Governance, Cryptocurrency’s Big Problem

At a simplified level, blockchain technology is a giant global spreadsheet of transaction entries, wherein the software only permits the recording of new transactions by entities authorized to actually write to that ledger.

Sounds pretty simple.

Transactions Define Human Interaction

All social constructs are the result of transactional behavior. Society itself is a mesh of interconnected transactions. As humans intentionally organize themselves around a defined, intentional purpose, transactions define the internal and external operations of the entity.

Depending upon the parties, the “thing” and the nature of the transaction, different rules are applied. These rules can be based on a contract, a law, a corporate policy, etc… The output artifacts of the transaction are also varied — such as different documents and other information records attached to the thing, the transaction itself, the parties, etc…

How any transaction works within any case example is based upon the understood and agreed upon governance between parties in the ecosystem. This is the root of the concept of “consensus” which is also incidentally the term used in Blockchain Land.

Blockchain Consensus Models

Bitcoin and derivatives use a consensus model called Proof-of-Work. The complexities of the mathematical calculations are established within the software so that miners run servers to discover and write blocks of transactions. This just requires that someone have a server powerful enough, an download the software to hash. The system is designed to allow anyone to connect to the public network and conform to the rules.

The rules of the road for any chain is based on the consensus between the people operating the server nodes doing the computing work in support of the blockchain infrastructure. Blockchain happens because these individuals agree to use a standardized software application to create and persist the ledger data.

It works as long as it works.

However, when those people disagree on the software and underlying parameters set at the protocol level, even public chains end up being fragmented as what is called a “fork”.

Blockchain Disputes

This can be demonstrated by the splits and forks in Bitcoin itself — most notably Bitcoin Cash.

Intentional agreement on changes to the core ledger have also been used to reverse and remedy major thefts and breaches as a result of the cooperation between node operators.

This was also the case early in the life of Ethereum. Bad code led to a hack and theft of funds from the Ethereum blockchain. The node operators agreed to fork so as to stem the losses of money that became Ethereum Classic chain.

The quandary of public blockchains and cryptocurrencies like Bitcoin and Ethereum is how to strike the balance between the concept of decentralized autonomy and need for a fundamental agreement on how to operate — which is by nature a form of centralization itself.

The governance problem enters when attempting to build out extended applications and ecosystems without securing that agreement at the foundation between all actors in advance.

These networks were created with a certain model with specific rules in mind. The public cryptocurrency systems are designed to be (relatively) anonymous and usable by any actor or entity for their own purpose. This requires a heightened security and difficulty, which impacts things like the technical attributes and performance of the software.

To agree, or not to agree, that is the question. And any enterprise system built upon a public blockchain is at significant risk of disagreement within the core platform itself. This risk is too high and broad for any rational leadership to accept.

So what are the alternatives? Intentionally-designed ecosystems vs. haphazard, experimental public frameworks.

Organizations Require Governance

Now that we’ve been through the evolution of cryptocurrencies into experimentation into enterprise use of blockchain, the rationale for these intentional governance models are the next level of discussion. Particularly around the ability to design and manage intentional economies using ledger ecosystems based on intentionality vs. amorphous chaos.

Blockchain technology helps to define a potential ecosystem for disparate actors to engage in a cooperative fashion. Even if that’s just how we agree on the manner in which transactions are recorded onto a ledger at a very granular level.

But it quickly moves from the context of blockchain algorithms into other use case specific applications — and that’s where the method of consensus and management of the data layer itself starts to radically affect other things.

Beyond just the blockchain, consent extends into how the actors participate between each other at higher levels of engagement — as well as the kinds of a software and information systems used. This might be represented by a vendor supply chain network, an enterprise resource planning system, an accounting payables system, and so on.

When it comes down to putting real, tangible value onto a blockchain ledger format, people get pretty protective of how things are managed — especially when there are billions and trillions of dollars at stake.

Cryptocurrencies and their underlying public network protocols do not easily provide any mechanisms to extend ledger management consensus into higher order governance when connecting these actors together around a distributed model.

Enterprise Blockchain Governance

Without participatory governance at both the ledger layer, as well as other higher layers, the particular blockchain technology itself will eventually be untenable for the actors involved. The ecosystem will fail, shrinking value for the stakeholders.

Maybe not at first, but eventually there will be a disagreement somewhere in the ecosystem. How those disagreements are resolved are paramount to the life expectancy of the data and ledger, as well as the affect on interconnected relationships between users.

But when any organization is intentionally designed for participatory decision-making, the “hive mind” can provide many paths to resolution.

I used to say:

“Blockchain will do for transactions what the internet did for information.”

Now I also say:

“Blockchain will do for governance what the internet did for communication.”

Well-designed organizations have strong governance mechanisms to facilitate two key principles guiding collective action:

  1. Where there is a poorly defined problem the organization has a structured process to collectively define the problem itself.
  2. Where the problem is succinctly defined, there are processes to manage the workflow to execute with intentional action.

Blockchains serve the need to record transactional events, provide proofs of verifiable facts, and enforce standards. Blockchains are (and should be) hard to change, which forces users to conform to the protocol much like a charter or constitution. Blockchains provide the efficient vehicle to decentralize decision-making as a formalized process.

This cuts to the very core of governance itself.

When any organization is faced with 1) reaching an agreement on values, and 2) deciding collective action, a blockchain framework establishes the boundaries for a widely distributed set of stakeholders and participants.

A well-designed blockchain governance system should facilitate the determination of group preferences and building of consensus. This is where public blockchain protocols fail… badly.

Value Chain Ecosystem Governance

By establishing a blockchain-based approach to designing associations or consortia around entire industry or value chain ecosystems, massive efficiencies can be gained throughout.

To achieve this, I refer back to the work by Jay Galbraith when he defined the Star Model in his book, “Designing Organizations”.

Star Model — Jay Galbraith

While his original work was written in the early 1990s, long before blockchain, it’s interesting to find the parallels between intentional governance design of organization & extended value chain ecosystems.

It is also an extremely useful roadmap to help navigate through the complexities of designing a blockchain-based governance structure for organizations and value chain ecosystems.


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