Rise of the Machines: Blockchain-Based Governance

For as long as humans have interacted with each other, there have been governments. Whether it’s the local tribe that appoints leaders to interact with other tribes and make decisions for their community, or vast State-run societies such as the Soviet Union, government is part of the human experience.

In modern times, government has inarguably become more intrusive and more controlling. Technology has made this reality both easier to achieve and chillingly efficient — governments are now able to reach into almost every aspect of one’s life. Furthermore, technology gives smaller and smaller groups the ability to control larger and larger numbers of people.

But what if technology could also provide the antidote to centralized government control? What if it could lead to a decentralized governmental system that allows for more freedoms and greater human flourishing?

Incorporating Governance into the Blockchain

A fascinating experiment is going on right now in the cryptocurrency world that may answer these questions. Dash, an alternative cryptocurrency that is based on Bitcoin, has recently incorporated a decentralized governance mechanism directly into its blockchain.

In order to understand this mechanism, we need to first step back and understand how new coins are created in a cryptocurrency. Like all Bitcoin-based cryptocurrencies, Dash generates new coins (called “block rewards”) on a regular basis, using mathematical algorithms to determine who receives these new coins. In Bitcoin, all the block rewards go to miners, i.e., those who set their computers to do complex mathematical computations in order to secure the blockchain. In Dash, on the other hand, the block rewards are distributed to three distinct parties:

  • 45% of all new coins go to miners.
  • 45% of all new coins go to “Masternode” owners.
  • 10% of all new coins are distributed through the Dash Budget System.

It is the non-miner block rewards — the “other 55%” — which allow for a decentralized, blockchain-based governance structure. First, there are the Dash “Masternodes.” The heart of any decentralized cryptocurrency are the nodes — those computers that store a copy of the blockchain and relay transactions through the network. In Bitcoin, nodes are not compensated for their work, but are essential for Bitcoin’s health. Dash, however, has introduced a 2nd tier of nodes — called Masternodes — which are incentivized (as seen above, they are compensated with 45% of all block rewards), but also are called upon to perform more of the heavy lifting of the project, providing features like InstantX and PrivacyProtect (formerly DarkSend). Anyone can set up a Masternode, but to have one, the owner must put aside 1,000 Dash as collateral. This collateral remains in the owner’s control, but is “locked up” as long as the Masternode is running.

In addition to performing important technical tasks, Masternodes are also at the heart of Dash’s decentralized funding and governance system, the Dash Budget System (DBS). The DBS is how the distribution of the 10% of the block reward set aside for new budget proposals is determined.

The DBS will accept a Proposal from anyone willing to spend the 5 Dash it costs to submit one. The 5 Dash are “burnt” (destroyed) on submission. Once the Proposal has been submitted, all Masternode owners can vote on it, one vote per Masternode. Two main conditions must occur for a proposal to be approved in the next Budget.

First, the total “Net Votes,” which is the total of “Yes” votes minus the total of “No” votes, must exceed 10% of all Masternodes. So if there are 3,500 Masternodes, there must be over 350 “Net Votes.”

Second, there must be room in the next Budget for this proposal. For example, let’s say the next budget will distribute up to 8,000 Dash, but the 10% approved Proposals total 9,000 Dash. The Proposals are prioritized by “Net Votes,” with the highest totals getting the top priority. Then the System simply moves down the line distributing funds until none available. However Proposals can receive only full or no funding — no partial funding is available. Consider this example:

In this situation, Proposals #1, 2, 5 would be approved, but Proposals #3 and 4 would not. Proposal #3 didn’t get approved because it didn’t meet the 10% threshold. The following chart illustrates why Proposal #4 didn’t make the cut. These are the Proposals approved by vote:

Because Proposal #3 takes the total over the 8,000 limit, it is not approved. In this situation, only 7,500 Dash will be created to fund the projects, and the remaining 500 Dash just aren’t created. Here is a screenshot of recent voting on actual Budget Proposals (using my tool DashVoteTracker.com):

What the Dash Budget System introduces is a decentralized self-funding and self-governance mechanism.

Self-Funding Through the Blockchain

One of the great challenges for open-sourced, decentralized projects is funding. Who pays for development, marketing, legal services, etc.? Historically, such projects relied on dedicated volunteers or corporate funding. Both situations, however, have flaws. In the first case, the whole project depends on the dedication and resources of a small group of supporters. But they need to eat, just like everyone else. What happens when either their dedication, or their bank account, runs dry? The other possibility — corporate sponsorship — has its risks as well. In this scenario the supposedly decentralized project is subject to the whims, and stockholders, of a centralized corporation. Their vision for the project may differ from that of the majority of the system’s users.

With Dash, the project literally funds itself. Currently there is a Budget Proposal which pays for the salary of the core development team. So every month, if approved, the Dash Protocol produces a set number of Dash which pay the core developers. Let that sink in for a moment — it is far more revolutionary than it first appears. Here is a technology which funds its own development! Here are employees of a computer protocol!

Projects other than core development can be funded as well. A healthy cryptocurrency ecosystem involves many products and services that surround the protocol itself. After all, if there were no mobile wallets, for example, using Bitcoin wouldn’t be very attractive, would it? Using the DBS, community members can propose their own projects for funding. One example of this was the creation of a Dash-powered soda machine — dubbed “Dash N’ Drink” — which debuted at the 2016 North America Bitcoin Conference. This project allowed Dash’s instant transaction feature (called “InstantX”) to be highlighted in a real-world point-of-sale system. It was partially funded from the DBS.

The Dash N’ Drink Soda Machine

The possibilities are endless: marketing, new wallets, point-of-sale systems, and much more could be funded straight from the Dash blockchain. A project need not rely on the altruism of volunteers or the unknown vision of corporate puppeteers in order to succeed. Dash, almost like a sentient being, has the innate ability to naturally grow on its own.

Self-Governance Through the Blockchain

The DBS goes far beyond just funding new development and projects. It can also help set the direction of the project itself. In any open-source, decentralized project, the issue of governance looms large. Who is in charge? Who decides the direction of the project? In some cases, such as Linux and Bitcoin in their early years, there was a “benevolent dictator” system, with the founders (Linus Torvalds and Satoshi Nakamoto, respectively) making all the final decisions for the project. But of course this is not a long-term viable structure. Eventually the founder leaves the project, or people start to disagree with his vision. When fundamental issues arise — such as the vision and direction of the project — decision-making can become embroiled in controversy and debate. Look at what’s happening right now in the Bitcoin space. Questions loom regarding the purpose of the Bitcoin blockchain — is it simply a final settlement layer for a whole network of chains or also a payment layer, handling all transactions on the Bitcoin blockchain itself? This debate threatens to divide the project down the middle.

In the Dash project, such issues can be resolved through the DBS. For not only can funding be decided, but so can development decisions. For example, in January, Evan Duffield, the creator of Dash, created a new Budget Proposal in which he requested a token 5 Dash (matching the cost of submitting a Proposal) for the Proposal “2MB Block Size Limitation Increase.” Basically, he was asking the Masternodes to vote on whether the Block Size should be increased to 2MB. Within hours, it quickly received the necessary votes and a part of the next budget, thereby approving the same change to the Dash system that Bitcoin has been rancorously debating for more than a year without resolution.

By building governance directly into the blockchain, Dash has allowed for a revolutionary form of decentralized government. Just as Dash is self-funding, so too it becomes truly self-governed.

Possible Objections

What are the possible challenges and/or objections to this decentralized blockchain-based governance? Some include: Can it be attacked? Is it fair? Does it remove too much of the human equation? Let’s look at these objections.

Masternode 10% Attack

It takes 10% of the Net Vote to approve a proposal, so in theory someone who controls enough Masternodes could force certain proposals through. How hard would this be to accomplish?

Currently there are about 3,500 Masternodes, but most Proposal votes only attract about 1,500–2,000 total votes. Let’s assume 1,500 voting Masternodes. To force a 10% vote over those 1,500 votes, you would need to control 2,055 Masternodes:

  • 10% of Total Masternodes = 555 (3,500 + 2,055 = 5,555)
  • 2,055 Forced “Yes” Votes — 1,500 “No” Votes = 555 Net Votes

How difficult would it be to acquire 2,055 Masternodes (which would require 2,055,000 Dash collateral)? At the current price of $4.00, that would cost $8,220,000 — a big hurdle. But the hurdle is actually much higher than that. With 3,500,000 Dash already locked up as collateral and a current total money supply of 6,100,000 Dash, there are only 2,600,000 Dash available to purchase. Trying to buy up almost 80% of the remaining money supply would drive the price per Dash sky high. In practice, such an attack would be impossible.

Mob Rule

A voting system like the DBS raises fears of “mob rule.” In any governance structure, there is a diverse array of incentives and actors involved that can make consensus difficult to achieve. Oftentimes, the loudest voices win, instead of those most invested in and knowledgeable of the project. The DBS, however, isn’t a true democracy; it is a meritocracy, whereby only those who are significant investors in Dash are able to set the course of the project. And since they are significant investors, they are naturally incentivized to work for the good of the project. Yes, there are still politics involved, but that is natural in the human endeavor; what is important is proper incentives for all those allowed to vote.

The Rise of the Machines?

Those involved deeply in technology and cryptocurrencies are very comfortable with technology, and even with giving technology a greater and greater role in society. But, as the title of this article suggests, there is an underlying current of fear in many at the prospect of technology taking over certain aspects of life. For some people Dash’s self-funding and self-governing system can seem to be too much technology. Do we really want technology governing us? Isn’t the human ability to make decisions and judgements an integral part of government?

These concerns, however, miss the point; after all, the Dash project isn’t controlled by the Blockchain, it is controlled by humans through the Blockchain. What this governance system does is three-fold: (1) it properly sets incentives for actors involved in the direction of the project; (2) it secures voting unassailably so that corruption becomes incredibly difficult; and (3) it makes everything in governance transparent. Instead of a small group of elites deciding things behind closed doors, the technology of the DBS actually puts power into the hands of the people.

A Path to a Better Future

The Dash Budget System looks toward a futuristic new world. People are employed by a technical protocol which is controlled by mathematical algorithms. A monetary currency is self-funded and self-governed. And all of this is happening in the open for all to see and evaluate. Think of the impact such a system could have when applied to corporations, or governments. Social media sites, instead of seeing users as marketing commodities, are controlled by those users. Or blockchain-governed search engines that vote to encrypt your searches from the prying eyes of powerful interests. Or governments that were actually of the people and for the people. There is revolutionary potential in such a system that could change the future of money and government.

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