Why governance matters

— Arthur Breitman

Over the last three years, the appeal and utility of cryptographic ledgers has transcended political and commercial lines. Today, we find people from all over the world flocking to Bitcoin, Ethereum, and other leading ledgers to store value, transact, and speculate. Investment to fund building core infrastructure around cryptographic ledgers has amounted to the hundreds of millions of dollars, with projections growing daily.

Yet, to consider competition settled is another debate. In some cases, their design can be overwhelmingly resilient against externalities, but it comes at the cost of an inability to adapt dynamically. In other cases, they advance full steam ahead with tweaks and innovations, but this leaves a too much power in the hands of a few influential developers. These criticism have been levied against Bitcoin and Ethereum respectively.

voting tokens from the early Athenian democracy

Back in 2014, many alt coins were proposed with “enhancements” to what was, for all intents and purposes, the same design as Bitcoin. Litecoin introduced memory hard proof of work functions while Dogecoin proposed permanent mining rewards. These minor differentiations looked more like marketing ploys rather than genuine contributions to the field, but the cryptocurrency ecosystem favored more opportunities for speculation and the market has sustained competition.

An appetite for dynamism and innovation also drove the appeal of Ethereum to consumers before its launch late last year. DAOs and smart contracts are an open invitation to create applications and a marketplace for common transactions while sustaining the same currency network. This is undoubtedly a large step towards the type of programmable value that so many consultancies write glossy marketing materials warning about.

Though the market favors innovations, cryptocurrencies have shown a tendency to ignore the stakeholder’s’ interests at the expense of other agendas. Governance happens behind closed doors and few have a seat at the table. This criticism has surfaced in the dialogue around the Bitcoin block size or Ethereum’s bailout of “The DAO”. While coin votes do sometimes happen, they are typically an afterthought and do not proceed from a predictable set of governance rules.

Tezos was started in 2014 based on the observation that governance of cryptographic ledger represented a security hole as a potentially dangerous source of centralization. At the time, the concept of governance was fairly new and hard forks were considered a non-issue.

Observing this ironic lack of coordination in a network based on technology optimized to forge consensus, the Tezos project was started to provide a mechanism to instantiate innovations into its protocol as a first class citizen. The nascent history of cryptocurrencies validated their usefulness, but also exposed their political deficiencies. Instead of pretending that these tensions will cease to exist, the Tezos project built a mechanism for aligning the interests of decision makers with stakeholders.

In the past few months, “on-chain governance” has become a hot discussion topic. Yet, many of the proposed solutions are mere band-aids. They often propose mechanisms for making decisions, but few ways to enforce them. Or they propose a given governance model, but do not allow for governance itself to evolve. In many case, they merely amount to a mechanism for crowning or depositing the equivalent of an absolute monarch.

Tezos’ governance puts everything in scope: the operations of the ledger itself (dubbed “transaction layer”) but also the consensus algorithm, and even the governance model itself. Crucially, it does so in an introspective manner. This means that Tezos can reason about its own changes, and even decide to reject these changes based on their content. For instance, stakeholders may wish to vote in a governance rule prohibiting further amendments from extending the supply of tokens past a certain limit (or requiring a much stronger majority for such amendments). This rule would be enforced automatically through the operations of the ledger itself, not by any particular development team.

Governance matters, and we are positioning Tezos to lead in the creation of blockchain governance structures.