Bringing Off-Chain Governance On-Chain

Off-chain vs. on-chain governance

Throughout the entire history of blockchain governance experiments, governance mechanisms have been able to be broadly categorized into two categories: off-chain governance, and on-chain governance. Some people confuse off-chain governance with a lack of governance, but this is clearly not the case, as networks without on-chain governance are still able to upgrade. The existence of upgrades implies the existence of governance, which is definitionally the process by which the participants in the network agree on which proposed upgrades to adopt.

In systems with off-chain governance, leaders are often identified by the quality and consistency of their thought leadership, their contributions to the protocol, and various other subjective valuations. Examples of such governance include the two largest cryptocurrency communities: Bitcoin and Ethereum. Contrast this with on-chain governance, in which the maximization of a particular metric, such as the amount of stake (Proof of Stake), or the amount of votes (Delegated Proof of Stake), explicitly grants governance rights to users. Examples of this flavor of governance include EOS, Tezos, Cardano, and many others.

Which is better?

There have been, over the years, many debates about which style of governance is able to produce the best results, and the answer often relies on what governance characteristics you prefer. On-chain governance advocates often tout the transparency, simplicity, and objectivity of stake/voting. If governance is on-chain, then the accounts with power are known, anyone with any tokens may participate, and consensus can be objectively measured to allow the network to upgrade more quickly. Bad actors may even be identified and objectively punished.

Off-chain governance advocates point out that bringing governance decisions on-chain makes the governance plutocratic, formalizes bribing, and depending on the design of the particular protocol, often introduces a Sybil attack vector. It is therefore preferred, they would argue, to rely on informal off-chain leadership to align on protocol upgrades and direction.

But the informality of a governance process is also specifically responsible for its own unique forms of tyranny. Those with greater reputation or closer proximity to media outlets are often able to have an outsized influence on the thinking and overall direction of a protocol. Furthermore, there are still incentives for parties to collude off-chain in a similar but often more secretive manner to on-chain bribes and collusion, to gain outsized economic or political advantages (See Selfish Mining for an example of this in Bitcoin).

In fact, many of the problems commonly associated with on-chain governance are not due to the reliance on public blockchain storage, but instead are a result of the particular details of most coin-voting strategies and their corresponding Pareto distribution of stake.

Fractal Democracy: best of all worlds?

Fractal Democracy is a new crypto-economic mechanism that attempts to combine the informality and subjectivity of off-chain governance with the transparency, speed, and consensus objectivity of on-chain governance. In theory, it achieves this without falling prey to either the “Tyranny of Structurelessness” of off-chain governance, or the rational voter ignorance and plutocracy of more traditional on-chain coin-voting governance. Both off-chain governance in practice and Fractal Democracy in theory result in the concentration of governance power to “core developers” and important thought leaders, but the allocation of that power is intended to be more transparent and credibly neutral in Fractal Democracy.

How does it work?

The core innovation is to redefine a proof of work. Similar to traditional proofs of work, which are not inherently “proof” of anything, a proof of work in Fractal Democracy is not proof of any specific amount of work done, but rather is a proof that consensus was reached among humans on the subjective value of the work done. For this reason, it has been referred to as Proof of Subjective Work to distinguish it from traditional hash-based Proof of Work. It is expected that these proofs of subjective work will correlate with a measure of the value of the relative contributions of different actors on average and over time. Similar to Bitcoin, a token is allocated proportionally to the amount of work done, but the token is not itself indicative of governance power. Rather, the power to produce blocks is derived from the ability to expend time, energy, and/or money in a way that is consistently deemed valuable by the community. This is similar to Bitcoin, wherein the “community” of miners and block producers have implicitly pre-agreed to consistently consider valuable the time, energy, and money used in the submission of a proof of work.

Fractal Democracy: other beneficial properties

Because the allocated tokens do not provide governance power, it is not subject to criticisms of plutocracy (as in PoS and DPoS). Because the proofs of subjective work do not require hashing, it is not subject to criticisms of environmental waste (as in PoW). Because the proofs of subjective work do not depend on an asset with a limited supply or rate of growth, it is not subject to indefinite capture by one who is responsible for 51% of the work/stake (as in PoS and DPoS). Because proofs of subjective work do not depend on a pre-existing token (as in PoS and DPoS), Fractal Democracy can be used to bootstrap a new network and a corresponding token distribution.

More analysis is needed to verify all the claims of Fractal Democracy, but if it delivers on its promises, it will be the first on-chain consensus mechanism without coin voting that is therefore capable of avoiding many of the game-theoretical pitfalls common to all other on-chain decentralized governance mechanisms.

Conclusion

What is clear is that Fractal Democracy is not just another on-chain governance strategy. In fact, it may be better to think of Fractal Democracy as a formalized off-chain governance mechanism that uses a blockchain to achieve better transparency and alignment by recording subjective consensus. This hybrid approach between off and on-chain consensus may be the best set of tradeoffs to achieve efficient, aligned, and scalable governance for communities with a common goal.

James Mart
Twitter: _JamesMart