The crypto-enthusiast narrative and vision behind blockchain technology states that blockchain is a powerful tool that will allow us to decentralise the infrastructure of economy, society and even politics. As blockchains are distributed transaction ledgers, in theory they can be used to represent any kind of asset. Bitcoin’s creator found the first application of this technology: digital cash system. This iteration is trying to change the nature of money in society by questioning the state’s role in controlling monetary policy and taxation. Soon after the appearance of Bitcoin, people started to understand that the applications of this technology expand beyond the realm of virtual money. Until now, the economic and political infrastructure for trading and interacting was provided by corporations and governments. Today, developers and blockchain supporters are arguing that this technology could support safer and faster networks without relying on intermediaries and gatekeepers. The main thesis is that by using blockchain we will fix the inequality of money and power that cripples our society. But how ? This post describes why blockchain governance design is one of the most important problems out there, its critical components, current approaches, and their impact.
A blockchain is best described as distributed database that records all the transaction that took place inside the network. The operations and exchanges inside a chain follow rules prescribed in their protocols. These protocols are defined by code and thus they are unambiguous, comprehensive and hard to change. These predefined protocols are the features that made the blockchain famous: decentralised! Immutable! apolitical! and trustless!. Removing the human agent from this critical points should in theory eliminate arbitrary, corrupt or inconsistent enforcement of rules. This is ‘off-chain governance’, when the coded rules engraved in the protocol are defining and regulating the rules of the ‘game’. This is an important breakthrough for sociologists and political scientist who have been searching, since long time, for better ways to cultivate trust and address ancient problems of cooperation and coordination. The problem known as the prisoner’s dilemma -The prisoner’s dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so- illustrates the risky outcome of human interactions in the absence of rules and strategies. The challenge is to find ways to impose this rules and limits without central institutions and organisations.
Blockchain technology is addressing exactly this problem and it is seen as a game changer because it can replace these corruptible and fallible social structures with impartial technological tools. ‘Off-chain governance’ can lead to new ways of organizing social interactions, but it does not avoid the fact that the network itself must be created and governed to begin with. The defining protocol of a blockchain, the software in which is presented and ultimately the hardware on which it will run are all inputs that are generated by diverse groups of people. These components are designed to be flexible towards changes, updates, and improvements. This is much needed in an environment that is evolving fast, blockchains have to be prepared for integrating better technology that could make the network more efficient and also fix vulnerabilities. This process of updating is an important and necessary part of a blockchain’s development and evenmore a fundamental social process. How the users come together to design, maintain or improve the rules that guide a network can be called ‘on-chain governance’.
The process of network governing was thought to be driven only by technical considerations, however, this quickly changed during Bitcoin’s block size debate. No issue in the past of cryptocurrencies has been debated as much, as often, or created such a great division as the bitcoin block size. Big block supporters sustain that larger blocks allows room for more users and makes Bitcoin more useful as money and more competitive as a payment solution. Opponents argue that increasing the block size limit is pointless, offers only temporary relief, and decreases the level of decentralization by increasing the participation costs. Evenmore, introducing a social/technical process for a hard fork risks that very same process becoming a future attack vector within Bitcoin. This was one of the first and most important example of a blockchain community facing complex problems of governance. It was clear that many issues can go beyond objective technical solutions. What began as a disagreement on how to scale the network best evolved into a debate over control of the governance and protocols. Similarly, the Ethereum community encountered the DAO issue, during which a powerful hack led to the ‘roll back’ of the Ethereum blockchain. It’s important to note that this bug was not caused by a mistake of the Ethereum founders, but from this one application that was built on Ethereum, nonetheless, debates over solutions again concluded with a fork. Ethereum holders voted on whether to institute a hard fork to return all ether stolen from the DAO. The vast majority of voters agreed with the hard fork, but a sizeable minority protested that this was a dangerous precedent and that blockchains should never be altered. Arguing that it violates exactly the underlying assumption of immutability of the network they continued to run and maintain the hacked version with a new name: Ethereum Classic.
Unfortunately these conflicts may have undermined the trust in this technology. Evenmore governance problems will not stop. Regulating human and social exchange is not an easy task and has serious ethical, moral and political consequences. The rules enforced in a blockchain network will naturally create both winners and losers. Users who produce or maintain a blockchain network have different levels of control over the outcomes, and this inevitably results in conflict over what the rules will be and evenmore over who decides on this rules. This is blockchain politics, and understanding problems of governance is critical in order to maintain their functionality whilst reducing the social conflict over network protocols. A big part of the blockchain community is unaware, blinded or passive when it comes to governance issues. However this might be a dangerous path as history tells us that even in social communities ‘without’ clearly predefined hierarchical structures, abusive power and politics will emerge.
The emergence of blockchain technologies increased the perceived impact of governance networks in formulating, determining and implementing public policy. Governance networks engage public, private and civil society actors at transnational, national, regional and even local scales in shaping the future of our societies. Network management is often mentioned to mitigate the risk of failure and enable governance networks to achieve desired outcomes in terms of more effective and democratic governance. The study of blockchain governance is a necessary step for the community to better understand the ways in which blockchains are designed, how are they updated and how conflicts should be resolved. Governance by the network can work only if the rules are robust, fair and predictable. These systems need to quickly evolve in order to survive, and while initial design is important over a long enough timeline the mechanisms for change are crucial.