The 10 Most Insightful Comments on Our Crypto Governance & Consensus Conf Call
On October 18th, we held an hour long conference call on “The Current State of Crypto Governance & Consensus” with four experts (Ari Paul — Managing Partner at BlockTower Capital, Kyle Samani— Managing Partner at Multicoin Capital, Stephanie Hurder, PhD — Founding Economist at Prysm Group, and Alex Evans — Research Associate at Placeholder) . The call was packed with insights, and is a great use of an hour for anyone with an interest in the topic:
Get a copy of each speakers slides by clicking here.
To save 55 minutes, you can simply read our Top 10 takeaways from the call:
1. Crypto Governance Has Evolved Overtime To Bespoke Solutions
Stephanie Hurder discussed the 3 phases of crypto governance. In phase one, decisions are made ad hoc. As the need for well defined governance systems become clear, people look to existing off the shelf solutions, which were not designed with blockchain in mind. We’re now in phase 3, recognizing that we can learn from past systems, take elements of those, and then custom design for individual blockchain applications with bespoke governance solutions.
2. A Useful Framework For Governance Includes On-Chain Governance, Formal Off-Chain Governance, and Informal Off-Chain Governance
Ari Paul provided a useful framework for thinking about the different mechanisms through which governance occurs. On-chain governance, where decision making is built in to the algorithm itself, is the utopia that most decentralized protocols strive for. However, today, there is no highly functional on-chain governance system. As a result, many protocols have formal off-chain governance, where decision making happens in clearly defined ways “above” the protocol. Everything else is informal off-chain governance.
3. Technology, Money, and Governance Are Three Different Prysms Through Which People View Crypto Networks
Alex Evans started his presentation by stating that people look at evaluating Crypto networks from three different world views. A technology first view, a money first view, and a governance fist view. Tech is the most popular view, viewing Crypto as the next computing platform, with a focus on scaling.
In the money based world view, security and trust are viewed as paramount. Finally, in governance first approaches, the Crypto networks differentiate themselves via their governance and community.
4. Control Of A Decentralized Protocol Is Like A Keynesian Beauty Contest
After looking up what Ari meant by a Keynesian Beauty Contest, I found it a useful metaphor. In such systems, it is in the best interest of stakeholders to bet on what other stakeholders will do. So, for example, with Bitcoin, miners with specialized non-transferable hardware (ASICs) have strong economic incentives to support the long-term demands of crypto asset buyers. Developers want to develop a protocol that will be used, which is helped by support from service providers like exchanges and custodians. They also want a secure protocol, which requires the support of miners or validators. As a result, there’s lots of public debate where parties try to convince other stakeholders that their own position has the strongest support. Ari also describes this governance process as “emergent consensus”.
5. Governance Is Far Broader Than Voting, It Also Includes Communication, Education, and the Proposal Process
Stephanie made a strong case for focusing on the proposal process as an area for driving improved governance. Using hard forks to make her point, Stephanie highlighted how some hard forks can immediately be seen as sub-optimal by the entire community. Stephanie believes that in such cases, an improved proposal process could have eliminated the desire by a subset of the community to hard fork. This reinforces the need to for bespoke governance solutions for specific blockchain applications.
6. Decred Recently Introduced Politea — A Permanent Public Record of Governance Related Information
Alex briefly discussed Politea, a censorship-resistant blockchain-anchored public proposal platform, which empowers users to submit their own projects for self-funding from DCR’s block subsidy. These proposals, as well as voting records and other governance related information, are all stored on-chain as a permanent record. This is a good example of how on-chain governance looks to real world governance (e.g. Senate.gov) for inspiration to engender accountability and transparency among network actors.
7. The Makeup of the Community Matters
I thought Ari made a great point here. You can’t just read the U.S. Constitution to understand U.S. governance. You also have to understand the voters. Ari also pointed out how the makeup of voters can change via forks, potentially resulting in self reinforcing biases. Ethereum Classic left a more homogenous community for Ethereum. Continued forks and exits, may see self reinforcing communities. However, asnetwork effects strengthen, that could change. In the interim, there will be lots of moving/voting with your feet.
8. The Use of Proxies To Vote Is Becoming Increasingly Common
A common theme mentioned by the speakers was the complexity of many of the decisions that need to be made, and the intense amount of educated often needed to make informed “votes. As a result of the complexity, Kyle highlighted how there is an increasing use of proxies by less informed voters Below is a list of the top 10 proxies for EOS, where more than 100 million votes are in the hands of proxies.
A good overview of how EOS’ proxy process works can be found here.
9. Factom Is A Useful Case Study Of A Successful Scaling Protocol
Kyle Samani went in to detail regarding the governance process for Factom, a narrow use case of a permissioned blockchain with 65 nodes. The nodes are elected by humans, entirely off-chain. The value proposition of Factom is it logs hashes of arbitrary data on its chain. Then every 10 minutes, Factom generates a merkle root of its blockchain which it publishes and stores on the Bitcoin and Ethereum blockchains. It’s a clever way to get scale while benefiting from the security that Bitcoin and Ethereum provide. The plan was to start centralized and decentralize over time. Factom started with 5 Guides to insure the process for selecting the 65 operators would be coherent and orderly. It was a public process. There are 33 Authority Nodes and 32 Auto Nodes. System is growing, and generating income for the nodes, and the parties are working to improve the protocol.
10. All Governance Mechanisms Introduces Incentives for ‘Corruption’ and Rent Seeking Behavior.
The bottom line is there is no governance panacea. Every governance mechanism is rife with unintended consequences like the formation of cartels or vote buying by block producers. As a result, several speakers noted that a “Federalism” model could emerge. Such a protocol would have minimal rules at the global level, and smaller communities to enable more aggressive governance that is more responsive to those individual communities or “local” protocols.
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