Day One Governance

Why Governance Must Be Articulated From Day One

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There is a temptation for blockchain builders to take a “figure it out as we go” approach to governance. Defining governance processes and procedures on the front side can feel distracting - as in, who cares about governance if there is no one to participate in it?

We believe, however, that ill-defined governance systems will inevitably lead to one of two types of undesirable outcomes: anarchy or plutocracy. Any system that attempts to address these extremes through a democratic system, such as the governance of checks and balances we’re proposing at Storecoin, must do so from the beginning. When governance systems remain opaque or ill-defined, it leads to confusion and frustration, as people’s expectations of decision-making clashes against the reality.

To understand why this is, first we need to remind ourselves: what is the point of blockchain governance?

Blockchains are not companies or countries. They are, instead, a public commons. More precisely, they are multi-sided voluntary value networks, organized around a set of rules known to all participants and requiring the contribution of all sides of the network - from core developers to app developers to miners and validators to merchants to users and beyond - to function properly.

A prerequisite for these parties to participate is that they understand and agree to the rules that govern the network. Issues like monetary policy around inflation schedule have a demonstrable impact on which blockchain networks miners, validators and others chose to participate in.

If the first prerequisite for participation is to accept the rules of the network as they are at the time of joining, however, the natural next question is “how are those rules changed, and by whom?”

In the first decade of crypto, the participants have tended to be the type of people and companies who are comfortable in hazy-ruled frontiers, willing to bet on their own ability to arbitrage a lack of rule clarity to drive protocols in directions that benefit them.

While this has been fantastically lucrative for some, it has also had some significant downsides, such as operational inefficiency and value destructive forks becoming an accepted cost of doing business when agreement can’t be reached. Moreover, the lack of clarity around these fundamental questions of who sets the rules and how has limited the willingness of many actors - including, notably, those institutions that comprise today’s economic mainstream - to participate, constraining the growth of crypto as a whole.

Throughout history, commerce and trade has expanded when frontier markets become safe for more risk averse participants - usually through the introduction of contracts and legally-enforceable rules.

We are at this stage again in crypto now, where enforceable rules engines - i.e. governance systems - are attempting to provide the confidence required to make a frontier market safe for mainstream market actors.

This is, ultimately, the job of blockchain governance: to answer how rules are changed and by whom in a way that can be understood and agreed upon by a growing number of parties on the way to scaling the blockchain network as a whole.

So, if that’s the larger context of why blockchain governance matters, we can return to the question of why it needs to be articulated - and ratified - up front.

Power Creep

First, at the most basic level, we do well to remember that blockchain networks are made up of people. People in systems tend not to give up power once they’ve gained it. The default power of blockchain networks without clearly articulated governance systems is the core developers. Even without any malicious intent, and even in the case of devs operating with best intentions to act as stewards of the network with their decision-making, it runs counter to human tendency for groups in power to voluntarily cede power later.

Inefficiency

When governance decision making processes aren’t well articulated, it creates a likelihood of inefficiency, as the community has to figure out not only what change to make, but by what process to make that change.

In the minds of some, the inefficiency of change is a bulwark against takeover by a hostile force or a group trying to warp a protocol or network to its own benefit. To most, however, inefficiency is just that: inefficient, time wasting, and a reason to lose faith in the network.

Opacity & Credibility

There is another risk associated with the inefficiency mentioned above, which is opacity in the decision making. When a decision-making process isn’t well-articulated and inefficiency takes hold, there is a temptation for developers to ultimately just make unilateral decisions in the name of moving things forward. This process can often be opaque, and both that opacity and the centralized decision making can lead to loss of confidence in the network. Importantly, this can happen even when those developers are acting in good faith. It is very easy, after enough gridlock, to convince oneself that efficiency is worth the cost of transparency.

Community Fracture

One extreme result of inefficiency and opacity is for parties to opt out of a network they had joined. Community fracture can be extremely painful, whatever the cause. Recently, for example, Ethereum has been struggling with a prominent member who decided to abandon the project after experiencing extreme hostility upon bringing up a critique of the network’s speed of technical development.

In truth, however, there is an even greater concern around community fracture for ecosystems without well defined governance: forks.

In the context of open source blockchain networks, when one part of the community disagrees with the direction of the protocol or a decision that was made, they can chose to fork. On the one hand, this governance by exit is a powerful last resort. On the other, forks have demonstrated themselves to be significantly value destructive; costly to both the parent chain and (at least so far) damning to the child chain that forks away.

Forks are, practically, a way for a group to not respect and not follow a decision that was made about the network. We believe that it is much more likely that a group will disrespect a decision enough to want to fork away when governance is not clearly defined and articulated. Put differently, it’s not only the fact of an undesirable decision being made that impacts whether a group decides to fork, but the way in which that decision was made matters, as well.

When a blockchain network has a well-articulated process for making decisions that miners, nodes and other participants can avail themselves of from the beginning, it increases the likelihood that a network participant will respect a protocol decision - even if it wasn’t one they wanted.

By the same token, if a node operator feels like a decision was made in a way that was outside of whatever process they expected would be used for making decisions, or indeed, if they had no channel to oppose a decision they felt bad for the network, they are much more likely to disrespect that decision and even fork away.

Decision Making As The Path Of Least Resistance

The challenges that arise for blockchains that don’t have well articulated and ratified governance models are significant enough that many will find themselves in the position of needing to install a “good enough” governance system on the fly - if for no other reason than to have a way to make decisions the community respects without forking and fracturing.

In many cases, the path of least resistance will be a voting model based on token holdings. On the one hand - this is rational. There aren’t identities in blockchains, making true democracy possible, so voting based on token holdings is the obvious next choice.

Inevitably, however, token-based voting models simply enshrine plutocracy, or rule by the rich. When token holdings are used to apportion political power, it creates a situation where, while decisions can get made, they are overwhelmingly going to be made for decisions that favor the richest holders in the network. Over time, this both pushes existing small participants out and creates a barrier to entry for new participants, centralizing the protocol network in the process.

Plutocracy can be avoided - but it’s much more difficult when designing on the fly. Indeed, even governance systems that are well-articulated but find themselves needing to be amended are more manageable in this regard than the absence of a system. In other words, when real issues are on the line, it’s easier to amend than build from scratch.

Is something else possible?

So, if the lack of defined, ratified governance leads to anarchy or plutocracy, what’s the alternative?

First, we believe that governance needs to be articulated from the very beginning. Participants need to understand what they’re getting into - including not only the rules by which the network is organized, but how those rules change (and who has the power to change them).

Second, we believe that this articulated governance process needs to be ratified by the community. Not only do participants need to understand the change process, they need to have had the ability to have a hand in shaping that change process. Ratification creates the strongest bulwark against forking that might otherwise occur when a part of the community disagrees with a specific change.

Third, we believe the process of making change needs to be as fully considered and designed as the security model or monetary policy of a blockchain. The pull towards plutocracy is a powerful force that represents an inevitable and unavoidable force for centralization. The only way to avoid this is to create governance models where different groups of essential network participants play different roles that create checks and balances against the interest of any one or another hijacking the agenda for the network as a whole.

Fourth, any attempt to build a new form of democratic, checks-and-balances governance must start from the very beginning. While an approach like Storecoin’s proposed one-entity-one-vote system is designed to prevent long-term centralization, part of its solution is not to overly prioritize the wants of early adopters over later joiners of the network. This means that early adopters need to understand and accept the system and its trade offs from the beginning. Trying to introduce such a system later would lead to revolt.

Conclusion

It’s no surprise that 2019 is shaping up to be the year of governance conversations in the blockchain space. More and more, the community is realizing that, to break out of early adopter and proof of concept mode, the ecosystem needs to be safe for a wider array of (often more risk) averse participants. An essential vector in that opening is to answer the question of how those ecosystems make decisions, who has the power to do so, and by what process. These questions are not to be kicked down the field, but must be answered from day one. They must be the foundation upon which ecosystems build confidence in their network for those ecosystems to have a chance to reach their true potential.

To read more about Storecon’s approach to this set of issues, check out our recent essay “Ending Plutocracy & Enabling Democracy In Blockchain Governance” and keep your eyes peeled for a forthcoming essay on Storecoin’s approach to checks and balances.