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The six principles of blockchain governance

Governance is the single biggest unsolved problem in cryptocurrency; if we want this movement to succeed, we must take this issue more seriously.

There exists a collective delusion that blockchains do not require governance and that the governance of a blockchain introduces centralization. This could not be further from the truth; the reality is that the absence of formalized governance has been the greatest source of centralization throughout the entire history of cryptocurrency.

Human nature remains a constant, as the old adage by Lord Acton goes; “power corrupts, and absolute power corrupts absolutely”. It is the lack of formalized on-chain governance in cryptocurrencies that creates a void in power that is inevitably filled by bad actors who are effectively able to control the rules of a blockchain in a centralized fashion.

There are limits to this power in the same way that there are limits to a dictator’s power. However, that does not mean we should accept dictatorial control, as there are other solutions that lead to better and more fair decision-making. Political philosophy has been grappling with this problem for millennia. We have to embrace this knowledge and apply it consistently to cryptocurrency, introducing voting systems, divisions of power, and transparency to the process.

As a full-time cryptocurrency researcher over the last decade, I have seen certain patterns emerge as history repeats itself. My background in political philosophy and history also tells me this is a problem as old as time.

Blockchain technology provides us with new solutions to these problems; it is the main reason why I ended up dedicating my life to this movement in 2013. I always saw it as a tool for profound economic and political change. This is why it is such a shame that some of the most prominent cryptocurrencies failed to realize and take advantage of this fact. Instead, opting for the collective delusion of “social consensus”.

The problem with social consensus

Advocates of social consensus have the utopian view that people running nodes can reach consensus and make the best decisions without incentives or formalized systems of governance, along with the belief that developers will always follow this consensus. I view this as naive, often from well-meaning individuals with a background in computer science and not in the humanities.

The problem with social consensus is that it is extremely nebulous; there is no way to measure it. Social Consensus is, for the most part, the same as UASF, relabeled for a new time & people. What has not changed is that merely running a node without participating in block production is completely meaningless, as it is trivial to spin up thousands of nodes to spoof the system, as this type of social consensus lacks any form of Sybil resistance. Even the Bitcoin whitepaper stated as much: “If the majority were based on one IP address one vote, it could be subverted by anyone able to allocate many IPs”

This is why Proof of Work and later Proof of Stake was invented in the first place, in order to solve this specific problem which can and should also be extended out to govern blockchain rules. Curiously the Bitcoin whitepaper also stated: “Any needed rules and incentives can be enforced with this consensus mechanism”.

The reality is far darker than the advocates of social consensus admit; communities can be manipulated, and culture can be changed & shaped. A political system “without leaders” is only easier to capture due to our innate nature to seek out and follow leaders; this can be exploited in the case of supposedly decentralized cryptocurrencies. Which is what makes cryptocurrencies vulnerable to manipulation by outside political forces. Opening it up to external capture & disruption instead of internal unity and harmony.

Social consensus ends up being the equivalent of developers & their masters deciding on the future of a cryptocurrency. Either based on their perception of “consensus” or their own self-serving conflicts of interest. This lead to fragmentation and or central control as bad actors inevitably exploit this vacuum of power every time, as time serves the mean.

In democracies, we do not have a civil war after every election. Because we accept the outcome of an election even when we might have lost due to a social contract in measurable voting processes. Social Consensus lacks any such mechanism for avoiding disruptive conflicts! The consequence of this again is fragmentation and or iron-fisted dictatorial control; accepted, rationalized, and justified out of the fear of fragmentation.

This environment is ripe for abuse by politicians & influencers. Who gain disproportionate power over such a system by manipulating narratives. So it is really even worse than traditional governance systems as social consensus replicates old-world politics but without the democratic vote. The real innovation, therefore, lies in on-chain governance. Where there is an objective & Sybil-resistant vote by parties with actual skin in the game. That is what truly good decentralized governance should look like.

First principle: PoS-based stakeholder voting

There are no better alternatives than Proof of Stake-based stakeholder voting for a decentralized cryptocurrency, as public & permissionless blockchains are unable to identify individual human beings; this problem is also known as “Proof of Human”. This means that we are fundamentally unable to set up democratic systems of governance for cryptocurrencies. This makes stakeholder voting our next best option; even though plutocratic in nature, it aligns incentives toward the public good. As bringing about the best possible outcomes in decision-making is what should matter in the end.

Comparing such a governance system to how most companies are governed is valid, as the owners of a company are able to vote based on their stake of equity in the company. This aligns the incentives of the decision-makers with the evaluation of the underlying asset while also providing a far wider distribution of voters, which is the very definition of decentralization. Overall, this is a far superior scenario to the previously mentioned social consensus, which always devolves into dictatorship and or chaos.

Second principle: Full on-chain governance

We have to implement on-chain governance or fall victim to the machinations of shadow rulers. This includes putting the proposal & voting systems all on-chain as this enforces transparency & most importantly, creates a public Schelling point that we can all rally around. A major advantage inherent in the technology of blockchain which we should also take advantage of.

Thereby removing the ambiguity which has plagued public blockchains since their birth. As it is this lack of transparency that has provided a cover for the true decision-makers in corrupt and captured cryptocurrencies. Leaders disguising their will as the “will of the people” is another one of those tricks as old as time.

Third principle: Stake weighted based on time-locked

This ensures that stakeholders do not prioritize short-term decision-making over long-term decision-making, an ugly problem that has reared its head multiple times in cryptocurrency history, including during the block-size debates.

It is the primary reason why I now think that Proof of Work is systemically flawed as a governance mechanism, as miners have shown that they will prioritize short-term decision-making over long-term decision-making. As miner’s time horizons are too short, as electricity contracts and hardware usually do not have a shelf life beyond a few years. This leads to miners preferring not to rock the boat until they can eventually exit within their projected timelines for profit, making them extremely mercantile in nature.

Proof of Stake can theoretically solve this problem by enforcing longer minimum lock-in periods while also giving stakers who choose to lock their tokens for even longer a greater voting weight and interest rate. Depending on how long they are willing to lock away their tokens, making them inaccessible except for stakeholder voting.

Fourth principle: Multiple client implementations

Without multiple development teams putting forward competing proposals; all cryptocurrencies are effectively one-party systems. As the dominant client can act as a gatekeeper to all change. Stakeholders vote on proposals that are most often proposed or, at the very least, have to be implemented by a client’s development team. If there is only one development team, the choices on the ballot card can effectively be decided upon by a single centralized party.

We should also not delude ourselves of the reality behind client development teams; that they are effectively centralized dictatorships. Most often, with a single lead maintainer who has the final say over all decisions. Obviously, a Github dictatorship is completely unsuitable for the decentralized governance of a cryptocurrency. This is why cryptocurrencies require client diversity if there is any hope for them to achieve true decentralization.

It is understandable that small cryptocurrencies do not initially pursue this goal. But it is absolutely critical that eventually, they do, or the entire governance mechanism is reduced to theatre. Any change requires code; it is, after all, the first stage in the governance process.

Fifth principle: Self-funding model

This is when we take part of the block reward & put it in a treasury which is then used to fund a proposal system based on stakeholder voting. This is critical for multiple reasons, including funding multiple client implementations & preventing corruption by providing a native source of funding.

As client implementations are far too easily corrupted if their funding relies on external for-profit companies, something we have seen throughout the history of cryptocurrency. For instance, there might be far more funding for Layer 2 development compared to Layer 1 development; this undeniably can create a perverted incentive to favor Layer 2 development over Layer 1 development by individual developers. This can even have the net effect of pivoting a blockchain’s roadmap, even if that is not the best path for that particular blockchain; this is the case for both BTC & ETH today.

There is an old saying; “cue bono”, which means “follow the money”. Providing a source of funding that originates from the blockchain itself and the will of the stakeholders ensures that this money serves the interests of that blockchain, not whatever third party might be funding development.

Self-funding models also have the added competitive benefit that they can also be used for all sorts of additional endeavors, including well-funded efforts aimed at increasing adoption.

Sixth principle: Social contract

Even though I am no fan of “social consensus,” which I consider to be a cover for the true decision makers in most cases, deliberate or not. A strong social contract is still essential, especially if the previous principles are not fully implemented yet. This provides a clear commitment towards a particular goal, making it far more likely for a project to reach that particular outcome. Think of how a constitution functions within a state or how Ethereum committed to Proof of Stake from day one, making the merge far less contentious as a result.

This can be as simple as the founders verbally committing to on-chain governance as NEAR & EGLD did or as mind-bendingly blinding as some BTC supporter’s commitment to the 21M limit. The last example serves as a warning as this type of social contract is inherently cultural, so we have to be incredibly careful not to ossify the roadmap in ways we might regret later.

A social contract should be there to get a cryptocurrency to a point where it is no longer needed. The goal of blockchains should be to circumvent “social consensus” & even democracy. This is why blockchains should be governed by their underlying consensus mechanism, such as Proof of Stake.

The challenge

Social consensus is a bad & dangerous idea. As it gives people the comfort of centralized leadership & gives others the illusion of having no leaders. Perfect for a population still struggling to understand what decentralization means in a cultural & psychological context. As most of us are psychologically conditioned for centralization. This tendency to look for authority is deeply wired into our modern psyches. It might take generations to fully break out of that paradigm of thinking. As it is the system we are all born into; true decentralization, therefore, has to be seen as a multigenerational endeavor. On-chain governance is an uncomfortable truth that will be hard for many people to accept, yet it is clearly the answer.

It is a form of governance that stakeholders will have to demand or threaten to vote with their feet. As in most cases, those in power do not willingly surrender their power, a historical rule where exceptions to this rule are exceptionally rare. For those few enlightened developers whose hearts are in the right place; I urge you to consult with experts in political thought. As there is a long & robust body of work supporting my position: That social consensus does not exist, and that good governance is about mediating inevitable differences without splits while also curtailing concentrations of power. This also aligns with the core ethos of decentralization present in most blockchains.

Ultimately it is human beings that invest, run nodes & stake. Blockchains are not automatons but a network of human beings incentivized through crypto economic game theory. Human beings are vulnerable to bad ideas, reflected in the code they choose to run. This is where the battle must be fought, not against regulators but against ourselves. As our own salvation & downfall lives within us.

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