bsips/bsip-0007.md

    BSIP: 0007
    Title: Fee Backed Assets
    Authors: Danial Larimer <Dan@cryptonomex.com>
             Stan Larimer <Stan@cryptonomex.com>
             Fabian Schuh <Fabian@BitShares.eu>
    Status: Installed
    Type: Protocol
    Created: 2015-12-16
    Discussion: <https://bitsharestalk.org/index.php/topic,20286.0.html>
    Worker: not applicable

# Abstract

Existing core features of the BitShares protocol are Market Pegged Assets (MPA)
and issuer backed User Issued Assets (UIA). In this proposal, we introduce
another type of asset: *Fee Backed Assets (FBA)*.

Feed backed assets allow to propose and fund *market based* innovation by
sharing a cut of future profits generated by this particular innovation with the
people that helped fund it. Think of it as a *Kickstarter* for features.
Hence, if people can profit from successful features in the form of fees then it
can help the BitShares ecosystem to become more adaptable over time as it
promotes innovation and can pay for its development.

# Motivation

Let's assume a developer installs a new function into the BitShares protocol
that charges fees for its service. Where should those fees go? To the developer?
To the share holders? How should a decision be made? Why would share holders vote
to fund a feature if they can't profit from it?

The answer is to pay the profits from fees generated by the feature to holders
of a UIA that has been created for that purpose, specifically. In other words:
owners of that UIA own a portion of those revenue producing assets. This revenue
generating counterparty free asset is backed solely by the blockchain and its
user base and can be sold freely on the decentralized market.

Since they have no counterparty, they are **not a security**. They are simply
capital equipment, like selling a mining machine.

This new kind of digital asset trades like any of the others but has fascinating
new properties.

For every new revenue generting innovation or feature in the whole ecosystem,
there can be a new fee backed asset. Developers recoup their costs by selling
(or pre-selling) these revenue generating software devices (or keeping them to
earn the revenue they produce.)

# Examples

## Taxi Rental

Let's assume we build 100 robotic software taxi cabs that deliver private
packages for hire. Program them via blockchain logic to take turns delivering
packages. Sell the cabs to the network in exchange for a set of tickets good for
rental minutes on a cab. Now we can resell or trade of those tickets on the open
market. This way, anyone can rent time on any of the limited supply of "cabs"
and earn fees for performing delivery services.

The `TAXI` FPA could represent all available minutes on a network-owned fleet of
robotic taxi cabs. Buy up as many minutes of their time as you want and you have
your own revenue generating business with no counter parties.

## Project/Feature Funding

In the case of the [Privacy Mode](bsip-0008.md), the project development can be
funded by a PRIVACY FPA that gets their owners a cut of fees produced by
transactions using that feature in the future. Every BitShares customer that
wants to gain advantages of that Privacy Mode needs to pay an increased fee for
its service. These fees are distributed among all owners of the `STEALTH` asset.

# Regulatory Issues

One of the first and thorniest problems we tackled is the nasty fact of
*Regulatory Risk*. There exists a vocal contingent of people who want very much
that an FBA (fee based asset) be created to fund a feature upgrade to the
BitShares blockchain. They want that everyone be thus enabled an opportunity to
participate in the fee stream originating from future use of the feature by
purchasing shares of a FBA.

The conundrum is that whoever creates the FBA and offers it to the public as a
means of participation in a fee-based income stream faces a risk of coming under
regulatory scrutiny if the project is a success (e.g. Satoshi Dice) or even if
it is not a success (through some disgruntled investor complaining to a
regulatory authority). For a more in depth look in to Regulatory Risk please see
[1,2].

If something falls within the definition of a *security* under applicable law,
it will be governed by extensive rules and regulations that can be quite complex
and expensive to comply with. And subject the issuer to a large fine/other
penalties if not complied with!

Once [BSIP-0008](bsip-0008.md) has been implemented and is available on the
blockchain (but not before), it will be possible for future investor and
entrepreneurs to create FBAs and crowd fund new features by having a *Private
Mode account* ([BSIP-0008](bsip-0008.md)), issue the FBA from an *unknown*
jurisdiction that is presumably not subject to securities concerns.

# Specifications

Since every innovation on the blockchain level has to come with a protocol
upgrade (previsouly denoted as a *hard fork*), the upgrade also comes with a so
called *management account* that is specific for this specific innovation or
feature. For regulatory reasons, the blockchain itself is seen as the creator of
the asset and has the sole permission to issue new shares.

The initial share holders of the FBA asset have to be defined upon the hard fork
by the developers of the feature. It is left to the developers of the innovation
to derive a proper scheme to identify the initial share holders.

Most importantly, the management account will have a Multi-Signature authority
assigned to the `X` largest share holders of that account weighted proportional
to stake and will have the power to set the fee.

# Discussion

Daniel Larimer: I would say that far more than Worker Proposals or anything
else, the Fee Backed Assets is incentivizing entrepreneurs to come up with
ideas, come up with features and then go and fund them and make it happen.

This proposal helps fund new features and innovations without the need to dilute
BitShares to pay for its developments. However, having the features transaction
fees be paid to the holders of the corresponding FBA results in a reduced
revenue for BitShares holders, which is only fair since they haven't funded the
feature. However, the infrastructure is still provided by BitShares and as such
a cut of the features transaction fees may be directed to the BitShares holders
by burning or reserving in the reserve funds.

The developer of a FBA-supported innovation can chose a mixed funding model and
make use of a worker to fund parts of the development. As a consequence a
higher percentage of the transcaction fees should be directed towards the
BitShares holders.

# Copyright

This document is placed in the public domain.

# See Also

* [1] https://bitsharestalk.org/index.php/topic,20499.msg264752.html#msg264752
* [2] http://www.cuttingedgecapital.com/what-is-a-security-and-why-does-it-matter/