Some Thoughts on ISPOs

Opens November 29th 2021 with a whiteboard video on ISPOs and Cardano developments, rebutting the ghost-chain claim.

Shows the Cardano Cube ecosystem map with projects like Space Babes, HUSKY token, and swaps, noting they helped SundaeSwap reduce contract memory by 35 percent via fewer higher-order functions and strict and lazy evaluation.

Cites Meld's ISPO with nearly 40,000 participants staking 620 million ADA, concluded October 27th, as an emerging Cardano crypto-fundraising use case.

A stake pool normally has delegators pool their stake to raise the chance of making a block, sharing rewards minus the operator's fee, a model running since Shelley with over 3000 operators.

An ISPO runs a pool with a high or 100 percent fee where delegators keep their ADA but the operator keeps the rewards and gives back tokens, unlike an ICO where you send crypto away.

You keep your delegation for a while, get a cryptographic receipt, then get your ADA back, though there is debate whether ISPOs help small stake pools and an open regulatory question.

Cites a 2018 article on SEC airdrop enforcement where a bona fide gift under the no-sale theory avoids registration, but the SEC could argue an ISPO raising project capital is still a securities offering.

The infrastructure bill's crypto broker reporting requirement demands you report delegator information or face IRS fines and criminal charges, including verifying senders' Social Security numbers for transactions over 10,000 dollars.

The infrastructure bill was never designed to be usable, so people are ring-fencing the US like eToro did with staking, since regulation is unclear versus creative jurisdictions like Sweden, Switzerland, and Singapore.

Ring-fencing the US forces a US standard and a rest-of-world standard, but Cardano has CIPs, with the CIP repo running from 1 to 30 including new Plutus ones, some community-led like CIP 30's dapp connector.

CIP 13 and 19 by Sebastien on URI schemes and Shelley-era address structure, and proposes writing a CIP for an optional delegation payload.

The payload lets a delegator encrypt a DID with the stake pool's public key as transaction metadata, decryptable only by the operator, like a Bitmessage idea.

The delegation payload lets an ISPO require a DID proving you are not under US jurisdiction to receive tokens, offshoring it via the delegation transaction while preserving privacy.

A KYC provider like Accumulate can unblind data with an included passphrase, giving two layers of protection via encryption and a DID alias, the only current way for US people to comply with the infrastructure bill.

The DID approach only solves the ISPO problem, not full infrastructure-bill compliance, since forcing every delegator to provide KYC would require hyper-centralization, so no proof-of-stake chain like Ethereum 2, Polkadot, Tezos, or Algorand can comply.

For a Reg S offshore exempt offering the optional method works via an identity center where you only get tokens with a valid DID, enabling fundraising innovation.

Warns the broker definition is so broad that a full node validating transactions could be a regulated broker required to report Social Security numbers even for Bitcoin, with a criminal component, calling it absurd.

Promises a CIP for the opt-in ring-fencing system, but nothing solves the infrastructure bill's full-node problem, though bipartisan support may undo it by 2023 and the IRS signaled a non-strict interpretation.

An ISPO probably is a securities offering under the Howey test since tokens fund project capital, unless the product is finished on day one, so you need to distinguish US from non-US participants.

Because delegation transactions are on the blockchain the operator parses and decrypts payloads with no IP address needed, and this extends beyond compliance to sweepstakes addresses, newsletter emails, or signing contracts.

Reflects that pioneers faced the National Science Foundation acceptable-use policy forbidding e-commerce until 1992, so pioneering industries always struggle through education, lobbying, and innovation.

China and India took draconian crypto views removing three billion people from the conversation with bad policy, while the US is nowhere near that stupidity and can be persuaded over time.

At the protocol level they can add data payloads and reward escrows, including a draconian option where rewards go to an escrow released only after KYC, creating a two-tiered US versus non-US system.

A rewards escrow could also hold an ISPO operator's fee in an auditor-controlled account releasing funds at project milestones, adding protocol-enforced accountability.

Marvels at Cardano's creativity, recalling the first ICO Mastercoin raising half a million dollars off a BitcoinTalk thread with Jerry Willett's keys in his basement, and that a billion dollars of ADA staked to an ISPO may generate more value than the Ethereum crowdsale.

Announces three Plutus CIPs feeding the read-only UTXO model from talking to DEXes and stablecoin developers, a beautiful learning loop, closing that regulation can create transparency features, that his gout is back, and a Bob Ross happy-accidents sign-off.