The Myth of the Irrational Token Holder

Blockchain governance doesn’t fit squarely into any existing model.

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. By providing a way to decide upon and enforce upgrades in a decentralized fashion, our team believes we can launch an innovative platform that does not fall privy to the whims of a centralized core development team.

When people first hear about our platform, they typically relate it to a governance structure they’re familiar with. We think that the nature of blockchain-based systems offers a unique model.

Skin in the game
Tezos has no concept of a registered identity, so all decisions on protocol changes will be weighed in proportion to the quantity of tokens owned by a participant. Some assume that our system ought to have “one person, one vote.” However, entities are hard to group or identify meaningfully when ownership is controlled by a cryptographic key and, more importantly, we prefer to have those with the greatest skin in the game impacting long term decisions.

We see proportional voting based on ownership of tokens as a desirable trait of our governance system. In fact, the title of this post is a play on the title of Bryan Caplan’s book, The Myth of the Rational Voter, wherein Caplan observes that voters in a democracy rarely have incentives to consider their beliefs thoughtfully. Though it doesn’t inspire a civic spirit, it’s fair to say that devoting little time to considering electoral issues is rational insofar as most policy decisions don’t make any direct impact on the welfare of most voters. By contrast, when it is explicitly costly to be wrong, actors have a tendency to give more thought to their decisions and may even act in a way that goes against their biases.

And so, when people object to relying on the opinions of token holders to govern our blockchain by citing poor outcomes in democracies such as massive property redistribution, it doesn’t really resonate with our model. We think of Tezos governance as being more similar to the dynamics of corporate governance than the dynamics of a democracy. That is, all the relevant parties have a theoretical interest in critically thinking in order to preserve the value of the network and people with more skin in the game have a greater stake in those choices.

Stockholders versus token holders
Some interlocutors will latch on to the similarities to corporate governance structures and Tezos immediately. Part of what invites this comparison is our use of delegates to vote, which can replicate the logic of proxies in a corporate setting. (This has also been referred to as “liquid democracy.”) At this point, some interesting scenarios are presented as theoretical objections. Corporations are not perfectly governed and, what’s more, it’s not necessarily costly for executives or activist shareholders to make bad decisions once they have positions of power. This is a flipside of the tension with democratic processes: won’t large token holders have too much power?

While we can learn a lot from failures of corporate governance structures, we think there’s a key distinction to be made when considering blockchains as a particular use case. The only asset of a blockchain-based network is the faith of the people who use it. Cryptographic tokens, much like fiat money, are lifted and destroyed by the belief that other people will find them valuable and want to hold them.

Recently, Vitalik Buterin speculated that, in the Tezos network, one could feasibly use bribery to create a coalition to vote for explicitly favorable laws towards one group at the expense of another. An evil corporate raider raising her stake in an oil rig company from 50% to 100% by bribing the board owns twice as many oil rigs as she did before. However, in the case of blockchain assets, it’s very clear to us that this sort of tampering would only yield, in the words of Voltaire*, rule over cemeteries from once-fertile plains. (This also goes without mentioning that the same “attack” is no less feasible within the highly centralized decision-making processes of existing public blockchains, particularly those with a propensity to hard-fork.) Once a community has reason to believe that the deck is set against them by a few select actors, the network loses its value in an irrevocable way.

Additionally, if a group of actors did try and succeed in pushing through amendments that disproportionately hurt a group, social consensus would simply take over. If a group of Bitcoin miners somehow managed to abscond with some Bitcoins through a deep reorganization of the chain, there’s no doubt that the other people holding a stake in its $17 billion market capitalization would find a way to exclude or ignore the responsible parties.

To be clear…
In our first iteration, we use a straight vote (with an option to delegate your vote) to select, then accept or reject, upgrades to the network. We don’t believe that our governance model is anywhere near perfect — which is why we created a mechanism to change it within the protocol itself. There are many opportunities to improve upon this model. Through the use of formal proofs, for example, we can incorporate a sort of economic constitutionalism by requiring mathematical evidence that all code submissions satisfy certain properties such as capping coin issuance. By running a prediction market for proposals, we can introduce a form of futarchy. There’s even room to express some form of representative democracy through elected councils.

There are many theoretical objections to what we have proposed, not least of which is the fallibility of our wholesale judgement. However, we have reason to believe that the flavors of our issues will be different than what we see in a corporation or Congress. The nature of blockchains represents an interesting opportunity to create a new decentralized paradigm.

Thomas Jefferson experimented with new governance mechanisms and cryptography! … but not at the same time.

* “Their principal dementia is their frenzy for shedding their brothers’ blood, and for devastating fertile plains so that they may rule over cemeteries.” The Princess of Babylon, Voltaire

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