Justus Perlwitz

Smart Contract Ownership

When building your smart contract platform — whether on Ethereum or any other blockchain — at some you’ll be faced with the question of ownership. In this article, I will explain three different types of smart contract ownership and discuss their advantages and disadvantages.

What is smart contract ownership? Smart contracts and decentralized applications (DApps) frequently require external input to guarantee continuous operation. Many of these external inputs and operations require some form of consensus from the contract stakeholders in order to:

  • fix bugs in smart contracts,
  • add features to smart contracts,
  • allocate dividends for shareholders,
  • mint new tokens, or even
  • shut down smart contracts.

In more practical terms, we can imagine each of these operations as calling smart contract functions. To illustrate this, let’s imagine a token crowdsale contract — one of the most popular forms of smart contracts out there, widely used for ICOs.

(This article explains the mechanisms of token crowdsales. OpenZeppelin’s crowdsale contract, which can be deployed on the Ethereum blockchain, is described here.)

A token crowdsale has lots of different knobs and settings that you might have to change while it’s running:

  • the token cap may be changed;
  • bounties can be awarded;
  • bonus payouts might be adjusted.

1. Ownerless

The simplest option is to make these settings fixed and unchangeable. In that case, your contract has to be set up correctly from the beginning. It’s not possible to go back and revise options. This also means that once the crowdsale is set up, token buyers will never have the feeling of investing in a bait and switch.

digraph {
  "Crowdsale Contract" -> "Token Contract" [ label="owns" ]

The contract code looks roughly like this:

The advantage is that this crowdsale contract can not be changed after deployment. If an investor decides to buy its tokens, they are guaranteed to receive the tokens during payout exactly under the same conditions that they have purchased them under.

There are two risks:

— crowdsale parameters might be misconfigured, potentially leading to unfair conditions for certain investors; - programming errors in the contract code can not be fixed, everything is fixed after the crowdsale goes live. If funds are lost, they can not be recovered.

2. Single Owner

The next option is to add a single owner to the contract.

digraph {
  "Crowdsale Owner" -> "Crowdsale Contract" [ label="owns" ]
  "Crowdsale Contract" -> "Token Contract" [ label="owns" ]

The single owner can then change crowdsale parameters, such as bonus payouts or soft and hard caps. We can then limit the ability to change crowdsale parameters to the contract owner. By default, this is the address that created the contract.

If you’re basing your contract on OpenZeppelin’s Ownable, implementation becomes an easy task. Simply define your smart contract like so:

Having a single owner allows changes to the crowdsale to be done swiftly. This is useful if urgent action is required. Especially if the crowdsale is happening in a trusted and closed environment — where all parties know and trust each other — having a single owner is the best option.

There are some risks to consider as well:

  • crowdsale owners can bait and switch investors by changing crowdsale parameters after the investment already took place; — ownership access keys can be lost or stolen, and a malicious actor could manipulate the crowdsale.

3. Governance

A third option is a governance smart contract. This can typically involve several shareholders who each own a stake in the governance contract and can change it based on consensus. The governance contract in turn manages the crowdsale contract. The stakeholders can be advisors, investors, or founders.

digraph {
  "Stakeholder A" -> "Ballot" [ label="votes" ]
  "Stakeholder B" -> "Ballot" [ label="votes" ]
  "Stakeholder C" -> "Ballot" [ label="votes" ]
  "Ballot" -> "Governance Contract" [ label="interacts", dir="both" ]
  "Governance Contract" -> "Crowdsale Contract" [ label="owns" ]
  "Crowdsale Contract" -> "Token Contract" [ label="owns" ]

Changes to the crowdsale contract parameters are handled in a very democratic way. The following steps are required.

  1. A stakeholder proposes a change to the crowdsale and creates a ballot. The ballot contains code that the governance contract can execute, in this case, code that changes crowdsale parameters.
  2. Each stakeholder is assigned a number of votes proportionate to their shares or other predetermined factors.
  3. All stakeholders have an opportunity to vote.
  4. Once all eligible voters have voted or the ballot has closed, whichever comes first, the ballot is executed.

This process will provide the best possible outcome in terms of openness and trustworthiness. Making decisions out in the open and letting those with a vested interest participate in it will show that you are seriously interested in implementing a democratic and decentralized crowdsale that treats stakeholders fairly.

In a governance setting, every change in crowdsale parameters will be preceded by a standardized voting process during which people have the opportunity to understand and discuss how the changes in the smart contract will affect their investment.

Even in the most democratic setting, malicious actors can manipulate the process. Someone owning a lot of votes — by acquiring crowdsale shares — can significantly influence a ballot’s outcome. The owner can even try to conceal this by owning the shares through many different wallet addresses. But still, since voting happens out in the open, deliberate fraud will immediately become obvious.

4. Conclusion

To sum it up, there are three different ways to implement contract ownership:

  1. ownerless contracts,
  2. single-owner contracts, and
  3. governance-owned contracts

When implementing your decentralized application on the blockchain, you should carefully weigh the advantages and disadvantages of each approach and come to a decision that works best for both for you and your users.

Date created:
April 20, 2018

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