Challenges in network governance

[lrettig]

Governance of cryptographic networks faces many of the same challenges as “off-chain” governance of things like corporations and political polities. There is therefore no reason to “reinvent the wheel,” and most governance best practices apply equally to the “off-chain” and “on-chain” world. Having said that, we must also understand that cryptographic networks do operate under a novel set of restrictions, meaning that governance of such networks faces novel challenges.

Permissionless participation, identity, and plutocracy

A common requirement of cryptographic networks is that participation in the network be permissionless, in the sense that anyone is free to transact on the network, deploy and interact with applications, validate transactions and earn rewards, etc. This is a desirable property, but in practice it leads to the challenge of Sybil resistance: how to map on-chain identities (such as IDs or wallet addresses) to off-chain identities (such as individuals and companies). This is especially problematic since, with no robust notion of unique identity, we cannot build naive democratic institutions such as voting, since a user could simply create many identities to amplify their voting power. It also means that we cannot, for instance, impose term limits on on-chain identities for the same reason: the real-world actor behind that identity can just create more identities to circumvent the limit. For these reasons, any meaningful notion of on-chain democracy is impossible.

What’s more, any attempt to introduce proof of work to validate identities simply reduces to plutocracy: those with access to more resources can use those resources to amplify their voting power. What we really want is a Sybil resistant “proof of unique human” algorithm. While teams including Democracy Earth continue to pursue this goal, it remains a fundamental, unsolved problem in governance of cryptoeconomic networks. For the purposes of this proposal, we assume this problem is unsolved.

De facto technocracy

Blockchains are extraordinarily complex systems, and they are complex in multiple ways: technically, yes, but also socially, economically, etc. Effectively governing a blockchain requires the input of experts, and the dedication of a lot of time and focus. Most network stakeholders simply do not have the time or expertise to dedicate to professional governance, which means that there is constant tension between falling back on technocracy, on the one hand, and the challenge of instituting more inclusive forms of government, on the other.

No governance equals stagnation and Tyranny of structurelessness

Some blockchains, such as Bitcoin, are designed to have “no governance.” In practice, of course, there is no such thing as “no governance,” so what this really means is a lack of explicit, participatory governance. Decisions are usually made by a small group of insider technocrats, a form of the tyranny of structurelessness. What’s more, such a system of government tends towards stagnation and ossification, as changes happy only very infrequently, which means the protocol may fail to keep up with the pace of technology or the needs of its users: witness the Bitcoin scaling debate.

Szabo’s Law

A lack of explicit governance is attractive to many blockchain vanguards since, to them, a blockchain should be “extra-legal,” i.e., beyond the reach of the laws of any jurisdiction, and “not something you can reason with.” However, this presents enormous challenges from a social-legal perspective, as such systems are, in fact, probably illegal and antisocial.

On chain governance is also plutocracy

Given these challenges, and the perception of the inefficiency of networks with off-chain governance, it’s tempting to introduce on-chain governance, where tokenholders vote on proposals (which may be written in dry or in wet code). However, in practice, such networks also reduce to plutocracy and are liable to a small number of plutocratic “whales” swaying or dominating the vote, to buying/selling/renting of voting power, etc. We have seen examples of all of these in practice in production networks.

Preventing entrenchment

Without careful thought and design, the natural direction that any system of government heads is ossification: the current set of arbiters remain in power indefinitely, or hand power only to cronies or to their own family. Democracies deal with this problem through term limits and the entry of new voters (the young, immigrants). Without robust identity, democracy, or term limits, how do we deal with this problem, making sure that there is sufficient churn in the arbiter set, and that sufficient room is made for new entrants?