Decentralized Governance Part 1: Defining The Problem
“In the Web3 world of permissionless value networks, we are building a new global economic order. So there is nowhere to hide when it comes to politics.”
So many token-backed networks look to build decentralized governance in “Phase 3", usually 2018 or 2019 and as a bolt-on to the existing system? Why? Not because it’s such a difficult problem to solve. Engineers love difficult problems. But they don’t like “soft” problems. Soft as in human behaviour. Subjective. Imprecise. Political.
Our inability to solve decentralized governance is why we’re in such deep shit in the real world. It’s why the planet is warming. It’s why we get reality TV presidents who put nuclear armageddon back on the fake news channels. As the European dream falls apart, outcomes range from the get-financially-crushed-like-Greece option if you stay, or if you have the nerve to leave you can spend years in a mandarin-crafted-purgatory-Brussels-style Brexit. There are many reasons why governance breaks down: factions, dogma, vested interests, regulatory capture, realpolitik, parochialism, bureaucracy, inertia, xenophobia and often just plain ignorance.
And it’s a divisive subject. We’re only on the third paragraph and we have already waded into a political quagmire. I’ve already lost the climate deniers, the alt-right groups, the civil servants and the corporate lobbyists. So let’s just call out the lefty liberals and the interfering do-gooders to restore the balance and move on. We’ll try to be as objective as possible but this whole discussion is really about the impossibility of pure objectivity in governance.
In the Web3 world of permissionless value networks, we are building a new global economic order. So there is nowhere to hide when it comes to politics. We have no choice but to tackle these issues head on. For example, in the governance discussion we could look to exclude inequality and redistribution, which would undoubtedly take some of the heat out of the debate. However, we may find that its not possible to take any issue completely off the table when it comes to human social structures. For example, aspects of blockchain network governance like anonymity, data privacy, censorship resistance etc. have direct implications for taxation and therefore redistribution. Over this series of blogposts, we’ll dig into more detail on how policy decisions impact economic outcomes.
We do have some scope to get out of this political mess. It seems clear that in some cases we can design networks so that many of the issues can be decided by a governance mechanism of, by and for the governed. In which case we will also need to explore the relationship between the technical properties of the network and the political constraints or opportunities that may arise. In the Darwinian battle of value networks, maybe each network design team gets to set their own initial conditions for their own primordial swamp?
I’d love to make this series of articles as interactive as possible. So please provide feedback and send on any articles, research papers, links to books etc. that you think might help us shed some light on this area. And follow us on Twitter for more updates. Update: adding in Gitter discussion forum. I’m keen to make this as accessible as possible, and while I don’t want to shy away from complex issues as they arise, I also don’t want to make this overly technical or introduce excessive academic rigor. Governance is political and as new waves of newcomers discover Web3, it would be great if there was some way for them to understand the governance trade offs without a degree in philosophy, politics and economics.
Let me start by suggesting two general rules that we’ll dig into later to see if they really do hold.
Rule 1: There is no such thing as no governance.
In the recent Bitcoin 2x wars, irrespective of the side of the 2x fence people found themselves on, a decision was made by a governance mechanism. No matter how informal or chaotic the mechanism proved to be, there is always something that can be construed as governance. It may have felt refreshingly or frustratingly anarchic, yet behind the scenes were carefully crafted signals initiated by leaders running hierarchal structures. It may have felt like there were (elected? self-appointed?) spokespeople for community projects, but in many cases these were more likely to people speaking on their own behalf, who may or may not have had any real influence within their communities. Decisions may be made by core developers, miners, investors, an arrangement between service providers or some mix of the above. Decisions may be made by human negotiated consensus, AI algorithms, voting, betting, hashing power, longest chain or flame wars. Decisions may have been made for many reasons: commercial, philosophical, pragmatic, dogmatic or intuitive. It may involve a benevolent dictactor, a Swiss Stiftung, an AI bot or a unilateral decision by an exchange. When the network forks it doesn’t indicate a lack of governance, instead you now have two governance mechanisms. You never have a (non-trivial) network with no governance. A lack of decisions is not a lack of governance: many national governments or international organizations can operate for months or even years in political deadlock. But this is still the governing body exercising their right not to make decisions. And it’s still governance. Like I said, we’ll come back to this so-called rule as we go.
Rule 2: Every non-trivial governance decision is political.
This rule could be more controversial than the first. We may find exceptions as we go. But let’s take a look at some of things we have seen suggested as governance issues for networks: setting the appropriate inflation or burn rate, using pooled funds to pay for R&D, agreeing protocol changes / upgrade schedules, elect council members, defining a treasury strategy for project funds, blacklisting DApps, restoring lost or stolen funds. Some of these will immediately jump out as being highly political: seizing assets, censorship, centralized control. Others are political because of the potential to create economic winners and losers. Adding new features may infringe on an already existing service running on the network. Changing the protocol might seem innocuous but it can have hidden implications e.g. block sizes in Bitcoin could theoretically make it difficult to use the network in low bandwidth conditions (the cockroach property that we discuss here) thus reducing decentralization and therefore reducing security and lowering censorship resistance. On the other hand, larger blocks could lower fees making the network more accessible and less costly for users. As we go we’ll look out for a little falsifiability and we may find “free lunch” governance decisions that are good for everyone. Let’s see.
So where will take this next?
Over the series, I will cover the breadth of governance models that tend to come up most including majority / supermajority voting, liquid democracy, futarchy / prediction markets, US-style constitutional republicanism / separation of powers, benevolent dictators, foundations etc.
In the next post I’ll cover the dfinity-network algorithmic governance model that is a very interesting approach, with a rich set of features that lays the groundwork for for AI-assisted governance. It’s a good example of how blockchain-enabled governance could completely reinvent real world governance. But it’s also a good way to examine the limits of a technology-lead approach when confronted with the idiosyncrasies of human behaviour. But it’s a good place to start to discuss the trade offs.
By the way, technically this is not our first governance-related post in the series, as we did cover VC governance in a previous post here and this is an area I’d like to revisit. In the same post, we also introduced the idea that market-based mechanisms could add an intriguing mix to governance. The liquidity of tokens will see the market will reward or punish governance decisions, which may reflexively impact the governance of other networks. So we will revisit both of these areas.
Jake Brukhman has given us some “light” reading here, so we hope to assess how some of these ideas might be relevant. I also want to dive into some ideas from Vlad Zamfir here (with thanks for Simon de la Rouviere for posting) and here, where he poses some great questions and highlights the issues around the challenges of building consensus in decentralized communities. His work on Casper also feeds into how we assess the robustness of a governance model, especially in the area of cartel resistance. And maybe Simon’s work on curation markets / attention economy concepts can help here to reduce information asymmetries.
So there is certainly lot’s to cover but we’ll try to keep it interesting by referring back to real world governance problems and how they might be tackled. So like I said, I’d love if this was interactive so please send on ideas, feedback and questions and don’t forget to follow us here.
