Making Sense of Blockchain Governance Applications

Josh Stark

is head of operations and legal at Ledger Labs, a blockchain consulting and development firm.

In this opinion piece, Stark seeks to provide a high-level framework for understanding the power and potential of nascent blockchain governance applications. 

Governance has long been one of the most-hyped applications for blockchain technology.

However, there's often little clarity about what "governance" means in this context. The term is used to encompass applications ranging from secure online voting, to new forms of political governance, to flawed experiments in decentralized investment funds.

First, we need to be clear about what we mean by "governance".

Most often the term brings to mind political governance. The institutions that, according to a system of rules and laws, make up our various levels of government. Political governance includes processes like democratic elections, votes held by representative bodies like parliaments, and the particular responsibilities and powers given to different institutions.

We might also think of corporate governance: the processes used by corporations to make decisions. Corporate governance includes processes like shareholder votes, board meetings and the different levels of power and responsibility given to executives and committees.

Both of these are applications of a common set of tools designed to facilitate group decision-making. Rules, laws, institutions, processes, rights and customs that, used together, become a system that enables organizations to make decisions. Applications of governance range from highly complex systems like nation states to very simple ones – say, a private club with a simple majority voting mechanism for approving new members.

This is what I mean by "governance" for the purposes of this article – the processes and systems used to facilitate decision-making in any organization.

Note that this doesn't refer to a particular use of those tools. Governance systems can be designed well or poorly, they can be effective or not and they can be just or unjust. But, the set of tools that lets us build any of these systems share common features, and it is the tools that might be improved by the various projects, products and technologies that make up the category of "blockchain governance" applications.

Any governance system requires certain basic technologies.

First, it requires a way to record a set of rules. Rules like who gets to vote, who gets to sit in parliament or who has commit access to a codebase. These rules have to be recorded somewhere securely so that they can't be lost, destroyed or forgotten.

Importantly, we must also be able to verify that a given rule is the real rule, and not fraudulent.

Second, there must be a way for people to interact with the rules. For instance, if a rule gives you the right to vote, then you need to be able to exercise that right. You need an election: poll workers, voting booths, paper slips, vote-reading machines and other technologies required to facilitate voting. If there is no way to interact with a rule, then the rule can't serve its purpose in the overall system.

Third, governance systems require a way to enforce the rules. What if someone cheats? What if they vote twice, or refuse to give up power when their term is up? There must be a way to compel individuals to follow the rules, otherwise the rule is again hollow. Existing governance systems use different tools to enforce their rules, like social norms or legal systems.

Let's look at a simple example: a small charitable non-governmental organization (NGO) with a three-member board. The NGO receives funds from sponsors, and must decide how to spend the money to achieve its mandate.

Its rules are contained in a simple constitution that sets out the purpose of the organization, as well as articles of incorporation and bylaws that contain the rules that define how decisions are made. The NGO keeps a copy of these rules, and so does its lawyer, who serves as a trusted third party – a way of ensuring that they can always be certain about what the "real" rule is.

To interact with those rules, the board convenes meetings where votes are carried out and recorded.

Third, the bylaws are enforced – if necessary – by the legal system of the jurisdiction in which the NGO is registered.

Blockchain technology offers an elegant new way of accomplishing these three basic functions of governance.

First, blockchains are ideal for recording information in a way that can be later verified as authoritative. Information stored on a blockchain is distributed, meaning it is very difficult to destroy completely and very easy to access. Anyone can verify for themselves that a given entry on a blockchain has not been altered since it was created and verify that it was created through a particular process.

Let's return to our NGO example and suppose it has a rule where the votes of two-thirds of the board members are required to approve any expenditure over $1,000. We could simply store a hashed copy of that rule written in plain language on a blockchain and then later be able to cryptographically prove that the rule we are reading is the same one we placed there and that it has not been altered since.

Second, blockchains provide a new way for people to interact with the rules directly.

To do this, we wouldn't simply store a copy of natural-language rules like in our example above. Rather, we could take this a step further and express the rule in code. Using what is commonly known as "smart contract code" technology, some blockchains allow users to create logical scripts that are executed by the blockchain itself.

Instead of recording our NGO's rule in natural language, we could express it as a simple computer program. The program would receive a spending proposal as an input, check to see if its value is more than $1,000, and then trigger a vote. The program would receive inputs in the form of signed votes, count them, and then determine whether there was a majority. If two out of three board members have voted "yes", then the program would automatically send the funds to the recipient defined in the proposal.

Crucially, we have already achieved our third requirement – enforcement. When the rule is expressed as executable code, the rule can be enforced at the same time it is exercised. So long as the code can control the assets subject to the rule, then the rule itself executes the outcome.

While they sound mundane, these basic features form the building blocks of any governance system. The fact that they can be achieved – even in a narrow sense – through the scripting capabilities of blockchain networks opens up new possibilities to augment existing governance systems or build entirely new ones.

Blockchain governance applications are an extension of the technology's general capability to execute rules defined in code.

This capability is most often discussed in the context of "smart legal contracts", where blockchain code is used to augment traditional legal contracts. In that context, blockchain code is used to store and enforce rules as agreed to between two parties to a commercial relationship.

Here, we are using the same technology – blockchain code as rules – and just applying it to a slightly different use case.

In a commercial contract, the parties are agreeing to a set of rules designed to facilitate trade of some kind. In a governance system, the parties are agreeing to a set of rules that will help them cooperate and make decisions together. In either case, the ability of blockchain smart contract code to "enforce" its own rules is a powerful capability, though it comes with limitations.

The first important limitation is what can actually be controlled by a blockchain governance system.

In our example above, our blockchain-enforced spending limit rule was useful because the rule itself can have control over the funds at issue. Once the votes are in, the money is sent. This is possible because we are assuming that the NGOs funds are in cryptocurrency, which can be directly controlled by blockchain smart-contract code.

But if the thing being controlled by the governance structure was something else – US dollars, or a physical asset like a vehicle – our solution can't be as easily automated. We could hold a vote through our system, but ultimately some person would have to enforce the outcome of that process by making a bank wire or transferring legal title of the car.

Over time, we should expect that other types of assets – like fiat currency, or vehicle registries – will be integrated with blockchain systems, which will expand the utility of blockchain governance systems.

Likewise, if our governance system is primarily concerned with controlling access and permissions within some other system (eg: over a codebase, or within a private Internet forum), then the utility of our blockchain governance system depends on whether the blockchain-enforced rules can control the permissions or access in those systems.

This, too, is a barrier that will quickly be overcome as platforms are built that integrate easily with blockchain technology.

Keeping in mind our analysis above, how do the various projects that fall into the category of "blockchain governance" relate to one another?

Some of these projects aim to simply provide a user a set of tools they can use to build their own governance systems. Boardroom, for example, is a suite of "governance components" that a user can take and structure however they want. Using pre-built default code contracts – things like votes, proposals, boards and committees – a user can more quickly build something that fits their particular needs.

The point of the product isn’t a specific type of governance, but rather just providing the tools needed for users to build their own governance structures. Our NGO above, for example, could use Boardroom to build the simple governance system we described.

Other projects attempt to build new types of governance systems that take advantage of the unique strengths of blockchain technology. The most obvious of these strengths is that blockchains are decentralized – there's no central party required to maintain the system or "enforce" its rules. This makes it possible for governance systems built on blockchain networks to themselves be decentralized, with no central party.

The best known project of this kind was The DAO. The DAO, which stands for decentralized autonomous organization, aimed to be a user-controlled venture fund. It raised funds by selling tokens, which granted holders of those tokens certain rights in its governance system.

Token-holders would then vote on proposals submitted to the DAO and decide where it should invest its funds. The DAO had no legal entity and no bank account – it was governed entirely through blockchain code.

It was an audacious plan, and it's unfortunate that it failed as quickly as it did. Critical security flaws in its code let an attacker siphon away The DAO's funds, destroying confidence in the project and leading to an elaborate game of cat-and-mouse as The DAO's creators tried to salvage their project and recapture the funds.

As an experiment in smart-contract security practices, The DAO was a failure. But, it was also an experiment in whether a governance system of this type – a decentralized venture fund – could succeed in the marketplace. The failure of the first experiment unfortunately means the second wasn't truly tested.

A third type of blockchain governance application is aimed at solving the practical problems facing traditional enterprise as they adopt blockchain systems more generally. For instance, consider the governance challenges facing consortium blockchain projects.

Many "enterprise" blockchain systems being explored today take the form of a permissioned blockchain network that is shared between entities – a consortium. The nodes that make up the permissioned blockchain would not be maintained by the public, but rather by each participating institution.

For instance, a shared blockchain ledger maintained by several banks that enables them to more easily settle cash balances between themselves, or a shared blockchain ledger that tracks ownership of financial assets like shares, derivatives, or bonds.

One challenge facing institutions as they work on these projects is how they will be governed. If there is no central entity that will "own" the ledger – indeed, this is part of the value of this approach – the participants must be able to govern it jointly. Not only is this politically difficult (coordinating among competitors with different priorities is never simple), it's a practical problem as well.

There must be a process, mediated by the code itself, through which the consortium makes critical decisions, like voting to add new members or removing existing ones, or upgrading the code over time.

More than our other examples above, this will require careful integration of the blockchain-code components that govern the rules of the system and the traditional governance and legal requirements facing financial institutions.

Within "blockchain governance" we can usefully distinguish between at least a few categories, illustrated by the examples above.

There are projects that aim to simply provide the tools of governance, like Boardroom. Then there are blockchain projects that are using those tools to build particular forms of governance. The DAO sought to build an entirely new form of economic entity made possible by blockchain governance.

Others have more modest aims, and are designed to solve the particular problems introduced by the adoption of blockchain technology – like those facing consortium projects. These use decentralization in a more limited sense: to enable a smaller group of participants like banks to jointly govern a shared piece of financial services infrastructure, with no centralized entity.

Blockchain governance systems matter because they have the potential to permanently lower the cost of creating and maintaining governance systems of all kinds.

Governance is valuable, and the systems that make it possible are expensive. Corporations spend large sums ensuring that their internal governance processes are followed, and they spend even larger sums settling lawsuits with shareholders or regulatory agencies when those processes are not followed or are inadequate.

For organizations in jurisdictions with weak rule of law, the challenge is even more stark – the institutions necessary to ensure basic political or corporate governance may simply be unavailable without relocating to a different country. Access to functional governance systems is a barrier to entry for all kinds of organizations, ranging from companies to political parties to charity organizations.

Blockchain governance systems could, in some circumstances, serve as a foundation for less expensive, more efficient and more automated governance. This could reduce the regulatory burden on existing political and corporate governance systems and give others access to enforceable, verifiable governance systems where they were not otherwise feasible.

It seems odd to think about governance as dependent on, or intertwined with, technology. But it's certainly true that technology shapes, to some degree, the possible range of governance systems available to us.

The possibility of modern democratic governance depends on the transportation and communication technologies that make it possible for millions of people to engage in secure democratic elections, and for a centralized bureaucracy to manage a nation with millions of citizens.

Blockchain governance systems won't usher in a utopia, up-end the modern corporation or replace all of our existing governance methods. There are many aspects of governance that cannot be replaced by, or obviously improved through, technology. A governance system written in code can be designed just as poorly as one written in ink. But at a minimum, we’ve expanded the basic governance toolkit.

Not only are these new tools cheap, but they're open source and can be accessed and improved upon by anyone with an Internet connection and a simple computer.

You can't help but be curious to see what new things we will build with it.

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