Advice for RWA Entrepreneurs: Legal Engineering is Crucial
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Advice for RWA Entrepreneurs: Legal Engineering is Crucial
RWA on blockchain is a permissioned system within a permissionless system, and a permissioned smart contract on a permissionless chain.
Navigating Web3 tides with focused insightsBy prestonbyrne
Translated by Luffy, Foresight News
Before diving into the dull legal questions, let me tell you a story from ten years ago.
It was June 2014 when I co-founded the first permissioned blockchain company with two others. (Yes, this should have been the first permissioned blockchain company—Mike Casey wrote about us in The Wall Street Journal a year later, here.) We had three co-founders: Casey Kuhlman, an Iraq War hero and legal hacker; Dr. Tyler Jackson, a brilliant quantum mathematician from the University of Guelph and LLL smart contract coder; and myself.
The project began as a contest—an announced prize by Olivier Janssens, a Bitcoin enthusiast and Hoppean anarchist, shortly after the Amsterdam Bitcoin Conference in 2014. Around the same time, Brock Pierce, then known for the Mighty Ducks and now famous for his work with industry-leading Blockchain Capital, was elected to the Bitcoin Foundation board. This move was controversial in some circles. Critics pointed to Pierce’s youthful associations with unsavory Hollywood figures as grounds for opposing his role in governing Bitcoin.
I wasn’t involved in that fight. But for this story, you should know that Janssens, Pierce’s opponent, played a key role. In fact, he was so angered by Pierce’s election that he offered a $100,000 bounty to replace the Bitcoin Foundation with code. Casey, Tyler, and I quickly formed a team to design, code, and publish a whitepaper explaining the first Ethereum DAO, which we called Eris. It would allow users to operate nonprofits and run crowdfunding campaigns on a new, not-yet-launched platform called Ethereum—specifically on Ethereum’s proof-of-concept version 3.
Janssens dismissed our use of a non-Bitcoin blockchain platform and awarded Mike Hearn, then a core Bitcoin developer, $50,000 (not $100,000) for a slide deck. (Hearn famously exited Bitcoin angrily during the 2016 bear market.) He generously gave our team $10,000 as a second-place prize to ease our hardship.
That prototype later became the first permissioned blockchain client and eventually powered things like the first commercial paper application for the R3 bank consortium and Deutsche Bank’s first bond prototype.
In other words: we set out to merge the crypto world with the real world. We failed—and frankly, over the next decade, most similar experiments also largely failed.
While we were quite unsuccessful at selling software, our small ten-person shop was remarkably successful at convincing banks our prototype worked. And we succeeded in competing against companies that stole our ideas. They’d call pretending to want to invest, then leverage their old-school financial pedigrees to raise millions, trying to steal our thunder—companies like Blythe Masters’ Digital Asset Holdings and R3. They lacked originality. Trying to copy us was a bad idea because we were simply too early.
I’m telling you this story now because I see it reigniting debates in two areas: first, in the DAO space, where experiments in new forms of organization frequently confuse organizational software with governance. Second, in the so-called RWA (“real-world assets”) space, where I see new entrepreneurs eager to follow up crypto’s big wins—like ETF approvals—by building more bridges between our industry and traditional finance.
We learned some lessons back then that you’ll have to relearn—hopefully the easy way, not the hard way. One of those lessons is…
The integration of RWA and blockchains requires legal engineering.
If you read our Eris whitepaper, we wrote ten years ago:
“One of our primary design goals is to continue designing and building DAOs that fully comply with legal and regulatory obligations. Below are types of features included in version 0.1 of Eris, combined with real-world legal entities—preferably nonprofit organizations—so these organizations can benefit from the significant efficiencies brought by blockchain and cryptographic technologies while still complying with the laws of their respective jurisdictions.”
Remember, we wrote this in 2014—before Ethereum, before DeFi.
After ETFs, I believe the era of on-chain RWAs may be arriving. Some bright young people will figure it out; most won’t. I’ve already seen—and will continue to see—many projects calling themselves “DAOs” that ignore the legal structure piece of the puzzle, create a token, and hope that solves everything. Take the first major DAO—the 2016 DAO everyone calls “The DAO”—which appeared two years after ours. It completely botched the legal structure and was doomed to fail even without the reentrancy bug.
Algorithmic stablecoins like Basis and clone-Luna are other examples of projects that ignored legal compliance. I read their whitepapers and saw only cargo-cult legal thinking—indicating the authors understood basic financial law and economics about as well as a freshman business major at a bottom-tier university.
Many of these twenty-something founders come from Stanford, Princeton, Google, or Jane Street, yet behave with staggering stupidity in real life. Just look at how Basis and Luna handled concepts like “bonds,” “stocks,” the Federal Reserve, taxation, and promises of predictable returns under all economic conditions. Unsurprisingly, both projects ended in failure.
As we enter another crypto boom, I expect—and am already seeing—many developers building and deploying incomplete new asset protocols or immature DAOs that lack very basic legal components, hoping a bull market will fix what their code does not. Hear me: a bull market won’t fix your incomplete project. It will only magnify the consequences of your mistakes.
You can avoid these errors. The lesson, of course, is that when you’re building products for people other than shitcoin degen (and I count myself among them sometimes), you must do far more upfront design work and account for the “real world” part of “RWA”—leaving nothing out.
For blockchain developers exploring the RWA space, my advice is: remember that RWAs on blockchains are permissioned systems on permissionless networks—permissioned smart contracts on permissionless chains. Assets must have their own rulebook, separate and distinct from the chain they reside on.
That rulebook is always a legal rulebook. Smart contracts must respond to court orders, so they will almost certainly need administrative override—“master keys”—that can rewrite ownership or any aspect of the asset’s behavior as needed (though never deleting asset state changes, since that’s impossible). Compliance with legal procedures, including revocation, is a prerequisite for market acceptance.
When building these systems, make sure you have a lawyer on hand who deeply understands the asset class you’re working with and its rulebook—not tucked away in legal, but embedded within the business function. In other words, integrate that lawyer into your development team early to ensure your specifications meet real-world requirements.
Do this, and you stand a much better chance of building an application that truly transforms how these assets are owned and traded.
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