Blockchain-Based Voting may work for Corporation Shareholders but what about Elections?

With all the controversy surrounding the sanctity and efficiency of the US electoral process at present, it seems justified to assess whether a standardised blockchain-based implementation is appropriate. To derive a conclusion, I first address the ways in which it has improved corporate governance sentiment in regard to traditional shareholder proxy-voting practises, in addition to touching on the resultant issues that it brings. Then, the discussion is transitioned from small-scale organisational to nationwide electoral voting blockchain applications where the relative pros and cons of the traditional paper-based and modern electronic systems are compared to reach a conclusion.

The last few years have seen blockchain technology gain traction within the out-of-date shareholder proxy-voting space. The traditional system offers shareholders the chance to nominate someone (a proxy) to vote on their behalf if they choose not to attend a meeting. This is necessary in order for the company to achieve a quorum. The company (mediated by the board of directors) sends out proxy solicitations containing information (such as material disclosures and financial statements) and a proposal of permission to vote on the shareholders’ behalf, specifying the available voting options. Shareholders may also submit additional proposals to be voted on, such as corporate actions or governor recommendations. Shareholders and employees alike are losing confidence in this process for various reasons.

Most notably, it is extremely difficult to guarantee that the proxy forms haven’t been manipulated in any way, either by other shareholders or third parties. Therefore, this distinct lack of transparency and accuracy of results means that shareholders are forced to relinquish a lack of control over their voting, vote history and proxy assignment. The process is also highly inefficient as it is extremely time-consuming and has a high associated cost, partly due to the involved necessary intermediaries. Associated misinformation may lead firms to believe they have either reached a quorum when they have in fact not or think they have failed to reach a quorum when they indeed have, which leads to further inefficiencies down the line. Due to an increase in cross-border investments, investors are struggling to engage while maintaining strong corporate governance and the process yields an alarmingly low shareholder turnout.

Fair virtual shareholder meetings are impossible to carry out according to bitFlyer CEO (Japanese company behind the bVote blockchain shareholder voting app trialled in June 2020).

Traditional data storage methods such as spreadsheets are no longer sufficient for storing investor wealth or managing the increasing complexity of private companies’ cap tables, which costs investors significantly when exiting. Due to the inadequate client-facing technology lacking specificity and personalisation, the firm’s competitiveness ultimately suffers.

These obvious inadequacies highlight a necessary growing demand for cutting-edge technological applications to transform corporate governance structures.

Blockchain isn’t necessarily the be-all-end-all answer that companies seek. Consequently, it may facilitate new passages of manipulation to open up.

Managers can potentially speed up the voting process, in turn manipulating shareholders and abusing the status-quo. Internal direct democracy may also form and undermine traditional legal and economic frameworks, therefore placing excessive power with an intermediary board. This diminishes the principle-agent problem but introduces a collective-action problem between shareholders. This is why any organisation should strongly consider implementing a blockchain-based solution for use in AGMs/general shareholder meetings, since any dysfunctionalities could foster a general lack of confidence in the underlying technology and ultimately stagnate any necessary improvements to current proxy-voting mechanisms.

Despite the aforementioned reasons, demand is taking hold as blockchain is still a viable option in our increasingly digitised world due to the numerous benefits it brings, and the successes seen where implemented.

Blockchain provides instantaneous, near real-time understanding of what certain positions look like, by allowing objecting and beneficial owners’ votes to be represented and tracked within any given proxy voting cycle — further enhancing shareholder democracy, upholding corporate governance and information security. Issuers are given a broad insight as to what outcomes they are able to drive and where their money is going. Organisations can assess whether or not they will get their desired result in near real time and, if not, they can pull out and not waste any more resources which will lead to huge efficiency gains in the long run. This transparency streamlines the entire share ownership framework and helps to quickly achieve proxy goals. The process is fast and fully auditable by any impartial body, which lays a foundation for advanced business analytics and relationship building. Insider buying and selling is visible, aiding the elimination of regulator and company corruption and shifts the balance of power back to a more level playing field between shareholders, managers and directors.

Each investor is afforded a single account to view and track the full voting history and access all eligible meetings — further reducing complexity and eliminating post-vote reconciliation, multiple database checking and strategies such as “empty voting” where voting rights are separated from aspects of share ownership.

The incurred costs involved in shipping, paper and phone calls are alleviated too.

Research has shown that digital communication is on average more effective as it is non-invasive, and shareholders aren’t obliged to immediately respond. Furthermore, shareholders tend to prefer digital channels where they vote at the same rate as paper-only shareholders, in a timelier fashion and hold more shares on average. More young/first-time voters are also incentivised to participate as they have more confidence in a more assessable framework.

Organisations should still, however, mainly focus on market analytics to reveal true shareholder preferences. To be fully systematised, blockchain needs to cooperate with the law and supporting regulations need to be imposed. Governance issues relating to conflicts of interest, data confidentiality and information security still need to be seriously addressed.

Now, it begs the question whether or not blockchain should be used as a form of electronic electoral voting.

Firstly, traditional postal ballots encounter delays and can be physically lost en-route, which is not the case electronically. Research into electronic voting in Brazil highlights reduced residual votes and greater enfranchisement (mostly for uneducated voters) — which has led to increased government spending on healthcare. Whilst also adopting electronic voting measures, India has seen a reduction in fraud.

Electronic voting machines (EVMs) boast major positives in larger (and less-developed) countries due to the operational speed and cost-saving implications (Note they are expensive ~$3000+ and have lifetimes of ~10–20 years). EVMs have no public mechanisms able to validate a tally. They also have numerous security issues, though software/hardware vulnerabilities and a strong reliance on trusted employees.

Blockchain can be used for voting through a few different consensus mechanisms, with each aiming to provide the desired trustless technology. This is the only technology capable of proving the necessary verifiability needed in elections.

The technology underpinning a blockchain voting platform (seen in Civica Election Services combined with the “verify my vote” open-source platform) provides confirmation to the user that their vote was correctly recorded and counted, without compromising anonymity since anyone on the network is able to check whether the counting was done properly without simultaneously undermining the secrecy of the ballots. This is decentralised to several trustees, which ensures that fraudulent votes need to bypass the scrutiny of several network validators, which in turn increases the overall cost implications and the number of participants needed to execute foul play.

A permissioned blockchain may be the most suitable to carry out the electoral process. The validators (such as a party representatives) are known to the public, which ensures further trust in the system and allows impartial auditing which isn’t possible within the current centralised system. These trusted bodies will have access to a copy of the ledger and be able to monitor in real time. Information records will be recorded onto an InterPlanetary File System (IPFS) which allows multiple levels of validity checks. Note that incentive mechanisms can also be introduced to token-based systems (each person is given a token corresponding to a single vote, and once cast they lose it), which will attract more validators in order to verify the results.

Every step of the way may be monitored and verified on the blockchain — right from electoral registration, to vote storage and counting — so it’s easy to validate the trustworthiness of the process. Double-counting is easily spotted, and vote validity can be checked to ascertain whether or not it came from an authorised participant. Furthermore, blockchain solutions boast faster turnaround times, higher accessibility and de facto enfranchisement.

Estonia’s electronic voting system allows the participant to change their vote allocation numerous times before an election, which in turn, discourages voter coercion or vote buying. The technology has also been used in small-scale voting in the US. In 2016, republican Rand Paul recorded results from Iowa onto a blockchain for long-term storage purposes. In some states electronic voting is allowed, and blockchain-based apps have been used.

With so much at stake in political elections, there is no failure tolerance or fix if a vote is not delivered or is altered in any way. There is “no means to make voters whole again” or any “insurance or resource against failure of democracy” (Rivest, MIT).

Although blockchain has many benefits as discussed above, encryption does not fully prevent bugs and any single flaw in the software/hardware or third-party code leaves the system susceptible to scalable and undetectable attacks. A single bug may alter what the voter sees (i.e., through vote misallocation). This may change the result of an entire election if undetected, and if detected, an entire new election would need to be run. Therefore, building evidence of votes is very challenging with blockchain. “Democracy — and the consent of the governed — cannot be made contingent on whether some software correctly recorded the voters’ choices” (Rivest). Furthermore, attackers are financially incentivised to exploit the system thanks to the costs of potential attacks reaching up to $6m. Inherent vulnerabilities in the technology greatly increase the risk of large-scale failures, whereas traditional paper ballots make it harder to carry out coordinated attacks due to the higher incurred costs and likelihood of being caught.

Many proponents of the technology have suggested different possible blockchain implementations, but each possesses major negative implications.

Token-based voting breaks anonymity and the participant must submit their vote within a given time window for the system to work. It is also ripe for zero days and denial-of-service (DoS) attacks (note however, the latter is fairly out-of-date at approximately 20 years old) which could make the network unavailable during crucial times. The system would also break down if a majority of miners were to collude (would require amassing an unfeasibly large pool of resources), or if transactions fees were maliciously increased which would dissuade participation.

Permissioned blockchains run on a smaller number of servers off the same operating system, this makes compromising easier as well as centralising the entire process. Additionally, authorised validator networks are unable to check to see if votes come from genuine users. Interestingly, MIT researchers have suggested that this method may, in fact, have little effect on voter turnout and actually increase disenfranchisement.

Zero Knowledge Proofs (ZPKs) provide a solution to facilitate voter anonymity, whilst simultaneously making a vote publicly accessible. However, it doesn’t prevent vote buyers or coercers from monitoring the network or people voluntarily revealing information.

The electoral process would crumble if a significant number of voters do not sensibly store their private keys, which therefore, would render their participation invalid. All possible methods rely on safe key storage, and the history of cryptocurrency demonstrates the associated alarming risks.

With all its benefits, large-scale implementation of blockchain-based mobile voting technology is still far away due to these technical challenges and the potential introduction of new problems. But as a concept, the call “is directionally 100% correct” (Vitalik Buterin).