Methodology for Assessing Legal Engineering Impact

This research was conducted for LexDAO by Spencer Saar Cavanaugh of Clinamenic LLC. Funding for this research was provided by the Hypercerts Foundation.

The following work does not constitute legal, financial, or accounting advice, but is intended purely for educational and research purposes. If you or your organization seeks to implement any such programs, proper counsel should be sought out.

The field of legal engineering is an applied field within computational law, and has seen a variety of innovative and experimental mechanisms developed to bridge legal systems with technologies like blockchain, specifically in the latter's capacity as a peer-to-peer virtual machine and financial settlement layer. Viewed through the lens of law as a public good, the field of legal engineering has the potential to democratize and streamline a variety of legal processes, such as blockchain-based ("onchain") reporting and compliance, onchain entity formation, and the facilitation of contracts. While this industry has already seen a number of exciting products and services developed, such as multisignature accounts and legal wrappers, there remains a systematic need for mapping and evaluating the work being done. The establishment and promotion of an evaluative methodology for legal engineering products and services, geared around the fundamental nature of such products and services as capture-resistant and permissionless public goods, can help ensure that such innovation remains accessible and interoperable as institutional adoption increases and regulatory regimes develop.

This prospectus is concerned with outlining some initial practices around how legal engineering projects can be evaluated on the basis of the impact they have as public goods. Specifically, this research will be exploring how certain protocols, such as Hypercerts and Ethereum Attestation Service, can be used for such impact evaluation. However, while much of the conversation around blockchain public goods has been geared around assessing impact as it is made, this research concerns how legal engineering products and services can be evaluated on the basis of potential impact. More specifically, this research concerns the development of an analytic methodology whereby legal engineering products and services can be evaluated on the basis of certain public goods criteria. Not every legal engineering product or service need be oriented around such an evaluative paradigm, but this prospectus is focused on those products and services which constitute public goods and which embody this notion of law as a public good.

This research, as well as many of the surrounding projects and initiatives, is conducted within the context of open-source software as a public good. While the methodology outlined here is intended to be applied specifically for legal software and applications, it is not intended to be limited to such, but rather presented for more general-purpose application. Before any methodological considerations, however, we will first examine the basic mechanisms underpinning Hypercerts and Ethereum Attestation Service, seeing as these two protocols, themselves constituting public goods, may be used in conjunction with one another in the assessment of public goods in general.

Hypercerts are onchain certificates designed to facilitate the assessment and funding of public goods. Someone working on a public good can mint a hypercert, specify the work they are doing, and sell a number of these hypercerts to funders who want to support public goods. This last step can also be understood as issuing a donation receipt to funders of public goods.

Like other protocols in the blockchain public goods space, hypercerts were designed with the intention of supporting an ecosystem. That is, they are configured to be interoperable within a network of developers, funders and beneficiaries revolving around public goods, all of whom having their own information to share and seek. People building public goods need to convey the work they are doing and the impact it is having, in order to receive funding. People funding public goods want to see evidence of the impactful work being done, in order to feel confident that their donations are being effectively allocated.

Ethereum Attestation Service is a general-purpose protocol for storing and indexing information onchain. Users can create and publish attestations as particular statements of information, and these statements can be integrated with smart contracts to trigger desired onchain outcomes. Not only can individuals publish information using attestations, they can also create attestation schemas to for other users to publish information.

For example, attestations can be used for programmatic membership agreements, where signing a membership agreement results in the user receiving membership in an onchain organization. Attestations can also be used in workflow management, wherein supervisors issue attestations to publicly recognize the work done by an employee or contributor. While attestations can be used for private purposes, they are generally understood as useful in situations where the information being conveyed or verified is public in nature.

In our case, we will be exploring how attestations can be used to qualitatively and quantitatively evaluate the impact and outcomes of public goods in the field of legal engineering. EAS, like Hypercerts, is itself a public good insofar as it is freely accessible and open-source. In this sense, protocols such as these collectively constitute digital public infrastructure, and can be used to systematically promote and support philanthropic and commercial work alike.

Before laying out any prospective methodology for tracking the impact of public goods within a given onchain ecosystem, it is worth highlighting some of the challenges currently faced, both in onchain philanthropy and traditional philanthropy.

Chief among the challenges faced in the ecosystem of onchain philanthropy is one which the rest of the industry also grapples with, namely the technical difficulty of user experience (UX). Without dwelling on this topic for too long, it is important to understand the extent of this technical challenge, seeing as it effects most of the methodology here considered. Because blockchain technology is still so difficult for most non-technical users to engage with, the existing ecosystem of users and organizations consists primarily of technically sophisticated individuals, even relative to the average internet user. This can be seen as natural, given the early stage of development much of this technology is still in, but it should nonetheless remain in our field of awareness if we are serious about using this technology for good.

One consequence of this technology's accessibility barriers is that the reach of this ecosystem is limited to highly technical users. This sheds a light on why so many of the blockchain-based public goods funding programs have focused on supporting open-source software, given the amount of software developers in this ecosystem.

That said, this UX difficulty does not necessarily stand in the way of these funding mechanisms expanding their reach beyond technical users. To varying degrees, individuals such as grant round managers, operating in or alongside onchain philanthropic organizations such as Octant or Gitcoin, can manage this technical burden to help offset the UX difficulty experienced by less technical users. A grant round manager is someone who administers key functions of a smart-contract-enabled grant program, such as the approval of applications and the disbursement of funds.

One particular instance of this technical barrier manifesting is the process of converting cryptocurrency, received from the grant program, to fiat currency. This process, known as offramping, can involve multiple transfers and conversions if the grantees needs those funds in their native currency. For grantees who are familiar with the technology, this process may come easily to them, or they may even be comfortable holding their grant funds in crypto.

One example of how this sort of technical difficulty may be addressed, is for grant managers to take on the responsibility of guiding grantees through this process, and thus educating them along the way. While this personalized form of guidance has proven to be an effective means of helping new users familiarize themselves with the underlying technology, it also increases the administrative burden of grant round managers, which is another challenge faced.

In addition to any procedural difficulty grantees may experience in offramping their grant funding into a currency they can use, there is also the risk of volatility, depending on the particular asset in which their grant was paid out. Because some onchain grant programs disburse grants in their native token, comparable to a company's stock, grantees do not always receive funding in the form of a reliable store of value. In addition to volatility, some of these assets may not have sufficient liquidity for the grantee to offramp them especially if the asset in question is new and lacks a developed market.

While there are certainly arguments to be made for the existence of grant programs like this, as an option for grantees with tolerance of such volatility and speculative upside, this risk is not something that most early-stage nonprofits and public goods projects can afford to incur. One solution to this problem of volatility and illiquidity is for onchain grant programs to use stablecoins, such as DAI, USDC, or USDGLO.

Another systemic challenge faced in the onchain philanthropy ecosystem is the amount of promotional work grantees often have to undertake in order to receive substantial funding. To better understand this, it may be worth elaborating on some of the existing procedures and practices at play within this ecosystem, specifically the process of quadratic funding (QF).

Traditionally, grant programs give out fixed amounts of money to grantees, as determined by the institution administering the grant program. In the case of quadratic funding, the determination of the final amount received by grantees is more community and participatory. Here, institutional donors contribute to a central fund (the "matching pool") which will eventually be divided among grantees, and the grant round operators assume a sort of fiduciary duty over this matching fund. Grantees apply to join a grant round, and the operators approve or deny these applications. Once accepted, the grantees have donation interfaces set up to receive small donations, in crypto, from individual donors, who review the project information of the grantees involved. Depending on how the parameters of the grant round are configured, the amount of the matching pool each grantee receives is determined according to the amount of donations they received, as if individual donors are voting for which grantees they think deserve funding from the matching pool.

Because the amount of money a grantee ultimately receives depends on the amount of individual donations they receive, the grantee is incentivized to promote their project(s) in public channels, in order to appeal to individual donors. This process is certainly more participatory than traditional grant programs, but it also involves the risk of this promotional work being inadequately compensated. This risk largely depends on the size, technical literacy, and affluence of the communities of would-be donors. It also often amounts to a sort of popularity contest, wherein the grantees who are best at marketing and have the most engaging social media presence receive the most donations. This social dynamic is not necessarily undesirable, depending on the circumstances of the grant program in question, but it is certainly worth bearing in mind as preparations are made.

Another risk which the onchain philanthropy ecosystem faces is the fragmentation of operations across multiple blockchain networks. Given the proliferation of "Layer 2" blockchains ("L2's"), which have their own particular financial settlement systems and host their own grants programs, grantees often have to make redundant efforts in seeking grant funding across these networks. Arbitrum and Optimism, both L2's atop Ethereum, each have their own grant programs structured according to different application review processes.

While this challenge, of conforming to the various structures of grant programs, is familiar to individuals and organizations seeking grant funding, there arises a novel difficulty in this onchain context. A major value proposition of using blockchain technology in philanthropy is to track the progress and outcomes of the work being done. While this vision is still nascent and unproven, the logic is sound. Nonprofits and public goods projects can document the work they're doing, using protocols like Ethereum Attestation Service, in a publicly verifiable and auditable manner.

It should be noted than any methodology or technique explored here is presented within the context of experimentation and nascent best practices. Indeed, one positive outcome to expect from this research is the advancement of the dialogue around such practices, and perhaps even the further development of the protocols themselves. In light of this, it may aid the reader to understand some of the prevailing challenges faced in the onchain public goods ecosystem.

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