There is no such thing as decentralised governance

Working toward the crypto trias politica

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TL:DR

  • The terms off-chain governance and decentralised governance are used with abandon in the ‘crypto’ space and without a full grounding in political philosophy.
  • Decentralisation, or preventing the concentration of power and increasing individual liberty isn’t a binary choice between centralisation and decentralisation, it’s a spectrum.
  • Different decisions and classes of decisions will need different levels of decentralisation and appropriate mechanisms for conflict resolution to balance efficiency versus diversity.
  • Today, most crypto projects are governed by the open-source development tradition based predominantly on Linux and the foundation model instigated by Ethereum. These structures are not robust enough if we are to build inclusive equitable global public utilities.
  • On-chain governance solutions are a step in the right direction but are liable to concentration of power in a technocratic elite with the time, knowledge and reputation to vote and decide on policy changes.
  • The separation of powers (trias politica) model which forms the basis of almost all liberal democracies provides a more appropriate framework than traditional corporate governance or full on-chain governance. Crypto networks need an executive (implement law), a legislative (create law) and a judiciary (interpret law).
  • Three network branches would formalise powers and act as necessary checks and balances on power consolidation. Regular voting and term limits would prevent power grabs by stakeholders, and formalised laws would build trust in the system by users that don’t want to participate in governance directly. A separation of powers will form the foundation of a social contract between the network and users.
  • We aren’t just building businesses, so corporate governance won’t work. We aren’t just building economies, so economics alone won’t work. We are building global communities, so I’m afraid we are going to need politics.

I. Political philosophy for the win

I love decentralised governance and on-chain governance as much as the next person but as with the word ‘blockchain’, we are suffering from a lack of clarity. What actually is ‘on-chain governance’? And why are we doing it? Aragon are building amazing tools and impressive projects like Cardano, Dash, Tezos, Decred, Dfinity, and Polkadot are live or going live with implementations. It all feels a bit ‘blockchain 2017’ and ‘ICO 2018’. (And ‘STOs’ 2019 by the looks of things). There are some transformational ideas floating around, but it is all thrown together as ‘governance’. Ideas of futarchy, quadratic voting, and liquid democracy are unmoored from the anchor of political philosophy. The question being asked isn’t a new one: how can we best organise the society/community? We have reached the answer of ‘full decentralisation’ because that was the answer for a peer-to-peer electronic cash system. It seems like we have decided the answer before we understand the problem.

In thinking through the question of how best to organise, the tension is between self-interest and group interest. How do we create rules to ensure individuals can trust that acting in the group interest also serves their self-interest? In small scales like families, clans and tribes, trust is formed through reputational pressure. But at larger scales like companies and states, trust needs to be codified as less formal pressures are less effective between strangers. Trust is enshrined by institutions into rules, laws and regulations: essentially so that it can scale.

And then Bitcoin came along. A ledger that could be securely amended by all participants anonymously. So for the first time scaling trust without the need for an institution to enforce the rules. Rules would be enforced by cryptography, economic and game theory dynamics. This idea of the ‘trust machine’ and ‘scaling trust’ became a common narrative, but it is now clear that decision-making is more complex. The bitcoin network and other public networks using proof-of-work can successfully enforce rules in a collective way, but for rule creation, amendment, and conflict we lack equally effective mechanisms.

II. The crypto trias politica

One of the best ways to contextualise the challenges of decision-making is one that is pretty familiar. Inspiring the Constitution of the United States, the French philosopher Charles-Louis Montesquieu published The Spirit of the Laws in 1748 and coined the term the ‘separation of powers’. The concept was to divide government responsibilities into three to reduce the potential for the concentration of power and provide for checks and balances. The executive branch would be responsible for implementing and administering the public policy, the legislative branch for enacting the laws, and the judicial branch for interpreting the laws and conflict-resolution. Certainly, the objectives of nation builders and crypto-network builders are similar: reduce the potential for concentration of power.

“A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.” James Madison

The Executive (Development Team)

The framing is not perfect, but crypto-networks today are like the executive branch lacking a functioning legislative or judicial branch. The executive branch can be seen as the core developers that invented and are tasked with developing the network. They are guiding the technical roadmap and pushing updates. In some cases the executive is formalised as a commercial entity, but in most cases, the executive is an ad hoc collective of individuals without any formal structure. Improvement proposals are an open process but in most cases, the accepted proposals are those from the core developers/executive branch. In the U.K. parliament for example, any member of parliament can propose a bill, but generally only high profile bills supported by well known members of parliament get support. Often proposals are accepted or rejected based on the different visions stakeholders have for the network. E.g. digital cash or digital gold with the Bitcoin network. In a national system of governance you could describe these differing visions for society or the network as political parties. However, unlike national systems with elections, crypto networks do not yet have a mechanism for changing the executive within the system, instead forking is the dominant expression of unhappiness. If crypto-networks are to be the digital communities of the future, it is imperative that a mechanism less destructive than forking is used to express the differing values of the community. Equally, it is unclear if eliminating the executive completely by dissolving the foundation and delegating all decision-making to the network users is an effective way to achieve network robustness and sustainability. A more pragmatic approach might be executive elections every four years acting as a limit to the concentration of power. The creation of a crypto legislative and judiciary would do the same.

Maybe the contours of an elected executive looks a little like the Collection Code Construction Contract (C4). But many projects are fearful of being see as ‘centralised’ or wielding too much power over the network. Indeed, as networks are still small consisting predominantly of pioneers and early adopters for which any form of centralisation is seen as anathema, this is a reasonable fear. But as networks grow and onboard the early majority, users will have different requirements. They will care about performance, ease-of-use, and innovative new features. An elected executive with a four-year mandate with budget to deliver could outcompete a network that has fully on-chain governance in which proposals are debated but consensus is hard to achieve.

The Legislative (The Foundation)

Very few projects have separated powers between an executive branch and a legislative branch. The legislative is tasked with the creation of laws and in most cases has the ability to allocate budget. The legislative is called a parliament, congress, and assembly depending on country. After the Ethereum Foundation set up in Switzerland, most crypto projects use a foundation structure primarily as a vehicle to raise capital rather than as a check on power. Tezos is an example of the difficulties in delegating budgetary responsibilities to a foundation. One popular approach is for money to be released by a foundation to the development team based on milestones. Blockstack and Aragon are compelling examples of this approach. This grant sign-off function of the foundation to the development team is similar to the process of budget sign-off by the legislative to the executive. However, there are few examples today of foundations acting more like a legislative and taking responsibility for lawmaking or network policy. (Edit: Sovrin’s Trust Framework is an example). Network policy is in theory delegated to the users of the network, but in reality, very few users are involved in network policy because of the time commitment and technical understanding required to contribute. On-chain governance approaches such as Dfinity, Tezos and Decred are experimenting with formally delegating some network policy responsibilities to the users of the network, which looks much more like direct democracy a la Switzerland than representative democracy.

The challenge will be in how to encourage participation in the creation and voting on network rules. Voter turnout in real-world elections can be close to 90% in Belgium or just 40% in Chile. And that is just for a single vote for a president or political party. How will on-chain governance projects limit voter fatigue? Or explain complex technical details that need to be voted on? Delegates or representatives are a good way to reflect the aggregate desires of a larger community. Innovation and experimentation should be around the size and structure of the legislative, rather than complete abolition. Vote for different representatives to take decisions on your behalf in areas for which they are experts. A cryptographer on security policy, an economist on budgetary policy, and a constitutional lawyer on constitution changes. With the appropriate rewards for representatives, a system can be designed that has powerful feedback loops between the actions of representative and the represented. It would be interesting to experiment with term limits to try and find an optimal term length to incentivise long-term thinking and high levels of performance. Every decision cannot be fully ‘decentralised’, in fact, a more robust system would be one in which a legislative body of elected domain-experts makes decisions on behalf of the electorate. You could even add a transaction fee to pay for such a body. Sounds a little bit like a taxation system….

The Judiciary (Miners?)

The third branch and the least developed in the crypto community is the judiciary. It has been argued, most prominently by Fred Ersham, that miners can be considered the judiciary in the sense that they ‘enforce’ rules. That isn’t quite right because in a state the judiciary interprets the rules to resolve disputes. Miners don’t really have any power to interpret. The community did also for a period suggest that “code is law” which did away with the need for a court system. With this line of logic, the judiciary is just an interpretive branch and therefore if new law was machine readable you could avoid disputes by well-designed laws. That is indeed a dream scenario, but the fact is, crypto projects will plug into real-world legal infrastructure for the foreseeable future. The SEC will see to that. Therefore dispute resolution will have to refer to existing legal structures a la Mattereum, Kleros, and Aragon take a different path trying to resolve as much as possible with a digital judiciary of jurors and game theory. Interestingly, Aragon throw a prediction market into the mix as a second appeal court. It’s possible that with portable reputation and self-sovereign identity, reputation becomes so vital to an individual’s ability to participate in the community that it acts as a sufficient deterrent to anti-social behaviours. Who needs prisons if the police could prevent Fortnight for a year? The Chinese social credit system spotted an opportunity early. For the foreseeable future though as real-world assets are on-boarded onto decentralised networks there will need to be an arbiter of conflicts. If we are to build trust in the system, there will need to an independent branch of the network that does not develop policy. The DAO bug and rolling back of the Ethereum network by the executive branch showed that the network lacked a robust conflict-resolution mechanism resulting in a loss of trust and a fork.

What an independent judiciary will look like in crypto networks is an interesting question. Crypto-economics can only take you so far. As long as bugs exist in software and individuals interpret information differently there will be conflicts to be resolved. All conflicts cannot be automated away by perfectly written contracts. For the foreseeable future there will be a need to be humans in the loop. The exact structure of a digital court could be experimented on for lower-level conflicts. What is the optimal number of jurors to strike a balance between understanding a case and finding consensus? How are jurors selected in order to prevent bias? Are domain-experts chosen to rule on particular cases? Is there room for voting experimentation? For example, how would quadratic voting work for conflict resolution? More questions than answers at this point, but the key is to start asking questions. The more people on-boarded to crypto and the more activity that takes place on networks, high-quality conflict resolution could be key to building sustainable trusted networks.

III. End of corporate governance and toward network constitutions

Surely we just want to build technology and get users to use it? Lean startup style? Right? Wrong. As software has scaled to billions of users, many of the problems Facebook and Google face are those of nation states not corporations. Balancing free speech and censorship; individual privacy versus collective benefits of data aggregation; state-sponsored disinformation campaigns. You can make the case that Facebook in particular has managed these crises poorly, but I would argue that it is structurally not designed to manage these political problems. Corporate structures are designed to balance the needs of investors, management and to a limited extent employers. Users are not stakeholders in this structure.

Crypto projects are embarking on a vast experiment in inclusive governance. Users are a core stakeholder in decision-making and investors are not prioritised. There is an almighty tug-of-war between all stakeholders as you would expect, but it’s clear that if the ambition is to build global digital infrastructure, a traditional corporate structure isn’t going to cut it. So the race is on to understand and experiment with governance models which take the best from national governance in terms of limiting the concentration of power and mix it with the efficiency of corporate governance structures. The debate has been fixated on increasing the number of nodes that can validate transactions when referencing how ‘decentralised’ a network is. From a security perspective, I can understand why. But equally important is the concentration of network policy power and the concentration of conflict-resolution power. DAOs are part of the answer to automate budgetary responsibilities and projects like Moloch are pushing the envelope. But DAOs should be part of a broader constitutional framework.

I would advocate for the creation of a network constitution that outlines the values of the community. These are basic values for which users would opt into. These values will help guide decision makers in the early days without precedents and when network preferences are hard to gauge. Decisions would be made in line with the values of the community not arbitrarily depending on the needs of the network or the development team at the time. E.g. data will always be owned by the user; all steps will be taken to protect user privacy; state level censorship-resistance will be prioritized; or 10% of all assets held in wallets will be redistributed to invest in charitable efforts. When all code and data is open-source, values are the only sustainable competitive advantage.

Once values have been articulated, the next steps are to formalize the structures for a network executive, network legislative and network judiciary. Checks and balances should be mapped out. And relationships between each body should be defined such as voting mechanisms. This work should be done in the open with the consultation of the network. The timing of this is a challenging question. The risk is slowing down decision-making to a crawl with multiple power-bases preventing decisions from being made e.g. the on and off again U.S. Government shutdown or Brexit deadlock. But equally, there is a risk that without the build-up of the different branches, the executive branch will consolidate power and lose the trust of the network stakeholders. Committing to abolishing the foundation as some crypto projects are planning is one strategy to prevent consolidation. The risk is that the network does not have the rules and processes in place to effectively make decisions. If this were easy, political science wouldn’t exist.

The crypto trias politica

We aren’t just building businesses, so corporate governance won’t work. We aren’t just building economies, so economics alone won’t work. We are building global communities, so I’m afraid we are going to need politics. We can’t just say ‘decentralised governance’ or ‘on-chain governance’ and get the network to vote on all decisions. We all want to meet the goals of inclusive, broad-based, diverse decision-making to limit the concentration of power. But we need to learn from the hundreds of real-world main-nets/nations operating today. These nations all have decision-making processes seeded from a single idea from 1748: the separation of powers. We now have the tools to improve governance and fix some of the misaligned incentives in national governance systems. But let’s not throw the baby out with the bathwater. We need a crypto trias politica.

If you are a startup working on governance tooling or working through the challenges of governance structures, I am keen to speak. lawrence@outlierventures.io.

First published on https://outlierventures.io/

Thanks to Ben Koppelman for feedback and discussions that led to this post.