A Framework for Blockchain Governance Design: The Prysm Group Wheel
Blockchain platforms are economies written in code. The goal of any blockchain-based platform is to intermesh participants — such as buyers, sellers, miners, voters, etc. — to transact and create value. Participants in a blockchain-based marketplace are focused primarily on buying and selling goods or services for mutual benefit. For example, a miner in a permission-less blockchain seeks to make a profit trading its computational power and bandwidth resources for block rewards and transaction fees.
As we have discussed previously, economies require multi-dimensional designs in order to function effectively. The most important — and perhaps the most misunderstood — dimension is governance.
In this post, we discuss governance in depth, analyze how it differs from operational rules, and outline our framework for custom-designing effective governance for blockchain platforms.
Operational Structures vs. Governance
To understand why governance is an essential tenet within the Blockchain platform, it is important to understand the difference between governance and operational structures.
Operational structures are mutually agreed upon rules and processes put in place to help manage the day-to-day functioning of the platform or ecosystem. Algorithms, for example, assist in determining the next block in the chain, and the size of the block rewards granted to miners. These key operational structures are the backbone of the platform and essential to its ability to function properly. They ensure that contracts, markets, and token economies behave effectively, allowing for individuals to reach mutually valuable agreements.
Governance, in contrast, is the set of mechanisms by which the community makes choices regarding changes or updates to its operational rules. If events arise that are not covered by operational rules, the community will also decide on a plan of action to remedy those use cases. If operational rules consist of all of the written procedures and agreements in black and white, governance is the set of processes that help us address the grey areas in between.
Governance allows a platform to deal with the unforeseen, unanticipated and unexpected.
All systems need the flexibility to adapt over time to inevitable market changes. In traditional organizations, these decisions are made on an ongoing basis by the leadership team. In a decentralized blockchain platform, this central authority needs to be replaced with something else. What form this decision making authority should take is an ongoing, contentious debate in the blockchain community.
As with any economic or technological component of a blockchain project, governance must be custom-designed to the specific task at hand if it is going to be effective. The low-cost practice of copy-pasting governance structures is a simple yet limited process that often has poor long-term payoffs. Investing time up-front to design governance for a specific platform will pay dividends later.
Before designing governance, we recommend that platforms first define their operational rules. These include contract design, market design, information systems, and token design. Determining these elements up front ensures that governance can address all of the various dimensions that need to change. Once a platform is ready to address governance, we recommend considering the following elements in turn.
A Framework for Blockchain Governance Design: The Prysm Group Wheel
These seven elements of economic design for governance need not be completed in a specific order. They should, however, be revisited often as a platform’s design evolves.
Scope of Decisions
As governance is being designed, it is important to have a sense of what kinds of decisions will need to be made with the governance process.
The multitude of decisions that the ecosystem faces will likely benefit from different governance processes. For example, some decisions will require proprietary information and will benefit from involving experts, while others will need to incorporate the preferences of community members so that the decision has sufficient buy-in.
Preemptively outlining the categories of operational processes that will need to be upgraded over time, as well as all potential decisions that will need to be made, will help to ensure a cohesive and robust governance system down the line.
Stakeholders / Participants
Each individual participant in a blockchain ecosystem has an interest in the ecosystem’s overall success because it is a mutually beneficial operation. The objective of a governance system, and the motivation behind ‘decentralized’ governance mechanisms, is to ensure that the decisions made with respect to the ecosystem are in line with all participants’ wishes.
Defining stakeholders and their various objectives at the onset of a project is vital to the success of a governance system. This way, you can address how any conflicting objectives will be handled in order to best achieve the platform’s overarching goals.It may not be possible to achieve that ideal balance, but having one in mind will set a direction for the design of the governance system.
It may not be possible to reach an ideal balance, but having a conflict resolution plan in place will set a positive path for the design of the governance system.
As governance processes are crafted, specific determinations can be made regarding how these different groups will be represented, and at which points — if any — they will be directly involved with decision making.
Policy Research and Development
In order for a decision to ultimately be implemented, a specific proposal must be developed. This is especially true for blockchain projects, as these decisions often have to be translated into code.
The timing of proposal development depends on the governance process. Consider the example of government referenda, the ultimate form of direct democracy. In some places where referenda are frequently used, such as California, a fully specified law that is ready to be enacted is presented to citizens for a vote. This means that before the citizens even had a chance to express their views, some small group of people crafted exactly what that law would look like. In other places, such as the UK, the process is basically reversed: first, citizens vote on whether they would like some policy, such as leaving the European Union, and after the vote happens, it is left up to a smaller group of politicians to determine the exact details.
In either case, the policy R&D process of researching all of the various policy enactment options and outcomes must be completed at some point.
This important task requires a shared understanding of who will undertake these activities and what resources will be used as support mechanisms.
Before a potential policy can be presented for approval or rejection, it must be brought to the attention of the full community by one or more of the policy drafting members.
This involves identifying a change that needs to be made, a general idea for how the issue will be addressed, and a means of communication by which to submit it for decision-making.
For example, before a bill can be voted on in state or federal government, it must be written and sponsored by one or more legislators.
Any well designed governance system must have a clear process by which proposals are made. As discussed above, the timing of the proposal and policy development process can vary depending on the specific design. Some governance systems allow for the proposal of a very general policy, with research and development completed after its adoption. In other governance systems, a fully-formed, specific policy change is required before the proposal process begins.
Information Distribution Systems / Education
When a variety of stakeholders are involved in decision-making, clearly communicating required information, no matter how seemingly trivial, is essential in the process of making informed decisions.
Many of the decisions that must be made for a blockchain ecosystem are extremely complex. In some cases, it may require technical or economic expertise to truly understand the impact of a potential change to an intricate platform. The results of the policy research and development process may be critical for participants to understand as they determine which options are best for them and the community.
Without a designated communications channel for sharing credible information about potential decisions with the community, governance systems do not function well. For example, due to a lack of shared information during the chaotic process that eventually led to the Bitcoin Cash hard fork, the community informally organized into different factions, both online and in person. The fragmentation of information led to uncertainty over which proposals were actually up for consideration and how much support each had. Even after an agreement was ostensibly reached, there was confusion over whether it would be implemented. Ultimately it was not enforced by all miners, causing the fork.
The design of any governance system, then, must include official mechanisms for delivering information to participants, even if the information provided using those mechanisms comes from crowd-sourced rather than ‘official’ sources. Such systems allow a community to coordinate and determine the outcomes of their own decision processes, which is in the best nature for all involved.
The ultimate goal of a governance system is to facilitate decision making that stakeholders feel represents their interests and preferences.
There are many mechanisms available to aid in the process of coming to a final decision. This can only be achieved once a fully specified proposal has been created and the required information has been given to governance participants.
In some cases, the mechanism might be a community wide vote in which there are specific rules for how much participation is required (quorum), and how many votes must be cast in favor of a proposal in order for it to be approved. At the other end of the extreme, there may be some decisions that are delegated to a specific role in the community (similar to a CEO), and whatever the person in that role chooses will be the final decision. Naturally, there are also a plethora of options in between these extremes.
The appropriate choice of mechanism depends on the collective elements of the design wheel, including information distribution systems and implementation rules.
Implementation and Property Rights
An important and often overlooked issue surrounding governance design is the property rights of ecosystem stakeholders. For blockchain-based platforms, many resources vital to the success of the network are contributed voluntarily by participants, who still maintain ownership of those resources after distribution. A prime example are the computer processors contributed by Bitcoin miners.
Ownership over resources can give certain participants significant power during the implementation phase of the governance process. For example, if stakeholder voting were implemented with a goal of determining which protocol upgrades would be adopted, the result of a particular vote would only matter to the extent that the nodes of that system chose to implement the upgrade on their machines rather than to leave the platform with their equipment.
Property rights, therefore, may constrain the types of decision-making processes that a community can credibly implement.
A rule of “one person, one vote” is all but meaningless if one participant controls 80% of the resources required for the system to function, thus controlling a majority of the informal power in the community.
Understanding the unwritten power dynamics imposed by property rights is essential when designing and refining the rules of a governance process.
A full governance process design may require several cycles through the wheel before it comes together in a cohesive manner. This is due to the crucial step of understanding how various elements work together, effectively enabling participants to design a governance process appropriate to the context. It’s best to plan for several design iterations before landing on the most favorable outcome.
In order for a system to reach optimal balance, it must have a structurally sound operational structure and a well-thought out governance design to manage and implement decisions that will ensure relevant stakeholders’ preferences are represented. It is possible to achieve such a balance through following the framework recommended above to warrant that each of its seven elements are thoroughly addressed.