The Long-Term Stock Exchange (LTSE) and Ethereum’s “hard fork”

OFF3R: The Week That Was: Friday 20th October 2017

The trendiest news over in Silicon Valley this week was that the Long-Term Stock Exchange has been backed by the likes of VC Marc Andreessen and LinkedIn’s Reid Hoffman. The brain-child of Lean Startup luminary Eric Ries, it promises a new system of corporate governance, and is currently preparing an application for stock-exchange status with the Securities and Exchange Commission.

The idea is to create an exchange where shareholders who hold their shares for a long time receive more votes — so-called “tenure voting”.

The thinking behind this is that those who hold their shares for longer will focus more on the long-term than those who sell quickly. Firms that use the exchange will also have to stick to other rules, like the ban on binding executive pay to short-term performance.

Its proponents hope the LTSE will provide a new incentive for large private firms like Uber and Airbnb to go public. Critics, however, say it’ll simply provide another way for powerful Valley investors to exert and maintain control at the expense of other shareholders. And while Ries says it’s “an experiment worth running”, others have voiced concerns about liquidity and how a fixed voting structure will affect (and possibly depress) share prices.

Ideas around redesigning capitalism will no doubt lead to some incredibly interesting initiatives. There are two things strike me about the LTSE. First, a chicken-and-egg question: are the trading behaviours we see in stock markets a symptom of structures that promote short-termism or a cause? And second, the LTSE will use top-down means to alter corporate structures. But it is worth remembering that corporate structures are creatures of statute: are more rules the best way to bust them open and innovate?

According to a whitepaper published by Deloitte and Swiss firm Avaloq, the money managed by robo-advisers will outstrip the work of the world’s largest asset manager, BlackRock, over the next few years.

The robo-advice market will account for between $2.2 trillion (£1.6 trillion) and $3.7 trillion (£2.7 trillion) of assets under management by 2020, it forecasts. By 2025, that will rise to $16 trillion (£12 trillion) — more than BlackRock.

However, the report notes that this still represents just 1 percent of private banking and wealth management — even a rise to 3 percent by 2020 still means most wealth will continue to be managed in more traditional ways.

That said, lines are blurring. In June of this year, for instance, BlackRock made a £30m strategic investment in three-year old digital investment firm Scalable Capital.Fund and wealth managers across the board are looking for ways to improve their technology (while providing huge distribution opportunities to startups), so we need to be careful about distinguishing too starkly between “traditional” and “robo”.

And all of this in the same week that Corbyn’s Labour Party had one of its better ideas: robots in the workplace could be owned by staff, using a cooperative structure, rather than business owners. You wonder, however, how decisions around further R&D and innovation would be made efficiently and, more vitally, whether this would be a system mandated and controlled by a bunch of mandarins.

And, finally, a hobby horse of mine: at the beginning of the week, Ethereum, the much talked about blockchain platform, designed to enable smart contracts and new currencies to be built on it, upgraded its network to Byzantium — a so-called “hard fork”.

Ethereum is known for being one of the world’s two largest open-access public blockchains — the other being the Bitcoin blockchain. And, more recently, it has featured a lot in the press because over 50 percent of Initial Coin Offerings (ICOs) — unregulated crowdfunding using digital currencies — have been launched on it.

The Byzantium upgrade will improve the software that Ethereum runs on, allowing those within the network to put right any security risks and add new functionality.

It’s too early to say that the process has been a complete success, or that the network is completely stable, but early signs are encouraging. “There were a few issues with nodes upgrading which has led to a bit of uncertainty as well as a few attack vectors,” says Charles Hayter, co-founder and CEO of CryptoCompare. “But nothing too dramatic as yet!”

The intention with Ethereum is to move from so-called Proof of Work to Proof of Stake later this year — and Byzantium is part of that process. Proof of Stake is a system of verification based on the number and age of ether a miner holds, rather than the work they’ve done to validate the chain (Proof of Work). The flaw with Proof of Work is that the cost of attacking the system is equal to the cost of running the system — which means that security is only achieved through high operating costs. Proof of Stake will solve this problem by providing more security for less cost.

Founder of HSG Advisory, a content consultancy that builds media platforms for the world’s most exciting companies