Blockchain Doesn’t Operate in a Vacuum — (Governance Layers)
When talking about blockchain governance systems, coordination and decision making to reach community consensus come to mind. In 2017, this was a big topic of debate because of the many forkings of Bitcoin (particularly Bitcoin Cash).
The problem here was that the Bitcoin community couldn’t come to a unanimous decision on how best to scale Bitcoin. As a result, one camp supported larger block sizes (Bitcoin Cash), and the other camp wanted to keep block sizes the same (although original Bitcoin was updated with SegWit).
As a result, we have seen many blockchain projects come forward and describe how they’ll be governed in a decentralised way to avoid this kind of conflict in the future.
Some projects are already implementing a system of governance, the best known being Dash. As an example, let’s take a look at the governance system Dash uses. It’s called the Treasury System.
The Treasury System
The Treasury System used by the Dash community as a way of reaching consensus on proposed changes to the network and the development of the Dash ecosystem. The treasury is funded by 10% of the block awards going into this “treasury” to pay for projects that benefit Dash.
Treasury funding can be used to hire additional developers to create updates and enhancements for things such as integrations with major exchanges and API providers. In order to decide which updates are carried out on the Dash network, proposals are put forward and voted for by the community. Proposals with the highest net votes will be paid and implemented.
Dash has created a system that doesn’t rely on external funds; everything is created in the Dash network. This is a clear example of a blockchain project which does well to maintain the decentralised nature of the system.
This is a great example of a decentralised governance system. The fact that Bitcoin has opened up the governance debate so early on in blockchain development is a great thing for the community.
The Larger Ecosystem
That said, I think we also have to take into consideration a larger ecosystem approach when considering blockchain governance. This is because we know that blockchain networks do not operate in a vacuum. It’s great that some projects like Dash already have project specific governance. But what about the bigger picture?
For example, if we wanted to influence an individual in society we could take a direct approach (e.g. via the legal system) and directly cause him/her to change their behaviour. Or we can take an indirect approach (e.g. using market forces or social norms) which would also be a way of influencing behaviour.
The point here is that, an individual can be influenced not only directly, but indirectly in an ecosystem. A blockchain based application and decentralised applications (dapps) also reside within an ecosystem and can be influenced regardless of its internal governance system. This is the bigger picture and we will take a look at.
The 3 Layers of the Blockchain System
So what ecosystem is a blockchain system residing in? They operate in three different layers each with their own rules of operation:
- Internet Layer
- Blockchain Layer
- Application Layer
Blockchain based applications will be defined by the rules that govern their systems but also the infrastructure that they are built on. Therefore, each layer will have an impact on the system’s overall governance. Let’s take a look at these three layers in more detail.
Internet Layer
Blockchain networks such as Bitcoin and Ethereum operate directly on top of the internet layer. This means that they will ultimately depend on internet protocols such as TCP/IP. So what does this do? According to Wikipedia:
“The Internet protocol suite provides end-to-end data communication specifying how data should be packetized, addressed, transmitted, routed, and received.”
So this protocol is responsible for transferring packets of information to different nodes in the internet network. Therefore a blockchain network built on top of this would not be able to operate without TCP/IP. Now we know it is totally unrealistic for a malicious actor to turn off the internet, thus killing a blockchain network. But there is another way that this layer can be manipulated.
Internet Service Providers (ISPs) ultimately control this transportation layer on the internet. Therefore, they could discriminate against packets of information coming from and to blockchain based networks. This is very relevant in the ongoing net neutrality debate where ISPs could discriminate packets of data from some websites in favour of others, this can also be true for blockchain based systems.
Imagine if an oppressive government was to ban blockchain networks, they could tell all ISPs to block all information linked to blockchain networks. Or what if an ISPs was to benefit from one blockchain network (maybe they own a blockchain network) so they inhibit transfer of information from all competing blockchain networks while letting their own flourish.
Internet layer governance is external to blockchain governance but it still can have a large indirect impact on blockchain application performance.
Blockchain Layer
Now let’s look at the next layer which will be the blockchain network. As mentioned earlier the most prominent are Bitcoin and Ethereum. So while ISPs are responsible for transferring packets of data on the internet, the miners on Bitcoin and Ethereum networks are responsible for validating and recording transactions (information) on these blockchain networks.
Consensus and sharing of information is reached through the Proof of Work (PoW) protocol. In this article, we’ll focus on PoW as it is the most proven protocol so far, but the same principles can be applied to Proof of Stake (PoS).
PoW is driven by economic incentive where miners are rewarded by newly minted coins and transaction fees. In terms of transaction fees, the higher fee you pay the faster your transaction will be processed and vice versa. Already this is one way of how to influence the network in your favour. People willing to pay higher fees than the going rate, will always get their transactions processed before people paying lower fees.
But apart from fees, there are potentially other ways to influence the network:
Markets
A large mining pool could collaborate with third parties in an off chain agreement in order to favour their transactions over the rest of the community.
Mining Cartel
Miners could decide to discriminate against certain dapps or wallet addresses and not process their information onto the blockchain network.
Laws and Regulations
Regulators could require miners to prohibit processing of information onto the blockchain networks for particular dapps or wallet addresses.
Although these examples are for PoW they can also be applied to PoS systems.
These external forces to the actual blockchain network can all impact and influence the operations of the system.
Application Layer
This is the layer in which we find most of the dapps. Some dapps sit directly on top of a blockchain network while other dapps are deployed on top dapp frameworks. The diagram below shows the layers we have been discussing with dapps on the very top layer.
As we reach the final layer, we can see that even if a blockchain application is designed to be autonomous, it is affected at every underlying layer.
Take the example of the DAO application (dapps layer) built on top of the Ethereum network. The DAO was hacked and lost 3.6 million Ether due to code vulnerabilities. As a result, the Ethereum network (blockchain protocol layer) performed a hard fork modifying the Ethereum network to recover the funds. This has been controversial ever since, as some saw it as a betrayal of “code is law”. But the point here is that the DAO was subject to the decisions made on the Ethereum network.
So while most decentralised blockchain applications have their own set of rules and governance, they also depend upon the platform they are operating on, this could cause two different types of problems:
- There is a flaw in the smart contract platform:
Any flaw on the platform will affect all applications that rely on the platform.
2. Some platforms implement proxy contracts that delegate calls to other smart contracts:
Proxy contracts can be updated and modified by platform developers which will affect all dapps using these proxy contracts.
As we can see even if the dapp has its own rules, it is still heavily subjected to the rules of the platform that it is built on top of.
Conclusion
From this exploration of blockchain governance layers, we can see that each infrastructure layer has a different impact, whether direct or indirect on a blockchain-based application. The impact can be big or small, but it is an impact nonetheless.
As a result of the Bitcoin hard forks, more projects are now describing ways in which they will be governed and managed by the community. This is great progress, but we can now understand governance from another perspective. Governance doesn’t just include the rules for a specific network. We must consider the ecosystem as a whole.
