Blockchain Governance Explained

Jason Yanowitz | July 4, 2018

For years, nation-states were ruled by the King model, where the king is everything: lawmaker, legislator, and executive.

Then, democratic countries came along.

In the United States, you have a legislative branch that writes orders, an executive branch that carries out the orders, and a judicial branch that adjudicates disputes.

Well, the same type of governance goes on in blockchains, but this time it's written in code. In a blockchain, the developers are the legislative branch.  The dev's are the group that creates the code, aka the law.  The miners are the ones who execute the law, which they do by throwing computing power at the code to carry out what it says it’ll do.  Finally,  the adjudicators are the users.

If there’s a dispute, the users can leave. In a blockchain, you vote with your feet and with your money. There are no borders, but rather, it's a market based governance system where users can come and go.

This creates a governance model that is far more flexible, permissionless, scalable, and in many ways, more equitable than anything created before.


BlockWorks Group Governance


A New Governance Opportunity
On July 4th, 1776, the U.S. finalized the Declaration of Independence, launching a nearly 250 year experiment in governance.

On January 3rd, 2009, Satoshi Nakamoto wrote the Genesis Block of the Bitcoin blockchain.

Since then, we have created a $100+ billion cryptocurrency, a computer network bigger than the top 500 supercomputers by 10,000x, and a diverse ecosystem of developers, users, and companies.

With blockchain emerging as a new global form of digital infrastructure, we have the opportunity to create different power structures than the ones people have become so fed up with. For the first time ever, we have the ability to program the future we want for ourselves.

Many people have said that the most significant issue with blockchains is scalability. I disagree. I believe that the most important, and most exciting, issue that we face today is figuring out the governance model of blockchains.

Governance is not a new concept. One of the most contentious aspects of the debate among the founders of the United States was how to best preserve the liberty of the individual while at the same time enabling the government to carry out its duties.

With crypto, the governance problem has been increasing in recent years. The first time we saw governance come into play in a big fashion was with Bitcoin. One long-running debate over bitcoin block size threw the bitcoin community into such disagreement and discord that the cryptocurrency ended up forking into Bitcoin Cash (BCH).

Since then, a number of solutions and new cryptocurrencies have emerged, promising to improve governance while preserving crypto's decentralized ethos.


What is Governance and Why Does it Matter?

Governance refers to the decision-making processes and actions by which heterogeneous systems update and maintain themselves - e.g. creating new laws, repealing old ones, voting on representatives and laws, enforcing laws.

Currently, the governance mechanisms that we are most familiar with - governments, business org. setups, university policy-making processes - are relatively centralized and permissioned.

With the phenomenon of public, permissionless blockchain systems like Bitcoin and Ethereum, in which there is one system to be governed but no default governing authority, we are forced to reconsider what we know about good governance.

Blockchains are open source, which means anyone can just take your code and create their own project/company. This is called forking, which makes it easy to start with the current state of a system and create a new path. Forking is basically like Facebook allowing any competitor to take their entire database and codebase to a competitor. Don’t like how Facebook is operating its newsfeed? Create a fork with all the same code, social connections, and photos.

Because of the open source nature of blockchain, governance will be how companies differentiate.

The most successful blockchains will be those that can best adapt to their environments. Of course, initial design is important, but over a long enough timeline, the mechanisms for change will be most important.

In general, governance is important because it determine the future direction of the blockchain. These decision include tech maintenance, recovering from attacks to the blockchain, and new project developments

Because of the dramatically reduced friction for exit, the need for effective voice (governance) is more critical than ever. It is trivial to fork a blockchain and copy all of its code and state. So the value isn’t in the chain of data, it’s in the community and social consensus around a chain. Governance is what keeps communities together and, in turn, gives a token value.


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How Does Blockchain Governance Work?

First, some basic language:

Governance: process that makes decisions that act on “the governed”

Participants: parties/agents who can interact with a government process to influence its decisions

Stakeholders: Affected by these decisions

And who are the parties/agents that make up the participants?

Miners: support the integrity of the code through designed economic incentives

Users: utilize the code and benefit from its integrity

Developers: write and amend the codebase

In the American/European tradition of governance, the amendment process requires a political process where the “users” get to pick the “developers” who amend the “code” on the basis of a “metacode” that dictates the process.

There are two critical components of blockchain governance:

 1. Incentives: Each group in the system (miners, users, developers) has their own incentives, which are not always aligned with the other groups in the system. Some examples of incentive structures include: 

a) Proof-of-Work (miner expends CPU cycles to earn a reward in terms of the native currency and ensure the integrity of the transaction history)

b) Proof-of-Stake (miner creates a deposit, denominated in the currency of the system, to earn a reward and to support the integrity of transaction history).

In general, most incentive structures make a group contribute a resource (cpu, energy, time, storage, etc) to support the transaction history and then are paid in something valuable within the system (such as the cryptocurrency).

2. Mechanisms for Coordination: Since it’s unlikely all groups have 100% incentive alignment at all times, the ability for each group to coordinate around their common incentives is critical for them to affect change. If one group can coordinate better than another it creates power imbalances in their favor.

On-Chain vs. Off-Chain Governance

On-Chain Governance: how to amend the “law” is laid out in the “law” itself.

On-chain governance is a double edged sword. On the upside it helps make sure a process is consistently followed which can increase coordination and fairness. It also allows for quicker decision making. On the downside it’s risky because the metasystem becomes harder to change once instituted. Like anything put directly into code, it can be exploited or gamed more quickly and easily if flawed. 

Off-Chain Governance: amend the “law” outside of the rules.

Developers coordinate through the Bitcoin Improvement Proposals (BIPs) process and a mailing list. Miners can coordinate on-chain in the sense that they are creating the chain itself (Ehrsam, Medium). 


Examples of Different Governance Solutions

1. Tezos: Tezos is a blockchain with a first-in-kind implementation of a native governance mechanism. All proposed changes to the protocol are decided upon by the community, then pushed automatically to the network. All decisions on protocol changes will be weighed in proportion to the quantity of tokens owned by a participant. those with the greatest skin in the game impacting long term decisions.

2. DFINITY: One step further past Tezos' governance system would be a system which allows both on-chain votes to the rules of the system like Tezos and direct, retroactive changes to the ledger itself. In other words, if something happens that tokenholders do not like (ex: a hack, a marketplace selling drugs), they can roll back or edit the ledger in addition to the rules of governance themselves.

3. EOS: Due to the strong human element invovled in the EOS's governance, it has been very controversial since the network launched in June. You can read more about that here.

4. Decred: Uses a hybrid proof-of-work (PoW) and proof-of-stake (PoS) voting system for all rule changes. Essentially, the PoW and PoS nodes on its blockchain implement (in the case of PoW) or vote (in the case of PoS) for proposed forks, which enables stakeholders (i.e. coin-holders) to override decisions made by miners if they don't agree with them.


What’s the Future of Blockchain Governance? 

Blockchains are unique because they 1) allow thousands of governance systems and monetary policies to be tried at the speed of software with 2) in some cases, much lower consequences of failure. As a result, there will be an explosion of economic and governance designs where many approaches will be tried in parallel at hyperspeed.

Many of these attempts will be spectacular failures. Through this process, blockchains may teach us more about governance in the next 10 years than we have learned from the “real world” in the last 100 years.

It’s probable we haven’t found the best governance systems yet. This, coupled with the open source nature of blockchains, creates a system where governance will be the primary means of differentiation.


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Jason Yanowitz

Co-Founder of BWG