicker: these people don’t need to know each other at all. They could use a fake name (a “pseudonym”, if you want to make it sound less ominous), never tell anyone a single detail about their personal life, and set a picture of Louis C.K. as their profile pic. Why Louis C.K.? Because he’s down-to-earth and chill.

You, a new member of this hip colony your friend told you about, contribute to the colony by completing tasks. In return, you are paid in reputation, colony-specific tokens, or other blockchain tokens like bitcoin (Aside: you technically can’t get paid in actual bitcoin. It would be other cryptocurrencies that run on the Ethereum blockchain — but they have value nonetheless!).

As you gain more reputation and colony tokens, you are able to do more in the colony. You can set tasks for others, you carry more weight in voting, and can generally have more influence on the distributed company. However, reputation decays over time to keep people from having undue influence without continual contribution to the colony.

This reputation system is the key to making colonies work. To keep things from running rampant, the companies rely on people who have proven their worth to steer the ship.

“Well that sounds like management and centralization of power all over again.”

To an extent, that’s correct. But you need some centralization for an organization to be effective. The groundbreaking innovation here is that influencers and managers are grown, not chosen. This is based purely on merit, represented mathematically by reputation points and tokens. In a mature colony with many members, it’s likely that no one will have significant influence over the entire colony.

There will be no CEO.

There will be no CEO. This has significant implications for everything we know about how to run companies. Yes, some de facto leaders will likely emerge in every colony, but their leadership will be based on merit. That makes them much more likely to gain respect and acceptance from the average contributor than if they were ordained CEO in a typical company.

That is a very high level picture of how a colony will work. It leaves out a ton of details, but I’m not trying to re-write the whitepaper here. You should check it out if you want to learn more.

The Common Colony

Now imagine that floating above your tiny colony (decentralized company) is a bigger colony known as the Common Colony.

The first main function of the Common Colony is to build and maintain the technological framework for the colony network. This structure allows the framework to evolve over time as needed, but only via community consensus. The founders of Colony are eating their own dog food, which is a good thing.

The second function will be Reputation Mining. All reputation changes within individual colonies are calculated in hash functions outside the blockchain, because…math. Calculating reputation changes on-chain would take up too much of Ethereum’s limited computational power, increasing transaction costs. Reputation miners in the Common Colony will compute reputation updates and relay chunks of information back to the chain with each block block update.

*simplified* pictorial representation of reputation mining. I’ve never claimed to be an artist.

The Common Colony will function like a normal colony, with a few exceptions. Initially, the founders will have significant control over the Common Colony. Any code changes will require sign-off from the Colony team. Over time, as the Common Colony hits specific (currently unnamed) milestones, the founding team will release control to the community. Eventually, the Common Colony will operate as a fully decentralized organization in the same manner as individual colonies.

Five Takeaways

  1.  — Improving incentives and speed of decision making vs. current open source projects
  2. A decentralized colony will not work for every company. By nature, the colony will make decisions slower than a company with centralized management, because large decisions will have to be voted on by all stakeholders. This is a disadvantage when compared to companies with a “visionary” CEO who can make swift decisions and guide her company down the right path.
  3. This framework could greatly enhance the operational capabilities of organizations like charities or open-source companies. Fred Erhsam wrote a great blog post about the historical lack of incentives to work on protocols. Often, only a few people contribute to base layer protocols that are critical building blocks for structures like the Internet. Colonies give inherent monetary incentives to contribute to these causes.
  4. Running the economics of a colony sounds like a full-time job. I could see colonies needing an economist who is involved in decisions such as setting the total colony token allotment or choosing which other tokens will be allowed as payment to contributors. These types of decisions aren’t simple, and they can significantly affect a company’s incentive structure. Econ majors everywhere are rejoicing as they discover they can now actually use what they learned in college, AND get paid for it.
  5. Being decentralized won’t magically fix all the problems normal companies have. Colonies will still have to struggle with one of the toughest issues all companies deal with — prioritization of work. What should be accomplished, and when should it be done? As I mentioned in number 3, this will be made even more difficult at times due to decentralization of power. You can see this played out in the current struggle/drama about bitcoin’s Segwit2x hard fork. The bitcoin community has debated this scaling issue for multiple years. Major prioritization decisions like this will hopefully move faster in Colonies due to the built-in voting structure, but big decisions will likely still take longer than they would at a centralized company

Conclusion

The Colony framework has the potential to make a huge impact on specific types of organizations. A true meritocracy seems finally attainable using the proposed structure and incentives, and I’m excited to see where this project goes.

If you want to check out the whitepaper for yourself, you can find it here: The Colony Whitepaper

[1] The only known case of a true meritocracy exists at Ray Dalio’s investment firm, Bridgewater Capital. I was convinced of this through the excellent podcast episode in which Tim Ferris interviews Ray about many things, including running a company based on merit. I highly recommend the episode. You can check that out here: Ray Dalio, the Steve Jobs of Investing


This whitepaper review was originally posted on Medium by Nick Neuman