Confio

    Evolutionary steps from blockchain to self-sovereign governance

    Martin Worner
    Sep 4, 2019 · 6 min read
    Photo by Ferran Feixas on Unsplash

    This article looks at organisations, the common threads, and the challenges each set face.

    Starting from a self-contained microcosm of a blockchain, and evolving the governance and economic models to Corporate structures through to self-sovereign organisations, we can learn lessons along the way of what works in reality and what needs further development.

    Blockchains are good incubators for discovering how decentralised organisations work in practice. The governance designs and economic models are still immature but give a valuable insight into the practical implementation.

    What are the challenges to blockchain governance and what did we discover?

    Blockchains are decentralised and a run by a network of people and organisations who run nodes, secure the chain and who are rewarded for doing so. There are a number of consensus mechanisms that are used, the original is Proof of Work used by Bitcoin, and of particular interest the Proof of Authority and Proof of Stake mechanism.

    The challenge of all modelling in blockchains, no matter what model is used, is figuring out the intended behaviour, and what measures can be put in place to mitigate unwanted behaviour. In a decentralised network there is, by definition, no central authority who can right wrongs or manage disputes.

    The typical ecosystem of an account based blockchain is a community of developers who maintain and develop the software used, the Validators who run the nodes securely, sign the blocks, keep the blockchain running, and a rewarded for the work they do, the token holders and the users of the blockchain.

    In the Proof of Engagement model it was identified that there was a common interest in the long term aims of the blockchain and that it is desirable for the participants to be actively engaged.

    Cosmos have built a bonded Proof of Stake which requires the Validators to deposit tokens which are used as a bond, known as Stake. If the Validators breach any of a set of conditions some or all of the bond is taken off them, referred to as slashing. The Validators build their stake either through their own holdings and or using delegators (or token holders) to lock up their tokens for reward. As a model, it works well and is a good design. There are, however, some issues about the model which the Proof of Engagement addresses. The issue that has emerged is that in a Proof of Stake model is that through a number of paths an emergent sub-set of Validators begin to dominate as they grow their stakes and their voting power. This concentration leads to centralisation which goes against the long term aims of a decentralised blockchain with a robust and diverse set of Validators.

    Photo by sps universal on Unsplash

    How do we apply the blockchain experience to corporate governance?

    In briefly describing the mechanics of consensus mechanisms in the context of a decentralised entity, it becomes apparent that there are a group of participants aligned to a long term goal and this is not very different to a commercial organisation.

    A company has a board, a management team, shareholders, employees, suppliers, customers and a duty of care to the environment (mitigation of external costs). So what has this to do with blockchain?

    The organisation is a proven model but as we have seen with the blockchain there are improvements that can be made to the distribution of rewards and engagement. Corporations have been following a model of “shareholder first” as a purpose of the company and there are parallels to Validators and token holders in the blockchain world running in a Proof of Stake model. The issue with shareholder first is the low engagement of the end beneficiaries who are typically the person who is saving towards a pension, the pension fund will represent the end beneficiary and thus the link is broken. A shift to encourage more shareholder or end beneficiary engagement will move the balance of power and help influence the direction of the company for the long term.

    Additionally there has been a wider gap growing between the leadership pay and the average earnings of the employees, a disconnect between risk and reward is manifesting. What if there were a method of introducing a further dimension as was done to evolve the Proof of Stake to the Proof of Engagement and introduce a non-linear reward curve?

    As with blockchain, if the collective interests in an Corporation were more aligned to the long term and there were a fairer distribution of rewards across all the parties and as we saw with the Proof of Engagement we can model engagement into the economic rewards.

    An interesting model would be a more decentralised structure in the Corporate model where the votes are distributed to the shareholders, board room, employees and as discussed the reward structure aligned more equitably based on engagement and activism. This removes the distortions observed and brings in better decision making through strong consensus.

    Photo by NASA on Unsplash

    One giant step

    As we have seen the real world application of governance and reward models in the blockchain have potential to change Corporate governance. How does this model extend to self-sovereign organisations?

    Beginning in a small blockchain organisation and adapting to a larger corporate setting the models hold up, the next step up to global self-sovereign organisations is a challenge but achievable by evolving the models.

    The difference between a corporation and a self-sovereign is scale and size of organisation. Self-sovereign organisations are not born as global organisations but begin small and evolve as they adopt more members, and the governance modules must evolve especially as a smaller group would establish trust amongst themselves, and scaling this trust is the biggest challenge that self-sovereigns have.

    Scaling Trust

    The evolutionary path of scaling trust begins with a selected group that govern and are aligned to the organisations values, this can be seen as a monarchy.

    The next step is a delegation of trust to a subset of the organisation, this might be appointed people or group leaders in a “grass root” movements. The appointees then ensure the governance is done in accordance to the aims of the organisation.

    A further step is in bringing democracy to all participants so that they can propose and vote on issues within the organisation. The challenge here, as seen in social media platforms, is the bots, fake accounts and possible vote buying or collusion. In order to introduce this a level of trust needs establishing and there are a number of ways to achieve this.

    A localist approach is for each new member to be proposed by an existing member and voted by a number of members. This mimics communities and has the capacity to scale. There is a risk that a new group is set up for the purpose of introducing new members who do not have the organisation’s values, a measure to counteract that is that there is a trust score given to a community by other communities so if one behaves against the organisation values they can be excluded. The communities are responsible for their members actions so if a “rogue” member is admitted the community can remove them if there is evidence of bad behaviour.

    As we saw in the blockchain model of Proof of Engagement tying together engagement with rewards combines economic and political models. In the corporate governance models, it was proposed to reward engagement of all participants and so with a self-sovereign organisation the same principals apply to governance and this can be extended with economic modelling to provide rewards across the organisation.

    The purpose of this article was to initiate a discussion around the practical implementations of governance in the context of what can be learned in decentralised, and self-contained structures such as blockchains and how the experiences gain can be applied to other organisations, small, medium and large.

    Martin Worner

    Written by

    Senior Product Manager at Custodigit AG | Unlocking Digital Assets for regulated financial institutions | Advisor at Trik [ managing drone data ]

    Confio

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