Non-deterministic, not decentralized, governance is key to old-school crypto

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With the public announcement of the Facebook-incubated Libra project, the question of proper governance in the blockchain space is again attracting attention and debate. Even if we set Libra aside, it has arguably been a sort of fashionable trend for recent blockchain projects to turn to modes of governance clearly different from those of the “old-school” projects like Bitcoin and Ethereum.

Recent blockchain governance trends

Hedera Hashgraph pioneered the model later embraced by Libra in which the governance is delegated to a council of prominent firms representing various industries where each firm has an equal vote. Projects like EOS and Tezos opted for using on-chain voting for decision-making. RChain’s solution is to create a legal entity in the form of a cooperative (and in the future a set of cooperatives) to manage the platform. Finally, Dfinity is developing an approach called “Blockchain nervous system,” a form of programmatic voting in which coinholders are incentivized to participate in governance by locking their coins for as long as possible and set their voting patterns in advance in a certain way by making their “neurons” vote in accordance with a predetermined group of authoritative neurons.

It is intuitively clear that there is something about all those governance solutions that makes them substantially different from the approach of Bitcoin and Ethereum but it is not so easy to pinpoint and formulate what that difference is. A knee-jerk response by a crypto enthusiast would be to use a buzzword and say that Bitcoin and Ethereum are more decentralized in their governance, case closed. However, this conclusion is not as obvious as it seems. One can easily say that a council of 100 diverse firms seems, if anything, more decentralized than Bitcoin Core or Ethereum Foundation, or the sets of major mining pools.

Instead, what seems to be special about Bitcoin and Ethereum is that their governance approaches are in a certain sense highly unpredictable before the actual decisions are implemented. One can say that their governance is relatively non-deterministic.

Non-deterministic governance in “old-school” crypto

It is not easy to precisely define terms like “non-deterministic governance” but I will give it a shot. Non-deterministic governance is an order of decision-making about a process in which at any point before the decision is implemented there is no clearly identifiable set of actors (short of a totality of those affected) whose consent is sufficient for ensuring a given outcome.

It may be a bit hard to understand this abstract definition, so let us consider Bitcoin/Ethereum governance context by identifying the relevant actors and their potential influence on decision-making:

• Full nodes. Full nodes are nodes that store the identical copies of the ledger. If a significant majority of such nodes is inclined towards an option, such an option has a significant probability of carrying the day because without a large number of geographically well-distributed full nodes a blockchain network is unlikely to be viable
• Miners. Miners are the special full nodes that are eligible to participate in creating new blocks in exchange for providing correctly configured computational resources. If the majority of miners supports a version of the ledger, they are likely to hold sway because without them, the minority hashpower chain is increasingly vulnerable to attacks, including by the miners on the majority side.
• Coinholders/users. Coinholders may be allowed and enticed to vote on the controversial decisions. If a significant majority of voting coinholders selects a given alternative, it may be hard for the other actors in the given blockchain’s community to ignore the popular will.
• Core development teams. Core development teams may influence the evolution of their blockchain networks in multiple ways, especially through limiting the range of options realistically available. They may also at times try to win by attrition by refusing to implement the popular proposals that they disagree with and forcing the proponents of the latter to achieve costly coordination to sideline them.
• Important developers. People like Vitalik Buterin do not have any formal authority or even computational resources but they can be highly influential to the extent that their active participation is widely perceived to be indispensable for the success of the project. The fake report about Buterin’s death even caused a substantial drop in ETH price.
• Major exchanges. Major exchanges like Binance can also be influential if they credibly threaten to censor those who stick to the options they dislike.
• Major other ecosystem units. In the Bitcoin world, one can think of projects like Blockstream, OpenBazaar and Lightning Labs
• Major DApp teams. This brings to mind how important for the ultimate Ethereum/Ethereum Classic face-off was a thread of announcements by DApp projects whether they were sticking with Ethereum or switching to Classic.

It is important to recognize, however, that the views of none of these types of actors (even in various combinations) are bound to be predictably decisive in any context. Nor can they always credibly commit to an option no matter what. Full node owners may initially dig in like the ones in the Bitcoin community did in their opposition to the block size increase. But it is not clear that they cannot be made to jump on the departing train if the miners and ecosystem projects stick to their preferred plan.

Miners generally do not want to be seen as dictating terms to the networks they serve. They can also be at least temporarily sidelined by concerted actions of full node owners and development teams that could preclude them from continuing to mine on their preferred chain.

Coinholders and users have a certain unique democratic legitimacy but it may be very hard for the supporters of any option on the table to ensure voter participation at a high enough level to secure that potential legitimacy. Even the leading lights like Buterin are obviously not omnipotent, and so on, you get the idea.

Why not just call this state of affairs informal governance, though? Because while Bitcoin’s or Ethereum’s governance is, indeed, informal, it is not all there is to it. An arrangement, in which the majority of three actors can from time to time decide anything within a system, is informal, too, but one can always predict the decisions to be made in advance given the reliable information about the views of the three actors in question.

The implications

The realization about the crucial feature of governance in old-school crypto has important implications in at least two respects. First, it raises the question whether the old-school crypto governance is or can be made compatible with the traditional legal systems, and what if it cannot be. Secondly, one may wonder what the major advantage this approach has compared to the newer approaches. Is it just about the potentially higher capacity to resist a coordinated government crackdown? And does this capacity, if it is there, outweigh the potential advantages of the more deterministic approaches?

I will try to grapple with these issues in the upcoming articles on the topic.