Unpacking Decentralized Governance in the Blockchain Era
On January 10 2019, I made a presentation at the Blockstack “Decentralizing The World” event in Hong Kong. I’m posting my entire presentation as speaker notes. You can also see the slideshare link below.
Good morning and thank you Blockstack for inviting me to this special event to talk about the Layers of Decentralized Governance, and greetings to Hong Kong and its tech community. I must confess, this is my first trip to your wonderful city, and I wished I had come earlier.
First, by way of disclosures, I am involved in a number of activities in this sector, whether I’m invested in or advising companies, these are the key one. Some of you know me as the author of The Business Blockchain, the first book to explain the blockchain in a business language. Actually, that book has now been translated into 10 languages, and the first language was the simplified Chinese, published by CITIC, and the 2nd and 3rd were Japanese and Korean, so the Asian interest is very strong.
Let me make a 2nd confession.
We know very little about decentralization, let alone governance models behind them.
Today, in this field, there is a lot more theory than practice, and there are a number of experiments that are dominating. And that makes it exciting to observe and follow.
We are still newbies in trying to apply, learn, push the envelope, fail, stumble, iterate and we are eager to show that decentralization has a future.
DECENTRALIZATION AS RAISON D’ETRE
Of course, decentralization has a future. It’s the raison d’être of the blockchain. The blockchain is the best tool we have today, to implement a future where decentralization can flourish.
You know, the stone age didn’t end for a lack of stones. So, if you think of centralization as being the opposite of decentralization and where are mostly today, we can’t wait for centralization to die, before embarking on decentralization. We must let decentralization take control of its own destiny.
CENTRAL SYSTEMS FLAWS
There is a school of thought that believes that for a every centralized business that exists today, there is probably a decentralized version of the same that offers a new set of benefits the central version didn’t have.
One could argue – there is nothing wrong with central systems,- think Web-based businesses mostly, but also some monopolies that share the same characteristics, as a starting point. And some of them have grown to be quite large and influential in our lives. The challenge is that many of these central systems or businesses have developed flaws as they grew. Some of them are perceived to be unfair, corrupt, untrustworthy, evil, abusive, inefficient, expensive, or useless.
The reality is that- few of these systems don’t have at least one of these flaws.
INCENTIVES TO MOVE
So, because of these flaws as weaknesses, these systems are giving us an incentive to move to decentralization.
But the incentive must be strong for users to move. There is a psychology of change that is prevailing here, and it goes like this:
People are risk-averse in the domain of gains, and they are risk-seeking in the domain of losses. Let me repeat it.
People are risk-averse in the domain of gains, and they are risk-seeking in the domain of losses.
This means that- you aren’t going to move users or people to try something new if they are currently happy with what they are using, and you just tell them it is “better”. But if someone is currently experiencing a loss, a pain, a defect, a deprivation, or something negative, and you come in and propose to them a solution that doesn’t give them these pains or losses, the motivation to move are much greater and they would gladly do it.
Example- if it is sunny outside, and I approach someone offering them a better shirt than the one they are wearing, they probably won’t be willing to switch it, but if it’s raining and cold outside, and you’re standing there, wet and shivering, and I come to you, and offer you an umbrella or a coat, even if they aren’t the best umbrella or the coolest coat, you will probably agree to take them in order to reduce your suffering.
So, you can’t just say – we’re going to have a decentralized twitter, decentralized facebook, decentralized messaging, etc. just because it’s decentralized. Right now, the best value proposition the blockchain has for this, is that the data is stored on decentralized network that can’t be easily taken down or hacked, and they are censorship resistant, so the government can’t ask for that data, and the companies that run them can’t abuse what they do with that data, because they don’t really own it.
So, the users that you will mostly attract and that will gladly move to a decentralized solution are ones who have suffered a loss or are not happy with the current system they are using.
Question- How many of you have been personally the victim of a data breach caused by a company where you use their service? Ok, of those of you that raised their hands, keep your hands up only IF you were caused some material harm, so please lower your hands if there was no harm that you know of.
See – we haven’t been hit so much yet such that the pain to move away from the Facebooks and other systems is not that great. But if we were hit, we would move in spades.
DECENTRALIZATION UNUSUAL BEAST
Decentralization is an unusual beast.
And getting to decentralization is full of compromises.
Decentralization maximalists want everything to be on-chain, including the governance aspects. You could say that in an ideal world, we’d have everything decentralized and on-chain, but that world doesn’t exist today. Except the DAO, and it crashed.
Let’s be careful with everything being on-chain. For example, blockchain transactions are irreversible by design. But decision-making wants optionality and flexibility. You cannot replace human judgement with automated logic which is what smart contracts are.
So, we need to design the right balance between different degrees of decentralizations and on-chain vs. off-chain linkages. And that is btw the essence of a good design for blockchain architecture.
DECENTRALIZATION AS COMMUNITIES
Decentralization and open source projects are communities. They are a living organism.
Success will be directly related to the vibrancy and well functioning of the community that is behind them.
Peter Hintjens has written a book called Social Architecture: Building Online Communities, where he names the 20 tools covering all aspects of a community, and the way you use that toolbox is to either measure an existing community or to design a community to help you focus your efforts to where it will be most useful.
All of these apply to the blockchain decentralization projects, protocols, platforms and products that are being conceived today. More specifically, I’d like to draw attention to a few of these characteristics that we must pay attention to (in bold):
– Strong missions – the stated reason for the group’s existence
– Free entry – how easy it is for people to join the group
– Transparency – how openly and publicly decisions are made
– Free contributors – how far people are paid to contribute
– Full remixability – how far contributors can remix each others’ work
– Strong protocols – how well the rules are written, and Good protocols let strangers collaborate without up-front agreement.
– Fair authority – how well the rules are enforced
– Non-tribalism – how far the group claims to own its participants
– Self-organization – how far individuals can assign their own tasks
– Tolerance – how the group embrace conflicts
– Measurable success – how well the group can measure its progress
– High scoring- how the group rewards its participants
– Decentralization – how widely the group is spread out (here it looks like the author is thinking of “being distributed” as the key factor)
– Free workspaces – how easy it is to create new projects
– Smooth learning – how easy it is to get started and keep learning
– Regular structure – how regular and predictable the overall structure is
– Positivity – how far the group is driven by positive results
– Sense of humor – how seriously the group takes itself
– Minimalism – how much excess work the group does
– Sane funding – how the group survives economically
See, the blockchain excels when its impact is being applied simultaneously along the 4 dimensions that it is supposed to address: Technical, Business, Social and Legal. If you only tinker with one of these variables, and ignore the others, your success will be more limited, and that applies not just to the implementation parts, but also for the motivation to get there. You could get away with tackling 3 of the 4 aspects, but 4 will get you covered the best.
Decentralization, when it’s well implemented is a defense mechanism. It becomes less vulnerable to attacks and offers protection for privacy, security and autonomy.
So let’s dive into the governance aspects and cover the landscape, as I see it.
Let’s answer the question: where are we applying governance? The reason for this segmentation is that – there is No One Size Fits All. Each one of these segments presents a different set of challenges, drivers and considerations.
Blockchains is where a lot of activity has been, but we should think of the emerging Peer-to-Peer networks as another important segment. An example is OpenBazaar, a decentralized protocol for e-commerce. These typically have a built-in protocols as their engine of sorts, but there is also another category – Protocols and these are sometimes not requiring their own P2P network, but they are to be implemented on top of existing blockchains. Example 0x which runs on the Ethereum blockchain. A 4th category that is emerging is everything seen as a Dapp/App or Platform. And finally, the last frontier of decentralization (arguably), using the blockchain as a tool for social and political change.
So this is my Toolbox list for Decentralized Governance, the layers to think about, and they are different for each segment.
So, if you are a blockchain, you want to optimize for preventing Sybil attacks and a sound consensus process that never fails.
If you are a P2P Network, the priority shifts to installation, self-incentivization and the economics viability of the network.
Protocols – It’s about adoption, nurturing the ecosystem, and providing value to it.
Dapps/Apps/Platforms – Network effects to guarantee success, development of the platforms, and support.
Socio-Political Change – Inclusiveness, Fairness, Wealth distribution.
So, once you have focused on these priorities, the other big factor is – Who are the stakeholders that will be interested in defining or participating in your governance. And this list is important. As a reference point, the current governance of companies today includes the board, the company’s management, and the shareholders mostly. But in the world of the blockchain, that list expands and includes new elements such as users, developers, regulators, node operators and even influencers as governance participants in addition to the investors and organizations. And even under these categories, there are new elements- the organizations we are seeing now are Foundations/Councils and in the investor category, we have token holders, not just equity owners. Users also are token holders and they can vote with their token to influence the future of decentralized organizations. Today, users vote with their buying power or they voice their dissatisfaction, but that’s an indirect participation.
MAPPING SEGMENTS TO STAKEHOLDERS
Now, if you put all of this together, what do we have. Think of this matrix where you have on one side the various stakeholders, and on the other the type of decentralization construct you are targeting, and in the middle the Toolbox priority list. So you need to optimize your governance to cover these aspects, without making it more complicated than necessary.
At the beginning of my talk, I said that we are living in a period where there is a lot of experimentation today with blockchain governance models. Here is a list of some of the interesting tools that are being tried:
Liquid democracy – Form of democracy where the electorate has the option of vesting voting power in delegates instead of voting directly themselves. And they can withdraw it too. (Example of application is D-POS blockchains, Delegated Proof of Stake)
Quadratic voting – Popularized by Glen Weyl in his book Radical Markets (a favorite book of Vitalik Buterin), it’s a form of decision-making where participants cast their preference and intensity of preference. Voters are given a budget to vote, say 10 votes, and they can elect to use 5 of these votes for 1 issue, and the rest on others, so you are voting with a weighting factor.
Futarchy – Form of government proposed by economist Robin Hanson, in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect.
Token Curated Registries – Pioneered by Mike Goldin at ConsenSys, is a way to curate lists with intrinsic economic incentives for the token holders to curate the list’s contents judiciously.
Foundations, Councils and Associations are additional forms of governance structures being added to the experimentation mix.
0x – Trying to gradually decentralize the evolution of the 0x protocol
ZCash – Aiming to find the right balance between ZCash the founding entity and the foundation.
Aragon – Is itself a governance tool, at the heart of which is a set of smart contracts that are coding actions on-chain. They have a governance process too.
Melonport – Here the focus is on Councils that steer the direction.
Blockstack – Recently announced their march towards decentralization in October and are in the process of doing it.
None of these are perfect. All are trying to a few things, and will be expected to iterate and make changes to things that don’t work, but they are some of the leading examples.
Everyone is trying to eat their own dog food, or a version of it. If it doesn’t kill them, then it must be good. But the dog food may not taste the same ….
ARE WE DECENTRALIZED YET?
There was a website that put this chart together. It was an attempt to visualize the various blockchains in terms of the decentralization aspects such as the number of nodes, voting powers, number of wallets, ….
These were not perfect, but it’s a good attempt- at least asking the right question.
It is becoming easier and easier to become part of the decentralized future. Of course, if you’re technical you can download the DAppNode to connect your computer to blockchains such as Ethereum or Bitcoin (maybe later Blockstack?). But you can also buy a cheap box, the decentralization appliance and you just plug it in and it’s always connected. Almost like a TV is always there to receive the signals. Starting price is $400.
DILEMMA – WE ARE STILL DEFINING DECENTRALIZATION
Some blockchains who don’t fully espouse the ideal decentralization architecture of Bitcoin or Ethereum try to water it down, and define decentralization in their own terms, so they focus on the Peer to Peer aspect of transactions validations.
GOVERNANCE AS TOOL – NOT WEAPON
So if you want to experiment with decentralized governance, let it be a tool, and not a weapon. When you look at some of the unfortunate contentious forks that have happened, that’s the equivalent of a separation from the original projects.
Do not hide under the pretext that open source projects are not real companies and that decentralization ethos has to take over above all common sense.
GOVERNANCE vs. GOVERNING
The role of governance is to ensure that there is good governing. Think of the Queen of England vs. the Prime Minister. The Queen doesn’t really govern. She ensures the prime minister is governing properly according to the UK constitution.
12 ISSUES AND CHALLENGES
In Closing, let me highlight some thoughts to keep in mind, and ones that I believe in.
- Token isn’t always needed
- In decentralization, economic incentives matter
- It is not just about voting
- Decision-making by consensus is not ideal
- Communities alone shouldn’t govern
- Premature decentralization of governance
- Does Code = Governance?
- Transparency / Openness in Self-governance
- One size doesn’t fit all
- Large gap in governance UI’s (it is still very technical to participate)
- Legal and moral aspects of unstoppable P2P networks (who is responsible?)
- Obsession with self-governance (DAO was not a standard)
Decentralized governance doesn’t have to be complicated. It needs to be simple, embedded and reliable.
Some software tools and products being developed as decentralized solutions may not have a strong case for being that way. Many of them are just discrete capabilities that have a given functionality, so decentralization governance for them would be a detriment, rather than a benefit.
We must always ask what the purpose of governance is.
SMALL PROBLEMS FIRST
“In decentralized systems, problems can be solved early and when they are small.” (quote from Nassim Taleb from his book, Skin in the Game)
THE BIG PICTURE
Let’s keep in mind that the big picture is the blockchain economy, which includes a direction towards decentralized data, content, storage, computation and protocols. It also includes a set of transactional functionality related to work, rewards, earnings and spendings; and it is meant to target any industry, including the future of nations, law, and government.
Hopefully, the blockchain can lead us to a new world that is better than the current one, just as the web has brought many benefits to our lives in the past 25 years.