A short history of blockchain governance or how to deal with unexpected conflict

Blockchain systems hold a significant amount of value. In this article we discussed the different stakeholders of a blockchain ecosystem. Different stakeholders will inevitably pursue differing interests and so the question becomes: how do we mediate between these differing interests? Who holds the upper hand in times of dispute and how do we achieve compromise between opposing parties? The short history of blockchain projects has shown that it is all but wise to ignore such questions. Despite the mantra of “code is law”, governance solutions more often than not depend on actions beyond code. How people respond to changes in the code or the “social layer on top of the math” has become increasingly critical for the success of blockchain projects.

The first major event evoking blockchain governance happened in May/ June 2016 with the advent of the DAO hack. The DAO was a form of investor-directed venture capital fund instantiated on the Ethereum blockchain. Based on the Ethereum blockchain, the DAO was stateless, thus with unclear rules on how to regulate the DAO. As a decentralized fund it had no centralized management structure and was funded via a token sale. As such it set the record for a crowdfunding campaign gathering more than 150 million USD. Shortly after the token sale the DAO was attacked through a number of vulnerabilities and about a third of the Ether committed to the DAO was stolen. The code written for the DAO had flaws which were skillfully exploited. There was a mixed response to this event from the Ethereum community. Some claimed that even though the hackers’ behavior was unethical, the withdrawal of funds from the DAO was valid. Along the lines of the famous motto “code is law”, this group tried to justify the results of the hackers’ behavior by arguing that whatever the code allows is in fact valid. The other side demanded the stolen Ether be returned to its rightful owners. In order to refund the stolen Ether, Ethereum eventually hard forked to send the lost funds to accounts available to the original owners.

In the eyes of many in the Ethereum community such a hard fork was inappropriate because it violated some of the basic tenets of blockchain technology, namely that code is law. However, due to the pull of Vitalik Buterin, Ethereum’s intellectual father, the forked version of Ethereum won adoption over the version incorporating the hack called Ethereum Classic. Today most of decentralized apps are written on Ethereum which undid the DAO hack. Whether the hack was legitimate was clearly a question of blockchain governance. Was the DAO fork supposed to happen and is a forked chain a legitimate version of the original protocol? Because the community had never anticipated the hacking of the DAO, it was difficult to establish a clear response when it happened.

Another controversial governance decision of the blockchain ecosystem happened last summer with the ongoing Bitcoin scaling debate. Some people in the community suggested to increase the block size in the face of slow transactions. When the rate of transactions exceeds the available space in the blocks, transactions have to be backlogged which means that in total transaction rate has to slow down. On August 1st 2017 Bitcoin forked into Bitcoin Cash, which increased the block size from 1 megabyte as in Bitcoin classic to up to 32 megabyte. The increase in block size is seen as controversial because in the eyes of some community members it encourages centralization. Again, there are several stakeholders which ultimately means that governance questions arise.

In November 2017 another major security flaw in the Parity multi signature wallet caused heated discussion on Ethereum governance. A vulnerability in the Parity library access allowed anyone to become its owner and self-destruct the library. As a consequence when a user under the synonym @devops199 accessed the library and killed it, 300 million USD in Ether became frozen and consequently useless on the wallet. Since then in order to restore the lost funds, Parity has come up with the EIP (Ethereum Improvement Proposal) 999. In this proposal to the Ethereum community they suggested to replace the self-destructed contract code with a patched version to undo the self-destruction of the library. This replacement of the contract code requires a change in the Ethereum protocol, hence the necessity of a formal proposal. Even though this proposal did not intend to change any EVM semantics and would have achieved to unfreeze the funds in a single state transition, it was nevertheless turned down by a close majority of 55%. Many in the community feared a hard fork because of this controversy even though Parity Technologies clarified that they did not intend to provoke a hard fork. Concerning governance, it is interesting to have a look at the voting dynamics of this particular vote. The strength of the individual vote was determined by the amount of Ethereum held. This was perceived as an unfair voting mechanism by some in the community as Polkadot and Parity Technologies, both companies owned by Gavin Wood, were able to influence the outcome though their huge holdings in Ethereum.

There are already several promising governance proposals out there which potentially mitigate the risks of hard forks and community splits. Agreement on a uniform governance structure may prevent serious conflict between stakeholders in the future. However, many governance models are complex and require the user to invest time for research in order to make informed choices. At times these expectations might exceed the capacities of users that hold many coins in their portfolios. At Pool of Stake we want to create a pool for all kinds of governance structures. We offer our users a unified voting mechanisms for all different native blockchain projects in order to lower the participation threshold as much as possible. With this we want to pave the way for better representation of all stakeholder groups in Proof of Stake blockchains.