by Kenric P. Nelson, Eystein Hansen, Steph Macurdy, Ninh Tran, Shay Battle, Jose Miguel De Gamboa, Dhiveshan Govender, Annette Minayo, Maureen Akuetteh, Edward Eykholt, Inés Gaviña, and Megan Hess
The Cardano blockchain community is seeking to develop a cryptocurrency ecosystem that can become a global standard for decentralized finance, digital identity, transparent accounting, and related applications. Since its launch in 2017, Cardano’s founders have worked with a global community to pioneer technical and social innovation to actualize decentralization within the network’s governance and treasury operations. Due to its significant innovation, Cardano is now one of the most decentralized blockchain networks. Permissionless stake pool operations with profit saturation and community voting via the Catalyst Program with a 20% network fee-funded treasury were the cornerstones that helped propel Cardano into the top 10 cryptocurrency marketcap. Stake pool operation now has more than 3000 pools and Catalyst has completed 10 funding rounds awarding over $60M to over 1250 projects.
Since at least the eighteenth century, humanity has leaned towards a progressive decentralization of power and representation where democracies have flourished thanks to liberal capitalism. Inspired by liberal democracies, Cardano is now seeking to deepen decentralization and initiate on-chain community governance of the network development and treasury management. However, the design and implementation of decentralization governance is fraught with challenges. While democratic principles, such as voting, are aspired to, to date these have been limited to corporate-style rights of ownership, one-coin one-vote, rather than citizenship rights of one-person one-vote. Cardano, like almost every network in the crypto world, prioritizes liberty through the principle of permissionless participation that does not require identification. However, this severely limits the possible modes of governance. While one-coin one-vote is appropriate for the management of a company in a regulated marketplace, the largest cryptocurrency platforms are striving to be the marketplace. As such, there is a danger of the governance devolving into plutocracy, in which the community treasury and the network design are extracting global wealth for the benefit of a small minority. The challenge is to develop a governance system that preserves the pluralistic autonomy of diverse communities participating in the cryptocurrency ecosystem while combining diverse views and interests into community actions with broad benefits that truly protect the whole ecosystem from centralized corruption.
In this white paper, we propose Democratic Pluralism for the governance of cryptocurrency platforms, such as Cardano, aiming to create trustworthy marketplaces that provide benefits to humanity as a whole. We focus on defining digital citizenship so that the principles of democracy can be fulfilled while designing fair market rules based on quadratic pricing of votes so that pluralism can be fulfilled. To establish a foundation, we review and critique Cardano’s governance design. We define and contrast an open corporation from a digital nation and describe the security requirements for citizen models of cryptocurrency governance. Finally, we outline a roadmap for Democratic Pluralism, based on incremental implementations of secure quadratic voting and funding systems.
1. Introduction to Cardano Governance
Since its inception, the Cardano blockchain development (Hoskinson, Charles 2017) and its treasury have been managed by a founding federation in collaboration with a global community. The federation comprises Input Output Global (IOG), Cardano Foundation (CF), and Emurgo. Spending from the Cardano treasury is controlled by 7 keys. These private keys are controlled by IOG (3), CF (2), and Emurgo (2). The approval threshold for an upgrade to the network or a treasury spend is 5 keys. The federation has included community input in the decision-making through processes such as the Cardano Improvement Proposals (CIP) (Cardano Foundation 2023) for network changes and the Catalyst program (Catalyst Community 2023; Input Output Global 2022) for treasury funding.
Voltaire, the Enlightenment political philosopher born in 1694, is the namesake of the Voltaire era for the Cardano roadmap (Input Output Global 2017). This is a well-intended step in the right direction, from centralized control towards decentralized community governance (Kiayias and Lazos 2022) in order to continue the evolution of the Cardano blockchain and ecosystem. To date, processes around StakePool Operators and Project Catalyst have supported decentralization and community participation, yet more impactful changes are now underway. With the adoption and implementation of CIP-1694 (Cardano Foundation 2022; LIDO Nation 2023b), treasury expenditure and other governance actions will transition to on-chain community governance processes. The Intersect Members Based Organisation (MBO) (Intersect 2023) was recently launched aiming to put “the community at the center of Cardano’s development.”
During the July 2023 CIP-1694 workshop in Edinburgh (Kim, Albert 2023b; Lindseth, Thomas and Hansen, Eystein 2023), Tamara Haasen, IOG President, described this aspiration as the development of a “Digital Nation.” The phrase expresses the sense of community through a common mission that has developed within the Cardano ecosystem. We will examine whether a strong, collaborative community with a common mission in the form of a “Digital Nation” can be fulfilled by the corporate-style one coin, one vote (1c1v) paradigm specified in CIP-1694, as the purpose and requirements for blockchain governance are entirely different from those of a corporation. One share, one vote has been the principal mechanism for stockholders to elect corporate directors; however, corporations rely on the centralized power of their directors, and corporate directors are held accountable through a combination of public identification, profitability statements, internal guidelines, and external public regulation. These basic accountability mechanisms are currently either nonexistent or poorly developed for blockchain governance.
The full CIP-1694 design calls for three branches of governance (Kim, Albert 2023a). The existing Stakepool Operator (SPO) community will continue to approve upgrades required for a hardfork combinator event (the technology that upgrades an older version with a newer version) (Input Output Global 2015). A Delegated Representative (DRep) role will be created, to which an ADA holder can delegate their ADA. Each DRep will vote on seven types of governance actions, including approval of CIPs and disbursement of treasury funds. As proposed, the votes will be based on 1c1v. Finally, a Constitutional Committee (CC), selected by the DReps and SPOs, will ensure that CIPs abide by a yet-to-be-written constitution. The CC will be an identified body that uses one person, one vote (1p1v) for its decisions.
This white paper will define a series of governance methods that we are calling Democratic Pluralism. Democracy starts with human rights and therefore requires some process to identify citizens or community membership. Pluralism recognizes that communities need autonomy and that differences need to be resolved through dialogue. Governance therefore must balance autonomy and alignment. In Section 2, we contrast the requirements that would begin to satisfy the elements of a Digital Nation with what we are calling an “Open Corporation.” An open corporation uses corporate governance methods, such as 1c1v, but opens the management of the organization to the public. In Section 3, we review how 1c1v decision-making has centralized the Cardano Catalyst program and what the consequences will be for the governance of the blockchain. In Section 4, we discuss the security requirements for digital identity, since this is fundamental to any alternatives to 1c1v. Finally, in Section 5, we propose a roadmap for the methods of Democratic Pluralism. While non-voting methods of decision-making are also important in order to build a healthy ecosystem, the focus here is to describe how the approximately quadratic increase in influence with accumulated votes requires a quadratic scale in the price of votes. Three methods are reviewed: quadratic voting based on preferential choice based on ownership of coins; quadratic funding in which community investments are matched by the square-root with a public treasury; and quadratic payment for votes into a smart contract and an equal disbursement of the average payment to the voters.
There are many challenges to building global governance systems for the management of blockchain ecosystems. Our objective for this white paper is to shed light on corporate-style governance and show why it is neither required nor optimal, and that democratic principles can still function while recognizing the rights of people who have heavily invested in the ecosystem.
2. Open Corporation or Digital Nation?
Decentralization of a blockchain’s consensus algorithm for approving transactions is fundamental to its security (Kiayias et al. 2017; Velliangiri and Karthikeyan 2020; Chaudhry and Yousaf 2018). Without decentralization, byzantine attacks can manipulate the block production, creating double spending and other corruptions of the transactions. As such, the principal design problem of blockchain governance is to ensure that the properties of decentralization extend to the governance layer. Both off-chain and on-chain approaches are being utilized. Off-chain methods may involve some centralized parties but can benefit from the accountability of identity to minimize corruption. On-chain governance can benefit from the transparency of blockchain transactions, but with weaker identity mechanisms, the design must have other decentralization guarantees.
Given the importance of decentralization it is natural to look toward democratic principles of governance to fulfill the decentralization requirements. And given the global scope of blockchain networks, it’s not far-fetched to think of these emerging communities as the foundation for a dispersed nation. An existing example is the digital citizenship that Estonia (Estonia 2023; Collins, Katie 2022) has created. A person from anywhere around the world can apply to become a Estonian Digital Citizen and thereby obtain the right to register new businesses, utilize public computing services, and vote on digital public policy. The key enabler is identity. The Estonian government trusts in their ability to validate the identity of anyone around the globe. In turn, people around the world are trusting the Estonian government to securely hold and safely utilize their identities. With this enabler, the digital citizens of Estonia can participate in a global democratic governance.
In contrast, Cardano established a principle of permissionlessness for the DRep and SPO roles of governance. As such, the possible forms of governance are severely restricted. Furthermore, it’s not clear that permissionlessness is a valid property for governance. The ability of blockchains to allow the use and even operation of the network without permissioned identity depends on the software layer verifying the identity and code of conduct of each node. For Cardano this is performed by the Oroboros protocol (David et al. 2017; Hryniuk, Olga 2022). Each node of the network has a unique identity so that it cannot be fraudulently copied. During a handshake with other nodes, the versions of the protocols are compared. Two nodes can only interact if a common version of the protocol is enabled on both nodes. Thus, the protocol acts as a code of conduct.
Governance also depends on enforcing a code of conduct among the governors and thus depends on some form of identity. Within the blockchain community the technologies of decentralized identity and verification of credentials are emerging as secure, self-sovereign methods of identification. The credentials and a related code of conduct must contain guidance on both the functions governors are expected to fulfill and restrictions that would undermine the security of the blockchain and its participants. Cardano intends to fulfill this via CIP-1694 through definition of the on-chain governance functions and a constitution to define restrictions protecting the blockchain and community. Supporting mechanisms are also being implemented, such as the initially centralized processes for registering DReps and creating the DRep certificates to be published on-chain and utilized per CIP-1694. As of October 2023, these supporting mechanisms are being developed and evaluated on the SanchoNet testnet. If a decentralized democracy had been the goal of the Voltaire design team, the starting point would have been a definition of citizenship via a combination of minimal ADA holdings and validation of a digital identifier (DID). In fact, CIP-1694 states in its preamble that no identity system will be used and that the only voting system under consideration is 1c1v. With these assumptions, the outcome is a corporate-style governance that will be at risk of centralization. Section 3 reviews the mathematical analysis demonstrating the current status of centralization in Cardano’s Catalyst funding methods and the future risks for the DRep program both in CIP-1694 and in Catalyst.
As such, the Cardano governance defined by CIP-1694 will be referred to here as an Open Corporation. Private corporations are privately owned and managed; public corporations are publicly owned but still privately managed. While the management of a public company is private, democratic regulations specify the disclosures necessary for the public owners to be informed about the performance of the management. Cardano’s proposal to base the DRep voting on 1c1v effectively creates an open corporation in which both the ownership and the management of the enterprise is public. Whereas for a public company, the public owners vote on a small, select group of directors, who in turn hire an executive management team, Cardano is inviting the public to serve in director/executive roles via the DRep, SPO, and CC bodies.
Modeling the Cardano governance after public governance, the three bodies could be described as executive (SPO), legislative (DRep), and judicial (CC) branches. This was described in an earlier report (Nelson, Kenric et al. 2023). However, clarifying the connection between the CIP-1694 design and an open corporation, the three roles can be remapped. The SPOs could be described as the operational function of the company. The DReps serve as the Directors, deciding on policy and budgets for the company. And the CC acts as a legal department, setting the ethical and legal framework of the company via compliance with the constitution. To be clear, this is a loose analogy intended to clarify the governing philosophy as being derived from corporate rather than public styles of governance.
In the next section, we’ll discuss the history of corporate governance and the nonlinear dynamics of voting power. The purpose will be to show the irreversible process toward centralization and how this could lead to corrupt governance. As we do so, it’s important to keep in mind the distinction between the trust each of us extends toward each other in our daily activities and the distrust required for security analysis of a trustless blockchain. For many people, an assumption of trust is implicit each time we greet a new acquaintance or collaborate on a project. In contrast, the cryptographic security of blockchain starts with an assumption of distrust in order to build trust that does not depend on the goodwill of the operators or participants. Likewise, a secure, decentralized governance design must start with an assumption of distrust and therefore requires a mechanism that guarantees governors will not be able to centralize control.
3. Cardano’s centralized governance plan and its consequences
3.1. One coin one vote vulnerable to centralization
Both wealth and voting power are influenced by nonlinear processes that create heavily skewed distributions. Because linear computations such as a total or average over a heavily skewed distribution are dominated by the extremes of the distribution, voting power using 1c1v is dominated by the wealthiest coin holders. This centralizing effect can be understood from both theoretical and historical analysis. The theoretical analysis draws from the statistical properties of complex systems and the measurement of voting power via the probability of being the swing decider. The historical analysis comes from the study of corporate ownership, which has a long tradition of assigning voting rights based on ownership of shares, a proxy for wealth.
Recent analysis of the Catalyst Fund 10 voting (LIDO Nation 2023a) shows the concerns about centralized power. Figure 1a shows the distribution of wallets and total ADA holdings across the wealth cohorts. In Figures 1b and 1c, you will see the voting weight of wallets holding greater than and less than 1 M ADA, respectively, across funds 5 thru 10. For Fund 10, the 871 wallets (1.5% of total) with greater than 1 M ADA held 56% of the votes, referred to as the “voting weight.” And this distribution generally holds true across Fund 5 thru Fund 10. The general trend has held relatively constant from Fund 5 to Fund 10, with a decrease in centralization from Fund 6 — Fund 9, and an increase from Fund 9 — Fund 10.
Treating the wealth cohorts as a single voting block, we analyzed the many different configurations of coalitions to determine how voting weight influences voting power. “Voting power” is measured by the Banzhaf Power Index (BPI) (Dubey and Shapley 1979; Felsenthal and Machover 1998; Lucas 1983; Tannenbaum 1997), which computes the probability of being the swing voter in a coalition that decides the outcome. Our voting power analysis uses wealth cohorts because the combinatorial calculation is computationally expensive. In the future, we plan to incorporate statistical analysis to refine the analysis (Leech 2003).
As you might expect, a concentration of voting weight in a relatively small number of wallets means those wallets have a disproportionate impact on voting power. Our BPI analysis uses the proposal approval threshold of 57.5%, though the threshold for funding can be higher depending on the available funds. If the wallets with greater than 1 M ADA are treated as a single voting block, their 56% voting weight translates into 97.5% of the BPI voting power. This means that in 97.5% of all combinations between voting coalitions, the top 1.5% of wallets can make the final decision. Since Catalyst is intended as an experiment, the continued existence of centralization should be a call to action for the community to design remedies.
If, for instance, Catalyst instituted a quadratic voting (Posner and Weyl 2015; Robey 2022) mechanism, which assigns votes based on the square-root of the wallet ADA holdings, we see a dramatic effect on the voting power distribution. Figure 2 shows a comparison of voting power for Fund 10 across the 18 wealth cohorts using 1c1v and quadratic voting. The 1M < ADA < 5M cohort with 773 wallets (1.4% of total wallets) has the largest holdings, 1.46 B ADA, which results in a voting weight of 33% and a BPI of 44%. In contrast, the cohort with 1K < ADA < 5k has the most wallets, 19,639 or 34% of the total. With 47 M ADA (1%)this cohort has 0.9% of the BPI. Quadratic voting modifies the BPI for these two cohorts to 16.5% and 2.7%, respectively.
While a reweighting of the voting power would support decentralization, this simple mechanism is not likely to gain acceptance among the largest ADA holders. For this reason, our Democratic Pluralism proposal recommends an approach that focuses on the proper pricing of influence rather than the redistribution of voting power. This is accomplished by implementing conviction voting which allows a voter to express the strength of their opinion about each proposal. The quadratic voting rule is applied to how many votes are applied to a particular proposal rather than to the wallet as a whole. This will improve the quality of the decision-making, as it eliminates the phenomena of heavily down-voting all the proposals in a category except for one. More details of the recommendation are described in Section 5.
3.2. Cardano as an open corporation
The centralizing tendency of Catalyst’s 1c1v and its rewards based on percentage of ownership should disabuse people participating in the Cardano ecosystem that the governance is progressing toward decentralization. This is a problem for the inclusiveness of the protocol and is a long term problem for the growth of the Cardano community. This is appropriate for an owned resource but causes significant problems for a community resource such as a large blockchain. The problem arises if claims of decentralization are used to justify trust without regulation and oversight (Markham 2023; Angotti et al. 2023; Mateen 2023).
For these reasons, we recommend referring to Cardano and similar cryptocurrency networks as Open Corporations. As introduced earlier, an open corporation expands the public’s role in managing the enterprise, but it does not fundamentally change ownership as the vehicle for designating rights. An open corporation contrasts with a public corporation with its open operation of the enterprise. For example, while the operation of individual nodes of the network is private, the protocol is public and the ability to run a node is permissionless. Likewise, the management of the Cardano treasury through Project Catalyst and the Core Cardano Development is transparent. The Catalyst program includes direct community participation through voting. Although the Core Cardano Development fund is not as visible as Catalyst, its primary focus has been IOG’s operational expenses for Catalyst. In Catalyst Fund 10 the operational management of the Catalyst program was opened to community voting, though IOG won this competition and will continue to operate the program for funds 11 thru 13.
The cryptocurrency community, including Cardano, has argued that coins should be treated as commodities rather than securities. The desire for the classification as a commodity is driven by the reduced regulatory oversight of commodities. Many cryptocurrencies, such as ADA, do indeed have utility or currency properties, in that they can be used to exchange value and buy products and services. Nevertheless, there are important distinctions. Ownership of a fiat currency does not provide any voting rights over the management of the currency. Ownership of gold, grain, or other commodities does not provide any voting rights over the production or allocation of commodities. In contrast, ownership of ADA (as with many other cryptocurrencies) is being used to assign governance voting rights.
Therefore definitions that distinguish a public corporation from a decentralized community, here referred to as an open corporation, are important. As an example, the Financial Innovation and Technology for the 21st Century Act (Thompson, Glenn, Hill, French, and Johnson, Dusty 2023), which recently passed the US House Financial Services and Agriculture Committees, defines a decentralized network with the following properties restricting the influence of digital asset issuers (i.e., sellers of the asset) and affiliated persons (an entity owning more than 5% of the digital assets).
- Over the previous 12-month period:
- No digital asset issuer or affiliated person (hereafter referred to as an entity) had unilateral authority to alter the operation of the network or restrict participation in use of the network;
- No entity owned in aggregate 20% or more of the digital asset;
- No entity controlled 20% or more of the governance voting weight; and
- All issuances of the digital asset were end-user distributions via the programmatic functioning of the network.
2. Over the previous 3-month period:
- No entity has contributed intellectual property that alters the functionality of the network unless, the change fixes a security vulnerability or was approved by consensus of the decentralized governance;
- No entity has advertised the digital asset as an investment.
Although not approved law, this example of legislative regulation has important principles for assessing decentralization. First, if there are no entities with greater than 5% of either the digital assets directly or control of the votes, the case for decentralized governance is much stronger. If there is an entity that has acquired either 20% of the digital assets or 20% of the governance votes, then the claim of decentralization is void.
As of October 2023, Cardano’s largest wallet holds 1.5 B ADA or 4% of the 35 B ADA currently in circulation (CoinCarp 2023). According to a Cardano community member the founding federation members are said to have the following holdings IOG, 1.5 B or 4%; Emurgo 1.0 B or 3%; and Cardano Foundation 700 M or 2%. We were not able to independently verify the federation holdings though there are discussion groups with some details (33nmakkie 2022). In conclusion, our analysis indicates that while 1–2% of the Catalyst voters have the potential to form a controlling cohort, the holdings of the founding entities and the largest single wallet are below the 5% threshold for which principal interest disclosures would be required.
3.3. Unsaturated Delegated Representatives
The Cardano community is currently hopeful that the ability to host or delegate to a DRep pool will expand governance participation and thereby contribute to decentralization. Unfortunately, the CIP-1694 design calls for unsaturated pool sizes, which undermines the ability of the DReps to act as a collaborative body of approximately equal influence. Not only will large ADA holders centralize their stake but even small ADA holders will preferentially stake to large DRep pools. Analysis of liquid democracy (Amanatidis et al. 2023; Cohensius et al. 2016), in which a voter is free to select from a group of representatives (or possibly vote themselves) has tended to focus on the quality of the match between a voter’s opinions and a representative’s votes. However, this overlooks the role quadratic influence plays in selecting a representative. Delegating to a pool has a differential impact on the pool’s influence and the derivative of a quadratic is a linear function. Thus a small ADA holder will contribute higher influence to the outcome if they delegate to a larger pool. People living in democratic societies have experienced this trade-off in choosing a political party. The larger parties may not perfectly match an individual’s preferences but joining a smaller party comes at the cost of reduced influence.
At the February 2023 CIP-1694 workshop in Colorado, Charles Hoskinson explained that DRep saturation limits were not being considered because decentralized identities (DID) were not a mature technology and that validation would be a centralizing process. However, the Cardano community already has experience saturating power with and without identities:
- the SPOs although permissionless nevertheless have profit saturation, but the community has been educated about the value of single pool operations and this has contributed to excellent decentralization;
- the Catalyst program published the design for a DRep pool saturation of 1% of the voting power, with proof of humanity controls, similar to those used for awarded proposals (Briggs, Jack 2022).
So the question remains, why was the saturation of pools removed from the CIP-1694 DRep design? Removing saturation limits allows for power blocks such as political parties or unlimited sized DAOs with all the voting power implications discussed in Section 3. The current version of the CIP-1694 describes a reasonable number of dReps post bootstrap of 5000–10,000 but this could be hard to achieve with unlimited delegation to one pool.
Here’s a hypothesis, that we would encourage the community to develop evidence to validate or refute. The nature of SPO and DRep delegation are fundamentally different. In delegating to an SPO, the delegator expects each SPO to strive to operate to a similar level of efficiency, so if they spread their delegation across multiple pools they can expect a similar return on their investment. In contrast, each DRep is expected to express independent votes. For a large ADA holder, delegating across many DReps presents a difficult problem of making sure those DReps represent their views. Far from the identity of a DRep being difficult to validate, measuring the correlation between voting patterns will be trivially easy, and thus detecting correlations between DReps will not be hard.
Thus, it is our hypothesis, which still needs investigation to validate, that the saturation of DRep pools was removed not because secure identification is difficult but rather because it is too easy. Saturation of DReps with even crude identity measures will dramatically dilute the voting power of the wealthiest ADA holders. Thus the disproportionate power of large ADA holders is protected through a poorly supported claim that identity validation is too difficult. In the next section, we review several options for establishing secure citizenship identity within the Cardano ecosystem.
4. Requirements for Democratic Pluralism
4.1. Transitioning from ownership to citizenship
As we argued in Section 2 and evidenced in Section 3, a 1c1v permissionless ownership-based model severely limits any form of democratic governance and instead steers governance towards a centralized open corporation. Now, two pillars are crucial for democratic governance to function properly; Anonymity, especially given the global nature of blockchains, and accountability, particularly in governance roles with more responsibility. These pillars are needed to assure checks and balances in the distribution of governance power.
Anonymity is required to achieve freedom of expression in governance without the fear of backlash (Langer, Jonker, and Pieters 2010; Cetinkaya and Doganaksoy 2007; Anane, Freeland, and Theodoropoulos 2007). It allows all governance participants to express their innermost preferences and voices freely. It compels proponents of governance action to build and run on platforms that appeal to both their core voter base and swing voters rather than solely targeting and shaming adverse voters. Anonymity protects the flow and continuity of governance from witch hunts and single-party takeovers. Online privacy is thus a crucial human right. It allows people to control their personal information and to communicate without fear of being monitored or tracked. Besides, people should be able to decide how their personal information is used and who has access to it.
With such freedom comes responsibility. Governance participants, particularly in representative roles like DReps and CCs, need to be held accountable for their governance actions. Accountability is an important mechanism to keep balances and checks on the division of power. Accountability, particularly in the form of being able to remove representatives, ensures long-term positive outcomes from governance actions and collective social actions. Cardano’s CIP-1694 provides for the removal of DReps through redelegation. It also provides for removal of the CC via a vote of no-confidence by the DReps and SPOs.
A global community that can successfully collaborate in the development of the Cardano ecosystem and thereby evolve into a digital nation will require a definition of digital citizenship that provides for a secure balance between accountability and anonymity. Digital citizenship (Fernández-Prados, Lozano-Díaz, and Ainz-Galende 2021; Mossberger, Tolbert, and McNeal 2007) allows for creating rights and duties in order for the digital nation to effectively self-govern within the boundaries of its participants, systems, and ecosystem. It also encourages participation and a sense of belonging to a digital nation spanning natural boundaries. Given the technical and social challenges of establishing digital citizenship, we envision that this will start with roles requiring the most responsibility. For instance, the Cardano CC will use 1p1v decision-making and thus guarantees of unique identity are required from the outset. We propose that digital citizenship is necessary for the DReps, so that alternatives to 1c1v can be implemented. Extending citizenship to the voters would be implemented slowly as the technical and social requirements mature. Users could continue to utilize the blockchain without permission, making use of citizenship as they saw fit. Citizenship in a digital nation would be much more fluid than traditional nation-states in that people would be free to have overlapping and changing affiliations.
With citizenship undergirded by anonymity and accountability, significant improvements over ownership models of governance are possible. Any ownership model of governance, even if balanced by methods such as quadratic weighting of votes, will inherently stagnate, since changes in the distribution of ownership are a slow process. In contrast, citizenship models of governance can be more dynamic in adapting to changes in the ecosystem. Following a discussion of the security requirements of citizenship, we describe Democratic Pluralism, which includes an option for votes to be purchased from the whole community rather than being a privilege of ownership.
4.2. Security & Digital Citizenship
Identity is foundational to any governance system based on the rights of individual human beings, so that false duplication, known as a Sybil attack, can be resisted. In this context an identity can be defined as the collection of attributes needed to disambiguate a unique human participant. A decentralized identifier (DID) can easily be created for a given person, but establishing a unique decentralized identifier per person (a uniqueness credential proof) is very challenging. Proof of citizenship in a decentralized community can be established with some level of assurance via various processes (e.g., proof of membership, proof of affiliation, proof of unique personhood, proof of soul, proof of identified ownership, or a combination of these), collectively referred to as proof of identity (Allison et al. 2005; Camp 2004; Grassi, Garcia, and Fenton 2017; Laurent and Bouzefrane 2015; Windley 2005). Leveraging decentralized processes, it may be possible to establish and prove unique citizenship identifiers and credentials. (Avellaneda et al. 2019; Dib and Toumi 2020; Grüner et al. 2020; Stockburger et al. 2021) or self-sovereign identity (SSI) (Stockburger et al. 2021; Baars 2016; Mühle et al. 2018; Soltani, Nguyen, and An 2021). Decentralized identity systems aim to give individuals greater control over their personal information and authentication processes while reducing reliance on centralized authorities or identity providers.
At the same time, however, perfect Sybil immunity is impossible. Definite proof of unique personhood is tough to achieve with any large population. Some blockchains are actively pursuing solutions via different methods, one of which is the biometric iris scanning process used by WorldCoin (Worldcoin 2023). Still, there are tradeoffs, such as the centralization of unique personhood verification or the accuracy of the next best approximation that is decentralized. No defense mechanism is perfect; instead, contrasting governance systems need to be measured against their overall distribution of power and potential for corruption.
The beauty of self-sovereign identity is that it enables governance participants to build their proof of reputation over time as they participate in governance actions or digital nation activities. It creates fraud-proof verifications of reputation and identity. On top of that, zero-knowledge proof of identity (Fiege, Fiat, and Shamir 1987) will preserve anonymity and privacy where disclosure is unnecessary, while zero-knowledge proof of reputation ensures accountability where it matters. There is a path for digital citizenship with proof of identity and reputation to be superior to ownership-only-based participation.
Digital governance fused with digital citizenship will enhance the accountability of digital governance actions, participating institutions, and public services. It can also foster digital citizen participation, inclusion, and empowerment in decision-making that positively affects the digital nation community and the individuals within the community. Digital citizenship based on decentralized identity systems offers several benefits, including increased privacy, reduced risk of data breaches, and enhanced user control.
Ecosystems such as Cardano, use token ownership as a security measure. The assumption is that owners invested in the network will not want to do harm to their investment. This is certainly true but it introduces a new threat, those owners will seek to maximize their personal investment at the expense of the community. An example is the natural self-interest of a proposer to Catalyst voting for their own projects. If properly balanced by other owners with a similar scale of coins the public interest can still be protected. Unfortunately, given the skewed distributions of wealth, the vast differences in scale of wealth renders aggregation of different opinions via linear methods such as 1c1v highly centralized. These methods create a positive feedback loop in which only the largest owners secure funding to further increase their ownership rights and thereby the centralization.
In the next section, we describe a citizenship-based model of governance, we call Democratic Pluralism. In Democratic Pluralism large-scale owners still have the right to use their resources to influence governance actions but votes are accurately priced to reflect their influence. And we propose a participation reward system that encourages vigorous circulation of the currency. In this way, the governance can contribute to creating healthy macroeconomics for the ecosystem.
4.3. Role of Democratic Pluralism
We define Democratic Pluralism for Cardano governance as a) supporting the self-sovereign identity and rights of human beings, b) defending the right of free assembly and autonomy by groups of humans, c) allowing individuals and groups to invest their resources in Cardano’s public policy decisions, and d) assuring that investments in Cardano’s public policy are designed to benefit the ecosystem broadly. This foundation in democratic principles is intended to contrast with the rights of ownership, such as a policy of assigning votes based on ownership of ADA. Corporations will play a critical role in the development and future success of the Cardano and other cryptocurrency ecosystems, but this must be distinguished from the governance of the ecosystem as a whole.
Pluralism provides autonomy for different subgroups and cultures to thrive within the larger ecosystem. It requires decision-making methods that balance the rights and responsibilities of minorities and majorities. Glen Weyl and the nonprofit RadicalxChange (“RadicalxChange” 2023) are pioneering research and development of methodologies for diverse communities to reach a balanced consensus. Plural Voting improves voting by accounting for quadratic increases in influence with the accumulation of votes, first documented by Penrose (1946). Thus the price of votes also needs to increase quadratically. Next we look at a pathway to implementing these principles.
5. Pathway to implementation of Democratic Pluralism
5.1. Implementing Preferential Choice
If quadratic voting and other alternative decision-making processes are to be embraced by the whole community, the focus needs to be on improving the market for influence and on enhancing voters’ ability to make nuanced choices. While the concerns about centralization by whales is real, designs which are solely focused on redistribution of voting weight are unlikely to gain acceptance. For these reasons, we do not recommend quadratic weighing of wallets as an initial step. Instead, we recommend quadratic weighting of proposal choices. The distinction is in a) enhancing the voting experience by treating wallets as a budget that must be allocated across multiple choices, and b) emphasizing that the purpose of the quadratic weight is to appropriately price the value of strong opinions about a particular proposal. Our recommendation is that quadratic voting first be applied to the DRep decisions, and then once the preferential choice and security mechanisms have matured, it could be applied to the delegation process.
For decisions that involve funding for projects, quadratic funding (Buterin, Hitzig, and Weyl 2019) can further improve the decision-making. With quadratic funding there is still a community investment treasury, like Catalyst, but now community members must donate funds. Community donations are matched by the square-root with treasury funds. Again, the square-root match is intended to properly price the influence of the community donations, creating a balance between small but broad donations and large but few donations. Creating incentives for participation will be discussed after describing the security implementations.
5.2. Strengthening Sybil Resistance
As described in Section 4.2 Sybil resistance is a requirement for alternatives to 1c1v; however, it is not the case that perfect security is required to make progress. 1c1v falsely assumes that each coin is independent and that influence grows linearly with the number of coins acquired. These false assumptions lead to 1c1v creating its own type of Sybil attack in which large, correlated sets of coins centralize and corrupt the decision-making process. Thus the focus and goal of moving to quadratic voting with Sybil resistance is to reduce the influence of correlated votes.
The Cardano governance design can be improved using layered defense methods. A non-identity layer would secure quadratic voting with methods such as correlation weighting (Miller, Weyl, and Erichsen 2022), and wallet reputation weighting (Avrachenkov, Nemirovsky, and Pham 2010; De Meo et al. 2014; Keizer et al. 2021; Selvaraj and Anand 2012; Wu et al. 2022). In parallel, citizenship identity can be introduced starting with individuals serving in governor roles and once matured extended to voters. It is expected that those wishing complete anonymity could continue to be users of the blockchain though they may have restrictions regarding governance roles.
5.3. Defining Constitutional Rights of Citizens
Ultimately, a global community or digital nation needs to define participation in terms of citizenship rather than ownership. This requires that individuals have a digital identity that balances the requirements for personal privacy with public validation. A suite of technologies is developing rapidly to provide decentralized validation of identities. There is skepticism about the readiness and long-term viability of these solutions but again decentralization is a continuum not a fixed end state. These technologies include DIDs, which in the Cardano ecosystem includes Atala Prism (Input Output Global 2023); Variable Credentials, which is currently being demonstrated by ProofSpace (ProofSpace 2023) and RootsID (RootsID 2023); Authentication and Verification, which can be implemented by selective disclosure by the user and selective verification of signatures by the service provider.
These processes are central to the writing of a constitution that the Cardano community is currently undertaking. An important question for those working on the Cardano Constitution is whose rights are being protected? Is it the rights of the ADA coins, the rights of abstract entities, or the rights of human beings and the environment that sustains life on earth? As currently written, CIP-1694 specifically rejects the rights of individuals in favor of abstract entities that own coins. If this philosophy prevails, it’s difficult to guarantee that the development of Cardano will support enhancement of human life as intended. In contrast, we propose that authentication of the human controlling a decentralized identifier and the verification of credentials be requirements of governance participants enabling focus on human rights within the Cardano ecosystem.
Finally, we clarify that these requirements would not modify the permissionless use of the network. Rather it is recognition that establishing long-term trust for the users requires decentralized identification of those participating in the governance, just as identification of network nodes is necessary for secure validation of transactions.
5.4. Experiments regarding vote payments and rewards
With the transition to rights of citizens, we recommend that voting rights be based on paying the community for votes rather than the community providing votes based on ownership of coins. The quadratic payment, as described earlier, would be based on the number of conviction votes applied to a particular proposal. The shift to payments rather than snapshot allocations is critical to reducing the ability to corrupt the voting process thereby damaging the long-term health of the ecosystem. Proper incentives for participation are critical for a quadratic payment system to work. The payments would be pooled into a smart contract and an equal disbursement of the average payment would be returned to all participants. Thus, each participant would have a net payment or reward depending on the strength of their opinions expressed.
This approach has the following benefits:
- new participants in the Cardano community with less accumulation of ADA wealth would be encouraged to participate in the governance since they would receive the highest net reward;
- more established members with higher accumulations of wealth would still have a higher influence on the decision-making; however,
- those seeking to express strong opinions would have to make the highest net payments to the community.
The incentives for participation could also be applied to the quadratic funding process. In this case, some of the community donations would be applied to funding of projects and some of the donations would be pooled as an equal distribution of rewards for participation.
While many communities, including the Colorado State House (Rogers 2019) and SingularityNET (Orbin, David, Wong, Penny, and Galfalvi, Esther 2022), have implemented quadratic voting based on allocation of voting weight, and Gitcoin (Weiss, Kyle 2022) has implemented quadratic funding in which individuals invest in projects, to date no community has implemented the equal disbursement of payments to voters. The equal disbursement of payments was part of the original quadratic voting proposal by Weyl and Posner. We see this as a critical component to expanding participation in cryptocurrency governance.
Nevertheless, we recognize the need for experimentation before the payment version of Plural Voting could be implemented for Cardano Catalyst or Voltaire. As such, we are seeking token communities interested in enhancing adoption through a strong commitment to decentralized governance to implement and report on this version of Democratic Pluralism. In the meantime, the wallet snapshot version of Plural Voting and Funding described in Section 5.1 is already in use by other blockchain communities and thus is ready for implementation by Cardano. In fact, Snapbrillia has built this capability on the Cardano network (Snapbrillia 2022).
6. Conclusion: Potential Benefits of Democratic Pluralism
In this white paper, we argue that verification of the unique humanity of each governor is fundamental to establishing a trustworthy decentralized governance. This is consistent with the requirement that each network node have a unique identification. The purpose of blockchain cryptocurrency is to establish rigorous trust within the software network such that people across the globe can exchange value without trust or permission. The fundamental issue of cryptocurrency governance is how to guarantee rigorous trust of the governors. The network layer trust is established through strict identity control of each node, such that duplication of nodes which would enable double spending is not possible. So too, users must expect identification of the governors overseeing changes to the network.
Cardano, through CIP-1694, as have other cryptocurrency communities, have instead insisted that just as users can be permissionless and unidentified, so too should be the governors. Furthermore, while the cryptocurrency community has claimed to be creating novel forms of human organization, they have defaulted to traditional corporate models of governance such as 1c1v. Unidentified governors chosen based on accumulation of wealth, whether through self-funding or community delegation, will necessarily converge to centralized control, defeating the claimed goal of trust through decentralization.
The tension between an aspiration for decentralized governance and the pressure to centralize control is not new. “The Dawn of Everything” (Graeber, David and Wengrove, David 2021) documents humanity’s early attempts at decentralized decision-making. In the early twentieth century the United States was emerging as a financial powerhouse. In the process, JP Morgan and his banking colleagues in collaboration with the US Treasury, created the circumstances for the 1907 bank panic (Prins, Nomi 2017). A myth was created that JP Morgan bailed out his colleagues but we now know that the American people financed the bailout through a secret deal between Morgan and the US Government. Knowing severe regulations were coming, the country’s banking titans met at Jekyll Island, Georgia to create the National Association of Currency. They sold their plan to Congress and the American people as a means to “decentralize” the management of the US Dollar, but JP Morgan understood that because his own bank dwarfed the rest of the banking industry in America, he would control what is now known as the Federal Reserve or US Central Bank.
The CIP-1694 design does not seem to be inspired by Voltaire, who advocated for democracy. Rather it is JP Morgan who would have understood exactly how to control a coin vote. Thus, designs such as CIP-1694 that focus on decentralization of participation without attention to the dynamics of power will not be adequate to sustain the long-term health of the Cardano ecosystem. Recent research on multilevel evolution has emphasized the need for groups to promote prosocial conduct (Atkins, Wilson, and Hayes 2019; Ostrom 2015). The game-theoretic dilemma of selfish undermining of community interests has been shown to be overcome by effective communication (Ostrom, Elinor 2014). The challenge of cryptocurrency governance is to extend productive collaboration to global communities.
This white paper on Democratic Pluralism has sought to shift the discussion of governance from the current ethos of ownership rights to that of a digital nation in which rights are held by citizens. The benefit would be to establish a culture that is continually welcoming new citizens on equal terms. In turn, this would diminish the ability of established members to create a stagnate culture that assumes the accumulation of governance privileges. Accumulation of ADA would still provide the means to strongly influence community decisions but the Democratic Pluralism procedures would introduce two constraints: voting on a Catalyst proposal or Voltaire governance action would involve allocation of a person’s ADA resources across a variety of choices; and the strength of opinion would be on a quadratic scale so the influence is properly priced. While experimentation is required, a further constraint could include a quadratic payment for votes distributed equally to all participants.
The critical issue is to recognize that Cardano is a long way from implementing a decentralized governance system that can be sustained long-term. The natural processes of complex systems to centralize around hubs are already active within the Cardano ecosystem. Assuming that decentralization of participation will be sufficient to counteract centralization of decision-power will certainly leave the community vulnerable. Democratic Pluralism and related methods are required to secure a future for Cardano that continually strengthens its collaborative, decentralized culture.
About the Editing
This white paper on Democratic Pluralism is a joint creation of the co-authors. Each author has made unique contributions to the Cardano ecosystem and brings their own perspective to governance design. We used consent-based reviews to finalize the editing of the white paper. Where concerns were identified, we worked together to craft resolutions. Consent does not always mean agreement rather differences of perspective have been clarified and supported with reasonable evidence.
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