Governing Blockchains and the Blockchain Government

And thus every man, by consenting with others to make one body politic under one government, puts himself under an obligation, to every one of that society, to submit to the determination of the majority, and to be concluded by it.

~ John Locke, Second Treatise of Government (1690)

Governance has never been so cool. In the past, only the stodgy professoriate debated the principles of good governance. While those who actually governed did so by brokering power in the back rooms of corporations and government offices, with little regard for rules and principles. But, the emergence of open source software and the Internet created a new kind of governance that, over several decades, coalesced and crystalized into “digital governance” guided by principles of “rough consensus” and “running code” and “benevolent dictators.” Sometimes, people would say that “code is law,” standing in for government and corporations. Nonetheless, governance remained in the hands of the wealthy, the powerful, and the elite.

Blockchain technologies emerged as a solution to outdated and outmoded governance, yet ironically, most blockchains cannot seem to get their own house in order.

Blockchain technologies emerged as a solution to outdated and outmoded governance, yet ironically, most blockchains cannot seem to get their own house in order. The rancorous debates, the screwups, and the outright criminality is legion. Even the best are troubled. How did the governance of leading blockchain platforms and companies—from Bitcoin’s scaling debate to Ethereum’s post-DAO fork to Tezos’ lawsuits—become so factious, obstinate, and broken?

In this blog post, I unpack what blockchain governance is, and more importantly, I establish some principles for how to do it well. Despite the popularity of talking about governance and blockchains, by academics and software developers alike, surprisingly little has actually been said. As a clarifying introduction, in this blog post I describe conceptions and misconceptions about what governance is. I offer a working definition of governance and I make an important distinction between governance of blockchains and governance by blockchains. I describe how blockchains can be used to help govern, equally relevant for small scale organizations and nation states. Future work will offer concrete principles for governing blockchains throughout their lifecycles.

Governance of blockchains or governance by blockchains?

It’s a simple point, but one that is usually ignored or misunderstood: you can either govern blockchains or govern by blockchains. Keeping this distinction in mind is vital since the mechanisms for governing blockchains are not necessarily the same as those used to govern blockchains.

Most blockchain researchers simply assume a shared definition of “governance.” Of the dozens of academic articles ostensibly about governance, only a few offer definitions or address the complexity and contentiousness of the term. These definitions can be helpful, but they lack needed specificity and context. For example, O’Dwyer (n.d.) invokes Foucault in arguing that “governance is the power to act upon the actions of others.” Morabito (2017) defines “blockchain governance” as “the provision of services in a potentially more efficient and decentralized way… [than] the state or government…” (41). Rooney, Aiken, and Rooney (2017) draw on auditing literature for their definition, suggesting that “governance is ‘the combination of processes and structures implemented… to inform, direct, manage, and monitor the activities of the organization toward the achievement of objectives’” (41). Hsieh, Vergne, and Wang (2018) drawn on organizational literature and corporate governance, defining governance as “the study of power and influence over decision making within the corporation,” which defines the “rights and responsibilities of… different stakeholders toward the firm” (48). It is encouraging to see these authors attempt definitions, but no one really gets at the heart of the matter.

The two best definitions of blockchain governance come from Don and Alex Tapscott (2014) and Vlad Zamfir (2018). The Tapscotts draw a parallel to Internet governance, which they characterize in terms of “stewardship.” Stewardship is further defined by the existence of seven “networks”—standards networks, knowledge networks, delivery networks, policy networks, advocacy networks, watchdog networks, and networked institutions. Successful blockchain governance must participate in all seven networks. Zamfir, on the other hand, defines blockchain governance in terms of “legitimacy.” According to Zamfir, if the rules and processes that govern blockchains are not accepted as legitimate they will be rejected by stakeholders, which eventually leads to crisis. This is especially important for open platforms like Ethereum, since above all, Ethereum must have the appearance of impartiality and fairness.

My own definition draws on these as well the considerable literature on governance in political science, but distinguishes between governance of blockchains and governance by blockchains:

  • Blockchains are governed by the wholistic application of legitimate management techniques to accomplish specified social, political, or business goals.
  • Blockchains govern by coordinating decisions and activities, establishing a shared record of facts, and (typically) incentivising and prohibiting behaviours through allocation and control of valuable tokens.

Naturally, not all blockchains are used for governance, but all blockchains must be governed (either well or poorly, implicitly or explicitly).

Taking blockchain governance seriously

The ways that blockchains are used for governance are varied and extensive (see DuPont 2018 for a complete analysis). In my own work, I helped design a “governance blockchain” that optimizes the intelligence of experts and engaged hobbyists to make investment decisions about a notoriously difficult topic—quantum technologies. The result is a design for a governance “decentralized autonomous organization,” or DAO, that manages people’s behaviours and their collective knowledge.

In this use case, legitimacy and stewardship are of secondary concern, so the design uses blockchain technologies to govern people, much like how the “original” and ill-fated DAO from 2016 (see DuPont 2018b) was designed to govern an entire ecosystem of startups and decentralized apps. The major contribution of The DAO, other than its posthumous notoriety, was to implement a mechanism for broad, democratic participation while avoiding takeover and control by a powerful elite or majority owner. Unfortunately, it was precisely this mechanism that was exploited by an unknown attacker. Once the attack was discovered, in order to save millions of dollars’ worth of tokens from being exfiltrated, the DAO community (and by extension, the Ethereum community, upon which The DAO was built) had to figure out how to govern their blockchain.

Famously, The DAO attack of 2016 was a wakeup call for blockchain governance. Prior to the attack, Ethereum was largely governed by a loose stewardship model, favouring “rough consensus” and “running code” in the model of decades of open source software development. However, unlike typical open source software development, the Ethereum platform needed to make changes quickly and decisively. Unfortunately, there were few guidelines in place for how to legitimately govern the platform, and practically nobody had experience dealing with these kinds of governance issues. In the end, largely due to the urging of Ethereum’s charismatic leader, Vitalik Buterin, a “sensible” solution was found (although some disagreed with the solution and broke away with a contentious fork). Since The DAO attack, figuring out how to govern a blockchain has become a central concern for the Ethereum community. Arguably, The DAO attack pressed the issue and Ethereum is better off for it today.

So, how does one successfully govern a blockchain? Oftentimes, concepts and ideas for blockchain governance mirror forms of political governance. For instance, the Polkadot platform invokes councils and referendums, much like how a small political community might be run. In the Polkadot implementation, like many blockchain governance mechanisms, proposed change is voted on by stakeholders. Voting schemes implemented on blockchain technologies range widely in their complexity and use: some require only a simple majority, others are devilishly complex algorithms that weigh and delegate votes or require multiple runoffs. Polkadot uses a “stake-weighted referendum” to make changes to the protocol.

I argue that successfully governing blockchains requires:

  • adequate security and technical performance,
  • legal and regulatory compliance, while acting in accordance with social norms,
  • effective leadership with a shared sense of organizational mission and goals,
  • operational rules and bylaws that are clear, explicit, and broadly accepted by internal and external stakeholders,
  • and, explicit guidelines for change and risk management throughout the entire system lifecycle.

My work designing a governance DAO was an example of a concerted effort to get governance “right.” Not only does the design squeeze everything it can out of the blockchain’s governance capabilities (governance by blockchain), the design is serious about ensuring that the platform is well governed too. The initial design isn’t perfect and there’s many operational challenges that would necessarily need to be sorted out, but I believe governance is such a difficult and important topic that it ought to be elevated to the C-suite—Chief Governance Officers ought to be running all blockchain organizations today.

So, if I had just one piece of practical advice for blockchain platforms and cryptocurrency startups, it would be to deal with governance issues before they arise—starting with hiring into governance positions and establishing clear rules and shared values.

~ Quinn DuPont

Works cited

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Hsieh, Y.-Y., Vergne, J.-P., & Wang, S. (2017). The Internal and External Governance of Blockchain-Based Organizations: Evidence from Cryptocurrencies. In Bitcoin and Beyond: Blockchains and Global Governance. Routledge. https://papers.ssrn.com/abstract=2966973
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